Part 1: How To Choose A Specific Oil and Gas Drilling Venture To Invest In

Know your investment strategy/goals:
Most investors do not have a lot of spare time to spend managing their investments. However, every investor should take time periodically to initially define and periodically reevaluate their investment goals, where they are currently toward reaching those goals, and what strategy they have to get there. This strategy needs to consider the investment risk tolerance of the investor, the timeframe needed to reach the goals, what assets the investor currently has and in what form, and many other factors.

What are your goals? What timeframe do you need to reach those goals? What is your risk tolerance? What assets do you have and in what form (home, stocks, cash, bonds, etc.)? How much cash do you have to invest? What percentage of your cash is available for higher risk investments? What amount of time do you have to watch/manage your investments? How are you investing (self, with others, corporation, partnership, trust, fund, etc.)? What purpose do you have for investing (retirement – when?, tax advantages, freedom, etc.)? What freedom do you have to invest the funds - Do you need permission? - From who and why?

Only after you have given serious thought and effort toward clearly defining your investment strategy and goals, then consider if investing in oil and gas drilling ventures is and appropriate investment for you. Don’t jump in because you think it is a quick means to wealth with the current high price of oil and gas. High prices alone do not mean lots of wealth for investors. There are many things that can go wrong with a oil and gas drilling venture where you will lose all of your investment. Only use risk capital that you are willing to lose after first building a successful investment base that continually generates the risk capital you need to consider oil and gas drilling ventures, again, only if it fits your strategy.

Typical investment strategy/goals associated with oil and gas drilling investments:
Investment goals you should have when considering investment in oil and gas drilling ventures should include:
- Rapid return on invested funds (look for projects with expected 6 – 18 month return on investment)
- Very low time commitment requirement
- Tax deductions against both ordinary income and capital gains
- Reduction of alternative minimum tax (AMT) and investment income that does not put you into an AMT situation
- An income stream with significant tax free components
- Limited loss to only invested funds
- Very low to no liability risk
- Investment in something that most everyone uses regularly with rising prices (increasing returns for the investor)

Many of these goals are due to the unique tax advantages provided by Congress for direct investment in domestic oil and gas drilling ventures (tax free income, deduction of each invested dollar against all income types and capital gains, up to 40% reduction of alternative minimum tax income –AMT, etc.). You can read more about the various benefits of oil and gas investments in past articles at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html.

Take your time finding the right oil/gas drilling venture to invest in:
You do not want to risk your money without taking the time to evaluate several oil developers and projects they are offering. I’ve noticed investors in a field they are not familiar with will try and get their information only from the oil developer selling interests in a project. The developer tells them everything they want to hear to make the project seem absolutely a “sure thing”. They then give all kinds of “proof” that you will believe if you don’t know the business. In this case, the investor then tends to throw lots of money into the project without much hesitation. They give more thought and research into buying their HDTV than in researching the right oil developer and project that fits his/her investment strategy.

When buying a TV, Car, or house, we spend hours, even days researching on the Internet, talking with people who have recently bought, reading reviews, etc., before ever making the final decision to buy. By the time we purchase, we have done enough research to make an educated decision. Why then can’t a new investor in oil and gas do the same level of research before investing? If you don’t know the business, then learn all you can about oil and gas investments first. There is a danger her of over analyzing as well where you never make the decision to invest because you never feel like you’ve learned enough. There is a fine balance that you need to find for yourself. Having a clearly defined investment strategy and associated set of goals is absolutely critical in helping you understand where oil and gas drilling ventures may or may not fit. You will be able to consider each drilling project to know how it does or does not fit within your plans. All of these play together in helping you come to a decision either to invest or not in a specific oil/gas project.

Next article in this series:
The next article in this series will continue thoughts on what an investor needs to do when considering investing in an oil/gas drilling venture.

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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.

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Debt Free Wealth Generation From A Good Oil and Gas Investment Strategy

Only use risk capital when investing in oil and gas drilling ventures.
When considering investing in oil and gas drilling ventures, only risk capital should be used. As with any investment, if you are not comfortable risking the loss of money, then you are investing too much. This level of comfort differs for each investor. You need to decide what your comfort level is. Once decided, follow an investment strategy that maximizes your returns while minimizing your losses.

