Part 2 - What differentiates a successful accredited investor? What makes them successful?

Continuation of previous article:
This the second article in the series describing my thoughts on what makes many accredited investors successful. How do they think and work? What differentiates them from those who have not achieved their goals? The previous article - Part 1 - covered the first three elements that make them successful: Having a dream that forces action, having desire to overcome challenges along the way, and having an end goal for reaching your dream. This article covers understanding that change is hard, not letting fear stop you, having a plan to reach your goal, and executing that plan.

Understand change is hard:
Most times change involve an initial period of very hard work trying to keep track of everything, making sure you don’t forget something as you work on the change. Without a strong desire to make the change, most people give up. Not the successful accredited investor. Most know they can’t keep doing the same thing they are currently doing. Their desire to do something different forces action toward change, whether they have fully visualized their end goal or not.

Think of the forces needed to initially get a large object to start moving on a flat surface (think of a very long train on tracks). It takes continued action to keep pushing this object faster until you reach the desired speed. Once at that speed, then much less energy/action is needed to keep the object moving at that constant speed. This is also true of change. When you initially start on a path of change, there are many forces/actions required to get the “large object” to start moving faster while also controlling the direction the object moves – toward your goal.

Don’t let fear win:
Fear of change is the biggest killer of dreams. All our lives we have experienced negative events that make us not want to repeat them again. We fear getting into a similar situation again where the possibility of experiencing the associated pain and anguish is high. Think of when you were rejected by someone during a sales pitch, presentation, proposal, love, etc. The first time you experience the associated rejection, it can be very painful. In general, people therefore react in two ways (from my experience): type 1 - they internalize and fear the event and do everything to avoid being in a similar situation again, or type 2 - they overcome their fear of the event by learning from it and figuring out how to change the outcome should a similar situation comes again. Again, your desire for change must be strong enough to move you from being a type 1 to a type 2 as an overcomer who learns and continues moving forward toward the end goal.

Personal story:
I have a fear of heights. However, I make it a point to do those things that make me uncomfortable. When we visit a city, I make it a ponit to go to the top of the highest sky scraper and walk around the top looking down. One of the scariest was walking around the top of the Stratosphere in Las Vegas. But I didn’t stop there. The Stratosphere is a very tall tower with rides on top. I saw the roller coaster called High Roller that goes around the outside of the observation area several times. I made it a point to ride that coaster no matter how scared I was. Boy was I in for a surprise. The ride is amazing since you don’t see anything under you but the city hundreds of feel down below. It feels like you are barely being held to the tower and could easily detach and fly down to your doom! THAT WAS SCARY! But, I did it. I felt proud for making myself face this fear and tackle it head on. I left Vegas that day feeling a bit more confident about my abilities to take on a challenge and win! You should also do the same for your fears. Face them a little at a time. Keep moving forward toward your goals as you overcome these large obstacles.

Have a plan:
As I mentioned before, you need to fully visualize the end goal and all the changes that will be needed to get you there. Create a list of all the changes needed. Don’t limit yourself at this point. Just write everything down you can think of. Once you have a complete list, then you can start figuring out which changes are realistic and which are not. You can then start grouping and categorizing the changes. Understand the sequencing of the changes – what order must they be done in. Prioritize the changes in order of importance. Continue reviewing these changes until you have a final list that is in chronological order so you know what to do first, next, and next after that. You can then guess how long each change will take, along with what you need to make that change. Place dates on the calendar for when you will start and achieve each change. Complete the calendar until you have a date when the final end goal will be achieved. At that point, you will know all the changes, when they need to be started, what things you need to execute each change, when the change will be completed, how they relate to each other (the order they need to be done), etc. This is your plan for success toward the dream.

Execute the plan:
Believe it or not, many people actually get this far, but never execute their plan. This is the critical point of no return. Either you truly overcome your fear of change or you don’t. Executing the plan can only be done by actually facing your fears and making the required changes. Doing nothing ensures status quo and no achievement of the dream outside of winning the lottery or some other unlikely change of chance.

Stay tuned for next week's continuation:
Next week, the next article will continue this series by covering the need to constantly learn, continually improve, never give up, and the importance of giving back.
- - - - - - - - - -

Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Sphere: Related Content

Part 1 - What differentiates a successful accredited investor? What makes them successful?

Overview:
This will be a little different from my usual articles. Rather than talk about a specific investment or investment technique, I felt it would be beneficial to talk about what makes many accredited investors successful. How do they think and work? What differentiates them from those who have not achieved their goals?

