Oil and Gas Investing

 

KNOW YOUR PARTNERS


It’s as true as it is trite, but the first rule of oil and gas investing—like so many other areas of financial endeavor—is:

Find out a little bit about your proposed business partners before you invest large sums of money with them.

Legitimate exploration companies, however small they may be, all have some kind of a track record. If the drilling deals they are selling are registered with the Securities and Exchange Commission, that record will be spelled out in their prospectus. If their deal is not registered (as is the case in the majority of instances), then you will have to ask around about them. Fortunately, in any given petroleum province in America, the oil business is a fairly small and close-knit community, and you generally won’t have to snoop around very long to find someone who knows something about the company or individuals with whom you are considering investing.


The questions that you will want to ask would be fairly standard ones in any industry: How long has this company been in business? Do other oil companies hesitate to do business with them? Have they ever (especially recently) been in serious financial trouble (or bankruptcy court)? Is the operator’s nine-year-old son on the payroll at a fat salary? How about the operator’s cousin? Nephew? Brother-in-law? Spouse? Parent? Do they make most of their money off of up-front promotional fees and/or monthly operation charges or do they make it from oil and gas production? Are their investors from five years ago still spending money with them? What sort of reputation do these people have for: 1) honesty, 2) finding oil, 3) paying their bills, 4) maintaining their producing properties in good condition, and 5) taking good care of their business partners.


Well, you get the idea. You’ll never get the answers to all of these questions, but you should get a feel for how this oil company is regarded by its peers and previous investors. As a general rule of thumb, if you would have any hesitation about buying a used car from those people, you should not be investing with them in a drilling deal.


One Last Caveat: In the oil business, as with so many other financial ventures, righteousness is not the last refuge of a scoundrel—it is usually the very first. The Good Lord hates a swindler, and He really has no respect for a stupid sucker.


Next, let’s take a quick look BEHIND THE SCENES and see who’s back there and what they’re doing to put this drilling deal together for us.