Generally peaking, there are four kinds of oil and gas investments:
1. Exploration These companies or projects buy or lease land and invest money in drilling. If they strike oil, the investment can pay off 10 times over. sometimes much more if the company uses borrowed money (leverage) to finance operations. If not, they may lose everything they invested in that particular project. Exploration companies are best suited for those with high tolerance for investment risk. These plays are speculative.
2. Developing These projects drill near proven reserves, hoping to unlock further value. These are less risky, but there are never any guarantees that their efforts will bear fruit.
3. Income These projects involve the acquisition of plots of land, either through lease or sale. Over proven oil and gas reserves, and seek to create a steady stream of income over and above expenses. This is the safest way to get involved in the drilling and extraction operations. And is more of an income play than a speculative play. The risk is that the oil or natural gas will run out faster than expected.
This investment is for those seeking a passive income stream. But can take on more risk than investing in other traditional income generators. Like investment grade bonds and annuities.
4. Services and Support These companies provide unlimited supporting services to the oil and gas industry. Examples include transportation, shipping and logistics companies, pipeline companies, construction and rigging companies. Drilling and refining hardware and equipment manufacturers, refiners, and many others.
Investing in these companies is like investing in any company involved in logistics. Some of these investments don’t rely on increasing fuel prices to be profitable. For example, pipelines make money by charging a fee per barrel transported. They’ll make roughly the same amount regardless of whether fuel prices rise or fall. As long as demand remains consistent.