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Newsletters
Newsletters provide us with a chance to educate our readers on a variety of investment related topics and in general to focus in on some fundamental details. We do not seek to inundate readers with long daily recourses. In fact we tend to keep our newsletters to 2 or 3 pages and to send less than 10 per year. Our motto is to only send when we have something of significance to say, as dictated by opportunity and market timing. Below are some samples of past newsletters.
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Panamania - Cheap Beach means Buried Treasure
Demonstrates a highly favorable comparison between investing in Panama's Caribbean versus Pacific beach front properties and provides currently available-for-purchase examples ...Panamania - The Land of Forgotten Land
Discusses an investment window of opportunity for taking land from "Rights of Possession" to "Titled" property. This strategy combined with taking advantage of future infrastructure and the general ...Panamania - Panama and “Peak Teak”
Discusses the merits of Teak Forestry Investments. The conservative, consistent and yet high yield nature of this virtually "undiscovered" class of investment and its further benefit as a hedge against ...Panamania - The Panama Story
Commentary on Panama's current real estate boom and why we believe it is likely to continue for the next decade or more despite corrections, which we believe are inevitable, in the US real estate markets. ...Oil & Gas 101 - Royalties vs. Working Interest
Educates the reader on how the same deal, structured in two different ways, can be heavily biased in favor of the operator. Stresses the importantance of assessing not only the potential of finding ...Oil & Gas 101 - The Secrets of ...
Lets you in on additional secrets you can easily apply to assessing current or future Oil & Gas opportunities of interest. Includes methods you can apply directly from your own home using the internet...
Oil & Gas 101 - How to Evaluate a Private Placement Drilling Program
Here we focus on the obvious and the not so obvious points to consider when assessing the risk and reward of Oil & Gas Private Placements...Oil & Gas 101 - The Future of Oil and Resulting Benefit of Private Placements
As the title suggests, this article it discusses the future of Oil & Gas and reasons for future pricing trends and the benefits of having a direct ownership ...Oil & Gas 101 - Introduction to Private Placements
Introduces the concept of Private Placement Memorandum and briefly discusses the potential benefits and some of the risks to be aware of when assesssing these potentially very lucrative investments...
Cheap Beach means Buried Treasure
Demonstrates a highly favorable comparison between investing in Panama's Caribbean versus Pacific beach front properties and provides currently available-for-purchase examples.
Just like our most recent newsletters, I’m writing this one from our new Panama offices and extending an invitation for all to come see some of the “buried treasures” we’ve found here in Panama. The treasure is not so much what’s in the sand, as the sand itself. Miles of uninterrupted pristine white sand beaches lined with lush tropical forest, coconut palms and the warm turquoise of Caribbean waters.
What would you expect to pay for such land? Well if you were looking on the Pacific side where road access is available today and you were to drive 1.5-2.0 hours west of Panama City, you might expect to pay between $10-20 ft2 (roughly $100-200m2), cheap if you compare it with prime beachfront in the US. We believe you could see good real estate appreciation by buying these titled, road accessible, Pacific beach front properties.
If you want extreme appreciation we believe it can be found in certain beach front properties on the Caribbean side of Panama. The Caribbean side has been relatively inaccessible with almost no roads to any of it and most of it is still untitled land. You can buy key beach front property at a 4th or 5th of what you might pay on the Pacific side. Although it won’t happen overnight we expect prices to rise up to the value of Pacific properties or even higher.
The Caribbean side tends to have lower tidal ranges, nicer beaches, and warmer, clearer waters than the Pacific. Neither side has hurricanes.
After several years of visiting Panama, we have also discovered some of the lesser known reasons to focus not only on the Caribbean, but on some very specific regions on that coast.
From 1999 – 2004 Mireya Moscoso, with ties to the Pedasí area, was the first female President of Panama and as is typical with presidencies’ in Panama you bring your friends with you. The end result of all those political ties back to Pedasí was a massive infrastructure boom in that area.
Since September 2004 Martin Torrijos has assumed the role of president. Martin and his late father General Omar Torrijos have strong ties to the Penonomé and the Coclé Del Norte areas as do many of their friends who recently joined the government ranks when Torrijos assumed the presidency. Well guess what, the infrastructure is on its way. Recently plans for a new international airport seem to have shifted away from the Pacific beach area of Farallon, over to the Penonomé area in the central part of the Province of Coclé, Panama. Rubén Blades, Panama’s Tourism Minister stated recently, “Panama urgently needs a new international airport in the interior”. A road connecting Penonomé to Coclé Del Norte, on the Caribbean Coast, is already under construction. As is a second road that will run along the Caribbean coast connecting Coclé Del Norte to Colón (Panama’s second largest city). Accessibility to Coclé Del Norte will be dramatically changed within a few years and great value will be added.
We expect much more infrastructure and benefits to come to the areas around Coclé Del Norte and Penonomé, bringing more appreciation to future property values. Why? Martin Torrijos still has 2 more years left of his 5 year term. Although term limits prohibit him from returning for a second term as president, it is widely believed that due to the economic boom in Panama and the resulting popularity of his government, that his party (PRD) will be brought back to power for another 5 year term. Torrijos would likely play an influential role in any future government and it is also likely that one of the current cabinet members (like Torrijos, the vast majority are from the Coclé Province) would become the next president. Now consider that Torrijos and his political friends own large tracts of land in the Penonomé and Coclé Del Norte areas. When general property values increase for that area they will be well served.
This area will also benefit from the current “titling” boom that has started on the Caribbean coast. Moving property from “rights of possession” to “titled” land is a slow moving, bureaucratic and poorly understood process and thus it’s not recommended for the average investor to perform titling directly. Despite the challenges however, titling can be well worth the effort. We have seen property values double, triple and even shoot up 10 times in value as land moved from “rights of possession” to “titled”. Also keep in mind that while the process of titling is cumbersome now, the government is strongly motivated to stream line this process since they benefit from the increased tax base as “rights of possession” properties are not taxed but “titled” ones are.
