Why You Should Invest in Oil and Gas Companies
Making an investment in an oil company is a very smart move if you are looking to diversify your investment portfolio. Demand for oil is not going to decrease in the near future and many companies are striking oil in new locations.
Investing in oil and gas is a big step to take due to the amount of companies that are out there. The same question always pops up when investing in something new, “Will this give me a return? How do I know if this is the right decision? Why should I invest in an industry I am unfamiliar with?”
In this article, we will discuss the reasons why investing in oil and gas is a good decision to make and some of the benefits you will be able to gain from the investment. Hopefully this will help ease your mind about investing in oil and gas companies and will give you the confidence to undergo the necessary paperwork and legal requirements that need to be done before investing.
Your Portfolio Will Be Diversified
When you diversify your portfolio, it means that you are adding investments from different types of industries to your overall portfolio. Financial advisors usually tell their clients to invest in different types of industries because if one industry goes through economic trouble, your overall portfolio will not be damaged as badly.
Diversifying your portfolio by investing in oil and gas is a move that can help increase the health of your overall portfolio. Usually when gas prices go up, the economy overall tends to slow down and stocks lose value. But, the oil and gas stocks in your portfolio will increase in value and can help insulate your portfolio from any harm caused by an economic downturn.
Potential for Profit
The potential profit that can be made from oil and gas companies can make your investment worth it. Investing in oil and gas companies does not require you to put down a large amount of money upfront. Often times when you invest in oil and gas companies, you are helping them fund new drilling sites. Depending on the location of the new oil well and how shallow the oil is, the initial cost of drilling can be less than most traditional deep oil wells. With a lowered initial cost, the potential for profit becomes greater. If the location is just right, a single well can generate a return that is a thousand times more than your initial investment. It is also important to note that successful wells will continue to generate dividends for you for years to come.
Different Ways of Investing
One of the big benefits when it comes to investing in oil and gas is that there are multiple ways of investing. If you are someone who is not prone to taking risks, a mutual fund is one of the safest ways to invest in the industry. Keep in mind that with mutual funds, you will be required to pay taxes on your dividends.
Another way to invest in oil and gas is to form a partnership. You can choose to enter into a limited partnership with an oil company so that way your liability in the operation is only reduced to the amount of money that you put in. The money earned from this type of investment is eligible for tax benefits and incentives.
One of the more profitable ways of investing is oil is by receiving royalties. If you own land that is rich in oil, you can receive anywhere from 12-20% of the gross revenue that the wells generate. This method comes with very little risk since landowners do not have any liability when it comes to the wells or leases. Keep in mind that if this is the route you choose, you will not be eligible for the tax benefits that partnerships receive.
Making the decision to invest in oil and gas can be a tough one to make. At times, the markets can be unpredictable However, investing in the industry is a safe bet. Depending on the company you pick and how successful they are in drilling for oil, you will be seeing returns and getting paid dividends for years to come. Make sure to talk to your financial advisor about what steps you can take to make the leap into oil and gas investing.