Imagine walking into a casino and taking a seat at the nearest roulette table. You set down a $100 bill, receive four green $25 chips, and proceed to stack them all on red. If the ball lands on a red number, you instantly double your money. If not, you lose it all and walk away with nothing.
The croupier gives the wheel a spin, lets the ball fly, and waves his hand over the table to signal no more bets. The adrenaline starts pumping as you watch the ball bounce from slot to slot, finally settling on... 20 black.
Your chips are unceremoniously scooped up. That was fast.
But wait. This is no ordinary roulette wheel. The dealer decides to reimburse you for your play and gives you $40 back. Emboldened, you pocket the chips and lay down another Ben Franklin on the table for a second spin. This time Lady Luck smiles on you.
The ball lands on 5 red. The dealer doubles your bet and pushes $100 toward you. But once again, he gives you an extra $40 bonus just for playing.
The laws of mathematics say this is a "can't-lose" proposition. Guess wrong, and you still get 40% of your money refunded. Guess right, and you're entitled to an extra 40% bonus on top of any winnings. Pretty soon you'll be asking the pit boss for permission to raise the table limit to $10,000 per hand, or $100,000.
That's what the Cook Inlet Recovery Act "loophole" is offering investors in oil and gas right now.
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The investment world hasn't yet caught on to the Cook Inlet Recovery Act yet, which is why now is the perfect time to tell you about it. Simply put, it may be one of the easiest tools we can use to secure big gains and high yields over the next few years...
Passed to stimulate production and tap into Southeast Alaska's abundant energy resources, the architects of the Cook Inlet Recovery Act are aiming to boost the availability of critical natural gas supplies during the harsh Alaskan winters.
You see, as with any sort of business venture, oil and gas companies prospecting for hydrocarbons involves an element of risk. Some holes are bountiful. Others are dry. You win some. You lose some. And there are high stakes. Drilling and completion costs in places such as the Bakken Shale in North Dakota (where demand for fracking crews is fierce) can run more than $10 million per well.
Even small independent producers have to spend huge amounts of cash to explore and develop their properties. Magnum Hunter's (NYSE: MHR) upstream spending budget has totaled $102 million through the first half of 2013. Kodiak Oil & Gas (NYSE: KOG), which has seven rigs running, spent $248 million last quarter alone.
Whether these companies find oil or not, that money is gone.
But the Cook Inlet Recovery Act has changed that for any company in this Alaskan oil-rich area.
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This is a place where explorers can spend freely knowing that they'll recoup 40% of whatever capital expenditures are made. Guaranteed.
So if a company invests $100 million for exploration and development, it gets back $40 million in the same year those expenses are incurred. And if that wasn't generous enough, there's a second component.
For any well that turns out to be a dud and isn't economic to operate, the state will throw in an additional 25% credit (technically a tax-loss carry-forward). When combined with the initial 40%, that means 65 cents of every dollar spent will come back to the company.
Not only do these incentives eliminate most of the risk, they let producers exploit abundant energy reserves and send the state of Alaska a bill for roughly half the cost.
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And the crazy part is, Cook Inlet is a proven hunting ground. It relinquished 227,000 barrels of oil per day at its peak and still contains hundreds of millions more up for grabs. In fact, the latest U.S. Geological Survey study estimates the potential remaining haul at 600 million barrels of oil and 19 trillion cubic feet of gas.
I know of no other place in North America where this one-of-a-kind opportunity exists.
But harvesting that oil won't be cheap. To raise capital, one company operating in this space recently issued preferred shares that carry a rich yield of 10.1%, and that's just part of the reason that I recently recommended it to my High-Yield Investing readers.
Bottom line, with the Cook Inlet Recovery Act "loophole," companies can take on a lot more risk -- and reap more reward -- with a lot more safety. You'll be hearing a lot more about this area in the coming months -- and you'll want to consider companies operating in this space for your portfolio.