Unlike in the U.S., the real estate market here is on fire, experiencing exceptional appreciation in the last few years. Propped up by the canal expansion and several other multi-billion dollar, long term projects, the future looks to get even brighter. If you are worried that the real estate situation in the US might affect the situation in Panama please keep in mind that Americans are not the number one purchasers of Panamanian real estate. In fact they are down to number 4 behind the Spanish, Venezuelans and Colombians.
We see a narrow window of 1-2 years for these road inaccessible, untitled, Caribbean beach front properties. After that we expect both the roads and the titling to be completed and of course the price appreciation to have already been realized.
Here are a few examples of currently available Caribbean beach front properties that we expect to benefit immensely from the roads, and other infrastructure, titling and general market appreciation. Keep in mind when you read these descriptions that it is not uncommon to pay $10-$20 per sq ft right now, for road accessible, titled, beach front properties on the Pacific side:
View the map on the next page to see the location of these projects. The dashed lines represent the two new roads currently under construction to Coclé del Norte.
PRIVATE COVE - 16.7 acres or 6.8 hectares at $735,000 or approx $1 per sq ft:
Very beautiful private sand cove with its own fresh water stream is a great beach paradise get away and located only one kilometer from the quaint village of Coclé del Norte. The property enjoys 941 ft of beach front and is already partially titled with Right-of –Possession documents on the front beach area.
GAONA BEACH – Developed lots with a minimum of 65ft of beach front at $48,620 or approx $5 per sq ft:
Beautiful Caribbean beach lots located on 0.6 miles of pristine undeveloped beach frontage for a great getaway or investment in the future. Crystal clear waters, light sand beaches, great fishing and far from the hustle and bustle of the city. Includes common areas and club house. These lots sold quickly with only 2 of 31 remaining.
PLAYA DEL MIGUEL – 37acres or 15 hectares at $587,500 or 40cents per sq ft:
This is a fantastic beach front property with over 610 meters (2000 feet) of beach. A series of 6 private sand beach coves separated by higher outcroppings that provide excellent building sites protected from storms with unbeatable ocean views. Selling at just 40 cents per sq ft it’s a steal. The property would be ideal for upscale beach homes and even if you flipped this property you would probably want to keep one of these exclusive coves for yourself.
GOBEA BEACH - 7.0 acres or 2.8 hectares at $535,000 or $2 per sq ft:
Almost 500 ft of sandy beach ocean frontage, nicely sloping up for great ocean views. The newly constructed Caribbean costal road has already passed this property so road access and electricity are already available. The property enjoys a fresh water stream and the clear blue Caribbean ocean waters. Located only 20 miles from Colon, Panama’s second largest city and with completion of the new super highway from Colon to Panama City a further 45 minute drive will bring you to the Cosmopolitan wonders of the capital.
PLAYA PLATANAL – 16.0 acres or 6.5 hectares at $550,000 or 79 cents per sq ft:
Palm lined wide sandy beach frontage (600 ft of beach). Great for resort development or large housing project. This property could be right out of a Caribbean beach postcard and at 79 cents per sq ft it represents huge potential gains.
To get an idea for some of the projects currently on the go you can also visit our Opportunities section of the website which is open to Accredited and Non-accredited investors alike.
Beach Front Properties Back to top...
The Land of Forgotten Land
Discusses an investment window of opportunity for taking land from "Rights of Possession" to "Titled" property. This strategy combined with taking advantage of future infrastructure and the general real estate appreciation trend in Panama has yielded excellent returns.
I’m writing to you once again from the beauty and bustle of Panama, “The Land of Forgotten Land”. Well it’s not so much forgotten land, as it is “untitled” land. Once you get outside of cities, you soon discover that most land ownership, known as “Rights of Possession”, has never been formally registered with the appropriate governing bodies. That can represent huge risk when buying “untitled land”, but more importantly it can also represent huge rewards.
On the risk side, it would no doubt be quite disconcerting to find that your newly purchased property is owned by someone else. That is something that can, and does happen to the unwary in Panama.
On the reward side, we have seen $100,000 “Rights of Possession” beach front properties transition into $1,000,000 plus “titled” properties.
So what is the difference between “Titled” property and “Rights of Possession”?
Titled Properties
Titled properties have been formally recorded and maintained in Panama’s Public Registry system. Thus, it is a fairly routine process to perform due diligence on a lot or property. Your attorney can issue you, in writing, an abstract title of the land, along with any and all liens, mortgages, covenants, encumbrances, maps, verification of tax payments and utility bills, special characteristics, ownership history, fence lines, encroachments, shared driveways, and registered surface area, and can verify that the person who is selling the property is the actual owner.
Rights of Possession Properties
“Rights of Possession”, is a kind of squatter's or concession rights, permitting one to acquire a right to possess based on the occupation and use of a certain area of land over time. Typically farming families may have raised livestock, planted crops or just lived on a piece of land, generation after generation, and the government recognizes their right to continue doing what they have been doing with the land.
Assuming the “Rights of Possession” have been recognized, those rights may be sold to someone else. However, there are still potential conflicts in buying rights of possession. Properties can be subject to third-party and/or conflicting claims of ownership, and the vagaries of Panamanian law and local politics. Who is to say whose cows were feeding off that plot of land first?
Rights of Possession properties are technically public property, and up until recently could rarely be owned or titled outright. However, recent changes in government policy and legislation have demonstrated the government’s desire to see property move from “Rights of Possession” (non-taxable property) to “Titled”, and therefore taxable property. The government is further incented by the significant fees that are charged throughout the titling process.
Another important difference between “Titled” property and “Rights of Possession” is that the latter cannot be mortgaged. This makes sense: if you do not actually own the land (hold title), you cannot mortgage it.
How significant are the Risks?
