Understanding Oil and Gas Speculators – Why Do We Need Them?

Oil and gas speculation is in the news:
Lately we have been reading about Congress and their desire to regulate speculation in the oil and gas market. What is this speculation? Who are the
speculators and how do they work?

What is an oil/gas speculator?
A “speculator”, in this sense, is an investor in the futures market who buys or sells futures contracts on oil or gas. In general, an investor will buy a futures contract (called going long) if he or she feels the price is going up. Alternatively, if the price is assumed to be going down, the investor will sell a futures contract (going short).

What is a futures contract?
There is an article on the Telegraph’s website (a Brittish newspaper) that does a good job describing the futures market. Also, the Chicago Board of Trade (www.cbot.com) website has a good brochure that describes the futures process mostly about agricultural products, but the principles are pretty much true for oil and gas futures contracts as well.

Bottom line – a futures contract is a legally binding contract between a buyer and seller to deliver a standardized quantity of the underlying product at a specified price on a specific future date. What this does is allow a seller and a buyer to agree on a set price to transact the trade of a item in the future, oil or gas in the case of this article, while shifting the risk of price changes onto the investor who buys the contract as a futures contract. The buyer could be a airline company who uses lots of gasoline and must be able to predict what the cost will be on a future date when they need to purchase enough quantity to fly their planes. The seller could be a refiner that produces jet fuel from crude oil for airlines and agrees to the future date and price. The seller is also able to project what future revenues will be from the sale of fuel on a future date. In fact, the seller may actually contract to sell fuel that is not yet in inventory. In this case, the refiner may also have a future contract with a crude oil supplier for deliver of oil on a future date at a future agreed price. In this case, there is a chain of contracts, all vulnerable to dramatic changes in actual market price for oil (or similarly for gas).

How are prices determined?
Both parties, the airline and the refiner, will negotiate the future price based on estimates of what the price of fuel will be trading at on that date using the best available data today. This estimate may be close or way off, either higher or lower. World events can occur during the time of the contract to dramatically change the price. If prices increase dramatically over the agreed price, the seller loses potential profits that would have been made at the higher market price. If prices go down dramatically, then the buyer could end up spending much more for the fuel than a competing airline who buys at the lower market price. Therefore, without a means to mitigate the risk of price changes, both parties may hesitate before entering a contract and both will not be able to accurately project future revenues and costs.

What is the role of a speculator?
This is where a speculator can help. The futures speculator takes on this risk of price changes during the time of the contract. The buyer and seller can feel confident to enter their best estimate for prices on a future date knowing they can then pass the contract to a futures trader, “speculator”, to take on the risk. The speculator that feels the price will increase to the contracted price buys the contract, which is known as “going long”. The speculator that feels prices will not reach the agreed price will sell the contract before it expires, known as “going short”. In fact, short sellers can make money as the price decreases by forcing someone to buy back the contract at a lower price than they sold at it. This is beyond the purpose of this article, but is one strategy that speculators use.

Strategies speculators use:
There are many strategies speculators use to hedge their long or short bet on the future price of oil or gas. Some involve buying or selling more than one contract and different strike prices (the agreed contracted price the underlying oil or gas will be sold at in the future). Some involve buying both a long and short position at different prices. Some involve buying or selling multiple contracts at the same strike price. Then there are options that can be traded on these futures contracts, which again is a topic for another article.

Futures markets support strong business:
The futures market provides buyers and sellers with a world-wide trading platform using standardized contracts that are easily traded and understood by futures traders. Buyers and sellers can feel confident to enter these future contracts knowing the risk is easily passed to future traders. This is a critical tool for business to accurately project future revenues, costs, and earnings in a volatile market. Businesses can move forward transacting business in unpredictable market conditions. Without the futures market, businesses would not be able to accurately project their costs and revenues. They may be forced to be overly conservative and hold off investments for future growth, which could lead to less jobs or even loss of jobs. It could mean missed business opportunities due to being too conservative on investments for future growth.

Prices are not determined by the speculator, but by market conditions:
Speculators are also guessing what the future price will be when the contract expiration date comes. They are subject to world events that can dramatically change the current trading price of oil and gas for past futures contracts that end each day. Buying and selling futures contracts does not change the price, the demand and supply of oil and gas each day does. I don’t disagree there may be some large groups who could manipulate the supply or demand for oil or gas each day (OPEC, emerging country growth – China & India, etc.).

Summary:
These are my personal thoughts on the wonderful benefits provided by the futures market and associated futures traders, also known as speculators. I don’t claim to be an authority on such markets, but these are my personal observations.

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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. Sphere: Related Content

Understanding An Existing Multi-well Oil Drilling Investment Opportunity

Overview of the project:
We are currently invested as lease a owner in a multi-well oil drilling project that will be drilled in Texas. This is a five well project that is being purchased by a foreign investor and slated for drilling to start very soon thereafter. Each of the five wells will be similar to the single well project written of in the previous article posted last week. This article will provide highlights of what a multi-well project looks like to provide readers with insights when considering investing in similar oil and gas drilling ventures. It is written for educational purposes only and is not a solicitation to invest or a prospectus. Some hypothetical situations have been added for purposes of helping the investor conduct his/her own systematic “what if” analytical approach when considering these types of investments.

