5 Things to Know Before Investing in an Oil Well

5 Things to Know Before Investing in an Oil Well

Oil is a money-making machine, and believe us when we say it’s never too late to diversify your portfolio and invest in a productive oil well. But before you take the plunge and dip into the oil industry, here are 5 things you should know.

Investing in an Oil Well Instead of Big Oil Can be More Profitable for the Investor: For those who are interested in investing in oil, big oil companies seem to be the safest and most profitable route. They have a reputation for doing well for themselves and for their stockholders, so you should invest in their company, right?

Not necessarily. When investing in big oil companies, so much of your money goes into the upkeep and overhead of the company itself, not into the oil. By investing in oil wells instead, your money is going toward very little overhead and a whole lot of black gold.

Being an Investor Doesn’t Make You Liable: Investing in an oil well gives you some sort of ownership over the operation, but you don’t have the accountability the supervisors of the well have. The only thing you are liable for is the money you lose or the money you earn — not any potential accidents that happen at the drill site.

So if this was a reason that made you apprehensive to invest in oil wells, you’ve got nothing to worry about.

Oil is a Commodity, So it’s Priced the Same Everywhere: The price of a barrel of oil is the same everywhere you go, but the amount of oil isn’t. Some wells will be full of oil, while others will only produce oil for a handful of years. For that reason, it’s important to know how reliable and successful the operator is at exploring for and finding oil.

Your profits rely heavily on how much and how long oil can be extracted from the well you invested in.

Investing in Oil Has Huge Tax Benefits: About 65-85% of your investment dollars will go straight to what is known as “intangible drilling costs.” These costs include things such as chemicals, mud, labor and grease, all of which are necessary to run a well-oiled machine.

Such a high percentage going to things that aren’t oil may seem a little risky, but you’re in luck: every dime spent on the intangibles is tax deductible.

Oil Investments Are a Great Way to Diversify: High oil prices are typically a huge reason for economic slowdowns, which could cause some volatility in the stocks you’ve invested in. However, at the same time your stocks may be underperforming, your oil investment will be well served.

On the other hand, when oil prices are low, the economic climate tends to pick up. Either way, you’ll be somewhat protected against either a rise or drop in oil prices.

SHOULD I GET RID OF MY STOCKS TO INVEST IN OIL

SHOULD I GET RID OF MY STOCKS TO INVEST IN OIL

The first thing to understand about investing in oil and gas is that it is a lot more volatile than investing in stocks. Stocks and low-yield, low -risks bonds are the most conservative way to invest. Stocks are equity investments that represents part ownership in a corporation and entitles you to proportionate part of that corporation’s earnings and assets. While Oil on the other hand is the most traded commodity in the world and has become an indicator of wealth for many countries.

Like every other investment opportunities out there, investment in oil as against investment in stocks and bonds has its pros and cons.

The stock market is one of the most conservative places to invest your money, though investing in stock can often become risky, ability to manage and mitigate against these risks, can help you take advantage of the stock market to secure your financial position and make money. Investment in the stock market as an asset class has an overall advantage for your investment portfolio.

An investment in stocks comes with a lot of benefits in the form of investment gains – the rise in the value of your stocks as a result of positive growth of the economy or market sector wherein you hold the stocks. Another benefit is income in the form of a dividend. This is an annual payment to investors and it represents profit earned in the fiscal year. These payments arrive even if the stock has lost value. Stocks can be easily liquidated in the event of cash crunch or the need to cut losses in a bearish trend.

The high demand for petrol and petroleum-based commodities backed by tax incentives offers a great investment opportunity for investors in oil. With advancements in crowdfunding technology and regulations. Investment in oil through crowdfunding platform can start for as low as $1,000 and some platforms have created a structure to pass through unique oil and gas tax benefits to the investor.

Investment in the oil and gas industry for individuals and small companies take different forms and risk/reward components. Investment portfolio in the oil and gas industry for small companies and individuals includes; mutual funds or ETFs, partnerships, royalty interest and working interest.

Mutual Funds or ETFs: This investment method poses the least amount of risk for the investor but it does not offer any of the tax benefits. Investors will pay tax on all dividends and capital gains, just as they would with other funds.

