Expansion of a financial portfolio allows the investor to manage his or her risk more effectively. When cash is properly managed, the upside is that the investor attains more in the way of attaining greater earnings. One area worth considering is becoming knowledgeable about how to invest in oil.
There are many avenues an investor may consider in order to invest in oil and gas. The emphasis of investment within the article includes various investment vehicles, how to invest in oil leases and developmental wells. Knowing the potential that private oil companies provide in way of investment is particularly useful for the smart investor. The first portion of the article addresses making use of different financial vehicles in order to invest in oil and gas.
Various Financial Vehicles Used In Oil And Gas Investing
Investors are encouraged to make use of exchange traded funds also known as ETFs and mutual funds as a means to invest in gas and oil and greatly minimize risk. Naturally, investing using an ETF or Mutual Fund is not the same as placing an investment with private oil companies. Another way to invest in oil and gas is by way of a Unit Investment Trust. The UIT is given special attention below.
Investing in a UIT is similar to investing in real estate or the stock market. Units are sold in the form of various trusts. The trusts are representative of purchases made with regard to a variety of individual oil and gas properties. Properties are held within the associated trust. The trust has a maturity date in place. The trust will either make a gain or suffer a loss. The gain or loss is pertinent to the sale of assets made by investors.
Wells Of Private Oil Companies
Wells represent another means of investment. A well is one way an investor can invigorate or re-energize his or her current financial portfolio. The strategy employed is to find a company with an impressive track record with respect to developmental wells. A developmental well many times can prove as a very sound investment.
The way to find a good company that works in the field of developmental wells is to investigate its background. Check the amount of time the company has been in operation. Find out what types of technology the prospective company uses in in order to locate and subsequently drill for oil. A development well can be a risk. The well, however, on the upside, provides any investor with a significant return if the area where the drilling is taking place strikes oil.
As it pertains to investment by means of developmental wells, such wells are safer than wildcats. However, any place where drilling takes place can end up dry. However, if oil is struck then the return on investment is tremendous. If the investor wishes to attempt the developmental well approach it is probably to his or her best interest to spread the investment among two or three developmental wells–in order to minimize risk.
Another Avenue Which To Invest Is The Oil Lease
A commercial lease is attained from the mineral owner (lessor) prior to drilling. A landman determines who owns the mineral rights. The determination can be made at the courthouse. He or she approaches the Owner of the Mineral Rights with an oil lease.
The oil lease is considered a legal document. The mineral owner signs the Lease in order to receive a royalty. Naturally to invest in a lease represents much in the way of profitability. An oil lease with a time limitation is said to have a primary term. If commercial production has not been established prior to expiration of the primary term, then the lease becomes invalid.
However, if production has been established, the life of the lease covers future production. Oil leases are considered forms of property which can be purchased sold or traded. The lease plat is a document which is included with a proposal to drill. The lease plat makes it possible to identify the area or acreage where drilling of the well takes place.
Investors wishing to attain the least risk are wise to use one of the financial vehicles mentioned at the beginning of the article. Persons involved in the actual process are at the greatest risk; however, have the greatest amount of upside potential.