Often, investors focus primarily on the potential rewards of an investment; however, you must be equally aware of the risk that accompanies it. When investing in oil and gas, you must be aware that it is possible you may lose your entire investment due to the inherent risk and complex process associated with locating these natural resources. For that reason and to encourage domestic drilling programs, the U.S. government effectively underwrites a portion of the risk by providing substantial tax benefits to investors – tax benefits which exist whether the well is successful or not.

It is particularly important to understand the nature of the business when considering an oil and gas investment. That is, as with any investment, there are no guarantees. Due to the risk and complexity, it is unlikely an investor will have success with every project. Therefore, it is important to ask yourself if you're willing and able to invest in multiple projects rather than approaching it as a one-time deal. For example, while eight out of nine wells may hit oil and/or gas, it's possible that only a fraction of those will be deemed economically viable for commercial production, thus generating profits for investors. With that in mind, it is best to consider a series of single well projects or a multi-well drilling program to mitigate your risk and diversify your investment.

You should also understand that this is a business that has its fair share of unscrupulous players. Look for a company that utilizes a registered broker-dealer as its agent. Registered broker-dealers are members of the Financial Industry Regulatory Authority (FINRA, formerly the NASD) and are held to a higher standard of disclosure. Ask for references so you can hear what the company's existing investors' experience has been. And, instead of just evaluating the prospect for hitting oil, break the deal down to make sure there is going to be a fair distribution of the rewards. Furthermore, find out how the deal is structured - whether it is "turnkey" or "invoice-cost" (aka "actual-cost"). The turnkey structure works against the investor as it ensures a return for the company whether the well is successful or not. The invoice-cost structure, on the other hand, aligns the company's goals with those of the investors and will prove to serve as a better partnership for the investor.

Assessing the risk also requires a good understanding of how oil and gas reserves are formed, where these deposits are found, and how they got there in the first place. The sophisticated investor should also understand the basics of drilling, testing and completion. And he/she should understand who receives what portion of the reward if the well is commercially successful. Finally, oil and natural gas are finite supply commodities that have the potential to be replaced, or pressured, by alternative energy sources that either currently exist or are under development. Over time, these alternative fuels and technologies may impact the future demand for oil and gas; however, because oil and gas are so ingrained in industrialized nations, it would take decades upon decades for any real impact to occur.

For more information on direct participation investments and multi-well drilling programs that serve to mitigate your risk, as well as the unique invoice-cost structure presented by Lone Star Securities, Inc., go to www.lonestarsecurities.com or call 1.866.859.7827. To see if you qualify for an oil and gas investment, go to http://lonestarsecurities.com/questionnaireRJDC.html.

page 33

Return to Table of Contents

© copyright 2008, Lone Star Securities, Inc. All rights reserved.