This video, produced by Oppenheimer Funds, is a good introduction to oil and gas MLP’s:
Posts for : September 2015
There are several different ways to form a business in the US and it can be a bit confusing as to which way is best for you. There is the sole proprietorship, where you basically own the business by yourself, you’re responsible for everything, and you gain in the profits. There is also a general partnership, that’s where the partners share in the responsibility equally, and the profits as well. And then there is the limited partnership where there can be lots of limited partners that each share some of the responsibility and a portion of the profits.
With A Limited Partnership The Partnership Isn’t Taxed
If you’re a limited partner in a business, you’ll usually be taxed individually on the income you earn but the partnership itself won’t be taxed. This eliminates double taxing that can sometimes happen in general partnerships. Also in limited, the liability is shared among all the different partners as business owners, which reduces the responsibility for each one by themselves. Spreading the risk is one of the main advantages of the oil and gas limited partnerships.
What An Oil And Gas Limited Partnership Does
When a group of investors decide they want to invest in an oil well the usually form a partnership before they start drilling for gas and oil. The benefit of this is that the liability is limited to a small amount because it is spread out among the partners. Drilling oil and gas wells can be very expensive and by spreading the risk and liability no single person can lose everything if the well doesn’t produce, but a bunch of investors would lose some money instead.
In the partnership, you can’t lose more than the money you have invested, so if there’s an oil leak you won’t end up 100 million dollars in debt after a lawsuit. In almost all cases your limit of loss won’t exceed the amount of capital you invested.
You Can Invest In Exploratory Or Development Wells
If you’re planning on drilling in an area where oil hasn’t been previously discovered, then that will be called an exploratory well because you’re still exploring the possibilities. On the other hand, if there are already a number of producing wells in the area, and there is a known bed of oil in the ground, then that type of well would be called a development well.
Obviously exploratory wells come up dry quite often and developmental wells are quite a bit more successful. The conservative investor would most likely be more happy with the developmental well drilling than the exploratory well drilling. It us up to the individual investor to ask the right questions, learn the terms, study the history of the company and then decide how much risk they’d like to be exposed to, for how much gain.
Tax Breaks Reduce The Risk For Oil And Gas Limited Partnerships
Oil and gas limited partnerships enjoy tax breaks that can help reduce the amount of risk to the partner investors. There is depreciation, where the cost of the equipment can be written off each year, and oil depletion allowances that are based on how much the oil or gas is worth as it’s extracted from the field. These tax breaks are typically better than the risks involved and help offset taxes that the investor might have on other more profitable businesses. As with any investment, it is wise to consult with a good oil and gas lawyer before making any decisions.
Be Aware Of Stranded Assets
Just a few years ago the word stranded assets would never have been applied to gas or oil, it was widely expected that every drop that was recoverable would be pumped out and sold. Now however, the term has gained some traction in the industry, and even though many top executives will deny it, there is a chance that not all the discovered oil will ever be extracted.
There are several different events that are coming together to create the perfect storm in the energy arena. Climate change is part of the puzzle in that it has spurred the investment and research into alternative energy, mostly wind and solar. Since the price of solar power has been dropping exponentially for decades, it has now reached the point where in 2016 it will drop below the price of grid electricity in most of the US, then continue to drop as more research and the economy of scale take over.
It’s believed that by 2022, solar without subsidies will be so cheap in rooftop installations that even if a power company could make electricity for free, the cost of transmission to the homeowner, and maintenance of the wires will cost more than rooftop solar. This could lead to a massive shift in demand for gas to run power plants, and oil to use in transportation, causing stranded assets to occur in the industry.
Investing in oil and gas wells has been very lucrative for decades, and will probably remaining that way for awhile longer. However, it has been said that “the stone age didn’t end because we ran out of stones” so any investor should always investigate using the full power of the internet before pulling out the wallet to get involved. As stated above, we recommend that you consult with an oil and gas attorney, such as the one at this Facebook page, before you make your investment.