Sunset Oil and Gas Partners, LLC
How to Invest in Oil and Gas

There are multiples ways you can invest in oil and gas. Investing can offer the opportunity for substantial returns and much-sought-after tax benefits for certain types of investing.

The two primary methods of investing are purchasing stock in an oil and gas company (public), or investing through direct participation programs (private). Those new to the world of investing must first choose between these two types of investing:

  • Public
    • Major Oil Stock or Other Stock Exchange
    • Commodities Trading
    • Funds: Royalty or Mutual
  • Private
    • Drilling Funds
    • Independents / Direct Participation Programs
Public Investing

Public oil and gas investments come in different forms, such as stocks and mutual funds. Some public investments are considered lower risk, but also involve much lower returns.

Others, such as the futures market or Commodities Trading carries a much larger risk. Some investors with excess capital choose to take the risk in hopes of large returns.

Private Investing

Many investors are not familiar with some of the private investing alternatives. Drilling Funds are a viable option, but do not carry as many tax advantages.

Investing in an independent oil and gas company is an investment in the oil and/or gas well itself, which give investors an ownership position in a well and a share of the income it generates. Generally there are no "middle guy" costs involved, and the investment includes some lucrative tax advantages.

Investing In Wells

The reason investing in an oil and/or gas well is not familiar to many individuals is because it is more popular in areas where those reserves exist. In many cases the oil company who drills the well, or wells, can find most of their capital without going outside the area.

Types of Wells

There are two basic types of wells used by oil and gas companies: exploration wells and developmental wells. Exploration wells are used to search for oil in unchartered regions. These wells carry the higher risk, and if unsuccessful are referred to as a dry well.

Developmental wells, on the other hand, are sunk in areas with known oil reserves. The strategy of drilling in known producing areas carries a lower risk.

Technology has greatly advanced in the oil and gas industry during the last few decades. There are many new drilling methods (see horizontal drilling video) and highly advanced equipment. This new technology is far more efficient in getting the oil out of the ground. Statistics have shown that the previous techniques and out-dated equipment used in the past left a very large percentage of oil in the ground.

Technology has also made leaps and bounds in the geological research and evaluation that independent oil and gas companies use. The geological research is one of the first and key steps in determining the likelihood of success. To learn more about the process, please read How to find an Oil and Gas Investment Drilling Prospect.

Tax and Other Advantages

When investing with an independent oil and gas company, the tax benefits are lucrative. Mike Traweek's article discussing how to invest successfully in oil and gas outlines a 1986 tax code that was revised to allow for the following:

  • 100% write-off of intangible drilling costs (IDCs)
  • 100% depreciation write-off of capital equipment over 7 years
  • 15% of income from the production is tax free (not a deduction)

Other advantages include high financial rewards (returns greater than 10 to 1), lower risk (because advanced technology has minimized it), prospect availability and lower costs, and higher demand and consumption. For more detail refer to ilikeinvesting.com's article entitled, "Advantages of Investing in Oil".