There are no signs that something is going to change in the oil industry. It still makes the world go around and it is always in high demand. Many industries use petroleum and it is the main component to create plastics. Mostly for cooking and heating energy, we use natural gas. Natural gas is now affordable when you compare it the price many years ago, but still, the demand is large.
Because many economists think that at some point the inflation is going to rise, investing in anything natural that is worth a lot is a good idea. One of the better ideas is oil well investment, because there will be always someone who wants to buy it and sell it, and the price will rise when the reserves get low. There are different approaches to this industry and different ways you can invest.
Types of Oil and Gas Investments
When it comes to exploration projects or companies, they lease or buy land and invest to make drilling possible. If they find what they were looking for, the amount invested can be 10 times bigger, sometimes more. The risk is large here, so the projects need to be really good or you can just take the risk. Developing projects mean that drilling is done close to the reserve where they found a lot of oil. This type is less risky, but still, you can’t be sure of what is going to happen.
Income project includes the purchasing of parcels of land, through purchase or lease, over established gas and oil reserves. This way, you can create a constant income. If you want to get involved in drilling, this is the safest way. The only risk is that we don’t know how fast the natural gas or oil will run out. If you can take more risk besides just investing in annuities and grade bonds, with this type you can create a nice income stream.
There are companies that are supporting and providing services to the gas and oil industry. For example, equipment manufacturers and refining hardware, pipeline companies, logistics and shipping, transportation, and many others. It is similar to investing in a company involved in the business to business service. It depends on the firm because some of them are just related to the business, but the price amount invested doesn’t go up if the price of fuel goes up. For example, pipelines are only making money on barrel transport through a fee per barrel. The demand is here important, so if it is higher, you will earn more.
Ways to Invest
There are many different ways you can invest in this market. One of the ways is buying shares in some gas and oil-focused ETFs or mutual funds. ADRs or large-cap stock are methods where you gain exposure to the gas and oil markets through a publicly traded company. You can buy stocks of big companies like Royal Dutch Shell, British Petroleum and many more. It is done through a broker. The futures contracts can be risky because it can expire without any worth. Read more on this page.
One of the most popular ways to invest is through small or micro-cap stocks and partnerships. This way you will have a more direct equity position in the projects or smaller companies. This is a more specific field of investment, and if the corporation is not publicly traded, you will usually need to engage the service of a broker who practices in this industry for access to this type of markets. For people who are ready to invest a larger amount, you can contact them directly, and ask for a private placement opportunity. This is done through a company’s management.
Advantages of Oil and Gas Investing
One of the advantages is the strong ROI potential you might have. If you invest in a project that proves successful, the return on investment can be huge. It is also important to know that oil and gas stocks tend to rise when oil and gas prices rise. One well can produce many times its costs if drilling strikes oil, and it can fund dividends for many years. The disadvantage here can be the risk of investment and the price swings they usually have.
The IRS grants tax incentives to stimulate private investments in oil and gas production. For drilling business investment, about 70% of a well cost can be completely deductible in one year if everything goes as planned. The other 30% is described as tangible cost and can be decreased over time, usually around 5 years. Additionally, companies don’t pay for 15% of the land tax. To make it even more attractive, there is a 100 percent decrease in legal and administrative accounting expenses, sales expenses, and property lease costs.