For several reasons we see this as a high reward/low risk venture
- Although the purchase of “Rights of Possession” and the subsequent titling process are bureaucratic and riddled with delay, they are not rocket science and with experience the common pitfalls are easily avoided.
- “Forgotten” beach front is in very limited and decreasing supply.
- It is the government of Panama that is pushing for the titling process as they seek the titling fees and the tax dollars that accompany titled properties.
- Moving properties from “Rights of Possession” to Title adds tremendous value.
- Even without consideration for titling, “Rights of Possession” property is on trend to continue showing tremendous appreciation.
- Further value can be added by targeting “Rights of Possession” land that will further benefit from infrastructure such as roads and airports. Such is the case with Caribbean beach front with no current road access, but where road access is contracted for completion within the next 12 – 18 months. This allows for the purchase the “untitled” land much cheaper than if road access was already available.
A Window of Opportunity!
We see a narrow window of 1-2 years for these types of projects. After that, as we mentioned, they are not making any more beach front.
The key factor is the purchase price for the “Rights of Possession” property. If you can buy early enough to turn a $100,000 into $1,000,000 you get a 10 times return, if you wait till the “Rights of Possession” is $250,000 or $300,000 you might only expect a 3 to 4 times return.
We would be happy to share some of our “live from Panama” research and discuss the various pitfalls and strengths of opportunities we have researched.
To get an idea for some of the projects currently on the go you can also visit our Opportunities section of the website which is open to Accredited and Non-accredited investors alike.
Beach Front Properties Back to top...
Panama and "Peak Teak"
Discusses the merits of Teak Forestry Investments. The conservative, consistent and yet high yield nature of this virtually "undiscovered" class of investment and its further benefit as a hedge against US dollar and other paper currency melt downs.
We just arrived back from yet another trip to Panama, our fourth trip in less than a year, and I can tell you we have never been more enthusiastic about investment opportunities in Panama. Panama is still in what we call the early stages of a huge transition, and to our great advantage, is only now being discovered.
In our most recent newsletter we discussed a strategy for holding high quality real estate in Panama by renting condos to the hotel market, which is experiencing an extreme shortage of quality supply. The strategy nets you an attractive rental income and assures that you can take part in the continuing upsurge in property values. We will be bringing you more “live from Panama” updates on this strategy in future newsletters but for now we would like to show you another “undiscovered” Panama opportunity.
This one, in Teak forestry, an overlooked commodity that consistently returns solid performance, but may be approaching a kind of mini “Peak Oil” like phase we will refer to as “Peak Teak”, that we believe could represent a bubble of even greater returns.
Why Invest In Timber?
Well according to Dr. Steve Sjuggerud, president of Investment U, “Timber beats stocks. Managed timber, has actually beaten the stock market – with less risk – over the long run. From 1973 – 2002, managed timber returned roughly 15% annually while stocks returned about 11%.......Timber is uncorrelated to stocks. Trees don’t know about the war in Iraq, or the bear market in the Nasdaq. While stocks couldn't keep up with inflation in the 1970s, timberland never had a losing year! Trees just keep growing year after year. So timber is an excellent way to balance your portfolio as its value rises even when stocks are falling.”
The price of timber has consistently beaten inflation. Timber is thought of as a good inflation hedge, and the numbers show that to be true. According to legendary investor Jeremy Grantham, over the last century, timber prices have risen at 3.3% above the rate of inflation.
With most timber deals you own not one, but two prime inflation hedging commodities, property and timber.
Why Invest in Teak Specifically?
Steve and Jeremy are referring to the quality of timber investments in general. Now consider for a moment that teak, the worlds most valuable hardwood grows 3 times as fast as pine and sells at double the price.
Teak operations we have assessed return conservatively 15% - 20% on the growth of the trees alone and when you factor in the increasing price of teak you can easily see returns of 20% - 25% in what many consider to be a conservative investment.
Basic economics tell us that decreasing supply and increasing demand produce even higher prices and that is what we believe is the future of teak.
Teak is a tropical wood that will only grow within 20 degrees of the equator. If you draw a band around the equator you will find that much of that 20 degree area is water, desert or politically unstable thus severely constraining supply potential.
Even in areas with potential, the trend for tropical forests is unmistakable. Tropical hardwood is now being extracted from rainforest that eventually will either be protected or destroyed necessitating plantations supply the worlds demand for wood. And yet only 1% of tropical hardwoods consumed in the world today come from plantations or tree farms.
Myanmar (formerly Burma) currently produces 80% of the worlds teak supply, but the National Geographic Society estimates that the last natural teak forest in Myanmar will be logged in a near future. Many countries around the world, driven by environmental concerns are banning the importation of tropical hardwoods, including teak unless they come from sustainable yield sources. Meanwhile, the world demand for tropical woods remains stable and the price of tropical wood continues to rise.
The two new economic powerhouses, China with 11% economic growth and India with 8%, contain more than 1/3 of the earth’s population and both traditionally favor teak as the hardwood of choice. As their citizens advance in wealth we could see the same staggering increased demand for teak as we have witnessed for many other commodities recently.
What about the Risk Factors?
Fire is the single greatest risk to the teak plantation, primarily during the first 2–3 years. After the 4th year of growth, the bark of the Teak tree becomes very resistant to fire. The leaves are large and rubbery and are highly resistant to fire.
Because of the unique characteristics of Teak, there are no known insects or no known insect infestations that have done any large scale damage to any mature Teak plantation in Panama. Young plants and nursery stock are subject to a root eating insect, which must be treated with a special pesticide.
Teak is extremely resistant to plagues and diseases. The one area of concern is in the initial planting of young nursery trees where the roots are susceptible to fungal attack. This is easily treated with a proven anti-fungal compound.
Panama enjoys political stability, unlike many Asian and African countries where teak is also grown.
Controversy has been generated in several countries by the promotion of teak plantation investment schemes based on unlikely growth and yield projections, unrealistic pricing scenarios and dubious fund management strategies.
