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.
When it comes to oil and gas, is there a difference in ROI between a stock investor and direct participation investor?
Yes. In the case of a stock investor, the returns are re-invested in the company; however, direct participation investors receive monthly revenue checks from the well's cash flow, which they can simply enjoy as supplemental income or use to re-invest in additional projects or other vehicles.
What is the minimum investment amount?
The minimum investment is $25,000 for one quarter unit due in two installments. A full unit in one of our Programs is typically $100,000.
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. We strive to include wells from all three areas in each of our multi-well partnerships. 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.
What is my payout? How long until I get my money back (return of investment)?
We strive to provide a minimum of a 30% annual rate of return. During our project selection process, we analyze nearby wells to determine production projections and target projects that we expect will return the investors' investment in 24 months or less. In some cases, however, a three to five year payout may be justifiable if the risk associated with the project is lower. Our latest multi-well program is proving to be even better than initial projections, potentially providing a 12-15 month return of investment.
What is the return on investment?
Once the investor has their money back (return of investment), the return on investment could potentially be in excess of three to one on your money, cash-on-cash, excluding tax benefits.
How many wells do you currently have in production and/or drilling?
We currently have 67 wells in production, and another 12 wells will be in production by the end of June 2008.
Are you drilling for oil or gas?
Our multi-well programs involve both oil and gas. Because our programs include both, we do not offer the option to choose between oil and gas investments.
What type of returns are your clients getting?
Investors who participate on a consistent basis are getting about a 30% annual rate of return.
Why should I invest in oil and gas?
While oil and natural gas prices are on the rise, so too is global demand. The top eight oil-consuming countries alone consume over 80 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 it generates via monthly disbursements, which investors can either enjoy as supplemental income or use to re-invest in additional projects or other vehicles. And, you continue to receive profits without leaving your principle invested as is the case with a stock investment. In addition to the high 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 can 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. To find out if you qualify for an oil and gas investment, complete our qualification questionnaire or call toll-free 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. To find out if you qualify for an oil and gas investment, complete our qualification questionnaire or call toll-free 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. Investors can 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. Limited partners may deduct expenses and/or losses associated with their investments against passive income. General partners may deduct expenses and/or losses associated with their investment against ordinary, active income on Schedule C of their tax return. 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.
What is a tax shelter?
A tax shelter is any method of reducing taxable income resulting in the reduction of the payments to tax collecting entities, including state and federal governments. Tax shelters are created by the government to promote a certain desirable outcome to help the economy as is the case with encouraging domestic drilling.
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 eight oil-consuming countries alone consume over 80 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 your track record?
Our track record is fully disclosed in our offering document, detailing 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 difference between the "invoice-cost" and "turnkey" structure?
Drilling and completion costs are typically handled on an "invoice-cost" (aka actual-cost) or "turnkey" basis. The invoice-cost structure means the investor pays the actual cost to drill and complete the well after paying a one-time overhead fee to cover the expense of managing and offering the project. With the invoice-cost structure, investors receive an accounting of all invoices paid toward drilling and completing the well. The invoice-cost structure ensures that the number one goal for both the company and the investor is to produce a successful well so as to create revenue for both parties. That is to say, the company doesn't profit unless its investors profit, often resulting in a more favorable partnership for investors. The turnkey structure, on the other hand, is a fixed amount set by the project manager, which is typically double or more than double the actual cost to drill and complete the well. The turnkey structure often affords the company a profit whether the well is successful or not.
How do I know your expenses are true?
As a result of the invoice-cost structure, investors pay the actual drilling and completion costs as charged by suppliers. A list of actual invoices is provided to investors upon request.
I've been burned by oil and gas investments in the past. How do I know your projects won't underperform like everyone else's?
At Lone Star Securities, we understand that many investors have been burned by oil and gas investments in the past. And, while there are no guarantees in the oil business, there is one promise we stand behind: At Lone Star Securities, you will be treated fairly. With over 20 years of experience in the oil and gas industry, we believe in offering our investors the best possible terms on compelling projects deemed to have a high probability for success as a result of our rigorous analysis process. At Lone Star, we do things a little differently from most in our industry, offering multi-well programs on an invoice-cost basis through our affiliate Riley James Development Corporation as opposed to the more common single-well, turnkey structure.