Partnerships: Partnerships in oil and gas investments can take several forms with limited partnership being the most common, this sort of partnership limits the liability of the entire producing project to the amount of the partner’s investment. They are sold as securities and must be registered with the Securities and Exchange Commission (SEC). Tax incentives are available on a pass-through basis. The partner will receive a Form K-1 each year detailing his or her share of the revenue and expenses. This sort of investment is direct and provides a stable base for investors looking at a minimal risk portfolio.

Royalty Interest: Refers to ownership of a portion of the resource or revenue that is produced. A company or person that owns a royalty interest does not bear any of the costs of the operations needed to produce the resource, yet the person or company still owns a portion of resource or revenue produced. Holders of royalty interest are not eligible for tax benefits enjoyed by holders of partnership and working interests.

Working Interests: This is the investment with the most risk and is the most involved way to participate in the oil and gas Industry. This sort of investment allows investors own a percentage ownership of the drilling operation, functioning as a form of lease, providing the investor a right to take part in drilling activities and a right to the resources produced from that activity. Along with deriving an income from the production of the resource, the investors are also responsible for a percentage of the expenses related to its acquisition. Investors with working interests are often eligible for certain tax deductions based on the operating costs associated with the business. This can include business expenses of a tangible or intangible nature, such as equipment costs, wages or utility payments.

Whatever your choice, a well-diversified portfolio will provide most of the benefits and fewer disadvantages than stock ownership or oil investment alone. This means you should have a mix of stocks, bonds and commodities. Research has shown that, over time, it’s the best way to gain the highest return at the lowest risk.

 

OIL COMMODITIES VS DIRECT OIL AND GAS INVESTMENTS, WHICH IS BEST FOR YOU?

OIL COMMODITIES VS DIRECT OIL AND GAS INVESTMENTS, WHICH IS BEST FOR YOU?

Investment in the Oil and gas sector is by no means a high risk/ high yield venture. Having the right information and knowing the right investment portfolio for you is the key to maximizing your investment and in some dire cases, the difference between making a killing profit and bankruptcy.

Investors have many options when getting involved with oil. These methods come with varying degrees of risk and range from direct investment in the oil and gas industry, to indirect exposure in oil commodities through the ownership of energy-related equities, futures and options.

Direct investment in Oil and gas involves the purchase of equity in any of the various physical businesses involved in the process of drilling through to bringing to market of refined crude Oil. There are distinct advantages of direct investment in oil and gas industry as opposed to the purchase of stocks of oil companies. Direct Oil and gas investments provide investors with an opportunity to diversify their portfolio and generate monthly cash flows while taking advantage of substantial tax benefits allowed by the US government. Each investor receives a share of the profits generated by the wells they own. In worst case scenarios where exploration hits a dry well, investors can recuperate their investment in a 100% total write off in losses.

There are several factors that encourages the direct investment in oil and gas: one of such factors is that the investor is more engaged directly in management of his funds and will get commiserate compensations in the event of success in the project unlike investment with public oil companies, where significant drilling successes tends to be highly diluted at the individual shareholder level.

In direct investment also, profit potential as a result of increase in the price of oil and gas is significantly higher due to fewer administrative layers. Even more so as the prospect of profit, so is the increase in associated risk. Many private oil and gas projects encounter mechanical and geophysical risk. To mitigate this risk, some investors may choose to build a portfolio of companies to spread their risk across a number of companies.

Indirect investment in oil commodities in the oil and gas sector refers to the purchase of energy-related equities on the stock market, through mutual funds / ETFs or a slightly direct method of investing in oil futures and futures option. All of these investments have their own risk/reward profiles. For instance an investor who doesn’t want to get into the complexities of directly investing in oil and gas companies but can’t resist the lure of the black gold or even if the purpose for investing is diversification, can purchase stocks of publicly quoted companies involved in exploration of oil.

