Simple logic suggests that, as the price of oil and gas goes up, the rational for investing in oil and gas becomes more attractive. Yet this is not necessarily the case. Higher gas and oil prices mean increased competition among both major and independent drillers for drilling equipment and drilling crews. At the present historically high price levels, we are seeing lengthening delays in lining up drilling rigs and crews. This means that the drilling part of the business is running flat out and can’t keep up with the demand. In this environment, the cost to hire crews and equipment is very high compared to historical standards. Since drilling and completion expenses are the major cost component of drilling projects, the price of oil and gas will have to remain well above historical levels for many projects to pay off for investors.
High oil and gas prices also mean that a great many previously unviable projects have now slid over into to the potentially viable side of the equation. Such investment projects will remain sound only as long as the price of oil and gas remains high. If prices decline substantially, many who invested in these previously marginal deals will be out of the money, regardless of whether the deal produces the expected volumes.
Given the current environment of high drilling cost and the availability of more and more marginal projects entering the market, any substantial decrease in oil or gas prices is going to generate a surge of unhappy investors.
My best advice to potential investors is to carefully scrutinize offerings to make certain that they provide an adequate potential return even if the price of oil drops as low as $30 per barrel or gas as low as $3 per MCF.
Before investing in a company, its advisable to go through their track records. Also should be ready to handle even if the oil prices drop to too lows..
Posted by: Royalty Interest | November 08, 2009 at 01:45 AM