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There are plenty of investment companies to help you invest in oil and gas, but how do you know who to partner with? We provide you some basic rules when determining your oil investment partner.
Be careful if they advertise “hundreds of producing wells” or “tons of opportunities” for investments.
There are different parts of the upstream oil and gas market, from large gargantuan fields to single-wells. More than likely, the large fields are reserved for the big hitters – your banks, private equity funds, and institutional funders. The chances are, if you are investing in an oil and gas project, you are looking at the lower market – the smaller opportunities that are too small for the larger companies to notice.
While this is a great place to find value – BE CAREFUL! Because the assets are smaller, there are literally HUNDREDS of opportunities. A strong and discerning management team knows how to whittle down the opportunities to just a handful they believe will bring the greatest value to their investors. So be weary when a company says they have TONS of opportunities for investment. There should only be a few great ones.
What is their source of opportunities and their process of evaluating them?
As we said, there are literally HUNDREDS of opportunities in the lower market of oil and gas. EVERYONE from John the Rancher to John the Independent Geologist is trying to peddle their oil opportunity as the BEST investment.
If you’re going to be giving a company your money, ask them how they find their opportunities and how they decide to pursue certain investment opportunities. They should spend time explaining their deal flow and their process of evaluation. Are their deals publicly marketed? If so, most likely they (and you) will be paying too much for the acquisition. Do they have a geologist to give an objective review? A reservoir engineer with commercial experience? Do they have spirited debates to evaluate the opportunity or does one person fly by the seat of their pants and decide the next opportunity for all investors of the project.
Do they focus solely on oil and gas?
There are some capital venture firms out there that actively tout their investment success in oil and gas. Although it may be true, is oil and gas their sole focus of investment? From what we’ve seen, some companies invest in not only oil, but also in real estate, business and technology. The truth is, oil and gas can be a complicated industry and without laser focus on your money and the oil investment, there leaves room for potential error and loss of funds.
Does the operator also take care of accounting and billing?
Imagine if you were a small oil company of 5, 10, or even a 100 people. Now imagine you are dealing with hundreds of investors wanting to invest in oil and gas because you advertise online. After investing, those investors now get monthly or quarterly checks sent to them. Who handles all the billing, accounting, and mail?
Unfortunately, all too often, many investors (and mineral/land owners) do not receive their checks due to lack of organization. Ask yourself if you’d rather have a company spend half their resources dealing with billing statements and checks -or would you rather have a company take care of your initial investment and focus on the actual part of the business – which is making a return on your oil and gas investment. It’s important to check if the company has either a third-party handling these logistics or has qualified personnel in-house. An active change management plan should be in place should the responsible employees become incapable of performing their duties.
Who is the team and what is their background?
We searched for potential opportunities to invest directly into oil and gas online. One firm had tons of information – everything from educational videos for the layman, infographics, pictures of wells and potential opportunities. It seemed promising! But then we looked for the team and the leadership. It was nowhere to be found. We scoured the website, but for the life of us, we could not find who was in charge.
The last thing we would do is invest money with a company when we have no idea who we are giving it to!
There are players across the spectrum in oil and gas, ranging from small mom & pop operators to the behemoth operators. With the industry being a highly technical business, it’s important to know the people you are giving your money to, including their educational backgrounds, experience in the industry, and past successes. If you do find these details out, ask yourself, why they aren’t available publicly on the website? Don’t be sold on the great advertising and glitzy websites – do your due diligence before you give someone your money.
What is the return structure?
In oil and gas, it’s not uncommon that after a well is drilled, the income is split 50/50 - 50% of net income goes to investors, while another 50% of net income goes to the company. This may be reasonable, especially considering the amount of work and technical expertise the company brings to the table. However, should a company begin to make money prior to investors recouping their investment? Shouldn’t investors, who are paying for the project and its associated risk, get their money back first? We think so. At Honeyguide, we use an investor friendly return structure that ensures investors recoup their investment PLUS a return before profits are split. A return structure like this is hard to find, but it is crucial because it also demands that the team only pick the best projects to get paid. Otherwise, a company can still make money drilling sub-par wells and investors would never make a return.
Get a downloadable infographic of this article HERE!