Centaurus Financial® on Oil & Gas Investing: Frequently Asked Questions, Part 3
Why do distributions from a partnership vary or fluctuate in value?
There are three primary components that determine the amount of distributions available for payment to investors. The three primary components are the volume of production, the price of natural gas and oil, and the amount of the operating expenses as discussed below:
1. Volume of Production: The volume of oil and/or gas that a well produces monthly and throughout its productive life varies substantially from well to well and from region to region. Also, the production from a well declines throughout the life of the well (the “decline curve”). The higher the volume, the more energy available for sale.
2. Commodity Prices: A partnership’s revenues are directly related to the sale of natural gas and oil and its price, which is volatile and uncertain. If natural gas and oil prices decrease, then your investment return will decrease. For example, the price that a partnership receives for the sale of its natural gas is a blended price which reflects the price per mcf (1,000 cubic feet) that a program receives for individual wells on specific meters based on their geographic location.
3. Operating Expenses: The partnership will incur expenses in the operation of the wells and the administration of the offering such as administrative fees which are fixed for the life of the partnership. Operating and production expenses include items such as drilling, labor, engineering, equipment leasing, water hauling, meter reading and other fees that enable the well to produce economically; partnership expenses could include check printing, year-end tax preparation and audit expense, etc.
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