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Oil & Gas Investment

Oil makes the world go round, and there’s no sign of that changing any time soon. Petroleum remains in high demand, as it is an efficient way to generate both BTUs (British Thermal Units, a measure of energy) and kilowatt hours. Petroleum also has a multitude of uses in industry, as it can be used as a lubricant and is a key component in the creation of plastics.

Natural gas, for its part, is a popular source of heating and cooking energy. It can also be converted into diesel fuel and electricity, and is essential in the creation of chemical fertilizers.

While crude oil prices and gasoline prices are relatively high compared to historic norms, when adjusted for inflation, natural gas prices are currently near a 10-year low, as of early 2012. This creates a natural possible buying point if demand for natural gas should increase – or if supply should fall – resulting in a price increase.

How we Invest in Oil & Gas

We approach oil and gas investing in a number of different ways. By considering the industry a collection of companies providing products or services to consumers, as well as to other players in the oil and gas industry itself.

We  also approach the industry as a commodity, and seek to profit from changes in the prices of crude oil, gasoline, diesel, and other products.

  1. Mutual Funds or ETFs
    Alternatively, we buy shares in a number of oil and gas-focused mutual funds or ETFs. These helps us gain substantial exposure to the commodity without taking direct risk in commodity spot prices and without tying too much of your fortune to the prospects of any one company.
  2. Large Cap Stock or ADRs
    These are two methods to gain exposure to the oil and gas markets, both via publicly traded companies – the most obvious being Exxon-Mobile (NYSE: XOM), one of the largest companies in the world, as measured by market capitalization. We also buy stock in other companies such as British Petroleum, PetroChina, Chevron, ConocoPhilips, Marathon Oil, Royal Dutch Shell, Gazprom, the Anadarko Petroleum Corporation, and many others. Each of these companies engages in oil exploration, and we buy direct exposure to them simply by buying shares or ADRs(American Depositary Receipts).

 

iii. Futures Contracts
We purchase derivatives such as oil and gasoline futures contracts.

  1. Small or Micro-cap Stock and Limited Partnerships
    We play further down into the oil and gas industry “food chain” into a small or micro-cap stock, or even a limited partnership that focuses on oil and gas. This is a more specialized field of investing, and if the business is not publicly traded, you we typically engage the services of our development team who specializes in this industry for access to these kinds of businesses.

Why Invest in Oil & Gas

  1. Diversification. Oil and gas investments have historically provided a useful diversifier against the overall economy. When gas prices rise, economies tend to slow. This could cause the rest of your stocks and funds to stumble. But when oil and gas prices rise, oil and gas stocks tend to rise with them. An exposure to oil and gas stocks can help insulate your portfolio against economic slowdowns caused by oil shocks.
  2. Profit Potential. Investments in the smaller companies and limited partnerships can occasionally pay off big. A single well can generate many times its costs if drillers strike oil, and the well can pay dividends for many years.

iii. Tax Advantages. There are some tax advantages to oil and gas investing. For instance, the IRS allows companies to deduct for depletion – an allowance similar to that for depreciation in rental real estate, which is a way of accounting for the gradual exhaustion of mineral supplies in a given plot of hand. If you buy shares in a publicly traded stock, this benefit will be largely invisible to you, since publicly traded stocks are C-corporations and don’t pass their gains and losses to shareholder tax returns. However, if you buy a membership in a limited partnership, this could be a very important consideration. Depletion could be the difference between a property that’s cash flow positive and one that loses money.