Oil and gas investments are generally at the riskier end of the spectrum, but investors can limit the degree of risk by careful research into the geology, structure of the deal and the company involved.

Every potential oil and gas investor should carefullyanalyze the prospective opportunity, the company and the individual representing the product. Only invest in a prospect when you clearly understand the downside as well as the upside.Always demand “full disclosure” and be sure your attorney reviews every contract.

Registered broker-dealers are required to send out a private placement memorandum, or PPM, which includes the details on the project and deal. The broker-dealer is responsible for completing due diligence on the projects.

PROS AND CONS OF OIL AND GAS INVESTMENTS

Oil and Gas Investment Benefits:

Potential Returns Projected returns of five to ten times the initial investment are common. Although sometimes risky, oil and gas can be highly profitable.

Tax Deductions Intangible Drilling Costs (IDCs):

For a producing well, 70% - 85% of your investment constitutes what are known as IDCs and are written off your ordinary income in the first year. IDCs include labor-intensive costs such as the drilling contractor and professional services and are reported to the investor at the end of the year.

$ Tangible Drilling Costs (TDCs): For a producing well, 15% - 30% of your investment constitutes which are depreciated over a seven-year period using the Accelerated Cost Recovery System (ACRS). TDCs include pipe, storage tanks, and wellhead equipment, capitalized and depreciated.

$ Depletion Allowance: If you are an investor in an independent oil and gas project, the current depletion allowance is 15% of your share of the gross income from the property based on average daily production, up to the depletable oil or natural gas quantity. This makes fifteen cents of every gross income dollar non-taxable, therefore producing tax-sheltered income.

$ Dry Hole: In the event that you invest in a nonproducing well, 100% of all dollars invested are written off as a loss against your ordinary income in the first year.

Rapid Results Checks can begin within 60 to 90 days of a well hitting, a rapid pace for an investment offering such high projected returns.

Risks:

Drilling a Dry Hole In oil drilling, as in real estate, it’s all about location, location, location. If the hole comes up dry, the investor will lose their entire investment (but can write off 100 percent of costs).

Price Volatility The profitability of oil and gas projects depend on the market prices of oil and gas. Volatile price swings are common and can dramatically impact the profitability of a project.

Scams or Bad Company Management Scams and schemes to take advantage of investors abound, so investors must ensure they fully understand any contracts or agreements. Success relies greatly on the management of the company, so in depth due diligence on the companies involved is a must.

Information courtesy of 4G Companies. 4G Companies is a Registere Broker-Dealer and an Evans Energy Industry Partner.

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