Review of: EnergyFunders
Reviewed by: Ruth Lyons
Last modified: December 19, 2017
EnergyFunders is a crowdfunding platform for investors specifically interested in investing in energy. While this is a great way to diversify your portfolio and take advantage of potentially lucrative opportunities in the energy industry, the service, and its investments are not totally without risk
With the election of Donald Trump as U.S. president, oil and gas companies are looking forward to a boost to their bottom lines… and investors are eager to profit right along with them.
But what’s the best way to invest in energy? Now, thanks to EnergyFunders, there’s a crowdfunding platform that allows direct investment into oil and energy extraction projects, where returns can easily exceed those generated by traditional and other alternative investments like real estate.
Investing in energy can be a great way to grow your wealth. Gas and oil demand is always there — all countries still rely primarily on gas and oil to run businesses, transportation, and manufacturing. And consumer demand for energy is largely relegated to gas and oil. Cooking appliances, electronics and gadgets, cars, the lights people use at home and in the office, etc., are all considered basic necessities, and all run on gas and oil.
However… investing in oil and gas exploration is considered high risk. Geologists must theorize about what happened millennia ago thousands of feet below the Earth’s surface. Hitting a dry hole is the worst-case scenario. Drilling in mature fields (which have proven production) can lower the risk of a dry hole, along with diversifying an investment by investing in multiple, different well packages.
Interests in closely held companies, oil wells, and other ultra-micro-cap oil and gas projects aren’t for everyone. There are unique tax rules that govern oil, gas, and mineral investments, and there are rules specific to limited partnerships that may affect you as an investor, whether you are taxed on gains and/or able to take advantage of deductions on your investment.
Within the oil and gas sector, companies tend to focus on one of these areas:
- Exploration — Invest in companies that buy or lease land for drilling. Referred to as “wildcatting,” this is very risky.
- Development — Invest in projects or companies that drill near proven reserves, hoping to unlock additional oil.
- Production — Invest in plots of land over proven oil and gas reserves seeking a steady stream of income until the wells run dry or need to be re-worked.
- Re-working and Re-completion — Invest in existing wells accessing existing oil and/or gas reserves that need additional work, drilling or mechanical, to increase or restart production.
- Support — Invest in the companies that provide support services for the oil and gas companies doing the exploration, development and/or transportation.
Assuming you do wish to invest in the oil and gas sector, you have essentially four options. You can:
- Buy stock or interests in oil drilling companies or master limited partnerships;
- Buy shares of a sector mutual fund that invests in energy-related stocks;
- Buy shares of an ETF (exchange-traded fund) or an ETN (exchange-traded notes), which typically invest in contracts rather than energy stocks; and/or
- Invest directly in oil and gas operations through limited partnership interests, ownership of fractional undivided interests in leases, and general partnerships.
Typically, drilling partnerships work like this: the promoter or salesperson takes an upfront fee that averages about 15-16% of one’s investment (commonly referred to as a promotion fee), while the operating company also shares in a percentage of any revenue generated. In return, the promoter offers the investor the prospect of a substantial first-year tax write-off and quarterly cash distributions from the sale of any oil and gas the partnership finds until the wells run dry.
Investment niche — EnergyFunders focuses on drilling and re-completion projects in proven areas with more than one well. Investors can choose projects that don’t depend on high commodity prices for oil or gas — projects that are profitable at low prices and can profit regardless of fluctuating prices.
Vetting process — EnergyFunders’ platform features only pre-vetted investment projects. Project submissions are subject to a lengthy vetting procedure including the analysis of financial metrics, an engineering review, a title review and other criteria.
Investment timeframe — EnergyFunders generally anticipates holding wells for a five-year period. However, this is decided on a case-by-case basis. In addition to receiving cash flow, when the asset is sold the sale proceeds are also distributed pro rata to the investor.
Transparency — Through its crowdfunding platform, investors get access to due diligence documents, including:
- Live webinars, including questions from investors, which are also available afterwards as recordings
- Geologist’s reports, including Induction/Gamma Ray Logs and Mud Well Logs
- Third-party engineering reports, including reserve reports
- Biography of the Operators, Team Members and Partners involved — it’s important to know the people, as well as the project, you’re investing in
- Estimated barrels of oil or MCFs of natural gas that the project could produce under a range of scenarios
- Net income and cash flow projections with the best, worst and medium-case scenarios, so you’ll know the range of possible outcomes from each project
- Detailed production and geological history of the project
Quarterly distributions — Payments are usually made to investors on a quarterly basis.
