How We Evaluate Oil and Gas Opportunities

Research the manager’s operating history and prior partnerships. Ask:

• How long has the manager been offering oil and gas investments?
• How many prior partnerships has it managed?
• How have mature projects performed relative to original expectations?
• Does the manager provide regular reporting and respond to investor questions?
• Can the manager provide references or evidence supporting its stated track record?

Past performance does not guarantee future results, but an established and verifiable history provides more information than projections alone.

Determine who will drill and operate the wells. Look for a well-capitalized operator with experience in the exact basin and formation being developed.

Review the operator’s nearby wells and ask whether it has repeatedly completed comparable multi-well projects. A recognized company name is helpful, but local operating results are more meaningful than size alone.

Search the names of the managing company, principals, broker-dealer, registered representatives and operator. Useful resources include:

• FINRA BrokerCheck
• SEC Investment Adviser Public Disclosure
• SEC Enforcement and Litigation Releases
• State securities regulators
• State and federal court records
• Secretary of State business records
• General internet searches using the company’s name together with terms such as “lawsuit,” “complaint,” “fraud” or “regulatory action”

Focus on patterns and substance rather than the mere existence of a lawsuit. Oil and gas companies may become involved in ordinary commercial disputes, but repeated investor, securities, title or payment-related claims should receive closer attention.

Request the exact working interest and net revenue interest being acquired. Determine how much of each well the partnership will own and whether that ownership is reduced by:

• Landowner royalties
• Overriding royalties
• Back-ins after payout
• Carried interests
• Reversionary interests
• Other contractual burdens

Investors should understand both the percentage of costs they are responsible for and the percentage of production revenue they are entitled to receive.

Compare the total investment cost with realistic production from nearby wells. Do not evaluate projected returns without understanding the assumptions behind them. Ask for a breakdown of:

• Leasehold or acquisition costs
• Drilling and completion costs
• Operating expenses
• Management or syndication fees
• Legal, accounting and administrative expenses
• Contingency amounts
• Any compensation paid to brokers or affiliated parties

Compare these costs with regional averages and comparable transactions whenever possible. Strong wells can still produce disappointing investor returns if too much is paid for the underlying interest.

Identify the wells used as offsets or analogs and confirm that they are geographically and geologically comparable to the proposed project. Consider:

• Distance from the proposed wells
• Target formation
• Lateral length
• Completion design
• Operator
• Initial production
• Cumulative production
• Decline rate
• Oil and natural gas mix

Be cautious when projections rely primarily on the best well in a large area instead of a representative group of nearby wells.

Determine whether the wells are:

• Proposed or permitted
• Scheduled for drilling
• Currently drilling
• Drilled but awaiting completion
• Completed and awaiting production
• Already producing

Earlier-stage projects generally carry greater timing and execution risk. Investors should understand what still must occur before revenue can begin.

Ask whether the initial investment represents the maximum amount you can be required to contribute. Some projects are offered at a fixed or turnkey cost, while others permit future assessments or cash calls if actual expenses exceed the original estimate. This distinction can materially affect an investor’s total exposure.

Ask for the estimated first-year intangible drilling cost deduction and determine whether the wells are expected to qualify for deductions in the current tax year. Tax outcomes depend on individual circumstances and may change. Investors should consult their own tax adviser and should not make an investment decision based solely on anticipated deductions.

Understand how the partnership will receive, account for and distribute production revenue. Ask:

• When are the first distributions reasonably expected?
• Are distributions made monthly, quarterly or on another schedule?
• How are operator expenses deducted?
• Will investors receive detailed revenue statements?
• Is there a secure investor portal?
• How frequently will drilling, completion and production updates be provided?
• Who prepares the partnership tax return and Schedule K-1s?

Reliable administration and transparent reporting remain important for the entire producing life of the wells—not only during the offering period.