Understanding An Existing Oil Drilling Investment Opportunity

Overview of the project:
We are currently invested in a single well being drilled in Texas. We are about to participate in a new five well project that will be open for funding by investors very soon. Each of the five wells will be drilled similar to this single well. This article will provide some highlights of this single well project to help readers understand what they will hear about when considering an investment in oil/gas drilling. It is written for educational purposes only and is not a solicitation to invest or a prospectus.

This single well project is a re-entry into a vertical well drilled by Exxon in the mid-80s. The well was capped at that time since oil was too cheap to continue producing from the well. This investment pays for a rig to go back into the vertically drilled hole to then drill horizontally upwards of a mile through the pay zone (layer of earth where the oil and gas are known to exist from the well’s previous log report.

An overview of horizontal drilling:
Horizontal drilling is a fairly new process for drilling where the drill bit can actually be steered sideways toward the highest concentrations of oil and gas. The drill operator usually has tools allowing logging while drilling (LWD) the hole. This means the operator can see what the formations in the ground are around the drill bit to know what the move toward or away from. This provides much better odds for a successful well than simply drilling vertical wells and logging the well after it is drilled to see whether the well will be a success or not. Also, another benefit of horizontal drilling is that the wells tend to produce strong for the first five years or so and then continue producing at a slower rate over the next 15 years or so. Over the life of this well, the investor may gain significant multiples of total return on their initial investment.

Understanding how the investment is structured:
- Investors ownership: Investors have 33% working interest (WI) and 25% net revenue interest (NRI) in the well. This means they own 1/3 of the well for tax purposes, but receive 25% of the revenues generated by the well since other percentages to the land owner, lease owner, oil producer, and others involved outside of investors.

- Cost of investment: Each unit of investment costs $100,000. This provides 2.75% WI and 2.0873% NRI in the well for the investor.

- Projected return on investment: This project was initially formed when oil was selling for around $80 per barrel. Projected earnings for the investor’s $100,000 at that time was $119,808 at 200 barrels of oil equivalent (BOE) per day for $80 per barrel oil. With oil now trading about $125 per barrel, this equates to around $187,200 income or a 187% return in the first year of production. This does not count the additional tax savings granted by congress for independent producers of domestic oil and gas.

- Tax savings benefit: There is an expected additional average tax savings of $32,000. All invested funds in domestic independent oil and gas drilling ventures are deductible against all income types with the intangible drilling costs (IDC) being fully deductible the first year and the remaining tangible costs being deducted over seven years. For this project, IDC are about 80% of the project so $80,000 of the $100,000 invested is fully deductible in the first year by the investor.

- Yearly tax free income benefit: In addition to the tax deductions, 15 – 23% of each year’s income is tax free for these types of domestic oil and gas drilling ventures. With a projected first year income of $187,200 at $125 per barrel oil, the investor would receive a minimum of 15% tax free, or $28,080. If you are in a 35% tax bracket, that is a savings of $9,828 in taxes. This is additional income to you.

Putting it all together for expected 1st year return:
At $125 per barrel for oil and 200 BOE daily production, this project is projected to create $187,200 income + $32,000 tax savings (80% of invested funds from IDC 1st year deduction) + $9,828 income tax savings (1st 15% of the year's income is tax free) for a total of $229,028 the first year for a $100,000 investment. This is a projected 229% total return on the investment. As stated earlier, in general, horizontal wells provide stronger returns initially and over longer periods of time than vertically drilled wells. Therefore, this project could generate many multiples of the original $100,000 invested funds over the life of the well.

New information since the original project was put together:
Recently another major oil drilling corporation has had several similar wells in the area come in at 500 to 700 BOE daily production. If this project comes in at 500 BOE daily, the first year income would be $468,000 at $125 per barrel oil instead of the $187,200 calculated for the original 200 BOE projected daily production. That would be a 468% return on investment in the first year. Again, this does not count the additional savings from taxes. We are keeping our fingers crossed that the well comes in around this range.

Low time required for an outstanding return:
As an investor, most of your time will be spent investigating the initial investment to consider participating in a oil/gas drilling venture and funding your share of ownership in the partnership. Once invested, you can sit back and watch the monthly payment checks come in. A good return for very low overall time commitment.

