How does one invest in oil and gas?
There are two primary methods of investing in oil and gas. The first and most commonly known method is purchasing stock in an oil and gas company. The second is through direct participation in one or several wells where the investor actually owns a portion of the well and receives a share of the income it generates. Lone Star Securities specializes in direct participation programs.
What is a Direct Participation Program?
A Direct Participation Program is a financial security which enables investors to participate directly in a business venture's cash flow and taxation benefits.
Where are you drilling?
We are currently drilling in Texas, Louisiana and Pennsylvania. We concentrate on South Texas and Louisiana because of potentially higher returns in those areas and on Pennsylvania because of the lower risk and longevity of oil and gas production. In Pennsylvania, we are in the Marcellus Shale, which experts expect to overshadow the popular Barnett Shale in Texas in terms of productivity according to the American Association of Petroleum Geologists Explorer magazine. Click here to view the article.
Why should I invest in oil and gas?
As oil and natural gas supplies are declining, global demand is on the rise. The top ten oil-consuming countries alone consume over 50 million barrels of oil per day. And even with the rising popularity of alternative energy sources as a means to fuel our cars, oil cannot easily be replaced as it is used to manufacture virtually everything we use on a daily basis, from clothing and pharmaceuticals to detergents and insulation. There are thousands upon thousands of petroleum-based products that we rely on every day. Through direct participation programs in oil and gas, investors actually own a portion of a well and receive a share of the cash flow generated via monthly disbursements. In addition to the income potential, oil and gas investments offer substantial tax benefits, which the U.S. government has designed to encourage domestic drilling. Since the Tax Reform Act of 1986, direct participation programs in oil and gas are one of the few remaining investments that allow investors to shelter income, making it one of the most tax advantaged investments today. Investors may be able to deduct as much as 65 to 100 percent of their investment within the first year, whether the well is successful or not, and 15% of your income is tax-free.
Who should invest in oil and gas?
Because of the risk associated with oil and gas investments, investors must meet minimum suitability requirements as defined by the SEC, TX State Securities Board and the Financial Industry Regulatory Authority (FINRA, formerly the NASD). Suitability requirements state that you must meet the following conditions: 1) you are able to sustain the loss of all or a portion of the investment; 2) you can benefit from the tax advantages associated with the investment; 3) you are an accredited investor; and 4) if not accredited, you are a sophisticated investor and the investment does not exceed 20% of your net worth. Contact us if you're interested in completing a questionnaire to determine if you qualify for an oil and gas investment or call 1.866.859.7827.
What is the difference between a "sophisticated" and "accredited" investor?
An accredited investor is defined as someone who: a) has earned in excess of $200,000 per year individually or $300,000 per year with a spouse for the last two years and expects similar earnings in the current year; OR b) has a net worth that exceeds $1,000,000 excluding home, automobiles and furniture. A sophisticated investor is defined as someone who can sustain the loss of all or a portion of the investment, and the investment does not exceed 20% of your net worth. Contact us if you're interested in completing a questionnaire to determine if you qualify for an oil and gas investment or call 1.866.859.7827.
What are the tax advantages associated with oil and gas investments?
After the Tax Reform Act of 1986 which eliminated many tax shelters, direct participation programs in oil and gas are one of the few remaining investments that allow investors to shelter income, making it one of the most tax advantaged investments today. Generally, there are two areas that are immediately deductible in the first year, including Intangible and Tangible Development Costs, which enable investors to deduct as much as 65 to 100 percent of their investment within the first year. Intangible Development Costs (IDC) include the labor, fuel, geology, engineering, logging, testing, hauling, supplies, etc. necessary for the drilling and development of oil and gas wells. Tangible Development Costs (TDC) include the well equipment necessary for the development of oil and gas wells, which are considered as the production of an asset. TDCs are capitalized and amortized over a seven year period, beginning with the month in which they are paid.
How do alternative energy sources affect the demand for oil?
Even as alternative energy sources are being developed and more efficient uses of petroleum are discovered, the demand for oil and gas continues to rise, most markedly in China and India where the population in each of these countries now exceeds one billion people. The top ten oil-consuming countries alone consume over 50 million barrels of oil per day. And, oil is more than a means to fuel our cars. Oil is used to manufacture thousands upon thousands of products we use on a daily basis. So, oil will remain a top-consumable for the foreseeable future and beyond as any alternatives would take decades to gain enough of a foothold to impact the demand for oil.
What is a track record?
A track record should detail exactly what investors paid in and the net amount of cash received by investors per project. Only this information can give you a true account of the company's track record, and it's important to note that many companies don't disclose this information. You'll find that many companies will only tell you the number of wells drilled and completed; however, you should know that many "completed" wells never pay out.
What's the best way to evaluate a drilling project?
