Should you invest in natural gas drilling in the Appalachian Basin? Stockbrokers at Butcher and Singer, a major brokerage house in Philadelphia, think so. They put $31 million into it last year. The figure could be as much as 40 percent larger this year, based on what they have already committed. They're calling it "Energy Search 1979."
"Compared to, say, Louisiana and Texas where the big fields are, Appalachian drilling is relatively low risk," says vice president Ted Stautberg. "Eighty to 90 percent of wells drilled are commercial, compared to about 10 percent in Louisiana. Of course the return is smaller, but in a properly structured deal the investor can double and even triple his money over 15 years." Butcher and Singer brokers deal in large Appalachian well packages in which their customers come up with the considerable drilling costs in return for more than 90 percent of the production.
Because about 60 percent of drilling costs are deductible, the investment is particularly favorable to those in a high tax bracket. There is also a depreciation allowance that gives the investor 22 percent of production profits tax-free. However, Stautberg cautions, "If the deal is not a good economic investment on its own merits, then it can't be salvaged on tax aspects." In other words, contrary to some beliefs, it doesn't pay anybody to drill a dry hole.