The world’s seemingly insatiable demand for fuel makes oil and gas investments an appealing addition to many portfolios. Whether you are seeking a replacement property for a 1031 exchange or simply looking for some diversification, this is an option that is well worth exploring.
The oil and gas sector brings many potential benefits. However, it is also complex and comes with risks that aren’t seen in other market sectors. Before adding oil and gas to your portfolio, it’s important to fully understand the various investment options, the in’s and outs of how they work, and the pros and cons. The following overview will provide the information you need, to begin exploring whether oil and gas investments are right for you.
Investors looking for ways to get involved in the oil and gas sector have a wide variety of options. Some of the most common include:
Some forms of oil and gas investments also qualify as replacement properties for a 1031 exchange. Each of these investment options has its own pros and cons. It’s also important to note that some are appropriate for novice investors while others geared more towards experienced investors with a high risk tolerance.
There are many reasons to consider adding oil and gas investments to your portfolio. Here’s a look at some of the most important benefits.
Diversification
Diversifying your portfolio is one of the most important strategies for risk management. Since rising gas prices often depress other sectors of the economy, oil and gas holdings can provide a hedge against losses in other sectors.
High Potential Returns
Many oil and gas investments have the potential to produce significant profits. This is particularly true when investing in small oil and gas companies, direct participation programs, or futures. The demand for oil and gas is also expected to continue rising. A combination of dwindling supply and growing demand bodes well for a high return on investment.
Attractive Dividend Income
In addition to returns, oil and gas investors also stand to benefit from attractive dividends. This can provide passive income, further boosting your portfolio.
Tax Benefits
Since the U.S. government wants to encourage domestic energy production and reduce reliance on foreign fuels, it offers investors generous tax advantages. This includes deductions for lease costs, tangible and intangible drilling costs, passive and active income deductions, and more.
All investments come with risk, and oil and gas investments are no exception. While many investors believe the benefits far outweigh the potential drawbacks, it’s important to fully understand what you’re getting into. Here’s a look at a few of the concerns oil and gas investors must consider.
Price Volatility
While oil and gas investments have the potential for high returns, these holdings are also quite volatile. Not only do operational expenses have a significant impact on investment values, but companies in this sector often face forces that are beyond their control. This can result in large and unexpected swings in profits and values.
Unpredictability
Oil and gas resources are constantly dwindling. To maintain a positive cash flow, companies must continually find new sources. However, this creates a significant amount of uncertainty. When companies invest in exploration, there’s no guarantee that they’ll find what they’re looking for – and if they don’t, it can lead to major losses.
Environmental Issues
The use of oil and gas creates carbon emissions, which can damage the environment. In recent years, there has been a push to focus on renewable energy. While demand for oil and gas has not yet significantly declined, as renewables become a way of life, oil and gas investments may lose value.
Political Intervention
Some oil and gas investments are located in politically unstable areas, adding even more potential for volatility and risk. The valuation of oil and gas investments may be impacted by trade policies, currency valuations, tax reforms, changes in government, and other types of political intervention.
Safety Concerns
Unfortunately, oil spills, fires, and accidents are not uncommon in the oil and gas industry. One major slip-up can have catastrophic consequences. BP’s Deepwater Horizon oil spill in the Gulf of Mexico is a primary example. While this occurred in 2010, the company is still paying for the damages today.
Oil and gas are some of the most important commodities in the modern world. As long as you understand and are comfortable with the risks, investing in them can be a smart move. If you’re interested in exploring whether these investments are a good choice for your portfolio, the team at Fortitude Investment Group is here to help. Contact us today or schedule a consultation here.
This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results.
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