There are several ways to invest in the petroleum industry, from easy retail investments to drilling programs for sophisticated investors. Each have a pro and con that we willl address. Below is a list of six basic investment vehicles:
1. Stocks in Oil Companies
2. Working Interest Partner in a Drilling Program
3. Existing working interest in a lease.
4. Stock in royalty trusts
5. Oil and gas royalties direct from mineral owners.
First - The easy, retail investment in petroleum is stocks. Simply call your broker and invest in shares of ExxonMobile, BP, XTO, or any other oil company. They often have low dividend yields of 3-6%, and a nominal growth rate. However, highlighted by the Exxon and BP oil spill, these oil stocks have a disaster risk, and a even greater political risk when congress lets loose its ire. The pro is that you don't have to actively do anything, just buy the stock. The expectation by wall street is a 8% return over time.
Second - Investing as a working interest partner in a group of oil wells has great risk. You can lose your entire investment or make a killing and you don't know which it will be when you invest. Highly volatile in its rewards, this investment can not be considered an investment but a gamble until you have enough money to invest in several drilling programs. At which time, the science of statistics will lower your variance but you will still be at risk of lawsuits, and cost overruns which you'll be obliged to pay. The pro is that millions to billions of dollars can be invested in this market with an expectation of 8 - 12% return. This is the typical investment of choice for billion dollar companies.
Third - Buying a working interest in a currently producing oil or gas lease is less risky than partnering in a drilling program. In this case, the potential for large unexpected expenditures is greatly reduced. On the pro side, the production of the well usually stays constant and the cash flow stream from production is easier to evaluate. The big plus of this investment is a superior return, as investors are shooting for 10-20% return. On the con side, you are still at risk for regulatory compliance and lawsuits from on site accidents. However, the biggest drawback is the need for technical knowledge of oil and gas wells, decline curve analysis and other engineering know how. Further, you have to actively search for those wanting to sell working interest, or go to an auction house like http://www.energynet.com, or Oil and Gas Asset Clearinghouse.
Fourth - Buying stock in royalty trusts is very different than buying shares in an oil company. Royalty trusts are set up with large assets of royalty and overriding interests. Like Permian Basin Royalty Trust (PTB). They have no business operations, only receiving cash flows from royalties. They typically are distributing 95+% of incoming cash as dividends. The pro is that there is no legal or geopolitical risk associated with an oil company. Their expected return is 7% to 9% over time. There is no effort to find these investments as they are offered on the NYSE. These investments are superior to buying oil company stocks for investors past 60 who can't afford investments to lose value.
Fifth - Buying royalties from private owners has several pros. Namely, the return can be quite large at 12-50%. Second, buying the royalties means you are buying the minerals. So if another oil zone is discovered, you'd be entitled to yet another royalty cash flow stream. On the con side, you need to understand how to buy mineral rights. The other problem is finding private owners who want to sell. Blackbeard Data, however, provides data that has all the royalty owners in Texas and Kansas; this can be used to find royalty owners who wish to sell. Another con, is that this is requires active participation. For institutional money, the biggest con is that they can't find enough sellers to invest billions or even hundreds of millions of dollars. Nobel royalties is a major royalty buyer, and they struggle each year to invest tens of millions of dollars. However, due to the large returns and low risk this has become the dominate and preferred investment of individual investors in the oil industry.
So look at your investing needs and pick the investments that are suitable to you.
McCartney Taylor is the president of Blackbeard Data Services. He is involved daily with helping investors find oil and gas royalties to buy.
Blackbeard Data, a leader in oil and gas data warehousing, maintains the world's largest database of oil and gas royalty, overriding royalty, and working interest owners. That database is well over 4 million records at this time. Blackbeard sells this data to individual investors looking to buy oil and gas royalties, and to institutional investment firms as well.
How to Invest in Oil
Investing in commodities is growing as a new form of investment. Many investors are diversifying their portfolios to enter commodities investment like oil and gas. Investing in oil can be a confusing task, especially for new investors. The price fluctuations are large and a simple mistake can cost you lots of money in an instant. But its fluctuations are one of the reasons why most people choose oil and gas as an investment option. By studying and speculating on the price of oil, smart investors can make quick profits in a short period of time - sometimes, in less than a few hours. If you are new to commodities investing and would like to try out investing in oil, here are some simple tips on how to invest in oil.