Teak opportunities vary greatly based on size of plantations, already planted trees vs. planting, visa vs. investment programs and the biggest risk of all, management.
In summary, we feel Teak investments represent wonderfully conservative opportunities with above average returns, an excellent hedge against inflation, diversity from stocks and other types of investments and the medium term potential for the kinds of extraordinary returns we all like to see.
We would be happy to share some of our “live from Panama” research and discuss the various pitfalls and strengths of opportunities we have researched.
Teak is where we'd like to see everyone in our investment family place a portion of their conservative funds for diversity, stability and relatively high returns.
The Panama Story
Commentary on Panama's current real estate boom and why we believe it is likely to continue for the next decade or more despite corrections, which we believe are inevitable, in the US real estate markets.
Just arrived back from our trip to Panama (early April 2007) and let me tell that the prices have risen a further 10% across the board, on properties I looked at, just since February. Since October of 2006 those same properties have risen 30%. There is a boom on now for Panamanian real estate and unlike in America where the bubble may be bursting, I believe this boom has only just begun. Now let me tell you why.
In our last newsletter we mentioned the $5.8 billion projected (and likely to still double in cost) expansion of the Panama Canal, the 800,000 US baby-boomers expected to relocate to Panama in the next decade, and a trend in Latin American immigration to Panama.
Now let’s discuss a few new and exciting things we discovered on this most recent trip. Panama is spending $300 million to clean up the bay in front of the city. This will undoubtedly have an impact on property values. This proven technology developed and tested by the Japanese is already approved for go ahead in Panama. A further $750 million has just been spent on the purchase of the old Howard Air Force base, one of two main American Air Force bases used during its tenor in Panama. An estimated $2-3 billion is rumored for development of the base into a world class industrial park. $Billions are currently in the process of being spent on real estate development in Panama City. You only have to look around to see a skyline filled with cranes to believe that this is really happening.
Now here is the kicker. Hugo Chavez, the president of Venezuela, is willing to build a refinery in Panama, as he is doing in many other countries as part of his thrust to move away from reliance on US refining. For Panama, we understand this to represent a further $7 billion, multi-year project. In fact there is even talk of a second refinery with an equally large price tag. On top of this there are several other small change $100 million plus projects either budgeted or in the planning stages. Our estimates are for $15 – 25 billion worth of project money to enter Panama’s economy over the next several years.
To really gain a full perspective of what this represents it’s important to compare Panama’s relatively meager 3 million population with America’s 300 million. In relative terms this would be the equivalent to $1.5 – $2.5 trillion worth of US capital projects, an astronomical amount even for the USA.
We see extreme opportunity here and as always we like to get in on the early stages and capitalize on the big profit potential as those shifts in the markets begin.
One of our questions has been how can the savvy investor make money in Panama while still enjoying the quality and comfort of home?
We have been able to identify a critical shortage of hotel accommodations that cater to the North American and European visitors. Just try making a reservation at the Miramar Intercontinental hotel or the Radisson Decapolis and you will see what I mean.
To such an end we have found 1 and 2 bedroom apartments that return roughly 10% per year after expenses and which are managed by an American run property management firm. The prospects are brought up to acceptable American hotel standards and are then marketed as short term rentals that compete very well with the undersupplied hotel market here in Panama. The properties are typically located in the heart of Panama City’s banking district or with a view of the ocean only a few additional blocks away. In addition to the rental income you hold a property that looks to appreciate very significantly over the next decade as Panama enters its next development stage and the icing on the cake is that you can enjoy your own hotel like space in the heart of a vibrant, beautiful and truly international city at a fraction of the cost compared to US cities.
If you’ve never been to Panama you are in for a real treat. It is nothing like you might expect. It is in fact a thriving metropolis, but still the size of a small city in the US.
European, American and Latin influences come together to create an atmosphere like no other. Juxtaposed against this back drop are colonial era neighborhoods, complete with cafes, hotels and bars enough to satisfy any world traveler. There are even remnants of more ancient times found in the oldest parts of Panama. Caribbean and Pacific beaches are only an hour away from each other. And Panama shares more than just a border with Costa Rica, it also has the same flora and fauna that Costa Rica is so renowned for; the difference being that Panama’s beauty is still an undiscovered gem.
We invite you to come see for yourselves as words can not do justice to what awaits you in Panama.
For more information give us a call toll free at 1– 888-926-4942 or join us at the next International Living Conference in Panama, May 10-12, 2007. See the web address:
http://www.internationalliving.com/events/07/pan_may.html
For those of you who are seriously contemplating attending this event we may be able to secure you a discount on the conference fees. Please call us to discuss further.
We will be happy to spend time with you and share some of the many other opportunities we have also learned about.
Call us toll free at 1– 888-926-4942
Royalties vs. working interest
Educates the reader on how the same deal, structured in two different ways, can be heavily biased in favor of the operator. Stresses the importantance of assessing not only the potential of finding Oil or Gas, but also to look at how each particular deal is structured.
In previous newsletters, you may remember, we discussed our 4 ideal rules to follow for optimizing success with Oil and Gas private placements. Essentially, ensure that the private placement:
- Drills for cost
- Drills in the right place
- Operates for cost
- Involves quality people
Since that time, many readers have approached with questions concerning private placement Oil & Gas projects that do not necessarily fit the ideal project profile. Since, these “non-ideal” projects make up the vast majority of opportunities; we are initiating a series of educational newsletters dealing specifically with how to evaluate those “non-ideal” components of ANY Private Placement Drilling Program.
We all know there is risk involved so why even bother to participate in such programs?
Firstly, there is a lot of money to be made in Oil and Gas. The huge record profits made this year by the Exxon Mobil’s of the world stand as testaments.
Secondly, if you do your homework you can eliminate much of the risk involved.
