Atlas Energy LP Is inviting investors to put in at least $25,000 in an oil and gas drilling partnership in Texas and other states in exchange for shared revenue from the output from the wells. Its subsidiary, Atlas Resources LLC, is seeking to raise up to $300 million by the end of the year, with the company saying it will put in up to $145 million of its own money. However, according to Reuters, a closer look at the company’s confidential offering memorandum reveals that outside investors may not end up reaping as much as they think.
The private placement venture is called Atlas Resources Series 34-2014 LP. Private placements are unregistered securities sold to a limited number of investors via brokerage firms. Brokers can only market them to accredited investors (investors that have $1 million in assets-primary residence not included-or $250,000/year income) or institutions. Because of inflation, the number of those that qualify to be able to invest in private placements has gone up and not every investor is a high-income one. There are even retirees who now qualify.
According to the Atlas memorandum, $45 million of the money raised will go to Anthem Securities, an affiliate, to pay commissions to brokerage firms. Up to $39 million will go toward purchasing drilling leases from a different affiliate. Some of the $53 million for transport and drilling equipment may also go to affiliated suppliers. $8 million is a markup for estimated equipment costs. Atlas will get $53 million for markups and fees once drilling starts. All this lowers Atlas’s exposure by at least 40%. Once revenue starts coming in, the company is entitled to 33% of this.
After looking at the marketing materials and offering memoranda of half a dozen oil and gas private placements in the last 15 years, Reuters discovered that Atlas’s deal, placing the issuer at greater advantage than outside investors, is not uncommon. And out of over half of the 43 private placements it has put out in the last thirty years, outside investors either broke even or sustained financial losses. In 29 private placement deals, Atlas faired better than investors.
Energy ventures are typically high risk. Wells can end up producing nothing and returns may be impacted by gas and oil costs. Granted, there are tax benefits, with investors able to write off over 90% of initial outlay the first year. However, the risks can outweigh the benefits.
It doesn’t help that brokers, who are supposed to conduct due diligence on every issue they sell to make sure it is suitable for each investor, sometimes depend on due diligence companies that are paid by the issuers. Regulators still don’t have much oversight over private placements, which are not subject to a lot of reporting requirements. Also, oil and gas private placements often come with hidden fees.
Special Report: For these oil and gas bets, the odds favor the house, Reuters, November 11, 2014
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