Investing In Oil
I spent most of Saturday listening to an investment presentation by some oil guys from Texas and Oklahoma. I come in contact with them on a previous deal. At that time I had shown their investment presentation to my CPA (who usually turns down every investment I show him) and he was so impressed, he decided to fly out and meet them. He’s become their accountant and is investing heavily in their current deal.
Incidentally, in the previous deal where I came across the oil guys, they were also investors like me in a gas pipeline deal in Texas. It was a pretty sweet deal and we should’ve gotten cashed out with a 30% profit after a year. Unfortunately our partner, Grant Wilson III, decided to swindle us out of the profits. After spending over a year with this jackass, subsidizing his travel and living expenses he just decided that he deserved all the profits and he’s disappeared. Luckily we got all our principle back.
We talked to a lawyer about our legal options. Apparently it’ll cost $25,000 to get a judgment against this crook and if he’s spent the profits, we won’t be able to collect anything. Spending $25,000 to maybe get around $60,000 doesn’t sound very appealing. Anyway, if you come across anyone called Grant Wilson III in Houston, who’s lived in Southern California and is originally from Boston, you should definitely keep your hand on your wallet at all times! The only positive thing in the whole deal is that I learnt a very important lesson about trust in business, and luckily it didn’t cost me much money.
But back to the original discussion about the oil men. Unlike Grant, who’s background is swindling people, oops, I meant to he was a lobbyist in Washington, these people actually have worked for decades in the oil industry. One of the principals has several patents and they all are extremely knowledgeable in various aspects of off-shore and on-land drilling and exploration.
They’ve basically put together a partnership deal where they find under-valued oil & gas producing properties with at least 10-12 years of production left. Usually its a distressed situation like an estate sale, lawsuit or defect in the title where the production has been stopped.
In the current “fund” (its called a fund but its really a partnership), they have 19 producing wells and will drill 2 more infill wells.
In normal deals that are “securitized” (sold as a security and governed by the SEC), dealer-brokers are involved and usually 30% of your investment goes to overheads like commissions, fees and marketing. Since only 70% of your investment actually gets invested you typically get low returns – in the range of 7-10%.
However, if you get an opportunity to invest directly with in a fund like this, where they aren’t paying any broker commissions, you can get a much better return. Assuming oil stays at $65 and gas stays at $6, my CPA thinks we can get a 24% annual return. If oil goes up, our returns go up too! And since about 40% of the return is considered return of principle, its not taxable. (Although it does lower your basis in the investment).
Unlike my other investments which have taken quite a while to start producing, this is supposed to start generating income with 60 days. Of course, I’m not holding my breath. But the fact that my CPA is investing alongside me and I felt I could definitely trust them gives me a lot of confidence.
I let you know how it goes.
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September 23rd, 2007 at 6:45 am
Hey Nirav,
Good luck with this, I’ll be checking back to see how it goes!
Best,
James
September 23rd, 2007 at 12:32 pm
Your Blog sponsors include a
scheme to ‘invest’ by playing
casino games over the internet.
I know that bloggers can’t vet
all their sponsors, but this is
just as crooked as the guy you say
swindled you in the article…..
September 23rd, 2007 at 5:49 pm
Hi,
I am acutually considering a oil well investment, & have a PPM that is thick as a dictionary, do you know where I could go …to get this analyzed or checked out? From what I understand, & how it was pitched to me…it seems a like a terrific investment.
Thank You
September 23rd, 2007 at 9:05 pm
actually it says “If you are looking for a conservative investment strategy to fund your retirement, this is not the place for you. But if you have money that you can afford to lose,…”
I hope you pay more attention to your finances!
September 24th, 2007 at 7:24 am
I sat away from Oil and Gas investments. They seem to be very greedy. I once signed up to get more info on an oil and gas investments. I heard the pitch line and I told them I was no longer interested. until this day a sales rep calls me about 1 a month. Trying to get me to invest.
That is a major turned off, they seem deperate for your cash
September 24th, 2007 at 7:49 am
MoneyMonk,
many promoters get 20-25% of your investment as a referral fee. So they don’t care whether the investment performs or not. They’ve gotten the largest chunk of their money upfront.
If you’ve seen the movie “boiler room”, you’ll get an idea of how they operate.
The returns to the investor are the least of their concerns.
September 24th, 2007 at 12:29 pm
Oh the boiler room…………I forgot. Good example!!
September 24th, 2007 at 6:18 pm
Great Nirav,
Make sure you read the fine print on those oil and gas leases/contracts. That’s burned me once before!
Grant
September 25th, 2007 at 11:13 pm
Dear Anonymous,
I suggest you show it to your CPA or attorney to review. If you do not have one or cannot afford one, you probably shouldn’t be investing in the PPM.
October 1st, 2007 at 6:04 pm
hi grant,
You seem knowledgeable on these type of investments, …how has the fine print “burned” you before?…if you dont mind me asking…im able to get into with a group of accredited investors with a very minimal cost, because they want to give me a chance….
October 1st, 2007 at 6:35 pm
um….I’m not grant.
that’s the crook that swindled me.
like i said before, ask a CPA.
that being said, if you know them personally and trust them and can afford to lose your investment, go for it.
November 27th, 2007 at 4:58 pm
Actually, I didn’t get that burned.
My problem was that the group that I purchased a lease from slid a royalty clause into the agreement without any one of the parties involved on my side catching it.
Consequently, we owe a royalty fee to the former owner until the beginning of 2009. It’s not terribly significant, but you can bet that if we’d caught it we would not have agreed to those terms.
-Grant
February 1st, 2008 at 2:16 pm
This is an old post, but I’ll reply anyway. Stay away from oil and gas deals. Far, far away. The movie Boiler Room is an accurate representation of the average O&G deal. I was an O&G sales rep once – I had no idea what the industry was about and thought I was getting in on something legit and exciting. I found out a year later that I was ripping people off, promising 30% to 100% returns in a year and delivering $0 and a “tax write-off.” If you want to invest in O&G, buy public companies or invest in the oil exchange, but avoid private placements.
Refer to http://www.vcresearch.info for more details. I wish I had never been involved in that industry.