The 1st in a series of short monthly essays
INVESTING IN PROPOSED WELLS
IN THE OIL AND GAS BUSINESS
This is often
very different from investing in, say, a company that makes things people buy: compared to the manufacturer/retailer, where sales go up and down. You can, and often do, lose your entire investment with a dry hole.
So why invest in proposed wells at all? You ought not do so if, when the well is dry, you're left short of cash. Drilling wells is definitely not for those incapable of handling high risk. Companies in the exploration and development business often factor in dry holes at the start, realizing that it is only "down the road" that they may realize any revenue stream at all.
I remember one Chicago money raiser telling me that, after a string of dry holes, he called his disappointed investors in for a meeting. Instead of apologizing, he opened the meeting with the suggestion that all those who did not want to continue should leave the meeting right away. Too brusque? Not really. This was an immediate
reiteration of high risk and the money raiser was doing his investors a favor. (I think this group has drilled some good wells since then.)
People invest in wells for tax reasons. And for other reasons. Most because they want to make a lot of money. And if a well or wells do
well, lots of money of course can be made. But first look at your personal balance sheet.
It's best to invest in outfits who have been around a while and done a bunch of drilling (a "track record") and have good reputations. Do
some due diligence. Such companies ought to have a mixed program, i.e. a mix of "development" wells drilled near already discovered oil and gas fields where risk is relatively lower and exploratory wells where risk is greatest.
Activities in the oil patch have generated, unfortunately, lots of well
-earned stories about inflated predictions and smooth talking promoters cheating people out of their savings.
But it takes two to tango.
(Let me know what you'd like to hear about)