There are a lot of great ways in which to invest oil industry, from retail investments and oil investment companies to drilling programs. Before you get involved with oil gas investing it is important to know what these different vehicles are and what the pros and cons of each include.
Stocks in Oil Companies
One of the easiest oil investments is in petroleum stocks. All you have to do is call up a broker and invest in shares of an oil company such as BP, Exxon Mobile or XTO. Oftentimes these dividend yields are low (3 – 6%) accompanied by a small growth rate, disaster risk and even a political risk too. However, you won’t have to do anything but buy the stock.
Working Interest Partner in a Drilling Program
There’s a great risk to becoming a working interest partner in a group of oil wells since you could lose your whole investment. On the flip side however, you could also make a killing. Unfortunately, you won’t know until you invest or rather take on this gamble. Whenever you do get involved with this type of investment oil you’ll be at risk of lawsuits and cost overruns that you’ll have to pay. However, you could also make 8 — 12% return on your investment.
Working Interest in a Lease
Something that’s less risky than becoming a partner in a drilling program is buying a working interest in one that’s already producing oil or gas because there’s a lot less potential for unexpected expenditures to pop up. Usually you’ll be able to watch as you make money, as much as a 10 — 20% return. However, you’re still at risk for lawsuits and you’ll also need some technical knowledge.
Stock in Royalty Trusts
You can purchase stock in royalty trusts, which is quite different from purchasing shares in an oil company. These trusts are established with big assets, overriding interests and no business operations. All they do is receive cash flow from royalties. In fact, they will typically distribute at least 95% of their cash income as dividends. There’s no risk of lawsuits here and you’ll get between 7 — 9% return over the long term. These investments are easy to find since they’re offered on the NYSE.
Oil and Gas Royalties Directly From Mineral Owners
You can also purchase royalties from private owners. There are a lot of advantages here, including large returns (12 — 50%) and the fact that you’re actually purchasing minerals means that if a new oil zone is discovered you’ll be entitled to another royalty cash flow stream. However, you do need to know how to purchase mineral rights and find private owners who are willing to sell. Of course, this also means that you’ll need to be an active participant here. Whenever you stop to consider the large returns and the low risk factors, you’ll see why this has become a much preferred method of investing for individuals who are looking to invest in the oil industry.