Dear prospective 'new' investor to oil & gas. If you are considering and reviewing oil & gas private investment programs today there are some key points to remember to do during your due diligence process. Ask at some point during your review of an oil & gas investment to speak with the 'operator', or the man with the license, who is bonded, insured, and supervised by the state where he drills and works as an operator in the oil & gas business. You've got to talk to people who have the experience and can give you a balanced account of what to expect when investing in oil & gas. One way to know this is when a professional talks about his failures, and well as his successes. People who tell you they always succeed, or over-emphasize a feature, or benefit of their current deal are not being fair & balanced, and will not be able to arm you with the facts or help you need to decide the pros and cons of investing with a particular company. DON'T YOU MAKE A DECISION BASED ON BEING HAMMERED WITH A SPECIFIC CHARACTERISTIC OF ANY DEAL ABOVE ALL OTHER ISSUES, OR CONCERNS YOU SHOULD BE LOOKING AT. DO NOT BE TAKEN-IN BY AN OVERLY ZEALOUS COMMENT ABOUT A SINGLE ASPECT OF A GREAT SOUNDING DEAL. LOOK AT ALL OF THE POINTS BEING DISCUSSED. USE THE BENJAMIN FRANKLIN APPROACH. DIVIDE A PIECE OF PAPER IN HALF, AND LIST THE GOOD REASONS ON ONE SIDE, AND THE BAD REASONS ON THE OTHER SIDE. SUBTRACT THE BAD FROM THE GOOD, AND MAKE YOUR DECISION. REGARDLESS OF YOUR DECISION DON'T PUT ALL OF YOUR EGGS IN ONE BASKET NO MATTER HOW GOOD THE DEAL SOUNDS.
DO NOT be persuaded by the plethora of recent 'johnny come lately' promoters, and salesman who've flocked to our industry to make some quick & easy money as the oil & natural gas prices go skyward. Bottom line, you can avoid most of the excessive promote, and certainly the commissions by working directly with company officers, and owners, and their operators in legitimate oil & gas drilling and production programs. Broker/Dealers know next to nothing about the 'nuts-n-bolts' of our business, and could care less...they are simply chasing a commission, while they wine & dine one another, and talk about the 'flavor of the month' deal they are in love with for the moment. Most have no 'skin in the game', and have never been in an oil field for more than a couple of hours if at all. This includes the lawyers, accountants, and gate keepers working for retainers, and commissions. Make your own decision! You'll know more about the people, the deal, and the business with a couple of hours of research than most of the side-kicks out there ever will.
By the way, as a 'contrarian' you can, and should now seize those opportunities that exist today in the oil patch when investing in private deals. This is where the greatest upside is, not in the stock market, or with B/D's who hustle many deals for commissions. Many of the credible people in our business have made adjustments in how they conduct themselves, and have improved their reporting, and the conduct of development with their drilling plans effort to make investors money.
Investors today are getting higher percentage ownership, and pay-outs, and are typically getting a better shake, or deal these days, and have much greater upside, and have more chances to make money in highly diversified deals with the RIGHT PEOPLE then ever before. In the past you drilled a single test well 'heads-up' to test for the commercial quantities of oil & gas. We now combine leases, wells, and build infra-structure as part of the development plan, while first going after the easiest re-entry's, work-overs, and least risky drilling to make investors money. We do have high prices in the field for equipment, steel, suppliers, sub-contractors, and anyone willing to come-out and get dirty. It seems the guys who do the real work want to get paid...a novel idea huh?
If you are visiting oil & gas promoters who often have slick operations and you are meeting with promoters telling you what you want hear, be sure you are not mislead by unfavorable comparisons to another mans deal. Unless you can review both competing company memorandums which conform to federal and state laws, and the Form D's required by each state have been filed in each state where each company, and it's sales representatives do business your aren't comparing Fuji apples to Fuji Apples, and most importantly, you aren't doing the proper due diligence.
Give every company a chance to compare their deal with another company's. Then diversify, diversify, and again diversify. No one has a corner on all of the good ideas. DO NOT RELY on a single variable, or component of a great sounding oil deal. For example, if someone tells you they have a 97% completion rate, or that you can get a large ownership percentage for a small amount of money, or they rarely get dry holes, or the returns are always excellent, make sure you are running in the other direction. Chances are this is the tale of a 'sucker field' where you don't always lose money, however, you typically don't make much either. You might break even in 'blanket gas tight sands' but where's the excitement in breaking even? This is not the reason to invest in oil & gas private placement programs.
I've noticed during the past 25 years you will be told the top performing wells in a area, never the average, and never the percentage of dry holes, and Never the Cost of recovering the reserves of oil & gas. The geologists or dreamers in our business like to tout the big reserve numbers, and they never have any money in a deal. Stay away from any deal where the promoters, or companies are giving you a less than totally balanced presentation with both the good and bad points of any deal being offered.
Ask to talk to a couple of investors, or at least ask for the legal, accounting, and banking references for the company. Talk to them, you will get an impression that could be very revealing. Oil & gas field operations all look pretty much the same. Pump jacks go up and down, and gas pipe lines just lie there...and this doesn't mean much. Legal descriptions, and full disclosure of the deal points, audits, and tax returns are more revealing, and the people who make sure this information is in a 506Reg-D memorandum are more honest. Displaying your dirty laundry is good for the soul. Oil & gas people who do so are playing by the rules. Con men don't do this. Don't penalize the companies who fully disclose, and for admitting mistakes based on often working for years in the industry. (Full Disclosure, and everything you need to invest has to be included in a legal PPM by the way.)
Everyone wants to make money in this high risk industry. The key is to deal with people who've stayed in the business through the good and bad times, and can help you with the perspective you need at the beginning of your investment planning in the oil & gas business. Don't expect anyone who has been in the industry for decades to be squeaky clean relative to legal, or regulator actions. The real question is are the actions unresolved, and/or just warnings, and not judicial actions. Remember, the regulators have their own axes and agendas, as do the attorneys, and accountants who don't want to lose clients. Don't let this dissuade you from doing business with some experts who are sitting on oil & gas assets taking years to acquire they want to develop. Be that unique person who makes their own decisions, and realize the crowd knows little, and the regulators, and lawyers, and gate keepers, far less...Be the contrarian, its exciting and can be very profitable. People will then say gee, how did you get so lucky? Right...oh, by the way, why not be the investor making money in private oil & gas deals who smiles while filling-up their gas tank at the pumps? Dennis
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