How Do You Invest in a Highly Regulated Industry? A Case Study Using the Oil & Gas Industry
While the term “regulation” often infers a negative connotation. In actuality, regulation that takes steps to protect the environment, employees or consumers “often leads to innovation, increased productivity, and new businesses and jobs.”1 However, favorable outcomes are not necessarily guaranteed. In a study published in the Journal of Economic Growth in 2013, it was found that regulatory measures decreased economic growth by about two percent.2 To some, this is enough to argue for less regulation. To others, a mere two percent is nothing compared to the benefits these regulations have brought our communities.
When it comes to regulation, some of the most common regulated industries include: healthcare and life sciences, transportation, oil and gas, electric power and transmission, and financial services. In regards to investing in these industries, the simplest way to explain how to navigate best practices is to focus on one industry as its strategy could apply to other regulated industries as well. So for the purposes of this article, let’s look at investing in the oil and gas industry. There are several avenues you can take — from investing in the industry as a collection of companies or investing in it as a commodity.
Different Kinds of Oil and Gas Investments
The four types of oil and gas investments include exploration, developing, income, and services and support. Exploration investments are businesses or projects that buy or lease a plot of land and then invest money in the drilling. While the return can be rather generous if you strike oil, there could be a high chance of losing your entire investment if no oil is found. Developing investments, on the other hand, are projects that drill in areas that have found oil before. While there is a little more hope, there is still no guarantee the plot of land will continue to bring value.
Income projects are similar to exploration investments in that they involve buying or leasing land, however this time, these reserves have been proven to contain oil in the past. This could be a good option for investors looking to make some passive income. Lastly, there are services and support companies. From transportation to equipment, these businesses provide a wide range of services and support for the oil and gas industry. A bit simpler, this type of investing involves investing in these companies, which is similar to investing in any other business that offers B2B services.
Options for Investing in the Oil and Gas Industry
Similar to the different kinds of investments, there are four ways you can invest in the oil and gas industry — mutual funds or ETFs, large-cap stock or ADRs, futures contracts, and small- or micro-cap stock and limited partnerships. If you decide to go the commodity route, mutual funds or ETFs may be the right way for you. Not only can they help you gain a decent amount of exposure without assuming direct risk, but you also don’t have to invest the majority of your wealth in any single business.
Regarding large-cap stock or ADRs, you can gain exposure in the oil and gas industry through publicly-traded companies such as Exxon-Mobile and Chevron. If you go this route, you’ll be buying direct exposure just by purchasing shares or ADRs (American Depositary Receipts). As a third option, there are futures contracts, which are derivatives. However, these carry a significant amount of risk and can expire without carrying any value.
Lastly, there is small- or micro-cap stock and limited partnerships. Small- or micro-cap stock is a good option if you want to assume a more direct equity position in a smaller-scale business or project. However, because this is a more specialized approach to investing, you will most likely want to hire a broker who has expertise in this area. For those who have a significant amount of money they can invest, you may consider engaging with the company’s management directly for private placement.
Proceed with Caution and Consult with Industry Experts
From profit potential to tax advantages, investing in highly regulated industries comes with its benefits. However, with these advantages comes disadvantages such as volatility, liquidity and commissions. If you’re considering investing in a highly regulated industry, make sure you conduct thorough research into the optimal strategies and steps you should take in order to generate consistent and substantial success.
Especially in more specialized fields of investing, it’s always a good idea to pursue expert advice before investing any large sum of money. While the Internet offers decent insight and recommendations, you never want to take the leap without educating yourself thoroughly on the risks associated with each investment. When in doubt, consult with an investment professional who specializes in the particular industry you’re interested in. This way, you’ll gain clarity and insight necessary to confidently invest your money.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.