Thirdly, given the long term tightness in energy supply and higher projected demand, any good deal you can get into now should only get better with time. We believe this to be especially true now, given that one of the warmest winters in historical record has temporarily caused uncharacteristically low energy prices.
A few years ago we projected $70/bbl oil (while oil was still only at $35), now we expect to see NEW historical highs for oil, including spikes of over $100 per barrel, before the end of 2007.
Fourthly, let’s not forget the exceptional tax incentives, where an investor can often write-off 100% of the investment cost, against other income.
One critical component, for understanding any private placement Oil or Gas project, is understanding the terms and structure of the contract.
So let’s now get a better understanding of some of the major contract terms and how a slight change in structure might have a dramatic impact on your bottom line.
Royalty Interest (RI)
Royalties are priority payments based on a percentage of oil revenue and not on the profitability of the company. It is common practice for the owners of the mineral rights of the land to receive a royalty in exchange for the lease (in our experience 15 – 25% is typical).
In general, avoid deals where the “Operator” earns a royalty (remember the “Operator” is the one who is managing the deal and likely put it together). Many investors have gotten themselves into deals where oil (or especially gas) production was achieved but the production levels were mediocre at best. From the investor’s perspective, this limited production is overshadowed by the expenses, leaving only marginal returns on their investment. The “Operator” enjoying a royalty interest, is not adversely affected by the expenses of the company and may even thrive under such mediocre conditions. In fact the “Operator” might make a handsome profit, show a track record with drilling, completing and producing success and still leave investors feeling quite unhappy. Under these circumstances an unscrupulous “Operator”, with royalties working in their favor, might see no reason to change their method of operating.
Overriding Royalty Interest essentially amounts to the same thing as a royalty interest. Neither pays any well costs associated with the drilling, completion or workover of a well. They also do not pay any of the monthly operating expenses associated with a well.. Again, if possible, avoid a situation where the “Operator” is receiving a “royalty interest” or “overriding royalty interest”.
Ideally we would like to see the “Operator” receive a percentage of the “Working Interest” only.
Working Interest (WI)
Investors will typically be given a working interest in a well (or wells). You can think of the working interest as that which pays for all of the work. Working interest owners are obligated to pay a corresponding percentage of the cost of drilling, producing and operating a well. After royalties and costs are paid, the working interest entitles its owner to share in production revenues with other working interest owners, based on the percentage of working interest owned.
You can avoid a lot of problems by simply ensuring that the “Operator” pays their portion of the expenses in return for their portion of the revenues in other words receives a “working interest” instead of a “royalty interest”.
Net Revenue Interest (NRI)
A share of revenues after all burdens, such as state taxes, royalty and overriding royalty, have been deducted from the gross revenues. It is the percentage of production that each party actually receives. Once again we hope that your deal is structured so that the “Operators” don’t put any money in their pockets unless you do.
Let’s create a couple of simple examples to demonstrate the point and keep in mind we are suggesting poor to mediocre production levels such that the operating expenses will soak up a lot of revenue. Let’s assume: 10 investors, investing $100,000 each, for total invested $1,000,000.
|
Operator Royalty |
Operator Working Interest |
||
Revenue (Monthly) |
|
$ 100,000 |
|
$ 100,000 |
Landowner Royalty |
20% |
$ 20,000 |
|
$ 20,000 |
Operator Royalty |
20% |
$ 20,000 |
0% |
$ - |
|
|
|
|
|
Working Interest |
|
$ 60,000 |
|
$ 80,000 |
- Investors |
100% |
|
80% |
|
- Operator |
0% |
|
20% |
|
Expenses |
|
$ 59,000 |
|
$ 59,000 |
|
|
|
|
|
Net Revenue (NR) |
|
$ 1,000 |
|
$ 21,000 |
- Investors Interest |
100% |
$ 1,000 |
80% |
$ 16,800 |
- Operator Interest |
0% |
$ - |
20% |
$ 4,200 |
|
|
|
|
|
Each Investor Gets |
|
$100 |
|
$ 1,680 |
Annual Investor Return |
|
1% |
|
20% |
Operator's Royalty + NR |
|
$ 20,000 |
|
$ 4,200 |
In “Operator Royalty” example the “Operator” received $20,000 while each investor only receives $100 each. Even though expenses are quite high relative to the revenue the operator might be content to operate forever under these circumstances and might even look to repeat the scenario again and again. Now imagine that production declines slightly overtime (as it always does). A scenario soon develops where investors get absolutely nothing while the “Operator” continues rake in the money.
In “Operator Working Interest” example the “Operator” is now sharing in the expenses and only earns $4,200 whereas each investor is now getting a much more attractive return of $1680. As the decline scenario develops the investor continues to share in profits for equally as long as the “Operator”.
The purpose of this newsletter is to provide education and promote knowledge.
I am attending the International Living Real Estate Conference in Panama and will be back after February 10th, 2007.
Call us toll free at 1– 888-926-4942
For more information regarding Royalties, Working Interests and assessing Oil & Gas private placements, visit OilAndGas101.net.
Oil & Gas 101 - The Secrets of ...
Lets you in on additional secrets you can easily apply to assessing current or future Oil & Gas opportunities of interest. Includes methods you can apply directly from your own home using the internet.
In November we told you about “Evaluating a Private Placement Drilling Program”, this month we let you in on the secrets of:
- identifying which operators to avoid
- how technology can affect drilling profitability
- how programs can drill with confidence
- costs of operating
Track Records
If you are assessing an offering by a company that has been in business for many years then it will have a track record. Are past investors happy with the company’s performance? Are there any outstanding legal issues? Who are the key people and what are their successes?
If the company is relatively new, researching the key people has even greater importance.
Google (search the Internet) for the names of the company principals and the name of the company then read through the links (Internet articles). A Google search can turn up documents that reveal past securities issues, unsatisfied clients, fraud allegations, pending court cases, investor blogs (web discussions) and due diligence sites (recorded transcripts between past investors and/or investigators).
