Part 2: Oil and gas investments vs. real estate investments

Second article in a series on comparing oil and gas investments to real estate investments:
This is the second in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here and next article here.

Considering the risks of investing (part 2):
Investing in oil and gas drilling ventures usually involves available risk capital whereas investing in real estate usually involves significant debt. Both investments involve risk. The risk and reward differs for each oil and gas drilling venture and for each real estate project. It is up to the investor to do enough due diligence when considering any investment to learn as much about the risks and potential rewards. When the risks and rewards are understood, then they can be compared between each other to make a decision on where to actually invest the available risk capital. The level of risk can be mitigated by conducting research to ensure investment in those oil and gas projects or real estate projects that have the optimal risk to reward ratio that fits your investment strategy.

Building wealth on cash verses debt:
Building wealth in Oil and gas drilling ventures involves the risk of investing in bad wells that don’t pay out. However, you don’t have the risk of large debt that real estate investments carry (unless you pay mostly cash for the property). As stated earlier, you can mitigate the potential of a bad oil/gas well by investing with oil producers with strong track records (read our previous article “Conducting due diligence before investing in an oil or gas project”). Also, watch for red flags when considering oil and gas investments (see our previous article “What to watch out for when considering specific oil and gas investment opportunities”).

Once you find an oil producer who consistently produces oil/gas wells that pay good revenues to invested funds with an acceptable number of bad wells, you can continue reinvesting revenues in new wells. Over time, as you reinvest in new wells, you will be building an increasing income stream with significant tax free revenue and significant tax deductions of all invested funds against all income (no other investment vehicle gives the tax advantages of domestic oil and gas drilling ventures). Your wealth will be built on cash with no debt, no worries about managing real estate, and no time commitment other than considering each oil/gas well presented before deciding on the ones to invest in.

With real estate, you can make a lot of money quickly by buying the right investment at the right price with the right leverage. However, as stated above, most real estate investments involve significant debt. This debt usually must be paid very soon after taking possession of the property meaning it must be in income producing condition with a renter very soon to cover the debt payments. Seasoned real estate investors spend a lot of time evaluating potential properties before deciding on the one to invest in. Once the property is decided, the optimal amount of down payment must be determined to bring the periodic debt payments down to a level acceptable against the expected income. The buyer must also consider the other costs against the property such as property taxes, maintenance, upgrades, management fees, liability insurance, hazard insurance, renter incentives, and other costs. A seasoned real estate investor will not buy a property that is not able to get the rental income needed to cover all of these costs. Many novice investors get stuck with properties that are negative since they may not have considered all of these expenses required to keep a property in rentable condition. If done right, real estate is very profitable.

The most successful real estate investors build a portfolio of positive income producing properties that generate income needed to invest in other properties. When the leveraging of debt works in their favor, they care able to turn relatively small amounts of cash into significant wealth in time. However, not many will pay off all of their debts. Therefore, there is always the risk of debt that comes with wealth from real estate.

My personal preference toward domestic oil and gas ventures:
Personally, I like building wealth without debt through being selective about oil and gas drilling ventures that minimize the risk while maximizing the potential return on investment. I will not invest in a oil/gas project that does not have a significant probability of returning my full investment within one year. I also like the much stronger tax advantages of domestic oil and gas drilling ventures over real estate. Building wealth based on cash means less stress, and it provides extra income to consider other investments that may initially start negative before they also become positive.

Next article in this series:
The next article will continue these comparisons

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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 1: Oil and gas investments vs. real estate investments

First article in a series on comparing oil and gas investments to real estate investments:
This is the first in a series of articles to come based on my own experiences with investments in oil and gas verses real estate (you can read the next article here). These articles are not meant to be comprehensive or definitive on all of the benefits and pitfalls of either. My intent is to provide a comparison of both investment vehicles from the point of view of any accredited investor who does not have a lot of time to manage investments. It is not meant for very sophisticated investors in real estate who have mastered the art of always buying positive income properties. That would be the subject of another article.

Considering the risks and rewards of both:
I have invested in many real estate and oil and gas drilling projects for several years. Both have their good and bad points. Both involve risks and both have the potential for huge rewards. The risk and reward differs for each oil and gas drilling venture and for each real estate project. It is up to the investor to do enough due diligence when considering any investment to learn as much about the risks and potential rewards. When the risks and rewards are understood, then they can be compared between each other to make a decision on where to actually invest the available risk capital. In this light, this series of articles are biased on the side of oil and gas drilling investments over real estate for several reasons.

Considering the time commitment for both:
Oil and gas drilling ventures only require up front investigation to find the right project with the risk to reward ratio that fits your investment strategy. Do your homework up front and invested with an oil/gas project that minimizes risks (use of latest seismic technology, highly experienced oil producer and drilling rig operator, use of latest drilling technology like horizontal drilling far into the pay-zone, etc.) while maximizing returns (consider projects that project return of investment in 6 to 18 months for the risks involved). Once a well is chosen and invested in, your time commitment drops nearly to none. The oil producer then takes over and does all the work to hopefully get you a productive well that regularly sends you a check every month. Your only time commitment is depositing the check (if not done electronically from the producer) and entering the project’s K-1 tax information into your tax returns yearly.

With real estate, you can never fully let go of the investment. Renters call for repairs: plugged up sewage lines, leaks, carpet wear, broken appliances, and many other things. Even with a property manager, they require approval for repairs over a set limit and will ask you to send a check immediately to cover the repairs. You always have to be near a phone where they can reach you for those large unexpected repairs. Also, you are at the mercy of the renter who may vandalize the apartment when leaving.

