Oil and gas is like the backbone of the world, as it fulfills the very basic need of 21st century- to move from one point to another. But do you know what’s it like to be an oil and gas investor?At this moment, petroleum is not replaceable because of high demand and ability to generate both BTUs (British Thermal Units, a measure of energy) and kilowatt hours efficiently. Petroleum also has a horde of uses in industry such as a lubricant and is a vital component in the creation of plastics. Natural gas, for its part, is a main source of cooking and heating energy. Main forms of natural gas includes CNG, LPG, electricity and diesel fuel, and is important resource in chemical fertilizer plants.
Everybody amongst us has heard this line for at least once- “Investments are subject to market risks. Please read the offer related documents carefully before investing”. It, in general, signifies how volatile stock markets could be. In oil and gas industry, considering only market risks won’t give you whole prospective for investing. There are some more things to consider viz. geopolitics, supply and demand cycle, fluctuation in oil prices, risk factor associated with a particular field, track record of the company in successful exploration of previous oil and gas fields, number of brown and green fields in the basket.
- In investors’ world oil and gas industry is known for high profit margins. This, in fact, depends upon type of fields company operates on. Off-shore deep wells carry high risk, but also gives high profits to the company. Return on investment is recorded to be around 5 to 10 times.
- Investors do not believe in investing in only one industry. They always try to make their portfolio as diversified as possible. This also helps as petroleum prices are always fluctuating which increases uncertainty in receiving the expected returns. Generally, it is observed when economies are developing, demand for petroleum also increases. This results in increase in prices.
- Investors of oil and gas gain tax advantage especially, if they invest in LLP. They can also be benefitted from intangible drilling costs. These costs include all expenses made by an operator related to and necessary for drilling and preparation of well for the production of oil and gas. Percentage of investor’s money in the first year is written off to cover for incidental expenses.
- The market price of oil is very vulnerable and hence it is always fluctuating. Profitability in this business depends upon some uncontrollable factors such as geopolitical events, slowing of economies etc. Consider an example of recent market slowdown. Due to disruption in supply-demand chain, oil price rumbled down from $107 in July 2014 to $42 in March 2015. This resulted in losing jobs for thousands of people, also investors lost big chunk of their money.
- Buying in LLP seems like a profitable choice as their return on investment in high. But in this case commissions are higher than standard stock broker fees. Also, investing in small cap companies won’t bear you sweet fruits, as risk taking capacity of such companies is low. This means that your share is less liquid than in larger/public company.
- Scams are not uncommon in the industry. They could hide the real condition of the activities going on in the field and lie about the interests or even the existence of a well.
- There is always risk factor associated with every oil and gas field in the world. Professionals work hard to mitigate situations leading to such disasters but sometimes they are beyond human control. Such accidents could really hamper the balance sheet of the company (mainly operator). This leads to cutting of dividends if company is unable to earn enough profits.