How to Invest in Oil Wells – A Guide for Beginners

Investing in oil wells can be a thrilling way to diversify your portfolio, one with the potential to pay off abundantly. The industry boasts high demand and unmistakable global impacts, and tapping into it could mean more financial rewards for you.

But no investment is without its downsides, and you’ll want to make sure you understand your financial commitment before plunging in. In this guide, we’ll look at the details of investing in oil wells, fill you in on the potential drawbacks and advantages, and help you identify what factors to consider before taking the leap.

Why Invest in Oil Wells?

Oil and gas have proven to be a mainstay of every economy. With the world requiring more and more energy, and oil being one of the most traded commodities on the earth, there are astronomic profit-making opportunities around in this industry. When you consider the earning potential of these investments and how royalties, dividends, or asset appreciation can grow income, investing in this area becomes a no-brainer.

The benefits don’t stop there. You could argue that investing in oil wells could be a great way to hedge against inflation if you take into account historical trends. Simply put, it means when inflation goes up, the price of oil goes up, too. The investments are great if you’re in search of a long-term capital appreciation that offers a relatively stable cash flow in comparison to more volatile assets like stock.

While these other investment opportunities may appreciate in value over time, they tend to offer little to no income. Oil and gas investments, on the other hand, often pay returns in the form of cash payouts over the life of the well, making them an attractive investment for those who value immediate income.

Different Ways to Invest

There are a few different methods of investing in oil wells. Just be aware that each has unique advantages and disadvantages, so this is where you will need an investment professional to help you determine which opportunity you should run with.

1. Direct Investment

If you’re looking for the most direct way to invest, you’ll want to purchase a direct ownership interest. When you invest money into one, you’re essentially buying a percentage of ownership in the production. That means you’re entitled to a piece of the profits it produces. This investment method generally involves buying a “working interest”. There are also private deals where you’re able to buy a whole well.

These are often partnership investment structures and can come in other forms. Additionally, you can just buy a percentage of the ownership of the field. The downside to this is the wells can be volatile investments. They could be less profitable than anticipated or may dry up before it’s able to pay you back your principal investment.

Additionally, this can also be complex and difficult. You will need to keep up with the operational side of things, like prices or increasing production in an oil fracking site. This means having knowledge of the extraction process, projected and actual production costs, and market trends.

2. Royalties

Another way to invest is to buy royalties. Here, you basically purchase the right to a portion of the revenue generated from the well. The revenue, known as a royalty, is usually paid out to the landowner or leaseholder. With this method of investment, you’re entitled to a portion of the profits, but you don’t have to worry about running the business.

When you invest in royalties, it’s usually a lower-hassle investment than investing directly. However, they typically pay out less than direct investments because you’re not doing anything to earn the returns. Still, they can provide a stream of income over time as long as the well is producing oil. Since you’re not involved, this method carries a lower business risk.

3. Investment Partnerships

If you don’t have the capital or expertise to invest in an oil well, buying into a business might be an alternative option. An investment partnership funds the exploration, drilling, and operation of the wells by pooling investment money from multiple investors. This method can work somewhat like crowd-funding. When the wells start to produce, investors get paid according to their share of the partnership.

Keep in mind that this method still requires careful consideration. While it’s a good way to invest without the mess of managing the wells, if business becomes unprofitable because of a lack of production, investors in the partnership can lose their original investment. Click here to learn more about investment partnerships.

4. Stocks and ETFs

If you don’t want to be directly involved in drilling or production, consider buying stocks or exchange-traded funds (ETFs) of oil and gas companies. This way, you can get a stake in the industry without the work of thousands of miles of well to manage. You can invest in the industry by buying stock in companies that own and operate the wells.

ExxonMobil and Chevron are two examples of major companies that explore, produce, and sell oil on the market. You might also consider ETFs. An ETF that tracks the performance of several companies or one that’s invested in futures contracts linked to the price of oil can also be the best investment.

They allow you to benefit from owning stocks instead of owning the physical well, and they’re usually more liquid. However, because they trade on the market, you’re also exposed to all the market’s volatility. This makes oil stocks more risky than direct investments.

What to Consider Before Investing in Oil Wells

Like most investments, there are a few key factors to consider before taking the plunge with the investments.

1. Investment Horizon

Oil well investments tend to be a long-term game. Whether you’re investing in a well directly, buying royalties, or going about it some other way, you shouldn’t expect a significant payback for quite some time. If you’re looking to earn a profit quickly or only wish to invest in the short term, oil wells probably aren’t the best addition to your investment portfolio.

2. Risk Tolerance

This is a volatile market, and prices rise and fall for a variety of reasons, including geopolitical events, natural disasters, and changes in supply and demand on a global scale. Drilling for oil has its risks, too, including those related to dry wells, drilling incidents, and other drilling and production mistakes. Make sure you can handle these potential issues and risks before making a decision.

3. Costs and Fees

These investments come with a price. If you’re investing directly, this cost likely includes things like drilling and operational expenses. When you buy royalties, you have your transaction fees to contend with. Even forming an investment partnership for oil well investment comes with management fees. Before investing, be sure to take these costs into account and think about how it will affect your portfolio.

4. Legal and Environmental Considerations

The industry is heavily regulated and has legal and environmental sides to consider. So, understand the law at the state and federal level, and be sure to hire an attorney who has experience in oil and gas law to help you along the way.

Environmental factors come into play, too. Think of spills and the potential effect of drilling on ecosystems as examples. To learn more about taking this investment step, follow this resource: https://energiesmedia.com/.

Conclusion

Oil well investment can offer many benefits to your portfolio if done correctly. Potential long-term returns and a hedge against inflation, investment diversification, and having a passive income stream are just some of the pros. That said, it can still be risky.

So, spend time researching the available investment opportunities and the type of investment that best fits your goals. The more information you gather, the more confident you’ll be in putting money into it for a financial return.