Before you start investing, you need to know what are the factors that affect the price of oil. The change in demand and supply will cause fluctuations in oil prices. For example, turmoil and war in countries like Saudi Arabia, Iran, Iraq and Nigeria have affected the supply of global oil in the past. In terms of demand, rising prices will reduce the demand for oil, while industrialization will increase the demand for the commodity. Another factor that affects oil prices is speculation. Many investors and companies are bidding on oil futures contracts. These contracts let you purchase oil in the future for today's price, regardless of the increase or decrease of price in the future. If there is an increase in price in the coming months, companies have made a profit as their oil future contracts allow them to purchase oil at a cheaper price and vice versa. Trading oil futures are another form of speculation used by traders. The above factors are just examples, as there are many other issues that affect the price of oil.
Next, here are some of the tips on how to invest in oil. If you are new to the field, you will want to consider getting professionals to help you invest in the commodity. By putting your money into mutual funds that invest in oil and gas or other energy-related stocks, you are getting experts to use your money to reap profits. Before investing your money in any mutual fund, make it a point to study the mutual fund to review its past performance and its reputation.
And if you have had some time to study the commodity market, you might want to try a more hands-on approach to investing in oil. In this case, exchange traded funds (ETF) are a good way to start. Similar to the stock market in which you yourself decide when to buy and sell stocks, you are in charge of making the purchase and sales of oil and other commodities. ETFs give you the freedom of doing your own investing based on your own research.
Oil investing and other forms of energy-related investments are growing in popularity as there is always a need for supply of electricity and fuel. Although these investment sectors are profitable, do study the risks and returns well in order to help you make the profitable investments in oil and gas and other related sectors.
Before you start investing, you need to know what are the factors that affect the price of oil. The change in demand and supply will cause fluctuations in oil prices. For example, turmoil and war in countries like Saudi Arabia, Iran, Iraq and Nigeria have affected the supply of global oil in the past. In terms of demand, rising prices will reduce the demand for oil, while industrialization will increase the demand for the commodity. Another factor that affects oil prices is speculation. Many investors and companies are bidding on oil futures contracts. These contracts let you purchase oil in the future for today's price, regardless of the increase or decrease of price in the future. If there is an increase in price in the coming months, companies have made a profit as their oil future contracts allow them to purchase oil at a cheaper price and vice versa. Trading oil futures are another form of speculation used by traders. The above factors are just examples, as there are many other issues that affect the price of oil.
Next, here are some of the tips on how to invest in oil. If you are new to the field, you will want to consider getting professionals to help you invest in the commodity. By putting your money into mutual funds that invest in oil and gas or other energy-related stocks, you are getting experts to use your money to reap profits. Before investing your money in any mutual fund, make it a point to study the mutual fund to review its past performance and its reputation.
And if you have had some time to study the commodity market, you might want to try a more hands-on approach to investing in oil. In this case, exchange traded funds (ETF) are a good way to start. Similar to the stock market in which you yourself decide when to buy and sell stocks, you are in charge of making the purchase and sales of oil and other commodities. ETFs give you the freedom of doing your own investing based on your own research.
Oil investing and other forms of energy-related investments are growing in popularity as there is always a need for supply of electricity and fuel. Although these investment sectors are profitable, do study the risks and returns well in order to help you make the profitable investments in oil and gas and other related sectors.
Investing in Oil Stocks
Investing in oil stocks seems like a slam dunk way to make a lot of money. After all, the trend of oil prices seems to inevitably creep upward, so the value of the related stocks must do so as well, goes the thinking of unsophisticated investors. However, not only is the perception that oil prices move inexorably upward inaccurate, there is no necessary relation between the price of oil and the price of the stocks associated with it.