Call the securities commission in the state to see if they are aware of this company and if there have been any complaints.
Read the fine print of the offering documents. An operator, must disclose, in the offering documents, anything that might affect your evaluation of the deal, such as past fraud issues, past securities issues and any material information that might influence the decision of a potential investor.
At Oil and Gas 101 we have compiled a WATCH LIST of company names and employee sales staff names to be aware of. These are names that we have derived in some manner from our due diligence this past year and for different reasons we would be on guard if ever we found ourselves dealing with one of them.
Call us to find out if the person or company you may be talking to have one of these names.
Technology
Is the company you’re dealing with taking advantage of appropriate technology for the area in question? Or do they practice “closology” (drill “close” to existing oil or gas)? Appropriate technology can reduce your risks and gain you a competitive advantage. The key here is, appropriate technology, because some companies will inappropriately apply technology so they can further pad their costs and make it sound like they know what they are doing. Find out what technological advantages the company claims to offer and discover if they have had a track record of success in this area.
Technology has come a long way in recent years. With satellite imaging, hydro carbon density mapping, and 2d – 3d seismic tests, we know a lot more now than we did even ten years ago.
Where to Drill
It costs as much to drill a dry hole as it does to drill a wet one, so you may as well invest in a program that involves drilling where there is a high degree of confidence oil or gas will be found.
How to decide if your program is drilling in the right place
There are many questions you could ask.
- Where are they drilling? (Is the area already known for success and has there already been a significant amount of geological research?)
- What has been the success rate of previous drilling in this area?
- Typically how much oil does the average well in this area produce?
- What is the expected rate of decline?
- How long do these wells last?
- Are the Leases proven or not? (Has this particular lease already had success?)
- Is it Exploratory or Developmental drilling? (Are the intended drilling locations “Offsets” to existing successful wells?)
- Is the geology in the area considered a “Blanket” or “Fractured” formation?
Most states make this information available from their records. It’s just a matter of knowing how to look.
At Oil and Gas 101, we do the work. We sift through mountains of information to discover the true opportunities.
Give us a call to find out what we have found.
The costs of drilling
You need to be aware of where the money is going. You want your operator to do well only if they are successful for you.
Some companies will pad drilling costs so excessively they never really care if they find oil or gas. To protect yourself you need to know what the true drilling costs are. Every company will build some padding into their drilling costs in order to cover the unexpected, but that does not mean double, triple or greater increases in drilling costs are warranted.
It’s important to do some comparative analysis. Get on the phone and find out what would be considered reasonable costs for:
- Seismic (if seismic is included with the program you are considering.
- Drilling, and completing wells in the respective area and under similar geology.
When making comparisons, consider the depth and that deeper wells are more costly to drill. Manpower costs will also differ from state to state and area to area.
- Call the state Oil and Gas Association.
- Get packages from other Drilling Programs in the area and compare.
- Talk to the geologists, engineers, and geophysicists providing support for the respective drilling programs.
- Then talk to us, we can make it easy, simple, and profitable. 1-888-926-4942
The cost of operating
Once the company has drilled and found oil and/or gas the investor partnership will be responsible for paying the ongoing operating costs out of their share of the oil or gas income. Wells will only return profit after revenues have covered expenses. Most daily maintenance is basic and can be performed by relatively unskilled labor. Ensure the Operator is required to provide accountability if requested. Ensure the Operator can be removed “for cause”.
We like to see the Operator receive a percentage of revenues as payment for operating. The more oil or gas produced the more the operator will earn and the more investors will make.
The check is in the mail
When oil or gas is sold, the Operator typically likes to receive all the revenues, paying themselves first and collecting their operating fees before paying out the investors. This can cause problems if an Operator runs off with the money or files for bankruptcy. We feel revenues should pass directly to a trusted independent 3rd party for accountability and distribution, such as CPA Accounting Firms with oil and gas experience. In this way investors are protected.
Have a Safe and Happy Holiday Season from all of us at Oil and Gas 101 to you and your families!
- Call us toll free at 1– 888-926-4942
For more information on assessing Oil & Gas private placements, visit OilAndGas101.net.
How to Evaluate a Private Placement Drilling Program
Here we focus on the obvious and the not so obvious points to consider when assessing the risk and reward of Oil & Gas Private Placements.
This month as promised we will focus on
“How to Evaluate a Private Placement Drilling Program”
We all know there is risk involved so why even bother to participate in such programs?
Firstly, there is a lot of money to be made in Oil and Gas. The huge profits made by the Exxon’s, Shell’s and the Mobil’s of the world stand as testaments.
Secondly, if you do your homework and can find an honest operator and a fair deal you can eliminate much of the risk involved. NOTE: This involves work, but the payoff is worth it. Statistically, although we have looked at many Oil and Gas Private Placements we have only found a handful we felt comfortable with.
Thirdly, given the present tightness of the energy supply and higher projected future demand, any good deal you can get into now should only get better with time.
Two critical components are necessary for any deal, An honest Operator and a fair Deal.
Let’s start with the Operator.
There are many excellent Oil and Gas opportunities available, but even a great prospect can be a poor investment if it is badly or unscrupulously managed. “The people involved” are the most important consideration
In Private Drilling Programs, the “Operator” refers to the company that promotes, drills, and maintains the investment prospect. Some “Operators” will stretch the truth, create unrealistic expectations or commit lies of omission. It is important to know that the Operator is presenting the whole truth and nothing but the truth.
Of the roughly 10,000 Oil and Gas companies in the US today, few need to solicit investor capital by cold calling over the phone. These companies are already successful and established, and can raise capital through their own profits and through their loyal investor base. Those Operators that do need to phone, you have to ask yourself, “Why?” Perhaps they are not established to the same degree and are just starting out and building an investor base, or they have been around for a while but were not able to keep their investor base happy. This second group we definitely need to avoid. We can not stress enough how wary you should be of getting cold calls on Oil and Gas opportunities.