Riley James' multi-well program structure makes the most of your money by spreading out your investment across multiple wells so as to avoid putting all your eggs in one basket, so to speak, thus mitigating your risk. Furthermore, the invoice-cost structure means the investor pays the actual cost to drill and complete the well after paying a one-time overhead fee to cover the expense of managing and offering the project. With the invoice-cost structure, investors receive an accounting of all invoices paid toward drilling and completing the well. And, it ensures our goals are aligned with those of our investors, which is to drill a successful well and generate revenue as a result of the cash flow from that well. In other words, we don't make a profit unless our investors make a profit. The turnkey structure, on the other hand, is a fixed amount set by the project manager, which is typically double or more than double the actual cost to drill and complete the well. The turnkey structure often affords the competition a profit whether the well is successful or not, so the company makes its money on the front-end as opposed to being dependent upon the outcome of the well.
What projects do you have?
As a registered broker-dealer and member of the Financial Industry Regulatory Authority (FINRA, formerly the NASD), we are required to qualify investors as being suitable for this type of investment prior to disclosing specific project information. Once you have been deemed a suitable candidate for such an investment, we will be happy to discuss our current projects with you. To see if you qualify, complete our qualification questionnaire or call toll-free 1.866.859.7827.
How long have you been in business?
Founded in 1987, Lone Star Securities is a registered broker-dealer with more than 20 years of experience in the oil and gas industry. Founder and President Joe Ireland personally has over 28 years of experience in the industry. Lone Star Securities is in good standing with the Better Business Bureau as an Accredited Business member committed to upholding the highest standards to ensure a positive customer experience in all our affairs.
Where do you think energy prices are headed?
According to experts, oil and gas prices will remain high for the next several years due to the increasing worldwide demand and volatility in the Middle East.
What is your horizon?
The horizon, also known as the "formation" or "zone," varies with each project with the exception of the Marcellus Shale, which is a consistent horizon for our efforts in Pennsylvania.
Can I speak with some of your existing / former investors?
Yes, we encourage you to speak to our investors. Client references are available upon request.
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 your net revenue interest is 1.25% at a per unit price of $100,000. For your investment to break even, the well will need to produce a gross revenue of $8,000,000 ($100,000/.0125 = $8,000,000). If oil averaged $80 per barrel, you investment will have to produce 100,000 barrels over its productive life just to break even ($8,000,000/$80 = $100,000). 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. Even though oil and gas prices are at record highs, 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.
In addition to this formula, there are many aspects to consider during your evaluation. First look at how the deal is structured. Is it an invoice-cost or turnkey deal? If it's based on an invoice-cost structure, you know the company is not making money off of the drilling portion of the project as is the case with the turnkey structure. With the turnkey structure, the company often profits whether the well is successful or not, so they are less motivated to drill a successful well. With the invoice-cost structure, the company makes its money just as investors do. Secondly, look at the company's track record, including money invested vs. money paid out. Look beyond just the number of completed wells. It's important to note that many "completed" wells never payout either because of inadequate commercial reserves or a dry hole. Third, ask to talk to existing investors for a firsthand account of how the company conducts business. Fourth, check with third-party references such as the Better Business Bureau as well as regulatory agencies such as the SEC and FINRA (formerly known as the NASD). Finally, look at the company's longevity. You also have the option of hiring a geologist to evaluate the project.
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). It's important to know that anyone can sell an oil and gas deal, and high oil prices have invited unscrupulous players looking to make a quick buck to the industry. 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? Companies who structure their deals on a turnkey basis make their money on the front-end just to drill the project and are less concerned with the well's outcome. With the invoice-cost structure, on the other hand, the company makes its money on the back-end, profiting only on the production of a successful well as do the investors. (6) Who does the company rely on for geological/geophysical analyses? (7) Who operates the wells and what kind of experience do they have? (8) 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? (9) Are they a member in good standing with the Better Business Bureau?
Why should I invest with Lone Star Securities?
Lone Star Securities is a registered broker-dealer and member of the Financial Industry Regulatory Authority (FINRA, formerly the NASD) with more than 20 years of experience, giving it the longevity and experience investors rely on when it comes to oil and gas investments. Through our affiliate, Riley James Development Corporation, Lone Star Securities mitigates the risk associated with oil and gas investments by offering multi-well programs on an invoice-cost basis. With the multi-well approach, investors' money is diversified across multiple wells as opposed to a single-well deal where all your eggs are in one basket, so to speak. And, the invoice-cost structure ensures the company's goals are aligned with those of the investor because Riley James only profits on the back end as a result of a successful drilling project. This differs from the more common turnkey structure in that companies profit on the front end of the project, putting less emphasis on the outcome of the well. Riley James offers full disclosure of its track record and encourages potential investors to speak to existing investors, giving you a firsthand account of investors' experience with Lone Star and Riley James. In addition, Lone Star Securities is very discerning in terms of the projects it selects to present to investors. While scores of projects are evaluated each year, only a select few are chosen to present to investors. All projects are evaluated by Lone Star's management team and its panel of industry experts in the fields of geology and geophysics as well as experienced well operators with over 100 years combined experience in the oil and gas industry.
