A brief introduction into investing in oil and gas.
The easiest and most affordable way to invest in oil and gas is to be a royalty interest owner. Royalty interest owners receive a percentage of the gross income from a producing oil and/or gas well, while they do not share in the expense of the well.
When an oil and gas exploration company drills a well, a percentage of the production is allotted to the landowner via an oil and gas Mineral Lease. Oil and gas investors negotiate with the landowners for a share of their current and potential future royalties. By offering a large sum of money in advance, they can receive a monthly royalty check for their share of the acquired royalty interest.
Royalty interest can be acquired in and under a tract of land that is situated within a producing unit. A good offer for this type of interest is usually equal to 60-72 months of potential future royalty income. Keep in mind, that most natural gas wells suffer a considerable drop in production from year to year (as much as 200% in the first year alone), so be sure to factor that into your decision. This investment is less risky because you know there is good a well drilled and you have a guaranteed return.
You can also buy royalty interest under tracts that are not currently in production but have potential to produce in the future. These investments are riskier, but you can buy at a lower price, and potentially get more return. You must follow the trends closely and decide based on current and historical data.
The initial investment depends on various factors, such as; Production History of subject property, Production Rate of subject property, Production History of surrounding properties, etc. For example, if there have been dry holes drilled on the subject property in the past and there is some decent-to-poor production nearby, you can usually acquire the interest for a modest amount, but the risk of a return will be higher. If there is a lot of activity near the property and some wells are doing well, you may have to pay more up-front, but you have a better chance of getting a return faster. Like most investments, the greater the risk, the great the reward.
Do your homework. If an oil company is actively leasing an area, but has yet to drill a successful well, buy small royalty interest across server tracts of land to spread your risk around. Follow the development closely and buy more in the areas that look promising. The goal is to get in early enough when the price is low, but late enough so you feel good about the investment.
There are other factors when deciding on a good oil and gas investment. It varies by state and county. It varies from oil to natural gas investing. Each oil and gas field is different and hard to predict. There may be great production in one area, a few miles of no production, and then some scattered producing areas. Once you learn enough about the industry and start to pick up on trends, you can have a successful oil and gas portfolio by investing in oil and gas royalties.
There are also royalty brokers who trade in royalties. They are the middle man between the royalty owner and potential buyer. They negotiate for the interest, have all the documents executed, confirm title ownership and assign interest to the investors for a fee. They follow the trends very closely and understand when to buy and for how much. Remember though, there is always risk involved.
All investments are risky. You need to do your homework and understand the risk associated with this type of investment. Most people invest small amounts of money across more speculative tracts and concentrate most of their investments in more traditional producing areas. There is a huge market for royalty buyers and there is lots of money to be made. You should consult an oil and gas professional before making acquisitions.