How to Invest in Oil & Gas

Insider insights into the South Texas Oil Boom

When you consider how to invest oil and gas, there is no question that it can be a worthwhile investment for well-qualified oil and gas investor. Whether you prefer to invest in oil and gas with an owner-operator or treat the oil industry as a commodity, there are numerous avenues to seek profit.Mutual funds or ETFs allow for the opportunity to buy a number of oil and gas-focused shares. For those new to the oil and gas industry, it can be en entry to the wealth that awaits without the direct risk in commodity spot prices. An investor using this method can learn the tools of the trade without relying entirely on the success of a single company.

Large cap stock or ADRs (American Deposit Receipts) are other methods that open doors to the benefits of oil and gas investments. An investor has the opportunity to purchase stock in large or small oil companies, reaping the benefits of companies that engage in oil exploration as well. It is possible to either buy stocks directly or buy shares through a broker.

Futures Contracts are an option as well, but a risky one for certain. These derivatives can be purchases as oil and gasoline futures contracts, but an investor is then at the mercy of the market as futures contracts frequently expire without worth.

Lastly, there is a more direct line of involvement that a wealthy investor can take advantage of. A small or micro-cap stock or a limited partnership allows for a more direct equity position within smaller companies. Such investments are not publicly traded, as they are more specialized, and they are not nearly as accessible as other options. The use of a broker is often required, unless a sophisticated investor has a significant amount that can be invested. In that case, one can engage directly with the company’s management to arrange a beneficial arrangement.

Of course, as with any investment there is a level of risk. However, oil and gas investing, particularly in South Texas, still remain stable, complete with high demand and various forms of investing with different levels of risk. It should be noted that not every level is complete with the same tax benefits as previously mentioned.

Mutual funds offer low level of risk but none of the aforementioned benefits are available. Partnerships are common, limiting liability and sold as securities through the Securities and Exchange Commission. Tax incentives are available for partnerships but only on a pass-through basis that must be detailed each year. Royalties are reserved for those who own land where oil and gas wells are drilled, gaining from the gross revenue generated from wells and assuming none of the risk associated. Unfortunately, landowners are not eligible for tax benefits known to working or partnership interests.

Working interests in fact involve the highest levels of risk, considered more as a form of self-employment than a security. Regardless of the income, production is ultimately broken down into gross and net revenue. As far as tax advantages are concerned, there is no better avenue than oil and gas investments, and a sophisticated investor would be wise to partake in this fruitful trade.

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