Another way an investor can allocate a portion of his investment portfolio in the energy sector is through mutual funds or ETFs (Exchanged-Traded Funds). This allows the investor to buy into a basket of companies of energy companies and spread his investment in the entire energy sector, from the oil exploration, drilling, refinement, transportation and storage. The key is to find the low-cost and diversified energy sectors for your money worth. ETFs trade on a stock exchange and they can be purchased and sold in a manner similar to stocks. For example, buying one share of the U.S. Oil Fund (USO) would give you exposure to roughly one barrel of oil. ETFs, like the iShares Global Energy Sector Index Fund (IXC), and energy-sector mutual funds, like the T. Rowe Price New Era Fund (PRNEX) invest solely in the stocks of oil and oil services companies and these investments come with lower risk.

The purchase of Oil futures and Oil futures option is another way through which investors can invest in the oil commodities. Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. Futures are highly volatile and involve a high degree of risk. Additionally, investing in futures may require the investor to do a lot of homework as well as invest a large amount of capital.

Deciding on what best suits you, will require you consult with financial services professionals in the energy investment industry. They can offer investment advise when they understand your expectation’s including your investment objectives, tax considerations, risk tolerance, liquidity and time horizons. Understanding your financial circumstances enables them to advise a strategy that would reduce the risks associated with investment in the oil and gas industry, while increasing your chances for success.

SHOULD I USE MY REAL ESTATE PROFIT TO INVEST IN OIL

SHOULD I USE MY REAL ESTATE PROFIT TO INVEST IN OIL

A good real estate investor understands the necessity for diversification of investment and one of the many investment prospects that holds good value and can serve as an inflationary hedge for your portfolio is an investment in oil. There has never been a better time to invest in oil with many experts advising that opportunities for investment in oil and gas today through 2018 are better than the opportunities in the real estate market bubble of 2008.  With an estimated, over $1 trillion in large project cancellations, the future demand for oil and gas consumption which continues to see a steady growth rate, are sure to be unmet, thus forecasting a rise in future prices.

For the savvy real estate investor, now presents an opportunity to branch out and hedge your investments by adding to your portfolio an investment in oil. Adding oil to your investment portfolio has been made easy through advancements in crowdfunding technology and regulations. Investment in oil through crowdfunding platform can start for as low as $1,000 and some platforms have created a structure to pass through unique oil and gas tax benefits to the investor.

These tax benefits are backed by an Act of Congress. The purpose is to provide incentives for investors who elect to commit private equity in the high risk/high reward nature of oil and gas production. It authorizes a binding, one-time election to expense intangible drilling and development costs, which permits an immediate write-off of expenditures that would otherwise be capitalized and amortized. In essence, there is waiver to cushion the effect of any loss that maybe incurred.

Direct investments in oil and gas projects provides for the investor outstanding tax benefits, steady stream of profits generated by the wells they own on a monthly basis and a strong hedge against inflation. Not only do investors in oil take advantage of short-term tax benefits, Investors may also see a near-immediate return on investment, whereas it could take decades to get the full tax benefit on real estate investments. For Instance, if an investor commits $100,000 in a property, he gets to deduct $3,636 per year. Receiving the full tax benefit would take nearly 30 years but that investment of $100,000 is in an oil and gas project with “intangible drilling costs” (IDCs), he can deduct up to 80% of his investment, or about $80,000 in the first year.  At a 35% or 39.6% tax bracket, this is equivalent to a 28% – 32% return in year one, even before the project produces oil and/or gas. He would also receive additional tax reduction benefits based on production values and depletion of the reserves.

Intangible drilling costs (IDCs) is the term used to describe all cost associated with the exploration of crude oil. Cost includes items like labor, drilling mud, fuel, wages, structures necessary to perform labor, and supplies, whether it is performed on the well, to drill the well, or on the ground surrounding the well. Think of it as all costs incurred that have no salvage value.

Benefits outside of tax breaks that an investment in oil will derive for the investor includes but are not limited to the following :

Quick Turnaround Time of Investment : An investment in real estate can take several years to determine if the investment is a success.  In contrast, an investment in a small oil and gas project like those proposed by crowdfunding platforms, will provide for the investor a time frame of between six months to a year to determine the success or failure of the project.

