All You Need to Know About Investing in the Oil and Gas Industry
All You Need to Know About Investing in the Oil and Gas Industry
Why Invest in the Oil and Gas Industry?
The oil and gas industry can be a great market for someone looking for a long-term investment. The amount of money the industry brings in every year, and its global importance, makes it one of the top industries to be a part of in the world.
Besides being able to bring in high revenue, another benefit when investing in oil and gas is the large tax deduction investors will acquire. There is an 80% to 100% deductible on expenses associated with intangible drilling costs, as well as tangible drilling costs, which is around $70,000 to $90,000 in tax deduction. Other markets such as real estate, the gold market or even the stock market do not offer tax deductions like this.
History of the Oil and Gas Industry
Over 4,000 years ago people started using oil. Oil was first discovered in 600 B.C, but it wasn’t until 1859 that oil was discovered in the U. S., Pennsylvania to be exact. Oil was used to build towers and petroleum was used to create light. The demand for oil and gas quickly grew as ways of use for both also grew.
Today, millions of barrels of crude oil are pumped out of the ground each day, providing millions of jobs for people globally with even more jobs being created each year. Every year hundreds of billions of dollars are invested in the oil and gas industry making the value of global oil trade around $2.5 trillion per year.
All of this makes the oil and gas industry a crucial segment to the global economy and as an investor within this industry, there is a high probability to make a great return on investment.
Three main Sectors of the Oil and Gas Industry
There are three main sectors within oil and gas which include: the upstream sector, midstream sector and the downstream sector.
The upstream sector is the beginning step of the process of getting oil. It is the search and establishment of underground, and even underwater areas, for natural gas or crude oil and setting up the drilling well.
The midstream sector includes the transportation of oil and gas, storage and processing. Oil and gas are first processed into natural gas liquids, water and oil. It is then moved to storage facilities. This is done by pipeline, tanker ships and trucking fleets.
The downstream sector is when raw oil is filtered and molded into other petroleum products such as diesel, natural gas, gasoline and even lubricants, kerosene, liquefied petroleum gas, jet fuel and other petrochemicals.
Ways to Invest Directly in the Oil and Gas Industry
There are many ways to invest directly in the oil and gas industry, with a large amount of oil and gas stocks available. While there are many options, the most popular ways to invest include: crude oil futures contracts, exchange-traded funds, mutual funds and general partnerships.
Crude Oil Futures Contracts
Crude oil futures contracts are when oil buyers and sellers collaborate on a specific amount of oil to be delivered in the future on a certain day. It can be scheduled up to nine years into the future, with each contract covering 1,000 barrels. West Texas Intermediate (WTI) is a type of oil that is easy to refine because of its low density and sulfur content, which makes it the basis for crude oil futures contracts. Crude oil futures contracts are available to be traded uniformly. The main reasoning for crude oil futures contracts is to help connect producers of oil with consumers of oil.
Exchange-traded Funds (ETF) track an index and trades on a prime stock exchange. Stocks, commodities and bonds are available to invest within ETF. ETF allows investors to put their money in multiple areas while not having to depend on individual stocks. Investors do not have to own direct commodities. Management and other costs are covered by a percentage of fund's assets. Exchange-traded funds are traded on major stock exchanges with the price determined on the market value as the price continuously changes.
Mutual funds have similar properties to exchange-traded funds by allowing investors to invest in multiple stocks or bonds. Many ETF have similar mutual funds within one company. Also, like ETF, a percentage of fund’s asset costs are covered. Mutual funds do not require the investor to invest a large amount of money to make a large amount in return, but the downside is that many mutual funds do not do as well.
General partnerships is when an investor is partnered with another investor, or company, sometimes with multiple partners. Every year the partner receives the details of the share of expenses and revenue. Limited partnerships are the most common. Within a limited partnership, the partner is protected if another partner has a liability issue. This keeps the other partners or investors unaffected by the issue. Joint ventures are another form where two investors, or companies, create a contract to distribute oil and gas or produce it.
Benefits of Investing in Oil and Gas
One benefit when investing in the oil and gas industry is that it brings in monthly revenue. Another huge benefit of investing in the oil and gas industry is getting a tax deduction. For oil investors and oil producers, there is a tax-break. There are several major tax benefits within oil and gas as an investor which include: active vs. passive income, small producer tax exemption, lease costs, intangible drilling costs, tangible drilling costs and alternative minimum tax.
Active vs. Passive Income
Investing in oil and gas is considered a passive activity, according to the tax code. This in-turn means net losses are active income. The active income can counterbalance wages, interest, capital gains and other forms of income.
Small Producer Tax Exemption
Small producer tax exemption, otherwise known as depletion allowance, is an advantage tailored to small oil investors and oil companies. It is a 15% taxation on gross income from oil and gas wells.
Lease costs are calculated over the life span of the lease, by capitalizing and deducting the depletion allowance. The purchase of the lease, mineral rights, operating cost and other administrative expenses are included.
Intangible Drilling Costs
Intangible drilling costs includes all miscellaneous items used for drilling such as the chemicals, labor, mud and grease with a 80% deductible the first year and up to 100% after the first year. The upside of intangible drilling costs is that as long as the well is operating, the investor is guaranteed the deductible. Whether the well is producing oil or not has zero effect on receiving the deductible.
Tangible Drilling Costs
Tangible drilling costs is the direct cost of the equipment used to drill. Like intangible drilling costs, tangible drilling costs are also 80% deductible the first year and be up to100% deductible after the first year. The difference is tangible drilling costs must take seven years to be written off.
Alternative Minimum Tax
Alternative minimum tax is any other intangible drilling costs that have been specifically exempted from the alternative minimum tax return.
OPEC stands for the organization of the petroleum exporting countries. OPEC is an intergovernmental organization that’s goal is to co-ordinate and unify oil policies by maintaining a fair trade between the investors and the buyers. OPEC’s members include 14 countries with Saudi Arabia as the top producer. OPEC is the leading power of global oil production, which means it does have an influence on investors within the oil and gas industry. As an investor, it is important to stay up to date with OPEC operations.
Time to Invest in the Oil and Gas Industry
One of the things you hear frequently from Swan Energy, Inc.’s marketing representatives when they are talking with potential partners is the question "Have you ever looked at an oil and gas project before?" Though many have not, there are some that have involvement in oil drilling in some capacity. Be it the courageous roughnecks risking life and limb to supply our great countries energy needs, or engineers and geologists discerned in drilling techniques and rock formations to the most savvy investors able to make financial decisions confounding to most keeping them ahead of the herd, the common factor is always the same: they continually educate themselves in what's going on in the present. Using this approach is what can keep you with a job when there are few or a company solvent when others fold their tents. It's what keeps the savvy investors making profits from opportunistic moves while others sit on the sidelines watching profits go by. To be sure, bigger rewards require bigger risks but the risk can be mitigated with the right information allowing an informed decision to be made. For those investors looking for the latest tax deduction and increased portfolio performance, come have a conversation with us here at Swan Energy, Inc. It costs you nothing to be informed and why should you not be that savvy investor that can answer the question - Have you ever looked at an oil and gas project before?
Swan Energy, Inc. has formed and funded over 60 Joint Ventures, with over 100 Joint Ventures under management in 2017 and over 500 wells owned and/or managed.
Swan Energy, Inc. is based in Houston, Texas and accepting new partner applications. With new operations developing, now is as good a time there has ever been to start your oil and gas partnership portfolio.
For more information about a Joint Venture partnership with Swan Energy, Inc. click on the link below and Swan Energy, Inc. will contact you.