Why do oil companies need investors if the oil and gas investments are expected to be so great?

Why should an oil company consider sharing their profits with investors?
If the oil or gas well is projected to be very profitable, why doesn’t the company fund the entire well itself to keep all of the profits? The main reasons are the financial leverage and risk management gained by adding funds from investors.

Consider an example of not using outside investors.
Consider an oil company with a total of $10 million to invest in oil and gas wells. Assume each oil or gas well costs $2.5 million to drill, complete, and put into production. If the company decided to fully fund each well without using additional investor funding, then they would only be able to fund a total of four wells ($10 million in funds divided by $2.5 million for each well).
Consider an example of using outside investors.
Now consider an alternative strategy where the company purchases a 20% ownership in many wells and offers the other 80% to investors. In this case, 20% of a $2.5 million well would require only a $500 thousand investment from the company per well. With $10 million in company funds available, the company could have 20% ownership in 20 wells instead of full ownership in only 4 wells. Their risks would be spread over five times as many wells by using outside investors.

Other reasons for including investors:
1. Potential lenders view a company that is diversified with many wells more favorably than a company where everything is riding on only a few wells.
2. The company has a better chance raising capital with a stock offering if it has many accredited investors as clients. This pool of accredited investors may also include influential business people with access to resources needed during the growth and development of the oil company.

Bottom line, good businesses manage risk through diversification.
The same is true of the most successful investors. Also, these companies and investors usually have a network of other successful and influential persons that all work together for mutual success.

- - - - - - - - - -
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