Will Oil & Gas Be A Solid Investment For 2014?

Image by: Phillip Caper
By Michael Sterling

Oil & gas is always a conversation at the beginning of the year, but 2014 is definitely proving to be one of the craziest times for the industry. Many investors are either jumping on the bandwagon or leaving it altogether.

With recent legislation, new projects, and a high rise of public opinion on eco-friendly production, the oil and gas industry is sure to see some significant things. Whether you think it may benefit you or not, here are a few positive things to watch out for this year. Let you be the judge:

Major Tax Benefits

No other investment category in America is going to complete with the tax breaks available to the oil and gas industry this year. Clearly this shows just how serious the government is about developing the domestic energy infrastructure. Whether you an investor or small producer, the tax incentives are going to massive. Here’s a bit of a breakdown:

  • Intangible Costs: Everything but the actual drilling equipment, i.e. labor, chemicals, grease, and mud are considered intangible. All of them are 100% deductible and constitute 65-80% of the total cost of drilling well. So if it costs $200K to drill a well and 75% is intangible, an investor will receive a deduction of $125L. The best part is it doesn’t even need strike oil. As long as it operates by March 31 the following year, deductions will be allowed.
  • Tangible Costs: This is the actual cost of the drilling equipment and is also 100% deductible. The only difference is that the it must be depreciated over seven years, i.e. the remaining $75 could be written off in seven year increments.
  • Lease Expenses: All purchases of lease and mineral rights, operating costs and administrative, legal and accounting expenses are 100% deductible.
  • The “Depletion Allowance:” This is huge. It excludes from taxation 15% of all gross income from oil and gas wells. It’s limited solely to small companies and investors, but companies that produce/refine over 50K barrels per day and entities who own over 1K barrels per day are excluded.

Crude Oil Is Looking Good

According to the Energy Information Administration, world crude consumption grew by an estimated 1.1 million barrels per day in 2013 to a record-high level of 90.3 million barrels per day. They predict global oil demand growth by another 1.2 million barrels per day this year as North American supply remains strong and a recent agreement with Iran makes it easier to sell oil.

Many experts have high hopes since the central bank stated that it will reduce bond repurchases by $10 billion, bringing its monetary stimulus to $75 billion. This is all because the U.S. economy is currently strong enough to sustain it.

So while the Western economies exhibit sluggish growth, global oil consumption is expected to get a boost from consistent strength in China, the Middle East, Central and South America which are expanding.

*Tip: China just made a $10 billion investment in Nigerian Hydrocarbons. This is a great opportunity to step into the Chinese oil market. Whether it hits big up or down, it’s sure to make a splash.

Exploration & Production

On top of crude oil standing to benefit from rising prices, companies in the exploration and production (E&P) sector are the best places since they’ll be able to extract more value for their products.

Undervalued companies like Harvest Natural Resources Inc. (HNR) and Abraxas Petroleum Corp (AXAS) are great because their small-cap and also enjoy the benefits of crude oil price leverage. It’s a win-win.

Another great name to look out for is Chevron Corp (CVX). Its current project pipeline is believed to be the best in the entire industry, boasting large multiyear projects. Not to mention, it possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.