Investing in oil and gas involves the risk of commodity price volatility, the possibility of an oil spill or any other incident that could significantly impact the rate of production. If we look at the bigger picture, it could turn out to be a really profitable deal in the long run, provided you make a calculated investment decision. Taking the discussion further, we list four factors that are critical to protecting higher potential returns from oil and gas investments. Take a look at our energy investment tips.
1. Investment Options:
The primary factor is to consider the type of oil and gas investment you are interested in and believe will give you high returns in the long run. Exploration, existing reserve, and developmental are the three common options, with each having its share of pros and cons. While exploration is the most profitable, it is also considered the riskiest of them all.
2. Return on Investment:
The economic profit margin between value and cost of the commodity is an important factor to pay attention to when investing in oil and gas. Analyze the risk of investment and the potential for return. As the risk factor is higher in energy investments, it is always better to associate yourself with a company that has a good track record in the sector.
3. Annual Cash Flow:
The process of drilling and fracking goes throughout the year. You must analyze the cash flow data of the companies to check their financial health. This will give better insight to the success of companies and their drilling efforts on well sites as well as different geographies. Once you have the data, it will be easier to shortlist a few successful drilling companies as well as narrow down your options based on the performance preferences.
4. Demand and Supply Shift:
When investing in the energy sector, it is vital to consider the recent shifts in demand and supply as this has a direct impact on the oil and gas prices across the world. The International Energy Agency has predicted that the next five years will reshape the global gas trade, which indicates that it is a favorable time to invest in oil and gas. You may also want to consider production agreements between OPEC and Non-OPEC countries, such as the current one which aims to restrict production and was extended from 2017 to the end of 2018.
Despite the ups and downs in future, the oil and gas industry is one of the biggest contributors in the US economy. When walking the lines of oil and gas investments, make sure that you do the research and speak with an energy investment specialist who can provide non-conventional investment solutions centered around potentially high ROI in the long run. This is a great time for oil and gas investing, with the most energy-friendly administration in office and the recently passed GOP tax legislation. Lastly, it is important to always remember that regardless of how lucrative an investment seems, it pays to always have an exit strategy.
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