Oil drilling project investments usually come in two forms. You can invest in a private investment opportunities or you can invest in a public company. This article will concentrate on private investment opportunities and detail some of the important aspects that an investor should be aware of before any capital outlay in this area. The article will discuss limited partnership investments and PIPE investments as two specific examples of private investing. The article will then focus on specific areas of interest to an investor, including the benefits of oil drilling investing, types of reserves, and hedging practices.
- The majority of the opportunities available to individuals for investment in oil drilling projects come in the form private investments in public equities (PIPE) or limited partnerships. A private investment in public equity is usually offered to hedge funds or qualified investors who have a minimum of $1 million dollars of liquid assets. Your broker will occasionally have access to PIPE transactions, and if you are interested in this type of investment, you will need to inquire. PIPE investment allows you to purchase the stock of company at a discount to the current share price for the purpose of raising money. There are two types of PIPEs that are generally offered. The first, which is a traditional PIPE, is one in which either common stock or preferred stock is issued at a set price in an effort to raise capital. Sometimes a structured PIPE is issued, which can be convertible debt into equity. The second type of investment is a limited partnership. These entiti es create a company where there is a general partner who handles the operational manners, and multiple limited partners who own a percentage of the business.
- The main reason to invest in oil drilling opportunities is to make money when the oil is extracted out of the ground. Drilling projects are successful when an oil field is developed and consider unsuccessful if there is no oil to be removed. This is also known as a dry hole. Oil exploration and development companies will spend a lot of money looking for potential oil sites, but like most endeavors, they cannot be sure oil is available until they begin drilling. The process of drilling and development is very expensive, and this is usually the time that smaller companies begin the process of raising capital to extract oil.
- Before making an investment in an oil drilling project, you want to see specific engineering information that describes the proven and probable reserves that are available in the drilling site. Proven reserves are oil reserves that an engineer has confirmed is available with 90% accuracy. Probable reserves are an estimate of a particular amount of oil. Most professional analysts will haircut probable reserves by 40% when accounting for the amount of oil a company possesses. It is also important to know if the company plans to hedge their oil exposure. This is important because hedging (or selling the oil in the future) allows an oil driller to lock in profits at the time they begin to drill. Drillers in general will consider hedging proven reserves. Oil drilling projects can be profitable if you perform robust due diligence, and invest in the right investment vehicle.
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