Buyer Beware: Oil and Gas Investments

By: Matt McFarland, Associate at Kay Properties & Investments

With any and every investment comes risk. Investors everywhere are continually trying to balance the risks of an investment against the potential rewards.  As a national leader in DST 1031 Exchange and real estate investments, Kay Properties is constantly presented various investment opportunities to offer our clients.  We do not and will not participate in an oil and gas investment, as the inherent risks greatly outweigh the potential rewards and do not align with our investment philosophy. 

Here are a number of risks at play with investing in oil and gas programs:

  1. High Operational Costs: “Everyone in the energy industry is suffering as crude oil prices have slumped…it’s hard to make money when the cost of producing oil is higher than the sales price.” 1
  2. Supply and Demand Risks: “Both crude oil and petroleum product prices can be affected by events that have potential to disrupt the flow of oil and products to market…the volatility of oil prices is inherently tied to the low responsiveness or “inelasticity” of both supply and demand to price changes in the short run.” 2
  3. Extraction Cost Risks: “Finding oil and gas to replace the world’s fast dwindling reserves is increasingly risky as rigs probe areas once seen as too difficult or too dangerous, and costs are rocketing, which could imperil future supply.” 3
  4. Geological Risks and Barriers: “Drilling where there are no known reserves is called exploratory drilling.  Exploratory, also called “wildcat” drilling, is a risky business with a very high failure rate.”  4
  5. Political Risk: “Much of the world’s crude oil is located in regions that have been prone historically to political upheaval, or have had their oil production disrupted due to political events.” 2,5, 9
  6. Potentially High Fees: “In several cases the SEC alleged misrepresentations about what the invested funds were going to be used for.  Misrepresentations and omissions about uses of the investors’ monies included (i) paying big sales fees to brokers, (ii) the nature and size of compensation to the promoter and employees of the venture, (iii) operating and other expenses for unrelated businesses and (iv) using the money to pay for personal items 6
  7. Fluctuating Oil Prices: “The distinction between different oil demand and oil supply shocks has far-reaching implications because each shock has different effects on the US economy and on the real price of oil.” 7
  8. High Number of Fraud Cases: “The number of fraud cases related to private securities offerings for oil and gas ventures has increased over the last few years.  From few in 2005 and 2006,the number of SEC cases has averaged more than 20 per year since.  State securities regulators have experienced a similar increase in cases over the past five years. 6
  9. Environmental Risks: “Maryland’s governor has proactively stopped fracking before it could ruin the state’s water, air and communities.” 8

The ethos of our firm is to potentially avoid risk through avenues of avoiding higher risk asset classes such as oil and gas, hospitality and senior care, staying debt free if possible, diversification, specialization, and partnering with some of the best in-class real estate institutions in the country.  For more in-depth overview of why we choose to avoid oil and gas, please reach out to your Kay Properties contact as well as visit www.kpi1031.com.

Sources:

1) https://money.cnn.com/2015/11/24/news/oil-prices-production-costs/index.html

2) https://www.eia.gov/finance/markets/crudeoil/spot_prices.php

3) https://www.reuters.com/article/us-oil-exploration-risk-analysis/oil-exploration-costs-rocket-as-risks-rise-idUSTRE61A28X20100211

4) https://www.nationalgeographic.org/encyclopedia/petroleum/

5) https://www.aljazeera.com/ajimpact/oil-price-war-nightmare-shale-producers-200309173245129.html

6) https://www.sec.gov/files/ia_oilgas.pdf

7) https://www.wto.org/english/res_e/publications_e/wtr10_forum_e/wtr10_kilian_e.htm

8) https://stateimpact.npr.org/pennsylvania/2017/04/04/with-governors-signature-maryland-becomes-third-state-to-ban-fracking/

About Kay Properties and www.kpi1031.com 

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104.

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