Disclaimer:
Information provided in this article covers projections on a single well horizontal project. These are not to be considered actual returns. There are many factors that can cause the returns to vary from projections, including the possibility the well may not turn out to be producible (a dry hole - oil industry jargon). Each investor should always do his/her own due diligence before considering participating in any investment. This article is provided for educational purposes.

Summary:
I hope this example of a real existing oil drilling investment helps you understand some of the things I have discussed in previous articles to this blog. This is why the oil and gas can be very profitable for investors who know what they are doing and make calculated investments in this industry. I never suggest anyone invest more than they are willing to lose so seek advice of a professional if you are considering investing in oil and gas for the first time.

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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. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

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

Third and final article in the series:
This is the third article in this series about how to make the choice on a specific oil/gas well drilling project to invest in. Click here to read the first article.

Focusing specifically on an investment in drilling for oil and gas:
In the previous article, we covered many ways of investing in oil and gas. From this point forward, we will address those investors who have decided to invest in domestic drilling ventures for oil and gas.

Choosing a specific oil developer to invest with:
After you have clearly defined your investment strategy (see the first article in this series), you need to look for oil producers that offer the type of investments that fit your strategy. However, there are many inexperienced and questionable oil producers out there trying to get your money.

Once you decide to invest in oil and gas, where do you go to find viable projects?
Your best bet would be to find someone who is currently a successful oil and gas investor and find out what they are doing. Ask everyone you know if they know such a person. After you exhaust those sources, ask professionals who deal with high net people such as financial advisers, the local Chamber of Commerce, accountants, lawyers, etc. The most risky place to look for these investments is over the Internet, magazine or newspaper ads, and investment chat rooms.

Be cautious before investing with a oil producer.
You must be very cautious and check these producers out. A previous article provided provides information to conduct due diligence on oil producers to narrow your search to reputable candidates. Part of your elimination process should be understanding the various oil and gas investments they have to offer and matching those against your investment strategy.

How much should you invest?
When you finally chose the best project and associated oil producer, then consider how much you want to invest. Another past article covers a strategy for systematically creating debt free wealth through oil and gas investing. Spread your available investing capital across several projects to mitigate the risk of any one project being bad. This also ensures you have capital to invest when a true opportunity presents itself. If you are always fully invested, then you may be tempted to borrow funds for investing. Don’t start on that path with oil and gas investments. There are too many risks and you could end up in lots of debt with little cash flow to cover the payments.

Continually learn.
Eventually you need to start with one investment in oil and gas drilling. Don’t research so much that you never take this first step. Know that you will make mistakes and there will be dry holes (a term used to describe a drilled hole that will not produce oil or gas). You will lose money. However, if you never risk your money then you will never have the chance to participate in the very productive wells that can return 20 or more times your money over the life of the well. The rewards can be significant for productive wells, especially at today’s high prices.

Do your homework.
Don’t pass on the opportunity to participate in oil and gas well investments based on negative things you may hear about those companies that give the industry a bad name. Research the companies you want to invest in. Understand whether they are using the latest technologies. Continually learn as much as you can about the oil and gas industry. Find one or more successful oil or gas investor who will mentor and guide you. Learn from them to not repeat the mistakes they may have made. Find out what makes them successful. What is their investment strategy? They may get you into deals you would otherwise not be made aware of. In any case, make a decision and move forward systematically with your investment in oil and gas. Be sure to follow your investment strategy to help make good decisions and avoid those “investments” that do not get you closer to your investing goals that follow your 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.

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Part 2: How To Choose A Specific Oil and Gas Drilling Venture To Invest In

Second article in the series:
This is the second article in this series about how to make the choice on a specific oil/gas well drilling project to invest in. Click here to read the first article.

Understand there are many ways to invest in oil and gas:
There are so many different types of investments out there today. A few include:

-- Simply purchasing stocks in oil and gas related companies. Your investment loss is limited to the amount you invest so the risk is manageable. You do need to watch these stocks over time to make sure the underlying company isn’t doing things that may cause it to go into bankruptcy or other problems. Also, the stocks tend to fluctuate with whether oil and gas are in or out of favor at the time.

