A recent Reuters article analyzed the success of funds structured and offered by Reef Oil & Gas Partners, Black Diamond, and Discovery Resources & Development LLC . These firms have marketed their funds to investors as a way to profit from the U.S. shale oil and fracking boom. These companies issue limited partnerships and other private, non-traded investments that promise to drill for oil and gas and pay investors the profits that will result. Even in the best of times, such investments have substantial drawbacks including illiquidity (the fact that they can’t be easily re-sold after an investor purchases them), very high commissions, sales costs, and management fees, and risk that they investor may lose his initial investment. 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. The recent collapse in oil prices from around $100 a barrel to only about $45 a barrel will likely render Reef funds even less profitable for investors.
Under the terms of one Reef deal, of $50 million in initially invested, Reef immediately collected $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- including money that was payable to its own affiliates.
Ultimately, no more than half of the money raised from investors would be used to buy oil and gas land where there were reserves. Two funds singled out by Reuters for their high profitability for Reef and poor returns for investors (largely due to Reef’s high offering expenses and other charges) included Reef Income and Development Fund II and Reef Income and Development Fund III.
The high costs associated with oil and gas private placements, often 30-35% of the investors original investment, almost guarantee that investors will lose money, even in good times. How the investments will fare in today’s low oil price climate is open to question, but the likelihood appears to be that investor losses will only increase.
If you have suffered significant losses as a result of your investment in oil and gas funds offered by Reef or another firm, you may have a valid securities arbitration claim. To find out more about your legal rights and options, contact a securities fraud attorney at The Law Office of Christopher J. Gray at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.