There may be no other commodity in the market place as subject to political manipulation as is oil. Given that oil is in virtually universal demand, and demand is growing as Third World countries make a push for economic growth, oil producing countries with political axes to grind, such as those in the Middle East and Venezuela, can send shudders through the oil markets on a whim. These convolutions can have an impact on the price of oil stocks in the short term. However, even politically volatile nations can't afford to turn off the tap indefinitely, so the effect on the long term prices isn't as great as one might think. Historical oil prices and historical oil stock prices have a tendency to be more stable than their short term prices.
This would seem to indicate two things. First, there is money to be made by trading on a daily basis, as short term swings can produce very volatile changes in stock prices. Second, there is money to be made by means of long term investing, as values based on historical performance tend to even out and generate gains based on the long term strategies of particular companies.
For those with the ability and knowledge to follow and assess the significance of short term trends in oil prices on the value of these stocks, trading in the stock of individual companies on a daily basis can create quick profits. However, this is an incredibly demanding task, and investment houses employ armies of highly trained and experienced analysts to keep up with these movements. Rare is the individual investor with such resources, although one can subscribe to services that provide real time updates of the state of the market.
At the other end of the investment strategy spectrum, one can choose to invest in oil related mutual funds. In this case, one puts one's money into the hands of trading specialists who invest in a 'basket' of oil stocks. The shares of these companies are valued at the end of each trading day, and can be bought and sold based on those values. There is no ability to instantly know the value of each share of a mutual fund, so these investments tend to be made for the longer haul than trading in individual stocks.
For those who like the idea of spreading their investment across a number of oil stocks, but also want the ability to make instant trades based on daily market developments, there are exchange traded funds, or ETF's. One can invest one's funds with these funds rather like a mutual fund, but shares of these funds can be traded based on current values as measured throughout each day. It still requires close monitoring of political and other market developments, but the volatility of the investment is reduced by the fact that more than one company is represented by the shares, so developments affecting a particular company are watered down.
Whichever manner of trading one might choose, oil stocks show historical long term gains, in general.
If you enjoyed this article, you can visit this site to read more about oil stocks.
There may be no other commodity in the market place as subject to political manipulation as is oil. Given that oil is in virtually universal demand, and demand is growing as Third World countries make a push for economic growth, oil producing countries with political axes to grind, such as those in the Middle East and Venezuela, can send shudders through the oil markets on a whim. These convolutions can have an impact on the price of oil stocks in the short term. However, even politically volatile nations can't afford to turn off the tap indefinitely, so the effect on the long term prices isn't as great as one might think. Historical oil prices and historical oil stock prices have a tendency to be more stable than their short term prices.
This would seem to indicate two things. First, there is money to be made by trading on a daily basis, as short term swings can produce very volatile changes in stock prices. Second, there is money to be made by means of long term investing, as values based on historical performance tend to even out and generate gains based on the long term strategies of particular companies.
For those with the ability and knowledge to follow and assess the significance of short term trends in oil prices on the value of these stocks, trading in the stock of individual companies on a daily basis can create quick profits. However, this is an incredibly demanding task, and investment houses employ armies of highly trained and experienced analysts to keep up with these movements. Rare is the individual investor with such resources, although one can subscribe to services that provide real time updates of the state of the market.
At the other end of the investment strategy spectrum, one can choose to invest in oil related mutual funds. In this case, one puts one's money into the hands of trading specialists who invest in a 'basket' of oil stocks. The shares of these companies are valued at the end of each trading day, and can be bought and sold based on those values. There is no ability to instantly know the value of each share of a mutual fund, so these investments tend to be made for the longer haul than trading in individual stocks.
For those who like the idea of spreading their investment across a number of oil stocks, but also want the ability to make instant trades based on daily market developments, there are exchange traded funds, or ETF's. One can invest one's funds with these funds rather like a mutual fund, but shares of these funds can be traded based on current values as measured throughout each day. It still requires close monitoring of political and other market developments, but the volatility of the investment is reduced by the fact that more than one company is represented by the shares, so developments affecting a particular company are watered down.
Whichever manner of trading one might choose, oil stocks show historical long term gains, in general.
If you enjoyed this article, you can visit this site to read more about oil stocks.
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