New style of oil and gas fund attracts many small, careful investors

Investors in oil and gas funds are supposed to be rich and sophisticated, fans of high risk, seekers of shelter from the tax man. And some of them are. But more and more of them are not, because a new kind of energy investment is catching on among investors who do not have big money or high tolerances for risk.

It's called the income fund or program, a limited partnership that buys the mineral rights to property with proven oil and gas reserves, gradually produces and sells the oil and gas, and splits the proceeds, or income, among the partners. The earnings usually are not spectacular. Only about half of the take is less than fully taxed.

However, investors put nearly $1.3 billion into income programs in 1982, 64 percent more than in 1981, and their total topped that of all other oil and gas programs combined, according to Investment Search Inc., a Maryland research firm that tracks energy funds.

The income program ''attracts investors who are not risk takers, are not in a personal financial position where they can afford to take risks. Instead of buying company stocks and bonds, they're in effect buying a producing element of a company,'' says J. R. Bowen, president of Houston's ConVest Energy Corporation , which raised $36.8 million for income funds last year, compared with $6 million for traditional drilling funds.

Although their bent is conservative, ConVest's income-program participants don't have much else in common, Mr. Bowen finds. ''We have small businessmen, farmers, doctors, laborers,'' he says. ''One is a welder that does piecemeal contract work for us in the (oil) field. Truck drivers, airline pilots - you name it, I think we've got it.'' There are also investors in high-risk drilling programs who hedge their bets with an income fund.

The fund's organizer is the general partner, which registers the program with the US Securities and Exchange Commission, then sells it to the public through stockbrokers, explains Fred Newberg, managing director of the Energysearch division of Butcher & Singer Inc., a Philadelphia brokerage. The general partner , such as Energysearch, also buys the mineral leases - the right to extract oil and gas - on land with producing wells and receives a 10 to 25 percent working interest in those wells for managing the program.

Because oil and gas are depletable assets, the investor gets back some of his principal each year as well as a yield that is comparable to interest. The tax shelter is built on that depletion, Mr. Newberg notes, although the shelter does not approach the 60 to 70 percent immediate deduction a drilling program affords. He adds, however, that the usual minimum for participating in an income fund is $2,500 to $5,000, comparable figures for a drilling fund would be $10, 000 to $25,000.

Until 1982, drilling funds were reaching new money-raising peaks each year and were always ahead of income funds. But the recent oversupply of oil has driven its price down, discouraging drilling and forcing some producers to sell their mineral rights to pay for overextending themselves during the 1981 oil boom. ''This squeeze has created some very interesting opportunities in the purchases of producing properties,'' Mr. Newberg says, and distress-sale prices mean higher yields for the income fund.

As Popular as it is now, the income fund is a relative newcomer to the investment scene. Petro-Lewis Corporation of Denver, a longtime energy investment manager, invented it in 1970. During the previous two years, the company offered two hybrid programs to drill new wells and, to temper risk, buy established ones, recalls vice-chairman Dwight Moorhead. The interest in the risk-hedging half was so keen that the company began offering it separately.

In tapping that conservative vein, Petro-Lewis brought in a gusher. By 1973, it had dropped drilling funds. With two exceptions, it has marketed only income programs ever since, and hardly a month goes by that it doesn't set up a new one , Mr. Moorhead says.

Returns on its funds vary, he adds. A 1977 program, for example, is yielding about 6 percent; a January 1971 offering would have netted an investor $63,920 so far on a $10,000 investment, and that partnership's wells are still producing. (In its current offering, Butcher & Singer is forecasting a 14 to 16 percent yield in the early years.)

Mr. Moorhead says investors should stay in a fund a minimum of three years to come out ahead. Each month, Petro-Lewis offers partners a chance to sell out, while most funds do so once a year.

Like his competitors, Mr. Moorhead touts oil as an investment not quite like any other. The investor knows he can sell 100 percent of the product, usually as soon as it gets out of the ground. OPEC's influence tends to keep prices uniform. The eventual direction of price is upward. Operating costs take about 30 percent of revenue, compared to much higher rates in the rest of American business. Technology can measure how much oil is in a well and how much will be produced each year. Moreover, technology also improves ways of extracting more of it, so most quantity estimates are ultimately underestimates.

The income program, especially in 1982, attracted more than investors. Numerous competitors staked claims on the field. In 1977, Petro-Lewis had 90 percent of the $100 million income-fund market. Investment Search reports that the company last year raised $603 million - a 46.7 percent market share.

But ConVest, Energysearch, and Petro-Lewis see plenty of capital to go around and much more to come. Mr. Moorhead predicts income funds will continue to outdraw drilling funds because there is far more average-income money searching for yield than big money looking for tax breaks.

How much is out there? ''Billions and probably tens of billions of dollars annually,'' he says.