What? Why on Earth Would I Buy an Oil Well???
Two words: black gold.
An oil well sounds like something that is not real, but that is not the case. When I first heard the term oil well I thought it did not make sense: why would an individual own an oil well when global companies are responsible for producing oil? Something has to be missing. However, the truth is that oil well investments can yield annual returns between 30% and 80%.
Profits $$$
Let us take a look a scenario of how purchasing an oil well would work. The price to purchase an oil well can range from ten of thousands to tens of millions. They are valued similarly to any investment with some caveats. For example say you purchase an oil well for $100k. Based on an EBITDAX multiple of 5x (EBITDAX = earnings before interest taxes depreciation and exploration costs) the oil well would generate $20k per year in revenue. This would result in a payback period of 5 years. After the five-year period you will have your full investment paid off, and like that you have an income-producing asset making you $20k per! This may not sound like a lot, but along with other income it can be very beneficial for one’s finances. Also, do not forget about the fact that this is passive income! You do not need to be sitting at the oil well for it to generate income for you, a beautiful thing!
Current Oil Market Environment – Some Secrets
Here is the part I get excited about. Although oil prices have rebounded from their previous lows in 2015, oil prices are still well below historical highs. At ~50 per barrel in current time, prices are much cheaper than they have been (roughly $100 per barrel). On top of that fact, oil is non-abundant commodity. This means that as oil is consumed over time, their will at some point be a lack of supply of quality oil resources. For an investor – this means that the price of oil must eventually rise due to the laws of supply and demand.
Next Steps
A great book to check out on this topic would be Investing in Oil and Gas Wells. This book comes recommended by a knowledgeable mentor of mine. There aren’t a lot of resources for investing in oil and gas, mostly because its typically been an investing product that only sophisticated investors use. Hence, there isn’t a whole lot of resources out there on the buying process.
A good review article would be over at savingadvice.com – answering the call of black gold. It lays out the nuts and bolts of what you’d need to seriously buy a well.
I also recommend dealing with a safe and secure broker that you trust, so that you know you are getting a proper purchase/deal. A good start might be here.