A basic strategy for oil and gas drilling investments:
· Don’t invest in only one or two wells. Reduce your risk by spreading the available funds over several wells.
· Invest approximately the same total funds in each oil and gas drilling project. Using the same amount of funding keeps you disciplined and consistent. You wont be as susceptible to an oil producer trying to more in one project since it is a “sure thing”.
· Only consider investing in wells that are projected to return your investment in 6 to 18 months.
· Develop a reinvestment plan into additional wells. Decide what percentage of oil/gas revenues from your wells to should be reinvested in additional wells. This way your income continues to rise from consistently adding new wells at the same time your older wells start dropping in production.

Consider an example of diversifying over several wells:
Let’s look at an example showing how diversification provides the best combination of risk verses return. In this example you have $100,000 total to invest. You invest approximately the same portion of this money across four wells. It is may be impossible to invest exactly the same in each well since the cost to participate may differ from well-to-well.

When the wells are complete and in production, we see the various monthly returns for each and further see that well #2 turned out to be a dry hole or non-producing well. The return on investment with the other three wells varies from a high of 200% to 67% with an overall combined return of 93% across all four wells.

Had you invested the full $100,000 in well #1, the total return would have been maximized. However, you would have risked losing all of your funds had it turned out to be a dry hole like well #2. Alternatively, had you only invested in two wells with the dry hole well #2 being one and either well #3 or #4 being the other, your combined returns would have been much less than the current diversified 93% across the four wells. Therefore, investing everything in one or two wells hoping for a 200% ROI Well #1 is not worth the risk, and misses out on the strong diversified 93% ROI.

A long term strategy for oil and gas drilling investments:
Every well runs dry at some point in the future with some wells only lasting a short time while others last for many years. It is important that you continually add to your portfolio of oil and gas wells to replenish lost income from the older wells as they slow down. As stated earlier, a portion of the income from your wells should be reinvested into additional wells. Beyond trying to maintain the same level of combined income, you should consider reinvesting even more so your resulting yearly income is always increasing. Over the long run, continued diversification will minimize your risk of loss while providing consistently increasing income. Another reason to continue reinvesting in additional wells is to take advantage of the tax write-offs against the income from these wells.

Consider an example of reinvesting oil/gas income into additional wells:
In the previous example we received a combined 93% ROI over four wells. This means we will receive $93,000 income from those wells in the first year. If we reinvest a little over half of that into two additional wells at $25,000 each, then the resulting income would be significantly higher while lowering our risk over more wells. This assumes the first wells continue to provide a strong payout after the first year.

Scale up your investments as income grows:
Continuing this strategy provides you with increasing income that is debt free. You are using income to buy additional income. This is a very powerful way of having your money work for you to increase your wealth. Eventually, as your income increases, you will be able to participate in larger projects while increasing your percentage ownership in the associated partnerships. You could scale up your average investment per well from $25,000 in this case to $50,000, then $75,000, etc. This may mean purchasing additional percentage ownership in these projects or participation in larger projects that require more funds per percent ownership. Also keep in mind that ongoing investment in additional wells provides associated tax write-offs against the growing income stream.

Your input is desired for future article topics:
We want to hear from you. What oil and gas investing related questions to you have that we have not already covered? Please email topics you would like us to consider at our generic email address MarcobeInvestmentsInc@gmail.com. Also, email us if you have any other thoughts or questions for us to answer. Thank 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.

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Part 5: Oil and gas investments vs. real estate investments

Fifth article in a series on comparing oil and gas investments to real estate investments:
This is the fifth and final 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.

Summary of comparisons between real estate and oil and gas investments:

Time commitment:

• Up front time before investing - Both require considerable time up front to chose the right investment that fits within your investing strategy/goals.


• Ongoing time after investment is made – Most oil and gas investments only require time to deposit checks periodically and to extract info from the K-1 tax form yearly. Real estate, on the other hand, requires time for continuous monitoring of - market conditions; monthly expenses for repairs, rent ads, upgrades; regulation/code compliance; liability exposure/insurance; currency of property tax payments; unplanned events/expenses; crime/violence issues/vandalism; and others. Some of these can be passed to a property manager at a cost, but even they will need your permission and time to deal with many of these issues.

