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Oil & Gas Investments Risk Profiles

Just like with traditional investments, Oil & Gas direct investments expose investors to different levels of risk. As such, portfolio allocation can be tailored to an investor's particular risk tolerance and overall alternative investment objectives.

Author: Unity Resources
Date: Jul 7, 2011 - 11:14:13 AM

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Unity Resources Oil & Gas Education Series - Free White Papers

Just like with traditional investments, Oil & Gas direct investments expose investors to different levels of risk. As such, portfolio allocation can be tailored to an investor's particular risk tolerance and overall alternative investment objectives.

Oil & Gas Investments Risk Profiles

Please note: there is no such thing as a sure thing in investing, regardless of risk profile.

All oil and gas investments are subject to changes in commodities pricing.

Exploratory Drilling (Wildcatting) -- With exploratory drilling, Operators seek new sources of production in areas that have usually not yielded commercial quantities of oil and/or natural gas prior to drilling. Exploratory drilling is, by far, the most risky of oil and gas direct investments. The biggest risk is drilling a dry hole, which means investors will lose the entire amount of their initial investment. If oil and gas is discovered, investors must be concerned with whether or not any production achieved will be enough to pay back the initial costs of drilling the well. Investors may be subject to capital calls if drilling costs exceed expectations.

Developmental Drilling -- With developmental drilling, Operators look to increase production in proven producing fields by drilling directly adjacent to or near a currently producing well. Producing wells have "proved up" the area thus theoretically lowering the risk of drilling a dry hole. However, the success of a well -- even in a known area of production -- is never guaranteed. Barring any mechanical issues encountered during drilling and completion, the well must produce in commercially viable quantities to justify the costs of development and continued operations. Investors may be subject to capital calls if drilling costs exceed expectations.

Buying Existing Production -- Buying production means buying working interests in wells, which have already been successfully drilled. Investors are not exposed to any drilling risks. However, this type of investment is sensitive to ongoing costs of operations -- cash flow is paid out only if there is any money left after all taxes, costs, and royalty payments are made. Investors may be subject to capital calls if continuing operation costs exceed cash flow.

Royalties -- Royalty ownership entitles investors to their share of income from wells. Income comes "off the top" of the revenue generated (after taxes are paid) based on prevailing commodities pricing. Royalty owners are not liable for any risks or costs associated with drilling, completing, or operating wells. However, as passive investors, they have no control over the development or ongoing operations of their property. Thus, they cannot push for additional development (new wells thus new cash flow potential) nor oversee the operations of their property. As such, Operator mismanagement or simple inactivity can negatively affect their cash flow potential. Royalty investors are never subject to capital calls.

In addition to general risks outlined above, cash flow potential from any Oil & Gas direct investment is dependent on 1) mechanical ability of wells to continue production, 2) amount of reserves and rate of decline, and 3) commodities pricing. The information provided is a brief overview of general risks associated with various types of direct oil and gas investments. We have not included information regarding certain tax advantages or potential returns that investors may view as offsetting considerations to an investment's risk profile.

ABOUT UNITY RESOURCES Unity Resources combines energy investment expertise with private wealth management experience to create offerings designed to provide growth and income potential. Over the years we have worked day-to-day with high net worth individuals to identify and pursue alternative investment opportunities that complement and enhance the performance of their traditional portfolios. We believe that this hands-on experience provides a unique perspective regarding structuring investment opportunities specifically designed to meet the needs of accredited investors.


Unity Resources, LLC

5600 Tennyson Parkway, Suite 115

Plano, Texas 75024

972.378.0261 office

972.378.0504 fax

The information contained in this document represents the current view of Unity Resources on the issues discussed as of the date of publication. Because Unity Resources must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Unity Resources, and Unity Resources cannot guarantee the accuracy of any information presented after the date of publication. This White Paper is for informational purposes only. UNITY RESOURCES MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS DOCUMENT.

Unity Resources is a privately held energy asset management firm focusing on royalty ownership positions primarily in unconventional reservoirs throughout the United States. We believe that royalty ownership may provide a risk-adjusted option to participating in domestic oil and natural gas production.

Download this and many other fully illustrated white papers for free at Unity Resources. Visit the Unity Resources website:

View all articles by Unity Resources

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