Discover Your Own "Black Gold"
by Mark Mersman
Timing is everything. Once in a great while, events change the game and present tremendous investment opportunities.
Those events are happening now in the energy sector, with shale oil and gas. You can capitalize on the changing landscape, if you know how. One reason this is such a great opportunity is because so few people even know that energy rights exist as an asset class, much less how to invest in them.
I discovered this class of assets while helping clients who were seeking investments that would protect their assets through diversification. To do that, I have been helping them gain exposure to hard assets.
Gold and silver have been on quite a run lately, and with U.S. economic policy as it is, one can argue that those commodities will continue their ascent for the foreseeable future.
As an additional investment to gold, silver and other alternatives, an investor benefits from being directly involved in oil and gas. What do I mean by "directly involved"? Not through owning shares of big oil companies or publicly traded trusts, but by owning the assets themselves. Let me explain.
Over the last three years, while most of us have been trying to get through one of the toughest recessions in U.S. history, billions of dollars have been invested into domestic onshore oil and gas shale plays by the biggest and best oil and gas companies in the world.
"Blanket shales" are tight geologic formations that literally blanket hundreds or thousands of contiguous acres and are known to contain potentially billions of barrels of oil and/or natural gas. For years, production from these zones has been dormant due to the lack of ability to make them economically productive.
Recent advances in drilling technology known as hydraulic fracturing, coupled with advanced horizontal drilling technologies, has made millions of acres of minerals, containing trillions of cubic feet of natural gas and millions of barrels of oil, economically attractive.
Quietly, almost overnight, the U.S. has seen an oil and gas “land grab” unlike any in the history of domestic production. Operators such as ExxonMobil ($40 billion acquisition of XTO), Shell and many others have invested billions in acquiring the rights to develop minerals found in blanket shale. Even China, Spain and many other foreign national companies have invested literally billions of dollars into our U.S. shale plays within the last 12 months.
If you follow the money trail, you discover huge amounts of money invested by major oil and gas companies in acquiring the rights to extract those minerals from blanket shale. But how could that benefit an individual investor?
In several ways:
More Opportunity: Few individuals are aware of the fact that they can take direct ownership in the minerals contained in these shale formations. Due to the significant amounts of acreage with blanket shale containing oil and gas, more land is available for investment today than ever before.
Less Risk: By buying minerals in those areas where there has already been significant capital expenditures and aggressive development, one can figuratively “ride the coattails” of the best geologists in the world. In a “blanket” formation, there is a consistency to the reserves unlike traditional formations, where discovering oil is a hit-or-miss proposition. Reserves are found throughout the shale formation, providing a much greater degree of certainty in estimating recoverable reserves and determining valuations. More certainty equals less risk.
No Operational Risk: When you own mineral rights, you are passively partnering with the major oil and gas companies such as ExxonMobil and Shell. You don't carry the costs of operations, cap calls, environmental risks, etc. All of those risks and costs of development are assumed by the operator.
There is no question that mineral and royalty ownership has created significant wealth for families like the Rockefellers and Hunts over the years, and has provided tremendous diversification for endowments at institutions such as Yale and Harvard.
Most experts recommend that in these trying economic times, the safest investment strategy is to diversify your portfolio across asset classes, and especially by investing in hard assets. Just as you can own gold coins or bullion, you also can own “black gold” as a component of a well-protected and diversified portfolio.
As a 20-year veteran in the financial services industry, I can’t recall a time when I have been confronted with such an uncertain period in the global markets. That said, there are tremendous opportunities being presented as the investment landscape is changing. Direct ownership of shale oil and gas mineral rights is one of those opportunities that every investor should consider in diversifying his or her portfolio.
Mark Mersman is Managing Director of Blue Diamond Minerals, LLC. To learn more about investing in oil and gas minerals, or to register for one of his educational webinars, click here.