There is no “crystal ball” when it comes to investments in oil & gas. The old adage is as true today as it was when we made our first investment: “If it is too good to be true then it probably is.” The reality is that investor discernment is more crucial now than ever with the entry of market dynamics and the fluctuation of commodity prices. In the trailing twelve months, some investors feel more like someone just “shook it up,” and we are all waiting for the proverbial snow to settle.
Infrastructure companies – such as midstream and pipeline companies – are beginning to show signs of resurgence. There is a wave of infrastructure expansion with strong growth in the production of oil and natural gas. Interestingly enough, these investment opportunities have a multi-year forward cycle when you consider the necessary reconfiguration of existing facilities that can produce significant return on investment and long-term shareholder value.
According to The Texas Alliance of Energy Producers, “Independents have drilled 96% of wells in Texas, and produced 88% of the oil and gas in Texas.” To raise the needed capital for oil field development projects and the production of oil and gas in commercial quantities, independents rely heavily on investment partnerships. Because the operators are not fully capitalized, this provides a great opportunity for a win-win in prospect development. By looking at the merits of each individual prospect, investors can quickly determine costs to drill and the rate of return on production. This allows for the partnership to expand the portfolio and project footprint at a much faster pace and provides some diversity of investment for the investors and the operators.
Innovation and improvements in drilling processes are leading to even greater accessibility to formerly off-limit reserves. Coupled with new techniques being used to drill more wells, expect even more opportunities to be presented to investors in the coming year. To protect your asset portfolio, there are some key questions you do not want to overlook when considering an opportunity:
- What is the operator’s success rate? What is the track record of the operating team?
- What technology is this operator using? Or better yet, what innovations have they implemented with success?
- Can the operator produce projections of existing wells? Or demonstrate month-over-month sustainability within the project?
- Is your investment directly in the working interest? More importantly, will you receive a deeded title to your interests in the well?
“Drill, baby drill.” Those famous words apply not only in the geological sense but should describe the investors’ mindset about due diligence regarding an oil and gas opportunity. Start the research and analysis process early so that when 2013 arrives you can hit the ground running.