- March 28, 2017
In the modern world, oil is the elixir of life, feeding the ever-increasing energy demands of developed and developing economies. In addition to general public consumption, almost all major industries, including manufacturing, production, healthcare, and hospitality, also rely heavily on oil to fuel their operational needs, which makes investing in oil a promising proposition for investors. At Figtree Capital Ventures, we are committed to helping our investment partners identify and tap high yield energy investment opportunities to make the most from their investment dollars. In this post, we discuss the various types of models followed by energy investment companies to make oil investments a sustainable strategy.
Oil Reserve Exploration
U.S. energy investment firms working on this model identify sites that are expected to hold oil reserves. After the acquisition phase, the company starts drilling and may raise capital from investors to finance the venture. Most exploration projects have high risk as well as high returns, and if successful, some projects can generate as much as 10 times the amount invested. Even if the well turns out to be dry, investors can write off their losses 100%.
Proven Reserve Development
Investing in companies that drill near proven oil reserves is the best strategy if you want to play it relatively safe and have a lower appetite for risk. Oil exploration firms often conduct technical surveys to find proven reserves of oil that should have the best chance of producing. Even if the reserves are proven, the final decision to move ahead rests with the exploration company that can call-off the project if they don’t find drilling to be feasible. In such instances, the initial seismic cost is considered an economic sunk cost.
Services and Support
Apart from taking the direct investment route, you can also invest in ancillary industries such as shipping, logistics, and hardware manufacturing whose services support oil exploration projects. Returns in some of these industries is not dependant on the fluctuation of oil prices, making them less volatile. For example, pipeline companies charge on the basis of number of barrels they deliver, and under normal circumstances, they won’t lower their charges even if there’s a fall in global oil prices.
Many energy venture capital firms lease or acquire a part of the land where oil exploration companies drill, which helps in diversifying risks should the project hit a dry patch. In such instances, the investment firm, in most cases, will be treated as a fractional owner and must bear equipment and other costs related to exploration often referred to as Net Working Interest or NWI.
Why Invest in Oil and Gas?
The US inflation rate for 2016 was 0.82 percent, which is a whopping 583 percent increase from 2015. Investments in stocks, bonds, and mutual funds whose value is dependent on market trends can inherently expose investors to market risks. The value of oil investments is however, not decided by the same market volatilities, as oil is needed across all industries and verticals. Investing in oil can offer protection against market volatility and help you diversify your investment portfolio.
The U.S. government provides substantial tax breaks to domestic oil investors, including a 100 percent tax exemption on tangible and intangible drilling costs. The government also provides a 15 percent depletion allowance on gross income for small investors and companies (firms that refine less than 50,000 barrels a day). Also, the U.S. Tax Code allows companies to write-off lease costs over the life of the lease.
Healthy Growth Projections
The International Energy Agency estimates forecast a rise in global energy demand by almost 30 percent by 2035, inflating consumption by as much as 100 barrels per day. During this period, prices are estimated to touch $ 125 per barrel, which is almost 3 times the current rates. As oil powers global economies, investing in energy is a solid option that is expected to provide healthy long-term returns.
Energy has the most promising expectations for investors currently and into the foreseeable future. Improvements in oil exploration technologies and use of better equipment will open up more energy investment opportunities and avenues for investors. To take advantage of these opportunities, you need an investment partner that can provide comprehensive support throughout the process. FIG Tree Capital Ventures in one such name. Focused on the horizontal development of proven oil and natural gas fields, FIG Tree has completed over 77 wells, with many more projects underway. To learn more about our services and how we can help you strengthen your investment portfolio, fill out our contact form or call (866) 300-1885.