The oil industry has many ups and down, but when you strike right, you can make a lot of money. This is why many people look at investing in oil. If you are one of these people, it is important that you know about the different types of oil investments that you can make along with the risks that are involved. There are no risk-free ventures when it comes to oil because the oil market is volatile and could turn at any time.
Buy Stocks In An Oil Company
One of the easiest ways to invest in oil will be to buy stocks in an oil company. This is something that any investor will be able to do because these stocks are publicly traded. This investment option also offers high liquidity because of the active stock market and the active industry you are looking at.
The return on your investment will come in the form of dividends which are paid to you by the company. This will generally be a low dividend yield when compared to some other stocks and will range of 3% to 6% with a nominal growth rate. However, it is important to note that these stocks are not without risk and this will generally be a disaster risk.
Should there be a disaster with the company such as oil spills, the stock price and the dividend value will fall. Of course, with this investment option, all you will have to do is buy the stock and wait to get your return. You will also generally be able to weather any disaster by simply holding onto the stocks.
A Working Interest Partnership
Another way that you could invest in oil is by becoming a working interest partner is a drilling program. When you do this, you will go into partnership with a company that has a group of oil wells. These companies will generally be starting up and will not be making a profit off the oil wells yet.
This is a very risky investment option because you could lose your entire investment or you could strike it rich. As with all highly risky ventures, the rewards could be worth the risk, but only if you have the capacity to handle this. There are many people who do not view this type of investment as an investment at all and more of a gamble and you need to consider this.
If you do partner correctly, you could see a return on your investment of 8% to 12%. This could be a large amount of money if the oil wells hit a large reserve. However, the overall cost of this investment means that it is generally not ideal for the individual and mostly seen as an option for billion dollar companies. There is also no active trading market so you need to be in the oil industry to find this investment opportunity.
Working Interest In A Lease
If you are interested in investing in a company that is already producing oil but want something other than stocks, you can look at a working interest in a lease. This is similar to a working interest partnership, but will come with slightly less risk. The reason for this is the fact that you will be partnering with a producing oil well.
The production of the well will generally stay constant and this means that the cash flow will be easier to evaluate for your investment. The returns on your investment are also better and you could see a 10% to 20% return. Of course, this does not mean that there are no risks when it comes to this investment.
The primary drawback of this investment will be the risk of regulatory compliance. There is also a chance of lawsuits when there are accidents on the drilling site. You should also have some technical knowledge of the oil and gas industry to ensure that you understand your investment and how the company is performing.
Stocks In Royalty Trusts
Buying stocks in a royalty trust is different from buying stocks in the oil company. Royalty trusts are large assets that work on overriding interests and royalties which means that they do not have any business operations. The trust will not run an oil company and will only receive cash flow from the royalties they have purchased from the oil company.
The primary benefit of buying these stocks is the fact that you do not have any of the legal or political risks of the oil company. They also give a fairly decent return on your investment of between 7% and 9% over time. You will also have to do very little with this investment as you simply need to purchase the stocks. This is easily done because they are traded on a highly liquid market and many find these stocks to be superior to stocks in oil companies.
Buying Royalties From The Oil Owner
If you want to bypass the royalty trust, you could look at buying royalties directly from a private owner. This is not an investment option that everyone should look into because you need to understand how to buy mineral rights. You will also need to be in the oil industry or you will have a hard time finding private owners that are willing to sell.
Another serious issue that you might have with this option is the fact that it requires active participation. If you want an oil investment that you can leave once you have invested, this is not the right option for you. Of course, it is important to note that there are many benefits to this investment as well.
The primary benefit is the fact that the return on your investment can be very high. It is estimated that you could make a return of 12% to 50%. When you buy the royalties, you will also be buying the mineral which means that if another oil zone is discovered you will be entitled to another royalty cash flow.
While researching this article, we came across a very interesting website from Clarke Energy Fund Management http://www.cefmoilandgasinvestments.com/ who provide some very interesting information on oil investment opportunities. On their website they explain how rather than investing through the traditional method of one well at a time, they actually spread your capital investment across nine wells, thereby diversifying the risk. Certainly an intriguing approach.
Just like any investment opportunity, you should carry out your due diligence and research the investment before putting your money into it, but it certainly is fair to say, oil investing is not going away anytime soon.