As recently reported in Reuters, Atlas Energy LP has marketed itself to investors as a way to get into the U.S. energy boom. By contributing at least $25,000 in a private placement partnership that will drill for oil and gas in states such as Texas, Ohio, Oklahoma and Pennsylvania and share in revenues generated from the wells. Atlas Resources LLC, a subsidiary the energy group, has filed documents with the SEC for Atlas Resources Series 34-2014 LP stating that it seeks to raise as much as $300 million by Dec. 31 of 2014. The deal sounds good when pitched: participate in investments where advances in drilling technology have turned previously inaccessible reservoirs of fossil fuels into potentially viable prospects and to boot Atlas will invest up to $145 million of its own capital alongside investors. Through this method and similar deals, oil and gas projects have issued nearly 4,000 private placements since 2008 seeking to raise as much as $122 billion.
But before you take the plunge a review of the Atlas’s offering memorandum reveals some red flags and given Atlas’ past failure rate investors should think twice. First, up to $45 million of the money raised will be paid to Atlas affiliate Anthem Securities that will then be turned over to as commissions to broker-dealers who pitch the deal to investors. Up to $39 million more will be used to buy drilling leases from another affiliate. Think investors will get a fair price on the leases when Atlas controls both sides of the deal? More conflicts ahead as Atlas affiliated suppliers may also get up to $53 million for buying drilling and transport equipment. Next, an additional $8 million of Atlas’s investment is a 15 percent markup on estimated equipment costs. Finally, Atlas will pay itself nearly $52 million in various other fees and markups.
In sum, at least 40% of Atlas’s $145 million investment alongside mom and pop goes right back to the company. In addition, Atlas’ profits don’t stop there, when the venture starts generating revenue Atlas is entitled to 33% before accounting for those payments and markups. In the end, not much of a risk at all for Atlas.
Atlas isn’t alone in this type of arrangement. When it comes to oil and gas private placements they tend to be structured so that the house always wins. Just like Wall Street likes it. And since Atlas has issued dozens of private placements similar to Atlas Resources Series 34-2014 LP the company now has its marketing down to a science that includes: typical charges of between 15 to 20 percent in upfront fees from investors, while paying brokers an additional 10 percent of the total offering in sales commissions. Investors only get to see 65-70% of their capital actually put to work on oil and gas projects.
An analysis by Reuters shows how oil and gas projects have more in common with running profitable casinos than investments. Reuters found that slightly more than half of 43 private placements Atlas issued over the past three decades investors lost money or just broke even. While investors lost in more than half of the deals in 29 or 67% of those deals, Atlas actually out-performed their own investors.
To be continued…
Investors who have suffered losses may be able recover their losses through arbitration. The attorneys at Gana Weinstein LLP are experienced in representing investors in cases where brokerage firms fail to supervise their representatives sale of unsuitable investments in oil and gas projects. Our consultations are free of charge and the firm is only compensated if you recover.