The best way to evaluate a drilling project is to identify the potential payout of a project versus your investment. We call this the "acid test." The acid test will tell you your break-even point, meaning how many barrels of oil the project must produce just to break even and ultimately return your investment. This requires a little math, and you must know the price per unit, net revenue interest per unit, gross revenue and price of oil per barrel. For example, suppose you are being offered a .7% net revenue interest in a project for $100,000. For your investment to break even, the well will need to produce a total of $14,285,714 in revenue ($100,000/.007 = $14,285,714). If oil averages $50 a barrel, your well will have to produce at least 285,714 barrels of oil over its productive life ($14,285,714/$50 = 285,714 barrels) for you to break even. You can do the same math for gas or combined oil and gas projects using an anticipated price per thousand cubic feet of gas. Now, look at the surrounding wells / fields to see if any have yielded the amount of oil and/or gas your project requires to return your investment. Be sure to use conservative estimates with regard to the price of oil and/or gas used in this formula as you cannot predict what the future will hold. Be wary of those who inflate the market price in their projections.
For more tips on evaluating oil and gas investments, go to http://lonestarsecurities.com/evaluating-oil-and-gas-investments.html.
How do I know I'm working with a reputable company?
By far, the most important aspect of an oil and gas investment is who you're working with. Here are some tips to finding out if you're working with a reputable company: (1) Make sure you're investing with a registered broker-dealer and member of the Financial Industry Regulatory Authority (FINRA, formerly the NASD). Registered broker-dealers are held to the highest standards of disclosure and are subject to audit by state and federal regulatory authorities, including the SEC and FINRA. (2) How long has the company been in business? (3) Find out what their track record is, including the amount of money invested and the net amount of cash received by investors per project. Many companies report the number of wells completed, but it's important to know that many "completed" wells never payout either because they're dry or fail to provide commercial reserves. That's why it's crucial to ask about the amount of money invested vs. the amount paid out. (4) How does the company select its projects? (5) How do they structure their deals? In some instances the invoice-cost structure is preferred as is the case with shallow wells where there is low mechanical risk. In other instances, the turnkey structure with a fixed cost is more appropriate as is the case with deeper wells where the mechanical risk may be higher. (6) Who does the company rely on for geological/geophysical analyses? (7) Do they have an in-house geologist? (8) Who operates the wells and what kind of experience do they have? (9) Ask to speak to existing and/or past investors to find out what their experience has been with the company? Does the company provide timely information and keep investors informed at every stage of drilling? Do they provide disbursements in a timely manner? (10) Are they a member in good standing with the Better Business Bureau?
What are the risks associated with oil and gas investments?
As with any investment, investors run the risk of losing part or all of the investment principal; however, you can offset your losses through tax deductions. Because of the risk associated with oil and gas investments, regulatory agencies have defined suitability requirements to help identify who is a good candidate for such an investment. Contact us if you're interested in completing a questionnaire to help determine if you qualify for an oil and gas investment.
How did oil and gas form? Where does it come from?
Oil and natural gas were formed hundreds of millions of years ago and are the result of plant and animal remains or organic material from within the earth. For the most part, these plants and animals lived in seas, and their remains settled on the ocean floor together with sediment which washed down from exposed earth and rock. This sediment ranged in size from molecules that dissolve in water to small boulders. In later periods, these layers of organic material and sediment were covered by more sediment which, as a result of time and pressure, converted to layers of sedimentary rock. To fully understand its development and geological history, download our free eBook "Understanding and Investing in Oil and Natural Gas."
What is a "landman"?
A "landman" is an agent who works for an oil company to establish ownership of mineral rights and, ultimately, negotiate the lease terms between two or more parties. The landman also understands the laws and rules concerning leasing in a certain area and how to file the proper paperwork with the local government. In addition, the landman works to resolve problems that may occur in disputed ownership rights, and they're generally knowledgeable about drilling that has taken place in a certain area.
What is a "production project"?
Production projects are oil and gas properties that are already in production, typically producing and selling oil and gas. Sometimes production projects require rework / repairs. This approach allows you to enjoy an immediate income from their investment; however, it's important to know the projected lifetime of the well.
How many gallons of oil are in a barrel?
There are 42 gallons of oil in a barrel.
Will the oil and gas supply eventually run out?
Yes. Oil and gas are finite resources. While they are less plentiful today, the technology to locate resources is better. Experts believe we have already reached our peak oil supply, so the simple economics of supply and demand indicate the value will only increase as our supply falls off.
What is wildcatting?
Wildcatting is essentially drilling a hole in the ground without a great deal of geologic facts or research.
How do I know I'm not being scammed?
While many oil and gas investment firms represent investors fairly and responsibly, we understand many investors are skeptical of oil and gas investments due to the increasing presence of unscrupulous players engaging in fraudulent practices, many of whom have burned investors in the past. As the market fluctuates, state securities regulators warn that high oil prices often create a heightened interest in oil and gas investments, and, as with any highly publicized economic circumstance that creates an opportunity for money to be made, scam artists follow in the shadows to take advantage of the situation. Check out the U.S. Securities and Exchange Commission's red flag warnings website at http://www.sec.gov/investor/pubs/oilgasscams.htm. This website details steps you can take to protect yourself from oil and gas investment scams.
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