Diversification: Investment in oil and gas projects, serves as a good vehicle for diversification as it provides an inflationary hedge for your investment portfolio. It is most times independent of the bulls and bears of the stock market and returns from these projects are not dependent on the economy, as is the case for the housing market.

High Rewards: Direct investments in oil and gas projects can pay off big and has the capacity to break even several times over if the well is productive. This result of this is steady cash flow from distributions for many years.

Ownership of crude oil at the point of extraction can be a very lucrative addition to your investment portfolio, going by current prices and forecast of increased demands backed by the promise of Tax benefits, investment of profits from real estate in Oil is a very good bet.

TURN MY IRA INTO BLACK GOLD, HOW TO TURN YOUR IRA INTO AN OIL WELL

TURN MY IRA INTO BLACK GOLD, HOW TO TURN YOUR IRA INTO AN OIL WELL

Setting yourself up for a fantastic retirement all starts with having a great plan. To retire comfortably, you need the help and advice of investment experts on the right type of investment portfolio that suit your retirement goals and maximize returns on your IRA.

Traditional IRA investment portfolio consists of stocks, bonds and mutual funds. Investments are also sometimes held in non traditional asset class such as real estate and or publicly traded securities such as options, futures or other derivatives. Another favorite non traditional asset class is precious metals. This has for a long time been a great way to diversify the investment portfolio of your IRA. They also serve as an inflationary hedge for your portfolio.

In recent times, experts are becoming more daring and are looking beyond gold bullion to black gold—oil and the reasons are not far-fetched. As global demand for oil continue to rise, with the U.S. consuming more oil than it produces, the potential for increased domestic production on American soil is promising. Advancement in technology now offers the promise of tapping previously unreachable oil fields. North Dakota has produced record-setting oil output month after month and reaping the rewards of low unemployment and enormous profit. Meanwhile, the booming production at the shale fields in Texas have jumped by more than a third over the last year and production now outpaces even that of North Dakota. The future of Oil still burns bright!

 

There is no better time than now to turn your IRA into black gold. All indices points to an improved fortunes for oil in the future as even the U.S. is in the midst of an oil renaissance and this makes for very profitable investment opportunities. For instance, the Koch Pipeline Company has just proposed the construction of a new pipeline that would carry crude oil from North Dakota to Illinois. In addition to profit, there are tax incentives for investment in oil and gas. Where some ventures may seem risky or the potential for profit unlikely, investing in the black gold could serve as a hedge against high-risk investments and inflation. The revenue from a consistently producing well may pay off for many years.On the global market, oil still commands a fair price. The global crude oil price forecasts from the OECD in June 2016 shows 2017 oil prices flat at $50 per barrel. In contrast, according to the April 2016 estimate of the Economist Intelligence Unit (EIU), oil prices will go up in 2017, because oil consumption will outstrip production. Over a 40 year period, the price of oil have continued on a steady rise up until 2012 from which time there has been a decline in price but that is not to say that the future of Oil is bleak as the world Bank published forecast shows a resurgence in the price of oil due to growing industrialization of developing countries and increased demand for petrol and petroleum-based commodities.

Turning your IRA into an oil well offers you an opportunity to hold your investment in a secure portfolio, one that is certain to maintain or increase its value over a given period.

Turning your IRA into black gold can take diverse forms. The most common is investing in oil sector ETFs. Oil sector ETFs refers to ETFs that holds stocks of companies in the Oil and gas industry. These funds are an easy way for investors to gain exposure to the Oil and gas industry. They are diversified, which can reduce the volatility of the investment compared to holding the stock of a single energy company.

Investors may also hold the stocks for individual oil companies in their IRA. This method allows investors to pick their specific holdings. Investors may want to look at companies within the mid or small-capitalization space that can allow for greater price appreciation. Some investors may wish to pick the part of the oil industry in which they make their investments. Since the oil industry is so massive, there are many types of companies up and down the supply chain. Income-oriented investors may want to focus on companies that pay high dividends currently, or companies that are likely to grow dividends in the future.

Investors can tailor their IRA investments in the black gold to fit their specific risk profiles be it ETFs, individual oil companies or in Oil commodities. Whatever you choose within the oil and gas industry, your IRA will act as a shareholder and potentially garner great profit.