The information provided will be largely biased toward my own experiences and not necessarily representative of all accredited investors. With this in mind, I share my thoughts on what traits you need to be a successful accredited investor. I plan to complete this series in several parts with this article being part 1. Read the blog next week for part 2.

Common elements of a successful accredited investor:
In my view, elements of a successful accredited investor usually include the following:
- Have a dream: They want something that motivates change

- Have desire: They have a strong desire to reach the dream

- Have an end goal: They can visualize what life will be like when the dream is achieved

- Understand change is hard: They know change is hard

- Don’t let fear win: They don’t let fear stop them from moving forward

- Have a plan: They create a specific plan of action for changes needed to achieve their end goal

- Execute the plan: They work their plan

- Constantly learn: They love learning about new things, skills, how others overcome, etc.

- Continually improve: They refine/improve their plan of action while moving closer to the end goal

- Never give up: They don’t give up, but may readjust their end goal to be more realistic

- Give back: They want to give back by helping others succeed

I will cover each of these in more detail in this series of articles on the successful accredited investor.

Have a dream:
Deliberate success begins with a dream, not being satisfied with status quo. You need to see something beyond your reach that requires stretching yourself beyond your known current abilities and means. The dream must be strong enough to create desire to take action.

Have desire:
Your dream must create a strong enough desire to take action toward making a change. Most people have a very hard time making change. They may not be happy where they are in life, but they understand it and know what to expect. Even in misery, the person involved can find some strange level of comfort. The misery is familiar to them. They have learned to live within the associated environment and, to some extent know what to do, what to expect.

Have an end goal:
Visualize and understand what the end goal is. Where do you want to be and what do you want to be doing once the dream has been achieved? How will achieving the dream change your life? What does it look and feel like? Think about all the things that need to change in order to get you to that end goal.

Next article in the series:
Next week, the next article will cover understanding change is hard, overcoming fear, creating a plan of action toward the end goal, and executing that plan.

- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Understanding Oil and Gas Speculators – Why Do We Need Them?

Oil and gas speculation is in the news:
Lately we have been reading about Congress and their desire to regulate speculation in the oil and gas market. What is this speculation? Who are the
speculators and how do they work?

What is an oil/gas speculator?
A “speculator”, in this sense, is an investor in the futures market who buys or sells futures contracts on oil or gas. In general, an investor will buy a futures contract (called going long) if he or she feels the price is going up. Alternatively, if the price is assumed to be going down, the investor will sell a futures contract (going short).

What is a futures contract?
There is an article on the Telegraph’s website (a Brittish newspaper) that does a good job describing the futures market. Also, the Chicago Board of Trade (www.cbot.com) website has a good brochure that describes the futures process mostly about agricultural products, but the principles are pretty much true for oil and gas futures contracts as well.

Bottom line – a futures contract is a legally binding contract between a buyer and seller to deliver a standardized quantity of the underlying product at a specified price on a specific future date. What this does is allow a seller and a buyer to agree on a set price to transact the trade of a item in the future, oil or gas in the case of this article, while shifting the risk of price changes onto the investor who buys the contract as a futures contract. The buyer could be a airline company who uses lots of gasoline and must be able to predict what the cost will be on a future date when they need to purchase enough quantity to fly their planes. The seller could be a refiner that produces jet fuel from crude oil for airlines and agrees to the future date and price. The seller is also able to project what future revenues will be from the sale of fuel on a future date. In fact, the seller may actually contract to sell fuel that is not yet in inventory. In this case, the refiner may also have a future contract with a crude oil supplier for deliver of oil on a future date at a future agreed price. In this case, there is a chain of contracts, all vulnerable to dramatic changes in actual market price for oil (or similarly for gas).

How are prices determined?
Both parties, the airline and the refiner, will negotiate the future price based on estimates of what the price of fuel will be trading at on that date using the best available data today. This estimate may be close or way off, either higher or lower. World events can occur during the time of the contract to dramatically change the price. If prices increase dramatically over the agreed price, the seller loses potential profits that would have been made at the higher market price. If prices go down dramatically, then the buyer could end up spending much more for the fuel than a competing airline who buys at the lower market price. Therefore, without a means to mitigate the risk of price changes, both parties may hesitate before entering a contract and both will not be able to accurately project future revenues and costs.