Simplicity:

• Once an investment is made in a oil and gas venture, the investor sits back and waits for income and K-1 forms.


• Real estate investments require monitoring many issues on an ongoing basis.

Income hedge against inflation:

• Income from producing oil/gas wells will go up as the price of oil/gas goes up until the well starts to lose production over time. The investor should have continued diversifying through tiered investment in additional wells to maximize ongoing revenues over time.


• Income from income property will follow market conditions. When markets are tight, income rises fastest. In down markets, there is more competition and income tends to flatten or even decline. Diversification over different types of income properties can help alleviate this issue. Good real estate investors will plan their portfolio to balance each other under different market conditions.

Tax related benefits:

• Direct invested funds in most domestic oil and gas drilling ventures are 100% deductible dollar per dollar against all income types (passive, active, portfolio, capital gain, and up to 40% of AMT income). Typically 70-90% can be deducted the 1st year for intangible drilling costs with the remaining intangible costs deducted over seven years. In addition, the first 15-23% of yearly income is tax free due to the depletion allowance (similar to how depreciation works for real property).


• For real estate, expenses are deductible. An income related tax benefit to the investor is the depreciation allowance on buildings usually over 27 years.

Liability exposure:

• Oil and gas drilling ventures have the highest liability exposure during the drilling of a well. However, this liability is usually contractually the responsibility of the driller to cover with insurance. Therefore, the investor in a partnership have very little to no exposure. The only other period of liability is during transportation of the oil/gas, which again is usually the responsibility of the transporting company to cover.


• Real estate investors have full liability exposure at all times to fire, earthquake, tornado, and other mother nature events; vandalism; theft; crime events when someone is injured or killed; other injury or death due to issues with your property; and other exposures. Owners must maintain good insurance that specifically covers all events that could happen including the ones mentioned here. There are ways of structuring the real estate investor’s portfolio to limit liability exposure through asset protection methods. However, there is usually still some potential for financial exposure that, at a minimum, could involve legal fees to defend.

Use of debt/leverage:

• Oil and gas investors usually use risk capital for investing and do not borrow funds for this purpose. Therefore, they tend to build cash flow very quickly from good wells that provides funds to continue investing in additional wells. When done right over time with the right investment strategy, this can result in significant increasing cash flow through reinvestment while maintaining no debt exposure.


• Real estate investments usually involve some level of debt for leverage. One of the benefits of real estate has been the use of leverage (“other people’s money”) to multiply the returns on the investors invested funds. When done right over time, real estate investors are able to greatly increase their wealth. However, there is usually some level of exposure to issues related to debt. Investors may have a strategy to eventually sell some of their portfolio of properties to pay off all debts on the remaining properties. This would result in a debt free cash flow income that hopefully increases over time as rents increase.

Final thoughts:
As we end this series comparing oil and gas drilling investments to real estate investments, I wish to reiterate that the intention of these articles is not to say real estate investing is inferior to oil and gas drilling investing. In fact, they complement each other very well as components of a total investment portfolio for high net individuals, investment trusts, institutional investors, investment partnerships, corporate investors, and other investment related entities. Each of these needs to consider their respective investing strategy/goals to determine what percentage of risk capital to put into real estate and/or oil and gas investments. What you don’t want to do is blindly go into any investment without a plan, strategy, and goal to guide the daily decisions that will lead you to those associated targets. Taking the first step is always the hardest. Methodically taking each additional step forward will hopefully lead you on the right path toward continued success.

Your input is desired for future article topics:
We want to hear from you. What oil and gas investing related questions to you have that we have not already covered? Please email topics you would like us to consider at our generic email address MarcobeInvestmentsInc@gmail.com. Also, email us if you have any other thoughts or questions for us to answer. Thank 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.

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Part 4: Oil and gas investments vs. real estate investments

Fourth article in a series on comparing oil and gas investments to real estate investments:
This is the fourth 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.

Comparing tax advantages/issues:
For real estate investments, usually only expenses and losses are deductible during each year the property is owned. When purchasing a property, expenses generally total 5 to 10% of the price.