Considering liability exposure for both:
You have very little to no liability exposure with a properly structured oil or gas drilling investment. Look for the oil developer or operator to carry liability insurance for the drilling project. Liability exposure is mostly a factor during the drilling of the well. Once the well is completed and put online, there is no real ongoing liability risk. The resulting oil or gas makes its way to the refinery in one of several methods – trucks, train, barge/boat, or pipeline. The owners of these methods should carry liability insurance that insulates you from exposure. Therefore, at no time with properly structured oil or gas investments do you need to carry liability insurance unless you are drilling the well.

For real estate, there is always a liability exposure to the owner. Renters can get hurt in any number of ways by any number of things. Injury can come from appliances exploding or catching fire, other causes of fire, violent incidents, accidental injury on the property, damage to vehicle, drug or gang problems, etc. Many things can be mitigated, but there is always some level of liability exposure for the owner that requires ongoing insurance. Also, the insurance may or may not cover all damages from a large law suit such as the death of a tenant blamed on something you did do or something you did not do, but should have. Lawyers love landlords who have not properly protected their assets before tenants are injured.

Next article in the series:
The next article will continue these comparisons

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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

Conducting due diligence before investing in an oil or gas project

Be sure to conduct due diligence before investing in an oil and gas investment.
There are many companies selling oil and gas investments. Many of these companies make money by marking up the costs to assure a profit, even if the drilled oil/gas well turns out dry (bad). For this reason, you should conduct due diligence on a company and the associated oil or gas project you are considering investing in.

How long have they been in business?
Find out how long the company (usually an oil developer) has been in business. What is the owner’s experience in the oil and gas business? How many projects have they successfully funded, drilled, and brought online in the past couple of years? What are the specific returns on invested funds for each of those wells?

How is the drilling rig operator selected?
Find out how the developer selects the driller and operator for each well. Some developers have their own driller and operator to assure being paid for services whether the well hits or not. Also, these developers may not have experience drilling special situation wells. You should look for developers that bring together the right driller and operator for each well who have experience and equipment to assure the highest probability of success. For example, if a well requires horizontal drilling, the developer should find a driller and operator who has drilled many successful horizontal wells.

Check for disciplinary or legal actions.
Check with the state’s department of securities and attorney general for any disciplinary or legal action against the company or its principles.

Ask for ten personal, professional, and client references.
Professional references could include the company’s banker, accountant, lawyer, or other professionals. It is easy to provide a couple of client references that always say good things. However, it is much harder to provide ten unless the company actively maintains good relationships with everyone it deals with.

Check with the Better Business Bureau on how the company stands.
Are there any negative reports against the company? Is the company a BBB member?

Continue due diligence until you are ready to make a decision.
Continue researching what you can about the company until you feel comfortable making the investment or you feel they are not worth the investment risk. If you feel pressure from the company during your investigation, this may be a red flag. They may be trying to rush your decision to invest in order to cut your research short. Don’t let them take control. It is your money at risk, not theirs. Continue your research until you find a reputable oil producer with a project that fits nicely into your investment strategy.

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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 4 of Steps involved in a typical oil and gas drilling venture/investment – Putting a well into production

This is the fourth and final article in a four part series that provides an overview of a typical oil or gas drilling venture from beginning to end (payment of investors). The first three articles covered scouting a location for drilling through forming a partnership, funding the well using a private placement memorandum (PPM), and preparing and drilling the well. This article will cover putting a well into production and selling the resulting oil and/or gas. The first article can be read here.

Finding a buyer for oil and/or gas from a producing well:
The oil producer should now have a good oil/gas well. The producer then:
- negotiates the oil/gas purchaser’s buy contract.
- sets up the production facilities (as needed): compressor (gas wells) and pump (oil wells)
- puts the gas collection lines into the well and associated collection tanks

Doing the legal work before being able to sell the oil/gas:
Once a well starts producing oil/gas, then the producer:
- files paperwork with all government agencies involved with oil/gas wells
- begins selling the oil/gas
- Brings the “abstracts” up to date. These legal documents need updated to reflect a productive well.
- has an attorney prepare the Division Order/Title Opinion.

A division order is completed:
A division order is a legal document filed to show how revenues from the productive well are to be divided. This document must be filed before any revenues can be sent out. This mainly ensures the land and associated lease owners get their fair share of revenues. The gas company (oil/gas buyer) pays out three checks: 1) one to the land owner, 2) one to the lease owner, and 3) one to the operator/producer, who then distributes it to the associated investors in the project according to their investment’s net revenue interest (NRI) percentage of the well.

A Title Opinion is completed:
The Title Opinion is used to verify no leans exist on the property that should be paid first. Ideally, the producer should have checked for leans early in the project when considering a site for drilling. Producers usually look for clean title. The Title Opinion is forwarded to the purchaser of the well’s oil/gas. The purchaser then:
- prepares a Division Order, which sets up how the various accounts are paid (lean holder, land owner, lease owners, and operator/producer)
- sends the Division Order to the producer for signature, after when it is returned to the purchaser
- payments are scheduled and sent out accordingly as long as the well is productive

Entire process takes 60 - 90 days before you get revenues from a viable well:
Usually it can take about 60 to 90 days after a well starts producing for all of the paperwork to be complete for the purchaser to send out checks. The producer then sends checks to the investors.

Summarizing this series on steps in a typical oil and gas drilling venture:
So there you have it, four articles that cover most of what happens in a typical oil and gas investment project. I have not covered all of the various technologies available and used by the industry all along the way. This is a very interesting business and you can never learn enough. Each oil or gas well is unique and presents the opportunity to learn something new. I hope you have been able to get a better feel for all of the things involved in getting a well online and producing income to you.

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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. decision. Feel free to email any questions or thoughts to MarcobeInvestmentsinc@gmail.com. Sphere: Related Content