What is the role of a speculator?
This is where a speculator can help. The futures speculator takes on this risk of price changes during the time of the contract. The buyer and seller can feel confident to enter their best estimate for prices on a future date knowing they can then pass the contract to a futures trader, “speculator”, to take on the risk. The speculator that feels the price will increase to the contracted price buys the contract, which is known as “going long”. The speculator that feels prices will not reach the agreed price will sell the contract before it expires, known as “going short”. In fact, short sellers can make money as the price decreases by forcing someone to buy back the contract at a lower price than they sold at it. This is beyond the purpose of this article, but is one strategy that speculators use.

Strategies speculators use:
There are many strategies speculators use to hedge their long or short bet on the future price of oil or gas. Some involve buying or selling more than one contract and different strike prices (the agreed contracted price the underlying oil or gas will be sold at in the future). Some involve buying both a long and short position at different prices. Some involve buying or selling multiple contracts at the same strike price. Then there are options that can be traded on these futures contracts, which again is a topic for another article.

Futures markets support strong business:
The futures market provides buyers and sellers with a world-wide trading platform using standardized contracts that are easily traded and understood by futures traders. Buyers and sellers can feel confident to enter these future contracts knowing the risk is easily passed to future traders. This is a critical tool for business to accurately project future revenues, costs, and earnings in a volatile market. Businesses can move forward transacting business in unpredictable market conditions. Without the futures market, businesses would not be able to accurately project their costs and revenues. They may be forced to be overly conservative and hold off investments for future growth, which could lead to less jobs or even loss of jobs. It could mean missed business opportunities due to being too conservative on investments for future growth.

Prices are not determined by the speculator, but by market conditions:
Speculators are also guessing what the future price will be when the contract expiration date comes. They are subject to world events that can dramatically change the current trading price of oil and gas for past futures contracts that end each day. Buying and selling futures contracts does not change the price, the demand and supply of oil and gas each day does. I don’t disagree there may be some large groups who could manipulate the supply or demand for oil or gas each day (OPEC, emerging country growth – China & India, etc.).

Summary:
These are my personal thoughts on the wonderful benefits provided by the futures market and associated futures traders, also known as speculators. I don’t claim to be an authority on such markets, but these are my personal observations.

- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Understanding An Existing Multi-well Oil Drilling Investment Opportunity

Overview of the project:
We are currently invested as lease a owner in a multi-well oil drilling project that will be drilled in Texas. This is a five well project that is being purchased by a foreign investor and slated for drilling to start very soon thereafter. Each of the five wells will be similar to the single well project written of in the previous article posted last week. This article will provide highlights of what a multi-well project looks like to provide readers with insights when considering investing in similar oil and gas drilling ventures. It is written for educational purposes only and is not a solicitation to invest or a prospectus. Some hypothetical situations have been added for purposes of helping the investor conduct his/her own systematic “what if” analytical approach when considering these types of investments.

This five well project involves re-entry into vertically drilled wells by Exxon in the mid-80s by using horizontal drilling upwards of a mile through the known pay zones to minimize the risk of failure while maximizing the potential flow of gas and oil (payout to investor). These wells were abandoned at that time since oil was too cheap to continue producing from the well.

An overview of horizontal drilling (repeat from last week’s single well article):
Horizontal drilling is a fairly new process for drilling where the drill bit can actually be steered sideways toward the highest concentrations of oil and gas. The drill operator usually has tools allowing logging while drilling (LWD) the hole. This means the operator can see what the formations in the ground are around the drill bit to know what the move toward or away from. This provides much better odds for a successful well than simply drilling vertical wells and logging the well after it is drilled to see whether the well will be a success or not. Also, another benefit of horizontal drilling is that the wells tend to produce strong for the first five years or so and then continue producing at a slower rate over the next 15 years or so. Over the life of this well, the investor may gain significant multiples of total return on their initial investment.

Understanding how the investment is structured:
- Investors ownership: This five well project is being sold to a single investor. The investor has a 75% working interest (WI) and 54% net revenue interest (NRI) in the well. This means the investor owns 3/4 of the well for tax purposes, and receive 54% of the revenues generated by the well since other percentages go to the land owner, lease owner, oil producer, and others involved outside of the investor.

- Cost of investment: This is an $11.2M investment.

- Projected return on investment: Conservative revenue models project a 56% annual internal rate of return (IRR) for ten years. This is much less than the projection from the single well described in last week’s article. The main reason is that this 56% return is over ten years where the projections in last week’s article was only covering the first year’s return. Another reason is that the 56% projection assumes three of the five wells are drilled the first year and one of those wells does not produce. It also assumes the last two wells are drilled the second year and one of those wells is bad. Therefore, the conservative projection assumes that two of the five wells are dry holes (non-producing wells). There are other differences you should look for between investments such as the Working Interest and Net Revenue Interest differing from project to project.