For well executed real estate purchases, income from the property (and/or potential future capital gain) will more than cover these expenses. If not, then the losses are deductible, but the owner must carry these losses until the property becomes profitable or is passed to another party. Sophisticated real estate investors have developed other tax advantages. This article refers to the average real estate investor/investment.

One other tax advantage for real estate is the ability to depreciate the property (building/structure) over time, usually about 27 years. The land is not depreciated in most cases. The assumption is that the government says the building will only last that long at which time it will have a value of zero dollars. In reality, buildings usually last much longer than this. In locations where land is very valuable, the depreciation is against a small portion of the overall property value.

For direct participation in domestic oil and gas drilling ventures, you can write off the full amount of invested funds against all income types (active, passive, portfolio, capital gains, etc.). The intangible drilling costs (IDC) of a well can be written off immediately in the first year of the investment and can range between 70-90% of the invested funds. The remaining portion of the investment covers tangible costs and is written off over seven years. A past article covers this in more detail.

Other advantages of these oil and gas ventures are:

• First 15 to 23% of yearly income is tax free due to a depletion allowance. This acts much in the same way as depreciation of buildings does for real estate. The Depletion allowance assumes the well will be dry after 7 years like real estate assumes a building is worthless after 27 years (see related article).


• Income from a domestic oil or gas well will not count toward alternative minimum tax (AMT) income like it will for real estate (see related article). Income from property may put you into a AMT situation.


• You can reduce up to 40% of your AMT dollar per each invested dollar invested in a domestic oil/gas drilling investment (see same past article as previous bullet above). In general, real estate does not provide this benefit.


• You can reduce and possibly eventually eliminate capital gains taxes on 1031 exchanged assets by selling them outside of a 1031 exchange and investing the proceeds in domestic oil and gas drilling investments. Use the high first year intangible drilling cost write-off (70-90%) to eliminate taxes on that portion. Use the seven year write-off tangible costs to eliminate taxes on the remaining portion (the other 30 -10%) (see related article). Most real estate require paying taxes when selling outside of a 1031 exchange.

Next article in the series:
The next article will continue these comparisons between oil/gas investments and investments in real estate.

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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: Oil and gas investments vs. real estate investments

Third article in a series on comparing oil and gas investments to real estate investments:
This is the third 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.

Regulation and additional liability issues:
For oil and gas investments, the investor has very little to no liability exposure (see article 1 of this series) and no regulation issues other than SEC regulations for accredited investors. The oil developer is responsible for the liability and all regulation requirements to drill and put a oil/gas well into production. The investor has no time commitment required other than funding the investment. However, for real estate, you read more and more these days about new regulations being added to income property owners at the city, county, state, and federal levels.

Some cities now require rental dwelling (apartment, house, etc.) owners to be licensed. The intent is to teach owners about code requirements, how to get rid of bad tenants, how to reduce crime, how to find quality renters, etc. With a license, the city can control the quality of property owners, reduce crime, and increase the quality of rental units for current renters. This licensing requirement is growing as many cities experience success in raising the quality of tenants and rental properties while reducing crime. Another desired benefit is increased tax revenues as property values rise (hopefully) due to more desirable housing/properties.

There are many other regulations either being considered or currently in effect on income property owners. Laws are being considered to require designated smoking areas within apartment complexes. Owners are being held personally liable for crimes committed on their properties with claims the owner didn’t do enough to prevent the crime.

Additional real estate insurance issues (see the first article in the series as well):
If proven guilty of not properly safeguarding the property, you may have insurance issues if the insurance company also feels you didn’t do enough to prevent the crime. They may not pay damages in that case. Outside of crime issues, the insurance coverage you have on a property may not cover natural disasters such as earthquakes. Many property owners don’t realize they need to purchase separate insurance for earthquakes and these policies don’t usually cover the full replacement cost of the structure. The owner usually has a large deductible that will need paid to rebuild. Also, the insurance may not have kept up with increased property values so will pay out much less than the new increased cost to replace the structure.

Next article in the series:
The next article will continue these comparisons between oil/gas investments and investments in real estate.

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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