Let’s talk about “The Deal”
An Operator should treat investors like partners, not meal tickets. If the deal fails no one should make any profit.
Does the “Operator” believe in the deal? In other words are they willing to stake their own profits on the success or failure of the deal. “Operators” who do not believe strongly enough to allow their own profit to be at risk will structure so that they profit attractively even if a deal fails. They charge so excessively for the drilling and well completion costs, that it really does not matter if they find oil or not. Look for deals where the Operator is willing to drill for cost and only benefit if revenues are achieved. We like to see all parties making money, especially the Operator. This serves to increase the Operator’s incentive to find attractive opportunities. BEWARE: Just because the Operator is going to make a lot of money (usually via a Working Interest and/or an Override) does not mean they are Operating for cost.
Do your homework on the drilling costs.
Once wells have been successfully Drilled and Completed, regular maintenance must be followed to ensure things run smoothly.
This includes daily checks of the wells to make sure:
- The motors are running and jacks are pumping.
- There are no leaks in the flow lines carrying oil from the wells to the storage tanks.
- Trees have not fallen on power lines that carry electricity to the jacks.
- Monitoring storage tanks to see if oil needs to be picked up, and recording daily oil flows to identify any changes in productions rates.
Note: Gas wells require less maintenance than oil wells.
The Operator typically will provide this ongoing maintenance as per an Operating Agreement with the Investor Partnership. Since the average investor does not know what is involved in lease maintenance, it is easy for investors to accept extreme bills for operating costs.
Most maintenance is basic and can be performed by relatively unskilled labor.
Excessive operating costs eat away profits. Avoid being “Operated to Death”,
It is important that Operating costs are addressed and that Operators can be replaced by a partnership vote if they violate that trust.
We have a method for dealing with this issue. Call us if you want to know how.
It costs as much to drill a dry hole as it does to drill a successful one, so you may as well invest in a program that involves drilling where there is a high degree of confidence oil or gas will be found. A lease represents the right to drill on a particular piece of land.
You want your money invested in a program where the lease:
- Is already producing Oil or Gas
- Is situated close to a refinery or pipeline to keep the transport costs reasonable.
- Has sufficient and independent geological data to support further drilling.
Leases can be very expensive and valuable, especially if they in the middle of an oilfield where the neighboring lease owners are Chevron and Shell and abundant production is being achieved (Just like fishing in an aquarium is better than fishing in just any lake).
You definitely don’t want to be drilling on a lease that has limited or no previous history and no independent geological exploration data.
Note: Operators with limited capital can generally not afford good leases.
Odds of success can be further improved by using advanced technologies such as satellite imaging, hydro carbon density mapping and two or three dimensional seismic? These technologies are the fish finders of the modern Oil and Gas industry and have come to replace the antiquated and risky, “Close-ology” and “Creek-ology” of the past.
The last point is obvious and easy to implement. When oil or gas is sold, the Operator typically likes to receive the revenues and are then able to pay themselves first and collect their Operating fees before paying out the investors. This can cause problems if the Operator runs off with the money or files for bankruptcy. Revenues should pass directly to a trusted independent 3rd party for distribution. This way investors are protected.
We have a simple solution for this, Call us if you want to know.
Next edition we will to cover the “HOW TOs” of ensuring you:
- Find an honest Operator who uses current technology
- Drill in the right place
- Drill for cost
- Operate for cost
- Have a trusted 3rd party distribute the revenues
Then you should have a fair chance of sharing in the lucrative Oil and Gas market.
The purpose of this newsletter is to provide education and promote knowledge.
If you would like to hear what opportunities we have found please call us.
If you have found an opportunity that meets the above criteria we would love to hear about it.
Call us toll free at 1– 888-926-9793
For more information on assessing Oil & Gas private placements, visit OilAndGas101.net.
The Future of Oil and Resulting Benefit of Private Placements
As the title suggests, this article discusses the future of Oil & Gas and reasons for future pricing trends and the benefits of having a direct ownership of Oil via Private Placements.
Support for higher oil and gas pricing pre-dates hurricane Katrina and comes from a variety of fundamentals that will continue to drive the price of oil and gas much higher in the near future. At the core of these fundamentals is Peak Oil.
Peak Oil does not mean we are running out of oil. It simply means that we have reached the point where we can no longer increase the production rate of oil. This would not be much of a problem except that the demand for oil has reached our maximum ability to supply oil. Again this is not a problem for the price as long as all runs smoothly.
- But what do you expect to happen to the price of oil if a hurricane, disrupts the supply of oil coming from the Gulf of Mexico, like hurricane Katrina did? If the supply is so tight, and then we have a disruption of that tight supply, someone is not going to get their oil. The ones who really do want their oil will pay more. The price of oil goes up.
- If the new economic powerhouses of China and India continue their current trend of increasing their demand for oil, there will again not be enough supply to meet the new demand and those who want the oil will pay more to get it. The price of oil goes up.
- If an act of terrorism takes out a refinery or some other major component in the already tight supply lines? The price of oil goes up.
- If the US continues to print more and more money to cover their ever increasing national debt,with oil priced in US dollars, the price of oil has to compensate. The price of oil goes up.
- To relieve oil pricing pressure the US and other nations have released millions of barrels of oil from their strategic oil reserves. They have succeeded only to modestly in control the price of oil and we find it heading back near its $70 highs. Furthermore, this oil will need to be put back at some point and that, once again, will put further pressure on demand and oil prices.
- While the US needs to replenish some of it strategic oil reserves, China officially started this month, for the first time in history to build its own strategic reserves. Again this will impact the demand and put further pressure on oil prices.
- Should we have a cold winter we will see another crisis and again more upward pressure on oil and gas prices.
Now that we have your attention, let’s look at where you can gain.
Oil and Gas Private Placement Programs
As we mentioned, in our precursor to this newsletter, private placement programs offer just the kinds of high yield niche opportunities we are seeking.
