The Crude Reality: Oil & Gas—Fact, Fiction, Mystery and Myth
Wednesday, March 17, 2010 at 04:31PM By Scott F Whyatt
What people decide to do is never as interesting as why people do what they do. At the very 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 fueled by emotion, fact or a combination of both, and each occurs either spontaneously or after great deliberation.
Cutting across three lanes of traffic at nearly the speed of light and careening into the Wendy's drive-thru for a Baconator Triple Combo is a classic example of emotion and spontaneity that moves some to action. On the other hand, agreeing to make a 500 mile trip with four children and two dogs to see the in-laws in Tuscaloosa for the holidays likely took careful consideration of the facts and a great deal of measured reflection (and possibly a long, protracted negotiation with the spouse).
Investors from a broad 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 fearing they may miss a once in a lifetime occurrence. Others carefully and painstakingly consider the vast number of opportunities within a host of sectors, weighing each in great detail, ultimately making no decision at all. In both scenarios, there is one important ingredient lacking: a long-range 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 at all obvious and becomes even more confusing during difficult economic times. Take for example the childhood game many of us played in grammar school. One student is asked to read and memorize a short, concise phrase, and then instructed to pass the idiom onto his classmate in secret. That child in turn then passes the same onto the next child, and so on. After 30 translations or thereabouts, 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 phrase like "Mary's big brown and white cow produces gallons of cool refreshing milk for the farmer's family everyday" end up sounding like, "Manny found an eagle's talon 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 that impinges on the story altering facts ever so slightly until it is an unrecognizable finished product. Oddly, the last person in the chain believes the phrase "Manny found an eagle's talon..." to be the undeniable truth.
Arguably, oil and natural gas exploration and production is plagued by more confusion related to what is fact and what is more fiction, mystery and myth when compared to other sectors. Industry misinformation has driven some to invest with unrealistic expectations while compelling 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 provide you the facts - "just the fact ma'am, just the facts."
The Crude Reality
Oil & Gas is Too Complicated
Ask any first year medical school student if medicine appears complicated on day one and invariably the answer is a resounding, "Yes." So how do fledgling doctors become skilled, life-saving physicians? The answer is seasoned, experienced instructors who can effectively make the complicated seem understandable to their students.
So too is the case with Oil and Natural Gas investment. A professional firm who specializes in the sector can guide you systematically through the return on investment potential and outline a comprehensive risk assessment in clear, concise and straightforward terms that you will easily understand.
Oil & Gas is Risky
All investments have risk - some high, some low. Oil and Natural Gas is no different. But, all oil wells and drilling projects are not created equal.
For instance, a single 19,000' project targeting one potential pay zone is substantially more risky than a multi-well package drilling to 5,000' feet with 12 potential pay zones along the way. It doesn't make much sense to put your entire life's savings into a single stock on Wall Street, so why would anyone participate in a single drilling project? Sophisticated investors do not.
We Are Running Out of Oil
That is partially true. We are actually running out of oil deposits that are easy to find.
Many of the large fields have been drilled for decades and will approach exhaustion. Domestic reserves are smaller by comparison and have been untapped and overlooked, representing the greatest opportunity in the Oil and Natural Gas Exploration and Production sector. New advanced technology is making drilling far more efficient and profitable than ever before.
Tax Benefit Myth
Few understand that tax benefits are available to investors regardless of whether a dry hole is drilled or a gold mine is tapped. It's truly a matter of perspective. Our job is to develop projects with the greatest potential for success and therefore the tax benefits are better defined as tax deferments due to the offset of investment income derived from the project.
Another concern is proposed legislation that will change tax benefits for the Oil & Gas Industry. The fact is that the house and senate bill, if passed, will only change the manner in which investors will be permitted to take that deduction and how each will be amortized. The bill does not eliminate the tax benefits.
Turnkey Energy Investments are Safer
A turnkey project includes a fixed investment. This in theory eliminates additional cash calls during the project. The reality is that exploration costs are two or three times actual expense of operation in order to safeguard the producer and his investment in the project. Buyer beware as well: read the fine print for language that allows the producers to charge for ancillary costs not covered in the turnkey agreement.
At Cost (direct investment) structures are appealing to investors who want to pay for actual costs of a specific project or series of drills. If planned correctly, investors could see a refund for a project that is under budget, less expensive, and ultimately more profitable.
All Oil & Gas Companies Are The Same
If you had a bad experience with one dentist, would you stop taking care of your teeth? If your Escalade broke down on the way home from work, would you suddenly start taking public transportation? The obvious answer is, "No." But all too often we hear from investors who have had a bad experience in an energy sector and project that negativity to 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 extremely familiar with your producer and their industry experience and check professional sources.
Do that, and you too will be one of those who have achieved extraordinary financial success in the Oil and Natural Gas sector.
If you would like to learn more, please contact Monte Lang or Tim Philpot at 830-995-4162.
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Scott F Whyatt Article Source: http://EzineArticles.com/?expert=Scott_F_Whyatt |
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