[Posted on March 2, 2015 by Michael L. F. Slavin]
Oil investing can be a huge leap of faith for any person hoping for a financial windfall in return, but it doesn’t have to be a proverbial shot in the dark. Much of the uncertainty can be removed by dealing only with companies deemed to be fair and upright by the Better Business Bureau, and by researching the track record of success for any company you are considering for investment.
Still though, it is entirely possible that all invested can be lost, so it is best to be as informed as possible about potential outcomes, and to be armed with as much fore-knowledge as possible. Here are three fundamental notions that every investor should bear in mind in regards to oil investing.
#1 – Expect the best, prepare for the worst
This is not a good business to be involved with if you cannot afford some loss, because that is one of the possible outcomes from this type of investment gamble. Even when operating on the most informed intelligence, it sometimes happens that oil wells are no more than dry holes, or wells that will never become commercially viable. In such cases, investors will not receive any dividends from their financial support, but may often recoup a partial amount through what is termed a completion refund. In addition, the investment amount minus that refund is tax-deductible – but even so, much of that initial investment will have been lost. If you simply cannot afford to lose that money, do not invest in an oil well.
#2 – Don’t put all your eggs in one basket
One great way of increasing the likelihood of success in oil well investing is to diversify your investment projects. In other words, if it is financially possible for you, invest in several drilling projects at the same time. If one or two should go bust, you will still have the possibility of others being successful to lessen the negative impact of the losing wells. By investing in at least three wells, your risk is spread out and you are not dependent on the success of a single well. Not only does this cover the possibility of one well being completely dry, but it can soften the impact of one or two that never become really productive wells.
Another way to look at the all-eggs-in-one-basket approach is to avoid investing as a single entity, but to lessen your vulnerability by investing with at least one partner. With two, three, or more of you contributing amounts that represent your total investment, any potential loss will be much less than if you had been a solo investor, although any dividend will be similarly portioned out.
#3 – Don’t be concerned about market fluctuations
Oil well investment should be considered a long-term investment, and should not be something monitored along with the daily changes in market prices of oil and gas. Since productive wells are likely to produce for long periods of time, there will certainly be numerous fluctuations in the market price over the course of all those years, and this is to be expected. If a well does become productive, it is very possible that an investor’s initial financial commitment can be returned shortly after regular dividends begin distribution, so all the worry is removed from the investment.