Oil and Gas Private Placements allow you to invest directly in a drilling program, meaning that you directly own a share of the oil that comes out of the ground. The advantage is that when oil prices increase, your costs do not really increase and so your profits can increase exponentially.
Drilling for oil is like fishing. You don’t always know if you are going to catch anything but with the technology in place to day, statistically the fish are at a disadvantage.
At $25/barrel prices many oil and gas fields were not profitable or were only marginally profitable. Even in cases where oil was already known to exist, or there were proven reserves, lower prices of oil caused smaller leases to not be renewed and larger ones to lay dormant. It is in such leases, already known to have oil and/or gas available that we find a competitive advantage. They are being purchased for development, but because of the suddenness of the change in oil pricing many more of these opportunities still exist. The bottom line is, it’s a lot easier to catch fish in an aquarium than in the lake, and it’s a lot easier to find oil when you know its there.
The role of technology has compounded the above advantages. New mapping software and seismic techniques along with smaller, faster and more affordable computers have leveled the playing field and allowed smaller operators to gain some of the advantages that as recently as a few years ago would have only been available to the bigger players. Seek out those smaller operators that employ such technologies in addition to the above mentioned advantages and you are starting to gain a clearer picture of our strategy. It’s like the fish finder technology suddenly becoming affordable to all fishermen. Again it’s much easier to catch fish when you know where they are.
One other aspect we like to look for is existing oil production. Oil or gas wells that are already producing and generating revenues. You can compare this to buying fish directly off the dock from the fishermen. You know you are going to eat fish, and if you keep going back to the same boat he’ll give you an even better deal. We like to see revenues come in right away on any oil deal and at the same time like to mitigate some of the risks by securing some existing oil or gas production. This can be viewed as a show of good faith on the part of the operating company, to provide some of their own existing production, at attractive pricing, in exchange for your capital investment in their future endeavors.
One other advantage that can play a major role in both your ultimate return and managing your risk are the tax breaks. In many cases you can write off up to 100% of your initial investment, providing yourself with a tax reduction in the process. Further as you earn money from oil or gas production you are generally eligible for tax breaks such that the first 15% of your return is considered tax free. These are no minor considerations, especially if comparing with other types of investments.
It is through the exploitation of these concepts that Oil and Gas Private Placement Programs can provide significant advantages over other kinds of Oil and Gas opportunities.
How do you choose between the hundreds of Private Placement Programs available on the market and how do you reduce or manage your risk when getting into one of these potentially very lucrative ventures?
That is where we will pick up and continue with the next newsletter.
In the meantime, if you are already evaluating an Oil and Gas Private Placement Program opportunity, or simply want to gain a better understanding of the advantages of Oil and Gas, please call us on our toll free line at 1-888-926-4942.
For more information on assessing Oil & Gas private placements, visit OilAndGas101.net.
Introduction to Private Placements
Introduces the concept of Private Placement Memorandum and briefly discusses the potential benefits and some of the risks to be aware of when assesssing these potentially very lucrative investments.
I just wanted to keep in touch with all of my friends and fellow members at the Oxford Club, Taipan, and International Living.
OIL BREAKS THROUGH $67 PER BARREL !!!
For the average accredited investor, the most obvious oil and gas opportunities that come to mind are with the “Majors”, the Shell and Mobil Oils of the world. The “Majors” grab the headlines and tend to look the most successful. The opportunity to invest is limited to buying shares on the public market. These investments tend to be conservative so you never really get close to any of the lucrative returns.
“Majors” like large production and if an area does not produce large quantities or show significant potential, they will often sell off. This equals opportunity, which is usually picked up by mid level players, often public companies, or established independents. Once again when the lucrative returns are achieved, the average investor is either excluded completely or limited to a rather conservative investment in publicly traded shares.
For the private oil and gas venture, funds are often raised in the USA by way of Private Placement Memorandum (PPM). Investors will invest funds and receive an interest in an individual drilling program. If successful, the investor reaps the rewards and this is where the lucrative returns can enter the picture. The risk here for investors is even if the company has had success on all previous projects, if this particular drilling program is not successful, the investor can end up losing money.
For the small cap public company, funds are often raised by way of Private Placement. Investors will invest funds and receive company stock. The company uses those funds for exploration and drilling. If successful then the company stock value should increase significantly. Investors will benefit from the success or failure of the company as a whole and as such do not have to stake their dollars on any one individual drilling program. This is a double-edged sword, for while an investor has a hedge against an individual project failure, they will also have the extreme success of a single project watered down by all other projects already making up the value of the company.
How can the average accredited investor cash in on big profits in oil and gas before it is too late?
We have found niche opportunities in areas that larger established oil and gas companies will not pursue. In states like Kentucky and Tennessee where leases tend to be small and spread amongst many landowners, even when sizeable deposits of oil and gas are known to be present, “Majors” are simply unable to acquire large enough parcels of land to fit their operating models. While “Majors” do not want to deal with hundreds of landowners and/or individual lease owners, small local companies are much better equipped to work with a few local land and/or lease owners.
This spells opportunity for the average accredited investor, however risk is also present. Many of you can attest to this, since the majority of accredited investors I have spoken to have already lost money in private oil and gas ventures, so this letter is especially addressed to you.
This newsletter, which we will start sending you soon, will focus on these kinds of opportunities, as well as providing information on:
- tax benefits,
- what to avoid when choosing an operator,
- evaluating oil and gas opportunities,
- investor do’s and don’ts,
- oil and gas investment vehicles.
THE IMPORTANT THING TO NOTE IS THAT THERE ARE WAYS TO SIGNIFICANTLY REDUCE RISK.
If you have any questions or are already in the process of evaluating and performing due diligence on an existing project please do not hesitate to contact me for my comments.
In the Fall we will start sending this newsletter to you.
For more information on assessing Oil & Gas private placements, visit OilAndGas101.net.