Stone Diamond Oil

Should I invest in Oil & Gas Drilling?
If you are an accredited investor and understand the risks involved, you may want to investigate how an oil and gas drilling program could benefit your long term objectives.  You may want to review the differences between investing in exploratory drilling, which is very
risky as compared to investing in developmental drilling, which typically has substantially less risk.

What are the tax advantages to participants in energy drilling?
You may be able to tax deduct 100% of the intangible drilling costs (IDCs) allocated for wells you invest in this year.  The costs for drilling a well are broken down between tangible costs and intangible costs.  Many times the IDC costs are 60% to 90% of the total cost of the well depending on a lot of variables.  This calculation is based off the Authorization for Expenditure (AFE) that is provided for each well.  You should seek the advice of a tax professional and clearly understand the impact to your tax situation.  Generally, it is recommended to invest in energy drilling for the economic benefits rather than the tax advantages; however the tax deductions allowed to general partner investors and/or working interest owners, should help to reduce their current year taxes and reduce the risk of principal for the investment.

How can energy drilling investments reduce the overall portfolio risk within my portfolio?
Energy drilling is an asset type that is not highly correlated with stocks or bonds; in fact it may be negatively correlated under most economic conditions.  When the stock market is falling, many times both stocks and bonds are falling.  By adding an allocation of energy drilling investments to your portfolio, you may benefit from an asset type that does not typically follow the stock market.  Sometimes you will see the price of oil and natural gas move in sync with stock and bond prices, but normally this is observed for short periods of time or if the economy is being threatened with a recession or depression.  A recession is not good for much of anything.  Even though the price of oil or natural gas may be falling, the production of oil or natural gas from the well should still be producing cash flow to your portfolio.

What is the best way to participate in energy drilling?
One of the best ways to participate in energy drilling is to consider investing in multiple wells rather than just one well.  Also, you may want to avoid allocating too much of your investment for exploratory wells, which can be risky.  Identifying wells with multiple pay zones will further reduce risk.  If one zone fails, you still have more opportunities to develop the well.  Another good approach to reducing risk is to invest in multiple fields of wells rather than 100% in one field.  This will allow you to diversify geographically and will continue to add more diversification to your energy drilling investment.

Someone called on the phone and wanted me to invest in a “sure thing” big well.  Should I invest and is there such a thing as a “sure thing” investment?
No!  You should not invest with someone you do not know that wants you to invest without knowing anything about you or your objectives.  Investing in oil and gas investments should be done with a reputable company that you have had the time and opportunity to check out.  Also, anyone calling you to solicit your investment in a “sure thing” investment is unethical and acting outside the boundaries of the law.  All investments have risk and energy drilling has more risks than most investments.  It is possible to manage the risk, but you cannot avoid it.

Should I invest in energy drilling within my IRA?
Generally, non-qualified (non-IRAs) money is best for energy drilling.  You will not benefit from any IDC deductions if you invest with IRA funds and you need to be aware of any leverage involved with the investment if you do choose to invest with IRA funds.  As a rule, it would be better to avoid using IRA funds for energy drilling.

How much should I allocate to energy drilling investments?
You need to understand the risks and your time horizons.  You also need to understand that energy drilling investments are primarily a cash flow investment and that you are committed for the duration of the well or wells.  Investing a portion of your portfolio over time into energy drilling might be the best course of action.  By allocating your investments over time, you may be able to take advantage of the tax deductions in different future years to save taxes annually with your allocations.   Whatever you decide, avoid allocating too much to any one investment program and never invest in just one well.