For the last couple of years I have researched the best way to invest in oil. I’m not talking about how to invest millions of dollars but how the average working man can invest in black gold. From what I could find, there are multiple ways to gain exposure to crude, but with each option came many drawbacks. For instance, their are oil ETF’s but none seemed to accurately track the price of oil. They either lagged price movements or reacted in limited fashion to what the actual price of oil was doing. I wanted an investment with a very close correlation as you would expect with any investment. The futures market is where you can invest in the actual contracts (1000 bbl per contract) of oil, but requires a ton of money and seems to be very risky for those that don’t have years of experience trading futures. Then you can always gain exposure by investing in the companies that produce the oil. With this comes the risk of how well the company is managed, accidents, corruption, etc. This is where it hit me. The best way to invest and be as exposed to the actual price movements of oil is to actually produce and sell it.
So, I know that buying oil wells isn’t exactly cheap which was one of the drawbacks to the futures market. The difference is that when buying oil wells, you are actually buying the oil production apparatus. You are buying a stream of income as long as you can keep the stream flowing. With futures, stocks, or ETF’s you are simply buying the opportunity to speculate, hoping the price goes up. When buying an oil well or multiple wells, money can still be made if price goes down as long as the price is still high enough to offset the expense of the operation. It boiled down to I wanted to start and run a small independent oil company. No risk or speculation there, right?
I’m not so naive to think their is no risk in what I have set out to do. Each exposure to the oil market has its pros and cons. Each has a certain element of risk and reward. But only one option provided both a pure correlation to oil prices and was in the form of an actual business venture. Given all the options, starting an independent oil company was the truest way to gain exposure to the oil market.
Now, there is more to the story, I must admit. My grandfather has owned his own oil wells for about 25 years. It just so happened that he was placing twelve of his wells up for sale during the time that I was learning about my desire to invest in oil. After contemplating it for a while, I pitched the idea to a buddy of mine that had about six years of oilfield experience and his financial ducks in a row. Surprisingly, he had actually been thinking about buying oil wells himself. Everything seemed to be coming together. We decided to approach my grandfather with our offer to see what he thought about us buying his wells.
We all came to an agreement on terms, one of which included my grandfather mentoring us on the day to day operations of operating oil wells, and decided on a closing date. There is a ton of paperwork, state forms, bonds, insurance, LLC or company filings, and every other kind of paperwork you can think of that goes into a deal like this; however, having closed the deal two days ago (Nov 1, 2011), I can say it was all definitely worth it.
A&K Production LLC is now in business and pumping oil. We own 12 deep wells ranging anywhere from approximately 6000′ down to approximately 11200′. Eight of the wells are currently producing North Louisiana Sweet crude with a few high priority wells that we plan to bring back online in the near future. All of the wells are artificial lift, meaning they have pump jacks pumping the oil out of the ground, rather than free flowing. Current production for all the wells combined puts us at about 20 bbl per day. The oil that is pumped out of the ground is stored in our on-site tank batteries where it awaits an oil truck to transport it to market. We sell our crude to Genesis Oil in Louisiana. From there, the oil is sent to refineries to be used in thousands of different applications.
So, our main role is basically keeping the pump jacks maintained, keep the pump jack motors running, maintaining production and maintenance logs, monitoring income vs. expense, and correcting any issues that occur downhole. This downhole work would normally be extremely expensive, but the wells that we bought came with a 96′ mobile workover rig. We can use this rig for pulling the tubing, rods, and pump out of the hole. We can also use it for swabbing wells (another form of oil extraction). The workover rig is our key to success because we have our own means for working on our oilwells at our own pace and at the expense of our time only. Whereas it would cost anywhere from $3000-$5000 per day to hire a workover rig to come work.
After writing all of this, I feel in a little over my head, but I am definitely more confident in our success with this venture versus playing the stock market. There is also a sense of pride and worth in producing a vital product. We are bringing a fluid from 12000′ below the surface up to be made into something that is useful and drives our economy. Just having this opportunity to contribute in such a way is very exciting.
I have found the Best Way To Invest In Oil: Buy Oil Wells.
If you have questions or would like help doing something similar, don’t hesitate to ask. I would be happy to elaborate on anything that we have done thus far.
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