Direct Ownership

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Direct Placement Offerings (DPO) deliver an entirely different experience than that of other investments. By investing directly into a well you have the opportunity to:

• Receive ownership in a well.

• Short-term return on your initial investment.

• Long-term multiple payout.

• Deal directly with the company which is operating the well.

• Utilize income tax benefits otherwise unavailable in traditional investments.

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Short-term Returns:

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Let’s talk about the meaning of “short-term returns” in the context of oil investments. With an average investment it can take years before getting your initial capital back. A direct placement in an oil well can take years to recoup the original investment; however, it’s more common to assume an ROI (Return on Investment) of 6-18 months. Some wells can return your initial investment in as little as 1 month! Even a poorly producing well will usually exceed the return rate of an investment in the stock market.

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Long-term payout:

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It’s not uncommon for an oil well to produce for 30 or more years.  The life of a well is determined by many factors, market value of the oil, geology, quality of the crude, etc. What would traditionally be considered a poorly producing oil well can still be deemed commercially viable if the market value of the oil is high enough, as it has been for the last decade. In years past many wells were considered poor due to the price of oil at that time and abandoned or shut-in. Thanks to public records we can still find these wells and, through a process known as re-working, bring them to life. Whether it’s a new drill or a re-work the long term payout potential of an oil well can be astronomical.

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Directly dealing with the company:

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By investing in a direct placement offering you are actually dealing with the company in which you’ve invested. This offers a more active participation in your investment than available in a traditionally styled stock. You will be entitled to visit the company headquarters and see the lease where your well is located. In addition, you’ll receive weekly correspondence regarding well status and are welcome to call the company if additional information is desired.

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Tax benefits

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When investing directly into a drilling venture you’re eligible for tax write-offs not available with other investments.

Drilling: You will be eligible to deduct intangible drilling costs (IDC) from the original investment amount during the year in which the drilling occurred. IDCs may range between 55%-80% of the total well cost. The total amount of your investment allocated towards equipment is called “tangible drilling costs” (TDC). TDCs are amortized over a seven year period, beginning with the month in which they are paid. Tangible drilling costs are 100% tax deductable.

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Production

 

If you have an interest in a well you are eligible for tax deductions called “depletion allowance”. There are two ways of calculating depletion allowance: cost depletion and percentage depletion. Cost depletion is when the taxpayer deducts a portion of the original capital investment, less previous deductions, that are equal to the fraction of the estimated remaining recoverable reserves that have been produced and sold that year. Percentage depletion is calculated using a rate of 15% of the gross income based on your average daily production.

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Synopsis on the global demand for oil

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Oil has been in use throughout history. Before the refining process was developed in the 1850’s “rock oil” was primarily used in the ship building industry as a waterproofing agent; this oil was collected from natural seepage. In 1859, Edwin Drake developed the first “modern” drilling rig and extraction process. Initially, this oil was refined, replacing whale oil and animal fats, into fuel for lamps and used as a lubricant. We can trace the beginnings of our reliance upon “rock oil” to October 1, 1908, the day that Henry Ford introduced the Model T to the world. From that humble beginning we can jump forward 80 years and see what oil now means to the global economy.

Circa 1990 the world used an estimated 58 million barrels of oil per day. In 2009 global demand had increased to almost 83 million barrels per day. Recently, the demand for oil has been growing an average of 2% +/- per year. Oil is a limited resource and it’s used in almost every product we touch on a daily basis. With rising global demand, it’s almost a certainty that we’ll never see the price of $40-$50 per barrel of oil again.

If you were to look at global oil use from a supply point of view, for every one barrel produced we use 1.024 barrels. Given our current dependence on oil, the limits of the reserves, the fact that there is no viable replacement and the exponentially growing need for it, we can expect the price and demand to continue increasing until all resources are exhausted.

There are very few products that don’t use crude oil at some point during the manufacturing process. Here is a very short list of common items that are manufactured using crude oil:

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