HOW INVESTING IN OIL COULD SAVE YOU THOUSANDS ON YOUR TAXES

HOW INVESTING IN OIL COULD SAVE YOU THOUSANDS ON YOUR TAXES

In an effort to stimulate domestic oil and natural gas production financed through private equity, Congress provided tax incentives in the 1990 Tax Act to significantly enhance the economics of investing in the oil and natural gas industry. This incentives have made investment in the oil and gas industry one of the most tax-advantaged investments available.

The new Tax Code specifically states that a working interest in an oil and gas well is not a “passive” activity. Therefore, deductions can be offset against any income. This includes active stock trades, salaries, and business income. (section 469 (c)(3) of the Tax Code)

The concepts of “Passive” and “Active” income was first introduced into the tax code in the 1986 Tax Reform Act. The Act prohibits the offsetting of losses from Passive activities against income from Active businesses. What this implies is that, a loss or expense in an investment in a mutual fund(passive investment – since he doesn’t actively manage the investment portfolio of the fund) by a doctor cannot be offset by earnings from his medical practice but should the investment be a working interest in the oil and gas industry(another passive investment – since he also doesn’t manage the business), he would be able to deduct such loss or expense from the tax returns of his medical practice.

The lure of petrol dollar with the ever high demand for petrol and petroleum-based commodities backed by tax incentives, offers a great investment opportunity for investors. The investment options available in the oil and natural gas industry for the likes of Dr. James Rodriguez from Iowa or Mrs. Camellia Sullivan of Georgetown, New Jersey are quite varied with each offering marginal returns on investment and some, tax breaks on their day jobs. It is worthy to note that not all investments in the oil and gas industry attracts such tax breaks and it is our intention to clarify those that offer such incentives and those that do not.

Investment in the oil and gas industry for individuals and small companies take different forms and risk/reward components. Investment portfolio in the oil and gas industry for small companies and individuals includes; mutual funds or ETFs, partnerships, royalty interest and working interest.

Mutual Funds or ETFs: This investment method poses the least amount of risk for the investor but it does not offer any of the tax benefits. Investors will pay tax on all dividends and capital gains, just as they would with other funds.

Partnerships: Partnerships in oil and gas investments can take several forms with limited partnership being the most common, this sort of partnership limits the liability of the entire producing project to the amount of the partner’s investment. They are sold as securities and must be registered with the Securities and Exchange Commission (SEC). Tax incentives are available on a pass-through basis. The partner will receive a Form K-1 each year detailing his or her share of the revenue and expenses. This sort of investment is direct and provides a stable base for investors looking at a minimal risk portfolio.

Royalty Interest: Refers to ownership of a portion of the resource or revenue that is produced. A company or person that owns a royalty interest does not bear any of the costs of the operations needed to produce the resource, yet the person or company still owns a portion of resource or revenue produced. Holders of royalty interest are not eligible for tax benefits enjoyed by holders of partnership and working interests.

 

Working Interests: This is the investment with the most risk and most involved way to participate in the oil and gas Industry. This sort of investment allow investors own a percentage ownership of the drilling operation, functioning as a form of lease, providing the investor a right to take part in drilling activities and a right to the resources produced from that activity. Along with deriving an income from the production of the resource, the investors are also responsible for a percentage of the expenses related to its acquisition. Investors with working interests are often eligible for certain tax deductions based on the operating costs associated with the business. This can include business expenses of a tangible or intangible nature, such as equipment costs or utility payments.

The oil and natural gas industry is quite volatile. When you become involved in these ventures, have a healthy respect for the potential risks and be honest with yourself about your own risk tolerance and investment horizons. Ask cogent questions such as; Are you a natural entrepreneur? Can you afford to lose substantially on any one venture? Is it worth the risk if there’s a chance at great reward?

You may be a candidate for limited partnerships, futures, working interest or shares in small exploration companies. If they strike it rich, so will you. But you could lose it all. Pay heed to liquidity. If there is any chance at all you will need to pull your money out in a hurry, the limited partnership route is not for you. These investments can be lucrative, but they work best for those who are able to lock up their funds for years at a stretch