Understanding An Existing Oil Rig Purchase Investment Opportunity

What is an oil rig?
A drilling rig is used to drill the hole to reach oil and/or natural gas. Rigs come in many shapes and sizes.
- A shallow land based well may only require a mobile rig that is mounted on the back of a special vehicle. The vehicle positions itself over the drill site and begins drilling.

- A deep land based well requires a much larger platform drilling rig. These rigs must have a strong enough motor to turn the drill bit and associated pipes through thousands of feet of ground. The pressure at those depths are tremendous. Some rigs have motors strong enough to drill sideways (horizontal drilling), along with all of the associated equipment.

- Off-shore/Ocean drilling can be conducted by special ships or by platforms of various sizes. There are also many other new tools available supporting drilling off-shore.

What are the benefits of investing in a rig?
A properly structured rig investment means continued and rising income for the associated investors. With oil and gas receiving record prices, the demand for drilling rigs is tremendous. This means they can demand increasing daily drilling rates from oil producers having their funded oil/gas drilling projects drilled. Rigs can demand from tens to hundreds of thousands of dollars each day to drill one hole. Depending on the depth of the hole, it can take a week or over a month to drill the hole. Rigs are employed almost every day of the year - 24 hours per day - seven days a week. Daily drilling rates are rising all the time due to high demand. The associated investors who own the rig receive a portion of this rising daily drilling fee back as rising income, usually paid monthly or quarterly. The investment is usually secured against the value of the rig so the rig could be sold to pay back the investors if needed making the investment very secure in today’s high demand environment (rising values for rigs).

Example of how a real existing rig investment is structured:
Currently, an oil producer we have a history of investing with has an offering for investors to purchase 1/3 interest in an oil rig. Highlights of the deal are:
- This is a land based rig used to drill deep wells and horizontal wells.

- Investors can invest from $30k upwards to the entire 1/3 purchase amount.

- This investment is secured with a lien against the rig. The rig is worth more than the value secured by the lien so investors are very likely to receive all invested funds back should the rig be sold in the unlikely event the investment does not work out.

- At the end of the third year, the 2/3 owner of the rig has the right to exercise several options: 1) purchase back the investor’s 1/3 ownership share, 2) sell his 2/3 ownership interest to a 3rd party or the existing investors, or 3) may opt to continue with the revenue sharing plan. Any one of the three is quite beneficial to the investors. Investors will either receive funds back and move on or will continue to receive ongoing revenues.

- Investors will receive a portion of the daily drilling rig fees in quarterly payments according to the amount invested. For this investment, investors expect a projected annual 18.4% internal rate of return on their investment. However, this is only based on the rig being used 320 days per year with a constant daily rate. In reality, as stated earlier, daily rates are rising and the rig will likely be used nearly all 365 days per year. Therefore, the actual returns should be higher.

Low time required for a good return:
As an investor, most of your time will be spent investigating the investment and funding your share of ownership in the partnership. Once invested, you can sit back and watch the expected increasing quarterly payment checks come in. A good return for very low time commitment.

Summary:
I hope this example of a real existing oil rig investment opportunity helps you understand some of the things I have discussed in previous articles to this blog. I plan to cover a real oil/gas drilling venture in my blog next week.

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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. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

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 3 of Steps involved in a typical oil and gas drilling venture/investment – Preparing and drilling the well

This is the third article in a series that will provide an overview of a typical oil or gas drilling venture from beginning to end (payment of investors). The first two articles covered scouting a location for drilling through forming a partnership and funding the well using a private placement memorandum (PPM). This article will cover steps involved with preparing and drilling a well. The first article can be read here. The next article can be read here.

Selecting the drilling rig operator:
The oil producer now has a partnership established and funding from investors to start drilling the well. The producer should have established a relationship will a drill operator. The operator is usually responsible for securing resources to drill the well including a drill rig, rig workers, and all supplies needed. These resources vary with the depth and type of well being drilled.

Chosing the appropriate drilling rig for the oil/gas project being presented:
A simple shallow well may only need a small drilling rig that is positioned on the back of a special truck. The truck parks over the drill spot, raises the drill structure to a vertical position from the horizontal resting position, secures the rig with cables in the ground, and starts drilling fairly quickly once supplies and workers are in place. For deeper wells, off-shore wells, wells requiring horizontal drilling, these challenges require different types of rigs. The rigs can become substantial in size costing hundreds of millions of dollars. A good operator will select the right rig for the right job at the right cost.

Preparing the land before drilling:
The oil producer will pay to have the grounds cleared and roads put in for the rig and supporting equipment and supplies to have easy access for setting up. Initially they will spud the well, meaning start the drilling.

Understanding how an oil/gas well is drilled:
Drilling a well usually requires a drill bit that rotates through the ground with many teeth (usually diamond or other very hard material). The cut rocks and materials need a way to move out of the hole while being drilled. This is accomplished by having the drill bit sit on the end of a hollow drilling pipe. A special fluid (nick named mud), mixed with special chemicals, is pumped down the pipe - exiting through the drill bit. This lubricates the drill bit and carries out the cut rocks and dirt to the surface. On the surface, the dirt and rocks are separated from the fluid and the fluid reused again down the pipe. The mud serves another purpose of counteracting any pressures encountered while drilling such as gas or oil wanting to come to the surface. The weight is increased to counter the pressure and keep the well stable.

After drilling is complete, log the well to see if it is viable or not:
When the final depth is reached, the well will be logged. Usually a radioactive device is lowered through the mud to the bottom of the well. While the device moves through the total depth of the well, sensors read the reflections through the surrounding grounds. A trained geologist can usually tell what type of materials are present at each depth and how porous the ground is for letting oil or gas flow. Many times, there may be indications of oil or gas, but the ground may not be porous enough to support a good flow of the oil and gas through the well. These wells can be very frustrating for investors since the oil and gas may be present, but there may be no commercially viable/profitable way to extract it. Therefore, investors and other stakeholders in the well usually wait on pins and needles for the results of the log to know if the well is going to be a good producer or not.

Putting a viable well into production:
Viable wells will have casing placed around the wall of the well to stabilize the well, helping prevent damage or cave-in. The log determines underground layers/depths that look most promising for producing oil or gas. These areas are perforated (holes blown through the casing for the flow of oil or gas). Sometimes the well is not porous enough to support a good flow of oil or gas. The oil producer and operator may then decide to frac the well. In this case, special fluids or other materials are forced at very high pressure through the perforated holes well into the ground to open up fissures conducive to the flow of oil and gas. A frac job may not always work, but often does tremendously increase the flow of oil or gas. There are other methods used to stimulate the flow of oil or gas. The oil industry has many tools and methodologies developed over years to handle most situations encountered in wells. The goal is to get an optimal flow of oil or gas from the well that keeps the well stable and provides a good return for the investors.

Next article in this series:
In the next article, we’ll cover details about putting a well into production and selling the resulting oil and/or gas.

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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. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

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