Monday, June 30, 2008

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

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 with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: Past articles can easily be found at 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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