This five well project involves re-entry into vertically drilled wells by Exxon in the mid-80s by using horizontal drilling upwards of a mile through the known pay zones to minimize the risk of failure while maximizing the potential flow of gas and oil (payout to investor). These wells were abandoned at that time since oil was too cheap to continue producing from the well.

An overview of horizontal drilling (repeat from last week’s single well article):
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: This five well project is being sold to a single investor. The investor has a 75% working interest (WI) and 54% net revenue interest (NRI) in the well. This means the investor owns 3/4 of the well for tax purposes, and receive 54% of the revenues generated by the well since other percentages go to the land owner, lease owner, oil producer, and others involved outside of the investor.

- Cost of investment: This is an $11.2M investment.

- Projected return on investment: Conservative revenue models project a 56% annual internal rate of return (IRR) for ten years. This is much less than the projection from the single well described in last week’s article. The main reason is that this 56% return is over ten years where the projections in last week’s article was only covering the first year’s return. Another reason is that the 56% projection assumes three of the five wells are drilled the first year and one of those wells does not produce. It also assumes the last two wells are drilled the second year and one of those wells is bad. Therefore, the conservative projection assumes that two of the five wells are dry holes (non-producing wells). There are other differences you should look for between investments such as the Working Interest and Net Revenue Interest differing from project to project.

- Tax savings benefit: The projected return does not consider any added returns from tax savings due to write offs which could add an additional 25 – 50% to the first year return based on your tax bracket. As a reminder, 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. This project has a high percentage of IDC so a large portion of the total investment can be written off the first year against all other income. I don’t have the actual IDC percentage for this project. For purposes of this example I will assume 70% of the project is IDC (fairly typical for many projects). In this case, 70% of the $11.2M can be deducted the first year saving $7.8M in taxes. The remaining 30% tangible costs are deducted over seven years.

- 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. A projected first year income of $7.6M at $130 per barrel oil with a total 300 barrels of oil equivalent (BOE) daily production means the investor would receive a minimum of 15% tax free, or $1.1M. If you are in a 35% tax bracket, that is a savings of $385,000 in taxes that is additional income.

Putting it all together for expected 1st year return:
At $130 per barrel for oil and 300 BOE daily production, this project is projected to create $7.6M income + $7.8M tax savings (70% of invested funds from IDC 1st year deduction) + $385,000 income tax savings (1st 15% of the year's income is tax free) for a total of $15.8M the first year on a $11.2M investment. This is a projected 141% total return on the investment. As stated earlier, this return assumes 2 of the five wells are bad. Also, in general, horizontal wells provide stronger returns initially and over a longer period of time than vertically drilled wells. Therefore, this project could generate many multiples of the original invested funds over the life of the well.

Lets look at hypothetical high projection scenarios:
Recently another major oil drilling corporation has had several similar wells in the area come in at 500 to 700 BOE daily production.

For fun, let’s make assumptions that assume ideal situations concerning production from the associated wells. Again, these are hypothetical and idea situations provided to help the investor think about doing their own ‘what if” analysis of investments. As an investor, it is good to know your upper, as well as your lower boundaries of expectation before making an investment.

Scenario 1: Let’s assume each of the three wells come in at 500 BOE, that would be a total of 1,500 BOE daily (remember we also assume two of the five wells are dry holes). That would be five times the 300 BOE production shown earlier for this project. This would translate into a first year income of $38M at $130 per barrel oil instead of the $7.6M calculated for the original total 300 BOE projected daily production for the first year. That would be a 339% return ($38M/$11.2M) on investment in the first year of production from all three wells.

Scenario 2: Now lets assume all five wells are good and each producing 500 BOE daily. Total production from the five wells would be 2,500 BOE daily, 8.33 times the 300 BOE production. This translates into a first year income of $63.3M at $130 per barrel oil. That would be a 565% ($63.3M/$11.2M) return on investment in the first year of production from all five wells.

Again, these examples do not count the additional savings from taxes. Keep in mind that production will start dropping off each year for the wells so the income shown is not going to last through the life of the wells. However, if either of these first full year of production scenarios comes in, you can see why investing in oil and gas drilling ventures can be very profitable for investors in the right projects. The remaining years would be icing on the cake.

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:
Again, information provided in this article covers projections on a multi-well horizontal drilling 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 multi-well 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.

Sphere: Related Content

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.

Sphere: Related Content

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.

Sphere: Related Content

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

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.

- - - - - - - - - -

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

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.

- - - - - - - - - -

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 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.

- - - - - - - - - -

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: 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.

- - - - - - - - - -
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.

- - - - - - - - - -
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 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