4 Super Advantages of Oil and Gas Investing
Investing in oil and gas shares common characteristics with investing in various other types of alternative investments, the most obvious is real estate, which looks to provide a generous return through a combination of (1) current income and (2) appreciation upon sale.
However, there are some characteristics/advantages of oil and gas investments which differentiate it from real estate and other alternative investment. Listed below are a few.
- Absence Of Leverage – Debt or leverage is not often used in oil and gas investing. While real estate investors are open to foreclosure risk when loans failure to pay or cannot be refinanced on maturity, the oil and gas investor simply bears a reduced ROE, and has no personal risk on recourse debt or so-called non-recourse carve-out guaranties.
- Diversification – The benefits of diversification are notable primarily in royalty offerings, where risk can be spread through packages of royalties (1) across different fields, (2) counties and states, (3) across predominantly oil or predominantly gas producing properties, (4) across relatively mature and less developed properties and (5) across a broad range of qualified operators and distribution networks. The opportunities for diversification are less apparent in working interest offerings, although some sponsors are including (1) more than one opportunity in an offering, and (2) mixing existing production, (3) rework and drilling opportunities into the same package.
- Transferability – There is a long history of fractionalized oil and gas interests. Direct participation royalty interests are generally freely transferable without the types of securities law concerns and other obstacles which make fractionalized real estate interests difficult to transfer. Working interests and interests in funds are less transferable.
- Tax Benefits – Many oil and gas investment programs, especially working interest programs, include huge tax benefits. Be alert of programs that seem to push the envelope on tax benefits, and all the time review the offering with your own personal tax counselor before investing.