Pros and Cons of Investing in Oil Drilling Projects
Pros and Cons of Investing in Oil Drilling Projects
The pros and cons of any investment must be measured against the project and investor goals. If you’re investing in oil drilling projects to earn Return on Investment (ROI), then your investment must provide the financial structure and ideally reflect a clear and tested strategy to produce these desired financial results. Understanding the terms of the offering and the proposed business plan and activities may provide a path for profiting plus a possible multiple return of invested capital upon divestiture of the project’s assets.
The Pros of Investing in Oil Drilling Projects
Well drilling projects offer unique wealth generation possibilities to investors because of the global and domestic demand for the oil and natural gas product—and the multiple avenues to ROI.
Investors, or subscribers, to an oilfield development energy fund may benefit from a range of economic factors beyond the base commodity value of a productive well.
In fact, a new form of oil well investment is emerging that offers an investor-first approach to benefiting from these potential oilfield ownership advantages. This new strategy is built around the following investment opportunities.
1. Rapid Income Tax Mitigation
Investors can claim a first deduction of up to 90% invested capital against their adjusted income tax. Deductions from intangible drilling costs include costs such as labor, chemicals, drilling mud, and other intangible costs. The resulting income tax reduction lowers the actual amount of the invested capital due to the income tax savings.
A $100,000 investment, for example, could attract a $90,000 tax deduction that can be applied soon after the project commences.
Investors from states with high state income rates may reduce their actual invested amount by the greater reduced income tax liability due to claiming the first-year deductions on both their federal and state returns.
2. Monthly Revenue Distributions
Oil well investors may receive ongoing monthly revenue associated with sales of produced oil and gas. After an energy fund receives the capital as outlined in the offering and begins the planned oilfield development, consistent monthly distributions of net production income from the oil and gas sold in the prior month may be distributed to the investors.
3. Liquidity in 1 to 3 Years
The new approach to oil well investment mentioned above may result in a more reliable profit potential than traditional oil and gas investments. That begins with a potential partial divestment to a public company based on the value of the developed oilfield oil and gas mineral acres, existing producing wells, and the oilfield infrastructure. The benefits from this sale could potentially cover the initial investment cost. Investors would still be able to take advantage of the remaining holding, including a planned divestment.
4. Multiple Exit Strategies
An energy fund that develops proven acreage can pursue drilling multiple wells that would produce many undeveloped drilling locations, commonly referred to as PUDs. Direct ownership in the oilfield allows investors to potentially profit from each drilling location either developed or to be developed at a future date. This scalability makes it possible for an energy fund to pursue multiple divestment opportunities. A planned exit goal can be reached that generates ROI to oilfield subscribers.
The Cons of Investing in Oil Drilling Projects
Any commodity investment is accompanied by risk, even when it involves the world’s most often traded product. Due diligence is required when considering any potential investment. When it comes to oil wells, investors should examine the company sponsoring the offering.
The Securities and Exchange Commission offers some basic questions you can pose to your potential investment partner to ensure they are a responsible and reputable operator. These questions include:
- Is the operator properly registered?
- If dealing with a broker, can they supply a due diligence report?
- How are my funds going to be used?
- What is the exit strategy for my investment?
You can further protect yourself by investigating the energy fund or operation manager’s background. While choosing a trustworthy, proven oil and gas operator may ease your investment concerns, there are still risks involved in a drilling project.
1. Price Volatility
The price of a barrel of oil is subject to a complex set of external and internal forces—from global geopolitics to the inherent uncertainties of obtaining a natural resource. The current price, for example, has been negatively impacted by the COVID-19 pandemic. Some experts believe this low price represents an opportunity to gain entry to a potentially rebounding commodity, as happened after the 2008 global downturn; however, uncertainties remain whether history will repeat itself.
2. The Cost of Entry
Direct participation in an energy fund will usually cost more than accessing the stock market. Energy fund investments are very competitive with many options regarding legal structure and offering terms. That said, an investment of $100,000 would, for example, secure an ongoing place in an energy fund that offers potential monthly revenue distributions, immediate tax breaks, and a range of divestment strategies.
3. Production Shortfall
Any oil well drilling project has the potential to encounter drilling risks and experience production results below projected volumes and resulting net production expectations. As such, no investment can be guaranteed against loss.
That’s why it is crucial that you thoroughly investigate the offering terms of the energy fund, the offering sponsor, and the proposed oil and gas operator.
Understanding the strategies, goals, and motivations of any oil well drilling project is integral to making a prudent investment.
A New Way of Investing in Oil Drilling Projects
A new approach to oil well drilling is currently being employed in an energy fund in Colorado. This approach follows a well-defined timeline to prioritize the ROI of investors.
Rather than seek an ongoing commitment to an oilfield, the King Operating Corporation has targeted proven oil-producing acreage in Larimer County in hopes of increasing its value through the use of advanced horizontal drilling techniques. Should this prove successful, the oil and gas mineral interests, wells, and infrastructure will eventually be sold and the investors rewarded.
This approach possesses divestment opportunities, monthly production distributions, income tax deductions, and portfolio diversification opportunities.
King Operating Corporation’s investor-first method of oil well investment could be well worth considering when weighing the pros and cons of investing in oil drilling projects.
Investments in oil and natural gas partnerships are speculative and involve a high degree of risk. Oil and natural gas wells are naturally depleting assets. Cash flows and returns may vary and are not guaranteed. Past performance is no indication of future performance. Nothing herein shall be construed as tax or accounting advice. Investors may lose money. Some of the risks other than those described herein associated with investment in Larimer County Energy Fund are described in the Risk Factors section of the Confidential Private Placement Memorandum concerning the Larimer County Energy Fund accompanying, preceding, or following this Executive Summary. Prospective investors are urged to read and consider carefully the risks described in that section. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the investment opportunity described in this Executive Summary. Neither the Securities and Exchange Commission nor any state securities commission has determined the accuracy or completeness of the information contained within this Executive Summary or in the Confidential Private Placement Memorandum concerning the offering of limited partnership interests. The offering of limited partnership interests is made only by the Confidential Private Placement Memorandum, which must accompany, precede, or follow this Executive Summary, and an investment decision can only be made by the execution of definitive investment documents. Investors in Larimer County Energy Fund are required to be “Accredited Investors,” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933.