Investing isn’t just a cliche but a way of life. Now you can make sure you do it wisely.
In today’s unpredictable world, multiple streams of income are the way to go, and with the global demand for crude oil and biofuels, this seems like a wise investment.
The stats speak for themselves; in 2018 a whopping 99.2 million barrels of oil were used a day. This is a stark rise from the 86.4 million daily barrels needed in 2010. Experts predict that this demand will only increase.
So with that in mind, let’s explore what to look for as you leap into your first oil investment with oil and gas companies.
Does that sound good? Great. Let’s get to it!
Types of Oil and Gas Investments
Educating yourself on the kind of investment you’d like to make allows you to choose the most profitable option for you.
So, we’re going to make it simple by laying out the different types of oil and gas investments.
For instance, exploration is a risky type of investment for several reasons. Companies involved in this buy or lease land so they can invest in drilling.
That being said, it’s a ‘go big or go home’ type of investment. If the company should be right and stumble upon oil, the return is ten times over what they paid.
Yet if they don’t, almost everything they put down will be gone. But, this investment is suited for those who can handle a considerable investment risk. Decide if you are capable of losing it all before choosing this type.
Developing follows along the same risk lines as exploration but in a different manner. The goal is to drill near areas that are proven reserves, yet there’s no guarantee the land will produce what’s expected from it.
If you want to play it a little safer, then this income might just be for you. The process involves receiving land through lease or purchase instead of oil and reserves.
This allows a steady stream of income that’s sure to exceed your expenses. Of course, like any other investment, there is always a risk.
However, the risk with income is that the oil or natural gas will run out faster than anticipated. This, however, is highly unlikely.
Another option is to stick with a company that is always supporting the oil and gas industry. These can range from shipping and logistics companies to refiners and equipment manufacturers.
Whichever you choose, be reminded that these companies don’t rely on fuel prices to be successful. No matter what happens with fuel prices, they will remain virtually the same. This signals good news to your secure investment.
Once you’ve decided on the direction of your investment, now comes the question, “In what way?”
Well, this what the midstream sector is for. The midstream sector is a perfect start because it is less affected by commodity prices because its revenue comes from long term fee-based contracts.
Choose from midstream stocks and exchange-traded funds such as Global x MLP, Magellan midstream partners, Tortoise North American pipeline fund, and Infracap MLP.
These companies are all structured as MLP ( master limited partnerships) with tons of rewards like tax benefits and an attractive yield.
You can also invest in energy stocks. EFT’S, mutual funds, large market cap stocks, and futures contracts, are all ways of getting your investment into the right hands.
EFTS are perfect for those who don’t have the time to research for hours.
Oil mutual funds work similarly with a slight difference. An expert fund manager decides which area to invest in and decides what will make a profit.
While this option costs a bit more, you have the safety of someone beside you and not having to go at it alone.
You can also go directly to the oil wells. Choose how many projects you would like, which ones float your boat and pick the amount that fits your budget.
Success depends on what you pick, so say goodbye to predicting oil prices. No tax deductions are also a cool bonus to this semi risky option.
Risk it All
Before making any significant decisions in life, we must always judge if the adverse outcomes that may suffice are worth the risk. It’s no different when it comes to your investment. You must understand that demand is low.
Natural gas, for example, is only in demand in the winter. After that, it takes a massive price drop. Companies will not earn a high revenue during these seasons, which means your investment takes a hit as well.
Risking dividends is another huge change. Companies will pay out shares to their investors serving as a source of regular income.
However, if the company cannot earn that money, then the investors won’t receive theirs either.
Now we know oil is a major part of our world, so like the saying goes, “accidents happen.” Oil spills while on the decline, still happen.
When they do, this causes the share price to fall dramatically. What does that mean for you as an investor?
Well, your share will fall too. For example, in the wake of the BP oil spill in 2010, share prices came down 55% –a drop that equates from about $56 to $23. Imagine the hit your dividend would take if you invested in such shares?
Lastly, be mindful of scams. Unfortunately, they are not uncommon in this industry. Many investors are known to lie about the conditions of interests, create fraudulent explorations, and claim the existence of a well that isn’t there.
Make sure you have multiple credible sources that can vouch for your decision before putting your money into someone else’s hands.
What About Taxes?
Two things in this life are guaranteed: Death and taxes. When you invest in oil and gas, you are taking control of at least one of these factors. When you invest, the IRS helps out and provides tax incentives.
If you’re a high-interest earner who pays the highest federal income tax, these benefits are outstanding.
For example, if you had a tax bill of $45,000 on an income of $100,000, that would be a loss of $45,000. However, let’s say you invest 55,000 out of a 100,000 investment. That would give you a $45,000 tax bill reduction.
You are now creating an opportunity to have a stake in an oil and gas investment and creating an excellent stream of income.
Take, for instance, a drilling program investment. You may be eligible to receive a 60-80% deduction. 15% of a property’s gross cash flow is also tax-free.
If that’s not enough, a cost depletion allowance allows for 100% deduction off things ranging from sale expenses to property lease costs.
It’s also worth noting; you’ll see 90 days of excellent hitting. This type of investment yields rapid results. You can expect to see more than five times your projected amount in these returns.
IDC’S, also known as intangible drilling costs, is another benefit. All labor-intensive prices and professional services are reported to the investor by the end of the year.
If the well is active, 85% of the investment will be written off the investor’s ordinary income in the first year.
Do You Still Need Convincing That Oil and Gas Companies Are Good Investments?
While the above info may seem daunting, don’t let it take your eyes off what initially sparked your interest in investing. As you’ll know having read this article, there are tons of advantages to investing in oil and gas companies.
While money isn’t everything, it sure is something. The passive income you receive can help you launch and finish projects, save for retirement, or even pay off your student loans.
Making smart investments in areas where there’s high production will yield years of financial perks. But, when it comes to the stock market, many factors are out of your hands and unpredictable.
But, when you invest in oil and gas, you’re entering into a market that for the most part, is free from the torrential forces of the market. There are high stake benefits and minimal risks.
Like everything in life, it’s worth considering and evaluating. But, it just might be the extra stream of income you’ve been looking for.
For more info on how to start investing in oil and gas investments, be sure to reach out and contact us. We can’t wait to help you kickstart this journey. Speak soon!