- Tax savings benefit: The projected return does not consider any added returns from tax savings due to write offs which could add an additional 25 – 50% to the first year return based on your tax bracket. As a reminder, all invested funds in domestic independent oil and gas drilling ventures are deductible against all income types with the intangible drilling costs (IDC) being fully deductible the first year and the remaining tangible costs being deducted over seven years. This project has a high percentage of IDC so a large portion of the total investment can be written off the first year against all other income. I don’t have the actual IDC percentage for this project. For purposes of this example I will assume 70% of the project is IDC (fairly typical for many projects). In this case, 70% of the $11.2M can be deducted the first year saving $7.8M in taxes. The remaining 30% tangible costs are deducted over seven years.

- Yearly tax free income benefit: In addition to the tax deductions, 15 – 23% of each year’s income is tax free for these types of domestic oil and gas drilling ventures. A projected first year income of $7.6M at $130 per barrel oil with a total 300 barrels of oil equivalent (BOE) daily production means the investor would receive a minimum of 15% tax free, or $1.1M. If you are in a 35% tax bracket, that is a savings of $385,000 in taxes that is additional income.

Putting it all together for expected 1st year return:
At $130 per barrel for oil and 300 BOE daily production, this project is projected to create $7.6M income + $7.8M tax savings (70% of invested funds from IDC 1st year deduction) + $385,000 income tax savings (1st 15% of the year's income is tax free) for a total of $15.8M the first year on a $11.2M investment. This is a projected 141% total return on the investment. As stated earlier, this return assumes 2 of the five wells are bad. Also, in general, horizontal wells provide stronger returns initially and over a longer period of time than vertically drilled wells. Therefore, this project could generate many multiples of the original invested funds over the life of the well.

Lets look at hypothetical high projection scenarios:
Recently another major oil drilling corporation has had several similar wells in the area come in at 500 to 700 BOE daily production.

For fun, let’s make assumptions that assume ideal situations concerning production from the associated wells. Again, these are hypothetical and idea situations provided to help the investor think about doing their own ‘what if” analysis of investments. As an investor, it is good to know your upper, as well as your lower boundaries of expectation before making an investment.

Scenario 1: Let’s assume each of the three wells come in at 500 BOE, that would be a total of 1,500 BOE daily (remember we also assume two of the five wells are dry holes). That would be five times the 300 BOE production shown earlier for this project. This would translate into a first year income of $38M at $130 per barrel oil instead of the $7.6M calculated for the original total 300 BOE projected daily production for the first year. That would be a 339% return ($38M/$11.2M) on investment in the first year of production from all three wells.

Scenario 2: Now lets assume all five wells are good and each producing 500 BOE daily. Total production from the five wells would be 2,500 BOE daily, 8.33 times the 300 BOE production. This translates into a first year income of $63.3M at $130 per barrel oil. That would be a 565% ($63.3M/$11.2M) return on investment in the first year of production from all five wells.

Again, these examples do not count the additional savings from taxes. Keep in mind that production will start dropping off each year for the wells so the income shown is not going to last through the life of the wells. However, if either of these first full year of production scenarios comes in, you can see why investing in oil and gas drilling ventures can be very profitable for investors in the right projects. The remaining years would be icing on the cake.

Low time required for an outstanding return:
As an investor, most of your time will be spent investigating the initial investment to consider participating in a oil/gas drilling venture and funding your share of ownership in the partnership. Once invested, you can sit back and watch the monthly payment checks come in. A good return for very low overall time commitment.

Disclaimer:
Again, information provided in this article covers projections on a multi-well horizontal drilling project. These are not to be considered actual returns. There are many factors that can cause the returns to vary from projections, including the possibility the well may not turn out to be producible (a dry hole - oil industry jargon). Each investor should always do his/her own due diligence before considering participating in any investment. This article is provided for educational purposes.

Summary:
I hope this example of a multi-well oil drilling investment helps you understand some of the things I have discussed in previous articles to this blog. This is why the oil and gas can be very profitable for investors who know what they are doing and make calculated investments in this industry. I never suggest anyone invest more than they are willing to lose so seek advice of a professional if you are considering investing in oil and gas for the first time.

- - - - - - - - - -

Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Sphere: Related Content