BASIC INVESTOR THINKING.
Investors always want to know what the odds of losing their capital will be. Investors want to know when they will begin making money after sending funds to participate in any investment offering. This is the development time risk. Three, Investors want to know how good the profit structure is, or more specifically, how much money will they make during the life of the investment? I would add a fourth and fifth concern which would be what tax write-offs are there, and finally, what liquidity is there going to be in the investment, or in other words…what’s the exit strategy, if any?
RISK FACTOR.
Risk is a primary concern for anyone hoping to make money, and deciding with whom and where to invest are important questions. When an intelligent investor analyzes any investment, and determines whether to choose how much, or less, to invest, volatility, and everything in between, are all factors. There are many types of risk… I would like to list some of them based on my own experience, considerable research done during the past 24 years, and based on some failures I’ve also had over the years.
There is a people risk…finding the right people is essential, I believe this to be the single most important requirement before doing any business with anyone…bad people screw up great deals. Finding trained, experienced, and highly motivated professionals who don’t quit until the job is done right, and in a reasonable period can be difficult. People who can work together while finding the crews, and equipment you need to develop the leases, and fields you have so carefully selected, is not easy. It can make or break you. Relationships based on years of working together are your best insurance of getting the necessary, and correctly accomplished development work you need to be done in a timely fashion.Too many times business owners try to sell their idea verbally and at the end of the interview with the Bank the Manager is none the wiser than he was at the start. I think you can guess the outcome of many of those requests!
HOW DO INDUSTRIES WORKS?
Track records are important, but hard to quantify in oil & gas, simply because like the movies, you are only as good as your last picture show. Well-meaning, and extremely competent professional people, working with great teams, and putting a great deal together can lose, or not succeed with every endeavor, regardless of their desire to do well, or regardless of their wonderful technical abilities and experience. It’s always really important to keep this in mind…however, working with incompetent people, or people who don’t know how to get the job done right, or regularly finish what they start isn’t an acceptable outcome. You need to avoid these often fairly confident-sounding people when you first begin talking with them, and there are some excellent clues to look for when trying to decide who to avoid.
PROFIT OR LOSS?
The deal is of course paramount, but how is it structured to provide you with upside, while minimizing downside, providing diversification, and at the same time being achievable, and still in a reasonable amount of time? There is a significant challenge ... one's base oil and gas deal needs to be backed up with good history, logic, geology, engineering, and just plain good understanding of both the field and the time.
Some oil & gas drilling and developmental areas in the US are intrinsically very risky for example…the Gulf Coast is one such area, and it’s where the faint of heart should not venture… costs are extremely high, as are the technical risks of failure, of which there are many. The statistical track record for most participants in the Gulf Coast area is less than a 50% hit rate of completing commercial wells, even when finding recoverable reserves. Competition in the Gulf Coast areas is brutal, and the big boys control the lay of the land…you’ve all heard of the expression, my way, or the highway?
CONCLUSION.
Finally, there is the price risk or volatility risk… oil & gas prices are high, particularly oil prices, which are going up in the foreseeable future, or within the timelines, we are investing, and developing new oil & gas projects being planned during the next ten years…there will be alternate energy sources, and conservation efforts, but demand will be greater than supply capabilities based on my research.
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