How do you evaluate and select projects?
With over 100 years combined experience in the oil and gas industry, Lone Star Securities' affiliate, Riley James Development Corporation, has a project selection team comprised of its management and third party consultants who evaluate scores of projects each year. After diligent research and examination, only a select number of projects are chosen to present to investors. All prospective projects must pass rigorous geological analyses and demonstrate a high propensity for delivering a return on investment – typically in 24 months or less. Each member of the review panel must answer a definitive yes when asked if a project has a likely potential for success.
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. To see if you qualify for an oil and gas investment, complete our qualification questionnaire.
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 that primarily contain hydrogen, carbon and oxygen. 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.
Do you do wildcatting?
No. Wildcatting is essentially drilling a hole in the ground without a great deal of geologic facts or research. We only present projects that are in proven and/or production fields after diligent research and analyses.
Why aren't you in the popular Barnett Shale play in Texas?
We have evaluated projects in the Barnett Shale; however, when we looked at the cost vs. returns associated with potential production, we determined our investors' money would be better spent elsewhere. Upon evaluation, surrounding wells did not reflect the stated reserve potential. In addition, transportation fees for gas were too high. While we do not have projects in the Barnett Shale, we do have projects in the Marcellus Shale in Pennsylvania, which experts predict will outperform the Barnett Shale in terms of production.
If your projects are so great, why don't you pay for them yourself? Why do you need investors?
Just as major oil companies use stockholders' money, we rely on investors to cover the costs associated with project evaluation and overhead. We risk a considerable amount of money up front to evaluate projects long before they are offered to investors. We might spend thousands of dollars evaluating 10 prospects and only deem one worth pursuing. In addition to the evaluation, our investment includes the costs of buying the prospect, attorney fees associated with the offering, marketing expenses and overhead. Companies rarely invest to a greater extent in their own projects.
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. State securities regulators warn that high oil prices have created 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 legitimately, 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.
Lone Star Securities encourages investors to do their homework before making such an investment. Lone Star Securities has been in business for more than 20 years - such longevity is hard to come by in the industry. In addition, we are held to the highest standards of disclosure and subject to periodic audits by the SEC, Texas State Securities Board and the Financial Industry Regulatory Authority (FINRA, formerly the NASD) as a registered broker-dealer and member of FINRA. We are also a member in good standing with the Better Business Bureau. Furthermore, we invite prospective investors to speak to existing / former clients so as to get firsthand account of investors' experience with Lone Star Securities.
What is the process for making an investment with Lone Star Securities?
To make an investment, you must first speak with a Lone Star Securities Registered Representative who will determine if you are qualified for the investment. If you qualify as either a sophisticated investor or an accredited investor, information concerning the company will be mailed to you. A “get acquainted period” is required before the Registered Representative is allowed to send you an investment opportunity. Once a pre-existing relationship is established, you may receive an offering sponsored by an affiliate of Lone Star Securities, Inc., Riley James Development Corporation. Once you have a thorough understanding of the offering, you will be asked to participate. Assuming you wish to participate, the Registered Representative will walk you through the offering’s subscription documents. The investment is finalized once the subscription documents are signed and payment is received in the self-addressed Fed Ex return envelope, which we provide along with the Private Placement Memorandum.
Is investment info sent first from an inquiry?
No. As stated above, Lone Star Securities is required to establish a relationship with you and determine your level of income and investment sophistication prior to your receiving an offering.
Are there documents to sign?
Yes, the subscription documents must be signed and returned with payment to finalize the investment. The subscription documents accompany a Private Placement Memorandum which discloses all material facts concerning the investment to you.
What do you receive as proof of purchase?
You will receive a letter of confirmation of purchase from an officer of Lone Star Securities.
When is the start date of a program?
As soon as a program is fully funded, the proposed operations will begin.
On average, when would you start receiving payments?
From the date of your subscription, it could take up to one year to begin receiving revenue checks.
If there are losses, how would you be notified?
You will be contacted via email or mail depending on your preferred method of communication at every stage of drilling.
Can there be losses and gains?
Your actual costs associated with your investment may be treated as losses whether the investment is successful or not. That is, over a period of time, your entire investment may be deducted from your ordinary income if you participate as a general partner in one of Riley James’ limited partnerships. Although investing in oil and gas drilling is considered a high-risk investment, the potential gains are quite high.
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