3 Ways To Profit From The Current Decline In Oil Prices

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Growing up there was a friend of the family that we called Uncle Al that was always out hunting and fishing.  This guy never had a job.  He went to school to get a Ph.D. just for fun.  This guy was a total enigma to me since my parents worked very long hours and I had to work hard growing-up as well.

A couple of times a year I would go hunting on Uncle Al’s property.  His property was filled with great timber land that he never harvested, because that would hurt all the hunting he did on the property.  However, his property was very unique and different than the other areas where I hunted.  This property had oil rigs on it.

I later found out that when oil spiked in the 1970s a lot of people and companies bought land with oil reserves and were highly leveraged.  When the oil prices came down these highly leveraged individuals and companies all went bankrupt.

Apparently, Uncle Al’s family bought the land he currently owns from a bank that took the property over after foreclosure.

If you haven’t seen oil prices decline in the news you have definitely seen the gas prices at the pump decline dramatically.  For the highly leveraged people and companies that are reliant on income from oil this has been catastrophic at a level that we have not seen since the last major oil downturn in the early 1980s.

However, as the famous quote goes:

“Buy when there’s blood in the streets, even if the blood is your own.” Baron Rothshchild

This decline has presented a major opportunity to alternative income investors that are focused on generating income and generational wealth and can look past near-term volatility in oil prices.

Below are three strategies you can use to generate income and generational wealth for the long-term.

Buy Land with Royalty Income

This was my Uncle Al’s family strategy and my favorite personal strategy.  In-fact I am actively pursuing this strategy currently.  Land might me expensive where you live and you might not think this is feasible.  However, you want to be focused on buying land in oil-rich areas.  Additionally, skip the MLS and properties that are being marketed by brokers and contact the local community banks in this area.  They might have some properties they have on their books you can buy.  However, the real value they can provide is to give you an idea of the valuation of land in the area. They can also give you some good quality referrals to people who might be interested in selling.  All of this will cost you nothing but time initially.

One of the best parts of this strategy is you still have the land for whatever you choose.  You can choose to simply enjoy the land for recreational use like my Uncle Al or you could farm it for another income source.  You could also lease out the land to farmers and/or hunters if you don’t live near the property and don’t think you will enjoy either of those activities.

Finally, by owning the land you will enjoy any appreciation that has happens to land prices in the area.

Buy Oil Resource Rights

This strategy requires very little capital to get started.  There are several royalty brokers that will broker the rights to land where they have gotten the resource royalty rights.  I would highly suggest going through a broker for your first time implementing this strategy, because this industry has some very complex legal requirements and language you will want to get comfortable with before you try and start buying royalty rights without a broker.  Additionally, these brokers will save you a tremendous amount of time asking land owners for resource rights.

I personally like to evaluate royalty rights for land that has already been drilled-on and producing cash-flow.  This way you know how much cash-flow is produced given a certain level of oil prices.

One of the biggest factor in this strategy is knowing the age of the oil fields and having a qualified opinion on how much depletion has already taken place.  Oil fields can be pumped on for hundreds of years but can also run dry after only a couple of decades of drilling.

Buy a Gas Station (2 strategies in one)

I have several friends that have bought gas stations at 3 times cash-flow.  In my opinion, this is incredibly cheap to buy a business.  They operated the gas stations for three years and paid-off the majority of the debt they used to purchase the gas stations.  They then sold the gas station operations but kept the real estate and made the new owners of the gas station obviously lease the real estate.  All of my friends that used this strategy made at least a 50% return and this isn’t taking into account the debt they used to buy the gas stations.

However, in-case you have no interest in buying and operating a gas station I have an alternative strategy.  You can buy the gas operations of a convenience store.  I know a guy who builds gas stations and sells them to families who run gas stations for a living.  However, he keeps the gas operations part of the business and simply monitors sales and inventory through monthly reports.

By implementing this strategy he controls millions of dollars’ worth of gasoline every month with no debt.  Sure, the profit margin on gasoline is small, but it’s still a positive profit margin.  Additionally, this strategy takes very little time to implement.

According to the National Association for Convenience and Fuel Retailing, gross margin on gasoline sales average 18.5 cents per gallon.  However, after operating costs, credit card fee’s, depreciation and taxes the net profit margin average is 4 cents per gallon.

Screen Shot 2016-01-19 at 08.57.18Natural Gas

This article focused on oil and how to profit on the current decline in crude oil prices.  However, you can basically implement all of the strategies above using natural gas as well.  I am simply not as educated and familiar with natural gas as I am the oil industry.

Summary

Don’t let the current decline in oil prices deter you from investing in the energy business.  The current decline should make you energized to invest in the industry.  The majority of wealthy investors have made a significant amount of their wealth investing when prices were temporarily depressed.

“Be fearful when others are greedy and greedy only when others are fearful.”  Warren Buffett

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Jimmy is a former partner in a successful hedge fund and is now a real estate investor and banker.