-- Purchasing an oil Exchange Traded Fund (ETF). You can invest in a fund that buys and sells oil or gas. This way you are not dependent on the underlying company, but only on what direction the price of oil and gas moves. Therefore, these ETF will also fluctuate with whether oil and gas are in or out of favor at the time. However, you only have the risk of price movement from the oil and gas and not from a company as you do with stocks.

-- Trade commodities futures contracts. Here you buy contracts on oil or gas in the futures market. You can put very little money down in order to control a significant amount of oil and gas. If the price moves only a little, you stand to either gain or lose many multiples of that movement. Since the risk of loss is much more than your investment, these are extremely risky investments. Professionals know tricks to control these risks, but most individual investors do not. As a result, these investor have to watch these prices, at a very minimum, once per day to consider readjusting their positions. Again, if the price moves in the opposite direction the investor bets, then the losses can be very large, very quickly. Many times the price of oil and gas moves very big overnight in foreign markets and opens in U.S. markets sharply higher or lower. You will not have control to sell your position (in many cases) and may wake up to a significant loss. You must be very careful when playing the futures market. There are many professionals in the market who trade them all day, every day. They can drive the price against you very quickly.

-- Purchase of land where oil or gas may be drilled. The hope is that oil or gas will be drilled and productive on the land to provide a portion of the revenues back to you as the land owner. However, if you buy land in an area that is known to have productive wells, then the price of the land may already be inflated to a point the revenues may not be that significant after paying payments on the land. Be careful.

-- Purchase of a lease that covers the right to drill on a specific piece of land. In this case, since you are not the land owner, you don’t have to worry about covering payments on the land. You can receive a portion of the revenues from the wells, but will also share revenues with the land owner, the developer, others involved in drilling and servicing of the well, and with investors in the wells that are drilled on the leased land. For a small fee to lease the land, the revenues from productive wells can be significant, while the risk is only the funds you pay for the lease. The lease purchaser should secure land that is known to be productive or has a high probability of being productive. The lease should provide the rights to conduct seismic and other studies of the land to verify the potential for good wells. Also, leases usually cover the right to drill several wells on the land, which reduces the risk to the investor/owner of the lease since hopefully not all wells will be dry (bad or non productive). Smart leases are low risk and have the potential for huge returns. For these reasons, most leases are only offered to large institutional investors and not to individual investors. Many large oil companies like Exxon will own these leases while, in some cases, letting small oil producers with their associated individual investors fund the drilling of each well.

-- Participation in drilling one or more oil and gas wells. As a participant, you are usually a general partner with all the associated tax advantages granted by congress for domestic wells to reduce our dependence on importing foreign oil. However, the oil producer and investors in the well take the risk of the well either being productive or dry. However, with all the associated tax advantages (tax free income, writeoff of invested funds against all income types, reduction of up to 40% of your alternative minimum tax income, etc.), and with most of the revenues generated form a well going to these investors, the overall returns can be very significant for good productive wells. However, due to the high risks that go with the potentially high rewards, investors should only consider investing in wells with a high probability of returning all invested funds in 6 to 18 months. That makes the risk to reward ratio reasonable against the risk assumed with drilling oil and gas wells. The probabilities for a productive well can be increased by using the latest seismic technologies, conducting thorough research on other wells in the same area, using reputable oil producers and well operators, etc. Most of the articles posted on this blog are centered around these investors in specific oil and gas projects. Visit the blog site for additional articles.

-- Participate in funding the transportation of oil and gas. Some companies offer partnerships to fund placement of a pipeline to oil and gas wells for transporting the oil or gas to a buyer. As an investor, you usually receive a percentage of revenues resulting from the oil or gas flowing through your funded pipeline.

-- Participation on a off-shore oil platform. These types of investments usually involve tens or hundreds of millions of dollars. Due the the significant funds required, these investments are almost always only offered to very high net investors and/or institutional investors. Once a platform is placed, there can be many wells drilled from one platform. The result is increasing revenues from multiple wells without the additional significant investment of a new platform each time a well is drilled. The revenues generated from a platform can be significant if many productive wells are drilled from it.

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. Sphere: Related Content