Investing in Oil & Gas

Learn why oil & gas is an asset class that the rich and wealthy seek... and how you can profit

as well.

Passive Income with Tax Benefits

Investing into oil and gas (O&G) can significantly fast-track your goal of building your net worth and passive cash flow compared to public equities, i.e., stocks, bonds, index funds, and similar assets. This guide will dispel some misconceptions of investing in O&G, identify the numerous methods for investing, and the commensurate risks and rewards of investing in O&G. With this knowledge, you can take the next steps to diversify your portfolio and become a sophisticated investor!

Definition:

Oil & Gas

Oil and gas is used in more products than just transportation, which only accounts for 67% of its consumption. In fact, oil & gas go into producing 6,000+ products including the components needed to go green and zero carbon such as battery packs, solar panels, wind turbine, and more.

Transportation – energy used by a motor vehicle for transportation use.
Industrial – energy used for manufacturing, agriculture, forestry, fishing, and hunting, mining, construction, and heat and power generators.
Residential – energy used for heating, air conditioning, lighting, refrigeration, cooking, and running appliances. Commercial – energy consumed by businesses, federal, state, and local governments, sewage treatment facilities, non-profits and much more.
Electric power sector – consists of electricity only plants whose primary business is to sell electricity, or electricity and heat, to the public

Petroleum consumption by sector, 2022 (M barrels per day, b/d)

Source: U.S. Energy Association, Monthly Energy Review, April 2023, https://www.eia.gov/energyexplained/oil-andpetroleum- products/images/petroleum_spaghetti_2022.pdf

Benefits of Investing in Oil & Gas

Investing in oil and gas wells might not be the first thing that comes to mind when you think of diversifying your portfolio. But this sector offers significant tax savings for high-bracket taxpayers. In order to encourage energy production (whether it’s renewables or traditional energy sources), the federal and state governments offer generous tax incentives for energy projects. While there is risk in the form of well variability and variable operational costs (mitigated by experienced operators), there are several benefits to O&G investing.

Depreciation Tax Savings

Potentially write off 35%-50% of your investment as tax savings in the first or second year (typically ~94% of the investment is depreciation that can be taken in the first year).

Potential for High Returns

When oil prices are high and wells are productive, the financial gains can be substantial and considered passive income, which has its own advantages for tax planning.

Partially Tax-Free Returns

One perk of investing in oil and gas wells is that 15% of the income generated by an oil and gas investment is excluded from your taxable income.

Diversification

Investing in oil and gas can diversify your portfolio with an asset that only has a 35% correlation to the stock market.

Oil and Gas for Sheltering Taxes and Profit

Investing in oil and gas wells might not be the first thing that comes to mind when you think of diversifying your portfolio. But this sector offers significant tax savings for high-bracket taxpayers. In order to encourage energy production, the U.S. federal and state governments offer generous tax incentives for energy projects. The several benefits to O&G investing outweigh the risks of investing into oil and gas (O&G) and can significantly fast-track your goal of building your net worth and passive cash flow compared to public equities.

Benefits of Oil and Gas Investing
At-A-Glance

This 2 pager will highlight the benefits of oil and gas investing including up-to 100% tax shelter for intangible and tangible drilling costs as well as depletion allowances which shield 15% of cash flows. Click to download the two pager today.

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THE BIG DRAW:

Tax Incentives

With tax advantages such as deductions for certain costs related to the exploration and development of wells, oil and gas investors can reduce their taxable income, which can lead to lower overall taxes owed. Additionally, some tax credits are available that allow individuals who invest in new oil exploration or other similar projects to receive a credit against their income tax liabilities.

With the passage of the Tax Reform Act of 1986 (the “Act”), oil and gas ventures remain one of the few tax-advantaged investments available to American taxpayers. In fact, the Act specifically exempts oil and gas working interests from being classified as passive income and, as such, they must be classified as active income.

INTANGIBLE DRILLING COSTS (IDC)

Costs associated with drilling and completing a well, but don't have a physical component.
Examples: fees, wages, site preparation costs, services.
A large portion of O&G investment are IDC

100% deductible in the year paid
Actual deductible amount depends on nature of project

TANGIBLE DRILLING & DEVELOPMENT COSTS (TDC)

Costs associated with physical components used in drilling and completing a well, such as drill bits, pipes, casings and cement

100% tax deductible amortized and depreciated over 5-7 years
Allows investors to compare different drilling projects in terms of cost-effectiveness, and protect themselves from unexpected expenses

DEPLETION ALLOWANCE

Also called “Small Producers Tax Exemption”

15% of any investor’s gross income for an oil and gas property to be tax free, subject to certain limitations
Not available to large companies or taxpayers who sell oil or natural gas through retail outlets or those who engage in refining crude oil with runs of more than 50,000 barrels per day

Case Study

The following illustrative case study highlights the value of an investment in oil & gas opportunity.

BEFORE O&G INVESTING

W2 Income: $500,000

Tax Bracket: 37%

Tax Liability: ($185,000)

Tax-home Income: $315,000

AFTER O&G INVESTING

W2 Income: $500,000

O&G Investment: $100,000

O&G 1st: $20,000

15% Depletion Allowance: ($3,000)

85% First Year IDC Tax Deduction*: $85,000

Taxable Income: $432,000

Tax Bracket: 37%

Tax Liability: ($159,840)

First Year Tax Savings: $25,160

Take-home Income: $360,160

CASH FLOWS BEFORE AND AFTER OIL & GAS INVESTING

$ -

$ 100

$ 200

$ 300

$ 400

$ 500

$ 600

(Thousands)

Before

After

Incremental Cash Flow: $45,160 (40% cash-on-cash return)

*85% marginal tax rate

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