An introduction to the oil and gas industry

October 4, 20185 min read
Share on facebookShare on TwitterShare on Linkedin
Prairie-Oil-Saskatchewan-oil-and-gas-industry
Just out side of Weyburn, Saskatchewan, oil pumps working away, Image taken from a tripod.

At Yieldstreet we are always looking for industries where capital inefficiencies present opportunities to structure offerings with attractive target yields for our investors.

One such area is Oil & Gas, a mature industry and a staple of the global economy, which has become a source of technological innovation and development in the United States.

The oil and gas industry

The Oil & Gas industry is vital to the proper functioning of a modern economy. The industry provides the fuels needed for transportation and heating as well as the key raw materials used in construction, paving, and manufacturing chemicals.

Oil is a truly global industry. It can be transported around the world and refined into gasoline or petroleum which can then be made into a slew of other products like balloons or bandages. Natural gas tends to be more regional in nature, as its transportation and distribution is dependent on pipelines. Natural gas helps create electricity, fuel and heating.

oil-rig-oil-and-gas-industry

Industry supply chain

The Oil & Gas industry operates in three segments: upstream, midstream and downstream.

Upstream companies, also known as exploration and production (E&P), find, develop, and produce oil, natural gas, and natural gas liquids. Upstream companies manage their development and production costs and emphasize production volume to generate profit margins, which are sensitive to commodity market prices. As you’ll read below, this is where Yieldstreet is involved in our Oil & Gas Financing I offering.

Midstream companies gather, process, store, and transport crude oil, raw and liquified natural gas, and refined petroleum products and chemicals. The midstream business model is similar to a toll road that charges fees for the movement or intermediate processing of Oil & Gas.

Downstream companies refine petroleum products and engage in the manufacturing, marketing, and distribution of refined petroleum products such as gasoline, jet fuel, heating oil, asphalt, motor oil, and lubricants.

Recent oil price history

Put simply, oil prices are a result of supply and demand.

Over the last two decades, the US has emerged as major oil exporter, thanks to new drilling technologies, like fracking. Overtime, this steadily increased worldwide supply. On the demand side, a prolonged slowdown in growth from China, the largest importer of crude oil, led to a decrease in demand. Additionally, oil demand in other parts of Asia and Europe has been weakening.

Two other factors made the drop in prices so pronounced: price cuts made by OPEC to try and capture more volume and a devaluation of the Yuan by the Chinese central Bank, which shocked global markets, in August 2015.

gas-station-oil-and-gas-industry

Why was the drop so sudden?

Oil prices are considered inelastic – meaning that consumer habits will not drastically change because of its price. People aren’t going to stop driving because gas is more expensive. Therefore, small changes in supply and demand can cause drastic changes in price.

Why and how has it recovered?

After bottoming out below $30/barrel, oil prices have dramatically recovered, hovering just below $80/barrel.

The current recovery has resulted from major production cuts from OPEC, Russia and a few other countries. By reducing production, prices have increased dramatically. On the demand side, the global economy is humming with the US, Europe, and major Asian economies experiencing low unemployment and strong GDP growth.

What do you expect oil prices to do going forward?

Currently, there is greater demand for oil than there is supply. Worldwide demand remains robust driven by economic strength in the US, India, China.

Over the past year, worldwide supply has declined rapidly back to its five-year average as OPEC and 6 Non-OPEC nations (including Russia) cooperated to withhold 1.8 million barrels per day as response to the decline in oil price starting in late 2014.

Price risks

There are inherent risks to oil prices going forward, mostly geopolitical. Potential sanctions against Iran, a major oil producer could stifle supply. Negotiations on production levels, as well as compliance with those levels, between Russia and OPEC, could also impact oil supply and prices.

Other risks such as Chinese/US tariffs, weather, and a further ramp in production from rising prices (higher prices could attract more to enter the market, increasing supply, and potentially hurting prices) are other risk factors to consider.

oil-tanker-intro-to-oil-and-gas

Why oil and gas?

Because of the industry’s inherent cyclical nature, there are times when access to capital becomes strained (typically during and after a downturn) and deserving borrowers may not be able to find reasonable interest rates from traditional borrowers. When oil prices are high, producers can make more money, which is more desirable to lenders. When prices are lower, margins are smaller and traditional lenders become more become more risk averse.

Current Yieldstreet focus: exploration and production (E&P)

While large Oil & Gas companies, such as Exxon Mobil, BP and Chevron, known as “majors”, are involved in almost every aspect of the O&G business, many smaller companies operate in the Exploration & Production (“E&P”) segment.

These E&P companies, known as “independents”, are not directly associated with any of the O&G majors. Some of them have evolved from spin-offs of larger corporations, such as majors, pipeline companies, utilities, and more.

These smaller independents can sometimes have irregular cash flows and balance sheets, and as a result banks, and other lenders, may ascribe a higher risk profile. Yieldstreet provides an avenue for these smaller companies to get the loans they need to grow, at reasonable interest rates.

Louisiana, a strategic drilling location because of its proximity to the Gulf of Mexico, has recently experienced a drilling revival. Many traditional drillers moved out after the 2014 downturn, leaving behind established oil wells and rigs at a discount. The borrower in Oil & Gas Financing I opportunistically purchased land and pipelines in 2016.

In conclusion, the Oil & Gas industry, while mature, still presents opportunities to lend deserving borrowers the funds they need to grow. Some of these smaller “independents” can have a hard time getting access to capital, but can use their reserves, land, and pipelines as collateral to secure loans at better interest rates.

This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness or any other aspect of such website (or article contained therein).

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure