Hi - I am new to this world and was hoping I can get some insight from you.
Looking to invest in a drilling prospect. This prospect will be sold for a third for a quarter basis (75%NRI) per 1% WI.
Does this mean that I bare 1% of the cost of drilling and receive 0.75% revenue?
Welcome to the forum!
I hate to say it, but if you are new to working interest, walk away, quickly, on this kind of deal until you have spent quite a bit of time learning and thoroughly understanding both the profit potential and more importantly, the risks.
Working interests are not for the uninformed. You need to have deep pockets as the bills can keep coming for years and years and affect your family. You need to have an experienced oil and gas attorney and accountant. You need to understand the kind of insurance that you will need to protect you if there is a serious accident and you get sued. Factor their fees into the cost. This is not a one time payment. You will get Joint Interest Billing for all operating costs and abandoning costs on this well and possibly others. The current operator (do you know their reputation?) may sell to another operator that might not be very good and may waste your investment and bill you unexpected amounts. Do you know the reservoir? Do you know the likelihood of success? (confirmed by an outside party-not the one trying to sell the deal) Do you understand the oil and gas business thoroughly? Do you understand the tax liabilities? etc, etc, etc. Be very cautious!
I completely agree with M Barnes! I have several people contact me every year because they were not well-versed in working interests and are trying to "get out"of them because they do not have the financial wherewithal to meet the ongoing joint interest financial obligations. I’ve also worked with clients who discovered that their unscrupulous operator was padding the joint interest billing and charging them for more than they should. Working interests are for sophisticated oil and gas investors only. If you are not in that category, you may be much better sticking with oil and gas mutual funds.
The first thing the hits me is why would you invest in something you don’t understand? That said, no matter what percentage you buy, you get 91.6666% of it, but pay for 100%. After that, you subtract 25% for the royalty owner. These types of promotions in the oil business when out in the 80’s. This deal is the equivalent of paying your stock broker an 8.333% commission. If that is OK then go for it. If not, run Forrest, run. My 2 cents.
Thank you very much for the insight! I really do appreciate this.
I am pretty familiar with the oil and gas business as I worked for a service company and then on the finance side for almost a decade. That said, I’m new to the royalty side of the business.
Thanks for your input. I will be digging into this more thoroughly.
Thank you @TODD_M_Baker.
I agree with not investing in something I don’t understand. I have a passion for the oil business and am really interested in learning more. This was an opportunity that came across my desk so I wanted to look into it.
I figured I have to start somewhere. I am glad I found this forum and even more glad that there are great people on here willing to drop in some advice.
Thank you @AimeeHess! Well stated and put. I will be likely sitting this one out.
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