As someone who is new to investing, you want to make the best decisions for your portfolio right from the start and guarantee you’ll be set up for success and true wealth for the rest of your life. One way to do that is through oil & gas investing.
Taking just a few minutes to learn all about oil and gas investing and how to become an oil and gas investor can help you exponentially in the future. These are some of the most lucrative industries, and when you put your money in the right place, it’s bound to grow and grow.
What Is Oil and Gas Investing?
Oil and gas investing involve the process that an investor goes through to make money off the oil and gas industries. Many investors are interested in oil and gas because they are some of the most profitable industries on the planet. The demand for oil has increased every year by 1.3 million barrels per day for the past 50 years. And by 2025, oil demand is going to jump to 3.2 million gallons of liquid oil fuels per minute – which is the equivalent of five Olympic-sized swimming pools.
The natural gas industry is also growing, especially in the United States. The U.S. Energy Information Administration predicts that dry natural gas production will average 90.7 billion cubic feet per day (Bcf/d) this year, which is an increase from 7.4 Bcf/d from 2018. Energy Advantage Investor forecasts that natural gas production will continue to increase in 2020 to an average of 92.0 Bcf/d.
In 2018, the top oil and gas companies brought in record products. Chinese company Sinopec made more than $377 billion, and U.S.-based Exxon Mobil brought in more than $241 billion. Companies make these record profits by participating in upstream, midstream, and downstream activities.
Upstream, which is also called exploration and production, or E&P, describes the process of seeking out underground and underwater crude oil and natural gas fields. Companies who get involved in upstream also have drilling exploration wells and drill into established wells to find oil and gas.
Midstream companies transport, processing, and store oil and gas. They will typically be involved with the transportation of pipelines, trucking fleets, and tanker ships.
Downstream is the filtering of the raw materials discovered while upstreaming. It also refers to the purifying natural gas and refining crude oil. It includes marketing and distributing products like gasoline, heating oil, petrol, lubricants, and natural gas to consumers.
Even if oil prices fluctuate, oil and gas investors can enjoy a strong return, since these industries are in demand. It is a great way to earn a passive living and receive amazing tax benefits at the same time.
How to Invest in Oil & Gas
If you want to become an oil and gas investor, you can invest in the following ways:
- Shares of public companies on the stock market
- Oil and gas exchange-traded funds (EFTs) and mutual funds
- American Depositary Receipts (ADRs) of public companies
- Percentages of private companies
- Futures contracts
If you invest in private companies – say, you invest in a new well – you can enter a limited partnership and become a limited partner. A limited partnership is a business partnership, but a limited partner has legal protection that general partners do not have but a limited partner also does not have as much direct control. This is much riskier than investing in a public company or a mutual fund which are the safest ways to invest. However, the government gives you tax breaks for taking these kinds of risks in order to encourage oil & gas production in the U.S.
The many tax advantages of oil and gas investing as a limited partner in a limited partnership are:
- 100% of all lease costs, which need to be capitalized and deducted over the course of the lease via the depletion allowance
- 100% deduction for the year intangible drilling costs were incurred. These costs include grease, labor, chemicals, and other intangible costs, but not the drilling equipment itself.
- 100% of tangible drilling costs, which must be depreciated over seven years
- 100% of all net losses, which are considered active income, that is incurred in concurrence with well-head production and could be offset against other income like interest, wages, and capital gains.
- 100% of all excess intangible drilling costs that have been exempted as a preference item on an alternative minimum tax return
- 15% of all gross income from oil and gas wells for small producer investors
To spell it out, if it costs $300,000 to simply drill a well, and 75% of that cost is intangible, the investor could take out a tax deduction of $225,000.
However, with that said, the easiest way for a beginner investor to get into oil and gas investing is to start off with less risky choices like mutual funds and stocks. You can research the big oil and gas companies like Exxon Mobil, Chesapeake Energy, Total S.A., Hess Corporation, and Shell to see how much they are per share on Nasdaq.com. You can also look up the top oil and gas mutual funds, which include Vanguard Energy Fund and Fidelity Select Energy Portfolio.
Learning More About Oil and Gas Investing with Energy Advantage Investor
If you want to continue your education in oil and gas investing, make sure you subscribe to Energy Advantage Investor, a newsletter that gives you tips and techniques for making big returns in the oil & gas industries. To know what’s going on in these industries, all you have to do is open your email, learn from one of the world’s leading energy advisors Dr. Kent Moors, and make the financial moves he recommends. What are you waiting for? Subscribe today.