As recently reported in Reuters, oil and gas companies such as Reef Oil & Gas Partners, Black Diamond, and Discovery Resources & Development LLC have marketed themselves to investors as a way to get into the U.S. energy boom. These companies issue private placement partnership that will drill for oil and gas and pay investors the profits that will result. However, oil and gas private placements contain substantial risks that often outweigh any potential benefits including securities fraud, conflicts of interests, high transaction / sales costs, and investment risk. Due to these risks investors often lose money while issuers make handsome profits.
According to Reuters, of 34 deals Reef has issued since 1996, only 12 have paid out more cash to investors than they initially contributed. In addition, Reuters found that Reef sold an additional 31 smaller deals between 1996 and 2010 collecting $146 million for itself while paying out investors a paltry $55 million.
Under the terms of one Reef deal, investors raised $50 million and Reef immediately took $7.5 million for fees and broker commissions. After that, Reef received a monthly management fee of $41,667 from the fund. Reef also charged for drilling, operating, legal, and other expenses to the fund. Reef completely controlled these expenses and determined which other Reef entities would be hired to do work for the venture. In fact, no more than half of the money would be used to buy oil and gas land where there were reserves.
On two deals Reuters found that Reef got back 48 percent of the capital it put into Reef Income and Development Fund II and 61 percent of what its investment into Reef Income and Development Fund III. Conversely investors made far less receiving just 16 percent and 4 percent respectively. Similarly, Reef’s two most recent private placements are showing promising results but only for Reef. While the company has earned back a 182 percent return, investors have earned just 21 percent of their investment back.
Reuters also examined thirteen deals from Black Diamond between 2001 and 2006 which all failed to generate enough revenue to return investors’ initial contribution. Thereafter, Black Diamond filed for bankruptcy in 2011 after a major bank creditor failed to continue extending loans. One of Black Diamond’s principals Charles Koval founded Atlas Energy and are trying to sell Black Diamond’s leases and equipment
Reuters also found that Discovery Resources issued four private placements between 2006 and 2009, and filed for bankruptcy in 2010 along with its founder Richard Weyand. Later, Federal prosecutors charged Weyand with filing a false tax return and he pleaded guilty in April.
These examples show that the high costs of investing in oil and gas private placements, often 30-35% of the investors original investment, make profiting off of these deals nearly impossible. Unfortunately, most investors don’t realize these deals are often unfair to investors. In a normal speculative investment as the investment risk increases the investor demands greater rewards to compensate for the additional risk. However, with oil and gas private placements the risks are sky high and the rewards are only those comparable to other high yield investments.
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.