When building an investment portfolio, one possibility is to invest in oil and gas companies. The oil and gas sector has unique terminology and can appear to be complicated. One way to begin understanding how oil and gas companies operate is to look into how they earn revenue.
Companies in this sector can be identified as either E & P (exploration and production) or drilling and drilling services. Exploration and production companies search for new sources and then sell the resulting product; in the case of oil it is sold in order to be refined and create products such as gasoline. Drilling services drill wells and maintain them and are not involved in production, but are obviously influenced by the amount of production occurring. Both branches have many publicly traded companies that provide possible investment opportunities.
How to Invest in Oil
As with any investment, doing some homework before investing is vital. Those who choose to invest in E & P companies should closely watch the oil market and learn how it works. E & P depends upon many factors that lie outside of the borders of the United States.
Oil supplies come from many areas of the world, including Nigeria, Brazil, and Saudi Arabia. One easy way to invest in this sector is to simply buy shares in drilling companies. This part of the sector is not as easily influenced by changes in supply and demand, wells need continued maintenance long after the drilling is done.
Invest In Oil Leases
An oil lease is essentially a contract with a landowner for a portion of the profits of an oil well drilled on their property; it could also refer to wells on federal or state land. Oil leases can be purchased, either in whole or in part.
Those choosing to invest in oil leases should proceed carefully, just because a lease is in place does not mean that there is oil on the property and if there is, there is no guarantee how much will be found. Many oil leases are on federal land and only last for ten years, after which the ownership reverts to the original owner.
Private Oil Companies
Not all investments in oil and gas are stock or leases. It is also possible to invest in private companies. One way, which does have some risk associated with it, is to invest money in a drilling fund. This fund is used for oil and gas exploration. If the exploration is successful, the investor shares in the returns.
Another possibility with less risk is to invest in an existing well as part owner. Private oil companies need to raise capital to be able to drill; in exchange the investor gets a percentage of the revenue. These type of investments not only can produce revenue for the investor, but also increase exploration and drilling, strengthening the economy as a whole.