No investing fees — As soon as you’re registered on their site, you get free access to research investment opportunities. There are no upfront end fees for investing.
You must currently be an accredited investor to invest through EnergyFunders. Accredited investors earn more than $200,000 per year ($300,000 for a married couple) or have more than $1 million in assets, excluding the value of their primary residence.
What Is EnergyFunders?
EnergyFunders has created the first crowdfunding platform for oil and gas investing. Their model does away with the intermediary “promoter” and their upfront fee/commission that is taken from investors. Instead, EnergyFunders takes only a carried interest in the project. EnergyFunders’ financial structure is set up so that the company doesn’t make profits from any funded project until investors make money.
EnergyFunders focuses on finding drilling and re-completion projects in proven areas with more than one well. Philip Racusin, CEO of EnergyFunders, believes that the value of his platform lies in its vetting process for crowdfunding candidates. Part of EnergyFunders’ vetting process is looking for projects that can be profitable with oil prices as low as $10 to $15 per barrel. “We want low break-even, so no matter where you think oil prices are going, the project will return some profit,” says Racusin.
Every project that you’ll see on the EnergyFunders platform has been carefully vetted by their team and third-party expert(s) they’ve hired. The vetting process includes background checks on operators, checking references, making sure the cost to drill or complete are reasonable for the region and proposed operations, a reservoir engineering review, and more. It’s in their best interest to do a lot of vetting to make sure every project on their platform has a good chance to be a moneymaking one.
How It Works
You can subscribe to the platform for free. Your request to join is approved via an email verification process.
After going through a simple verification and a quick accreditation check, investors can review the details of — and invest in — various projects that are seeking funding. The amount of detailed information and documents you can review on each project is impressive.
Prior to investing, you electronically sign a contract purchasing a partnership interest in the specific project’s limited partnership (LP), set up to purchase working interest in the well(s). You will receive revenue generated from the project at your pro rata share of the distributions in the LP. You can invest as a converting general partner (which converts when the development work is done) or a limited partner, depending on your need for certain available tax deductions.
Pros and Cons
- Profit Potential — Investments in limited partnerships like EnergyFunders can pay off big. The return on investment could be five to 10 times larger than the initial capital outlay.
- Tax Advantages — The IRS allows oil and gas companies tax advantages not found in other investment choices.
- Portfolio Diversification — Exposure to oil can be a safe and efficient way to help balance your overall investment portfolio.
- Low Barriers to Entry — EnergyFunders reduces the traditionally high entry barriers to energy by providing technical knowledge, financial analysis, legal expertise and deal-structuring savvy.
- Risk Spreading — EnergyFunders' business model and low minimum investment allow investors to spread risk over more than one project.
- No Upfront Commission Fees — EnergyFunders' platform allows you to invest directly and skip the middleman -- and his commissions.
- Speculative — Drilling partnerships are considered speculative investments.
- Risk — Oil and gas prices could fall to a level where an investment is not profitable and an operator is forced to shut the well.
- Investment Complexity — True limited partnerships like the projects available on the platform may have unique liability issues and tax consequences that should be carefully reviewed by a trusted professional.
- Illiquid Investment — Units or shares in the projects are unregistered securities and not liquid. Investing in a limited partnership usually means that your money will be tied up for a while.
Using EnergyFunders’ secure web platform, accredited investors can browse pre-vetted drilling and re-working projects, view complete details of each investment and invest online.
Investing in gas and oil can be a good choice as long as you build a diversified portfolio and are aware of the risks you are taking. While the tax advantages and potential return can be alluring, there’s a reason you need to be qualified as an accredited investor. This type of investment is considered speculative, is highly illiquid and can have a long holding period.
In addition to pooling knowledge and diverse skill sets, the crowdfunding platform pools the funds of interested investors to invest in each project. This allows for individual investors to choose among, and invest directly in, many projects — investments that were previously available to only the very largest individual and institutional investors.