Oil and Gas Companies
Some stockbrokers and investment advisors have encouraged investors to invest in the oil and gas industry. However, this sector is highly volatile, and investments in it may not be appropriate for investors who want or need to handle their finances more conservatively. If investors' accounts are over-concentrated in oil and gas investments, or a broker fails to disclose the degree of risk in the investment, the broker may be liable. Losses may be recovered through FINRA arbitration or lawsuits against the brokers who promoted the investments. Our oil and gas FINRA arbitration lawyers are dedicated to helping investors nationwide who have been improperly advised or defrauded as to oil and gas companies so that they can potentially recover their losses.Understanding Investments in Oil and Gas Companies
The oil and energy industry is very large and offers numerous opportunities for investment. Among oil and gas companies are international oil companies that are vertically integrated and have global operations However, within the industry, companies are often identified by their place along a spectrum with upstream sectors that are in the business of extracting and refining oil and downstream sectors that are in the business of selling and delivering oil.
For example, one type of company in the upstream sector is an exploration and production (E&P) company, which finds, produces, and markets oil and gas. This type of company also builds infrastructure and collects data. If an exploration company strikes oil, the investment can have a huge return, but they are highly speculative. Therefore, if they fail to strike oil, they may lose everything invested in a particular drilling project. Developing companies drill near proven reserves and are slightly less speculative investments.
By contrast, refiners and marketing are downstream operations. They turn crude oil into usable products like gas and move the finished product from an energy company to retailers or end users.
Ways in which you can invest in oil and gas include buying stocks in oil or gas companies, buying stock in royalty trusts, buying an existing working interest in a lease, becoming a working interest partner in a drilling program, and buying oil and gas royalties directly from mineral owners.
Most commonly, investors buy shares of oil companies through a broker. These stocks carry the risk of a disaster, such as an oil spill. Buying stock in a royalty trust is different from buying shared of an oil company. Royalty trusts generate their income from the production of oil, natural gas, coal, and other natural resources. the trusts are pass-through financing vehicles with no physical operations. Other companies do the mining and pay royalties into the trust. Generally, these trusts have a very high yield, but they are also highly volatile gambles.
Investing in a Master Limited Partnership (MLP) is another way to invest in oil and gas. Their advantage is that they pay no corporate tax if at least 90% of their net income is distributed to their shareholders. However, some MLPs distribute from cash flow or borrow to pay their distributions, and these MLPs are dangerous investments because cash flow can dramatically change based on declining oil prices.
Another category of investments is private placements or Regulation D offerings. Although securities law requires that all securities offered for sale by a broker-dealer firm need to be registered with the SEC, private placements are exempt from registration. There are three exemptions from registration. One of these, for example, provides that companies do not need to register securities if they offer and sell no more than $1,000,000 of these in a 12-month period.The company cannot be in the developmental stages.
Other investment options include purchasing a working interest in a currently producing oil lease or partnering in a drilling program. The former is less risky and has a potential for excellent returns. However, you face the risk of accidents that may result in lawsuits and regulatory compliance issues. In order to be succesful with these types of investments, you usually need technical knowledge.
If your oil and gas investments were sold by a brokerage firm licensed by FINRA and the SEC, it is subject to laws enforced by FINRA and the SEC. Under Rule 10b-5, for example, you must prove that there was a misrepresentation or omission in connection with the purchase of a security, you relied on that misrepresentation, you incurred damages because of the misrepresentation, and fraudulent conduct occurred.
Another type of claim that is commonly brought against stockbrokers or brokerage firms is unsuitability. Brokers must consider an investor's financial situation, objectives, and risk tolerance when making a recommendation. If a broker makes an unsuitable recommendation in considering these factors, it may be held liable. To recover losses for unsuitability, you will need to establish that a transaction occurred, you lost money, and the broker was aware you needed a lower-risk investment.Seek Guidance from an Oil and Gas FINRA Arbitration Lawyer
FINRA regulations require stockbrokers and other securities professionals to make full disclosures of all the material facts related to the investments that they are selling before an investor purchases them. Investing in oil and gas is often a high risk. Our oil and gas FINRA arbitration attorneys have successfully represented many investors throughout the U.S. in their claims against issuers, underwriters, third-party professionals, and others before arbitrators and in state and federal courts. Contact us at (800) 975-4345 or through our online form to set up an appointment with a broker fraud attorney.