What people decide to do is never as interesting as why people do what they do. The moment we open our eyes in the morning, each of us begins to make a series of decisions throughout the day, some monumental, others mundane and inconsequential. Either way, our choices are driven by emotion, fact, or a combination of the two, and each occurs spontaneously or after great deliberation.
Cutting through three lanes of traffic at nearly the speed of light and barreling into Wendy’s drive-through for a Baconator Triple Combo is a classic example of excitement and spontaneity that moves some to action. On the other hand, agreeing to make the 500-mile trip with four kids and two dogs to see the in-laws in Tuscaloosa over the holidays likely required careful consideration of the facts and a great deal of measured thought (and possibly a long drawn-out negotiation). with spouse).
Investors from a wide and diverse spectrum make decisions every day about what, when and where to put their money based on those same universal precepts. Some act impetuously feeling the pressure to do something, anything, quickly for fear of missing out on a once-in-a-lifetime event. Others carefully and painstakingly consider the myriad of opportunities within a myriad of sectors, weighing each one in great detail, and ultimately making no decisions. In both scenarios, an important ingredient is missing: a long-term strategic plan that is rooted in fact.
In the unforgettable words of Detective Sergeant Joe Friday: “Just the facts, ma’am, just the facts.”
Interestingly, the difference between fact, fiction, mystery, and myth is not entirely obvious and becomes even more confusing during tough economic times. Take for example the childhood game that many of us played in elementary school. A student is asked to read and memorize a short, concise sentence, and is then instructed to pass on the language to their classmate in secret. That child, in turn, passes the same to the next child, and so on. After 30 translations or so, the last person must recite the phrase in its entirety. Rarely, if ever, does the final version remotely resemble the original.
So how does a simple sentence like “Maria’s big brown and white cow produces gallons of fresh, refreshing milk for the farmer’s family every day” end up sounding like “Manny found an eagle’s claw on a bar stool?” covered in milk. Simple: Every time information is innocently passed from one person to another, there is a small measure of personal perspective interfering with the story, altering the facts ever so slightly until it becomes an unrecognizable end product. Interestingly, the last person in the chain believes that the phrase “Manny found an eagle’s claw…” is the undeniable truth.
Oil and natural gas exploration and production is arguably plagued with more confusion related to what is fact and what is more fiction, mystery and myth compared to other sectors. Industry misinformation has led some to invest with unrealistic expectations while forcing others to avoid the sector altogether.
Our mission this month is to dispel some of the common myths associated with the oil and natural gas industry and bring you the facts: “just the facts, ma’am, just the facts.”
The crude reality
Oil and gas are too complicated
Ask any first-year medical school student if medicine seems complicated on the first day, and the answer is invariably a resounding “Yes.” So how do novice doctors become skilled doctors who save lives? The answer is experienced instructors who can make the complicated seem understandable to their students.
The same goes for investing in oil and natural gas. A professional industry specialist firm can systematically guide you through the potential return on investment and outline a comprehensive risk assessment in clear, concise and straightforward terms that you will easily understand.
Oil and gas are risky
All investments have risk, some high, some low. Oil and Natural Gas is no different. But, not all oil wells and drilling projects are created equal.
For example, a single 19,000-foot project targeting one potential pay is substantially riskier than a multi-well package drilling to 5,000 feet with 12 potential pays along the way. It doesn’t make much sense to put your life savings into a single stock on Wall Street, so why would anyone be involved in just one drilling project? Sophisticated investors don’t.
We’re running out of oil
That is partially true. In fact, we are running out of easy-to-find oil fields.
Many of the large fields have been drilled for decades and will be close to exhaustion. National reserves are smaller by comparison and have been underutilized and overlooked, representing the greatest opportunity in the oil and natural gas exploration and production sector. New advanced technology is making drilling much more efficient and profitable than ever before.
Myth of tax benefit
Few understand that tax benefits are available to investors regardless of whether they are drilling a dry hole or mining gold. It’s really a matter of perspective. Our job is to develop projects with the greatest potential for success, and therefore tax benefits are best defined as tax deferrals due to offsetting investment income derived from the project.
Another concern is proposed legislation that will change tax benefits for the oil and gas industry. The fact is that the House and Senate bill, if passed, will only change how investors will be allowed to take that deduction and how each one will be amortized. The bill does not eliminate tax benefits.
Turnkey energy investments are safer
A turnkey project includes a fixed investment. In theory, this eliminates additional cash calls during the project. The reality is that the exploration costs are two or three times the actual operating expenses to safeguard the producer and his investment in the project. The buyer should also beware: read the fine print for language that allows producers to charge for ancillary costs not covered in the turnkey deal.
At Cost structures (direct investment) are attractive to investors who want to pay the actual costs of a specific project or a series of drillings. If planned correctly, investors could see a payback for a project that is under budget, less expensive, and ultimately more profitable.
All oil and gas companies are the same
If you had a bad experience with a dentist, would you stop caring for your teeth? If his Escalade broke down on the way home from work, would he suddenly start taking public transportation? The obvious answer is no.” But too often we hear from investors who have had a bad experience in an energy sector and project that negativity onto the entire industry.
There are many producers in the market, and no two operate the same. Equally important, no two structures, locations, types or financial opportunities are the same. Like all investments, do your homework, consider each investment opportunity objectively, become familiar with your producer and his experience in the industry, and check professional sources.
Do it and you, too, will be one of those who have achieved extraordinary financial success in the oil and natural gas industry.
For more information, please contact Monte Lang or Tim Philpot at 830-995-4162.