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.
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 turbines, and more.
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Transportation – energy used by a motor vehicle for transportation use
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Industrial – energy used for manufacturing, agriculture, forestry, fishing and hunting, mining, construction, and heat and power generators
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Residential – energy used for heating, air conditioning, lighting, refrigeration, cooking, and running appliances
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Commercial – energy consumed by businesses, federal, state, and local governments, sewage treatment facilities, non-profits and much more
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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-and-petroleum-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
Earn $35k - $50k back in tax savings in the first two years combined for every $100k invested. Typically ~80% 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
Mineral interest depletion allows for 15% of the income generated by an oil and gas investment to be excluded from your taxable income.
Diversification
Investing in oil and gas can diversify your portfolio with an asset that only has a .39 correlation to the stock market.
Fueling Wealth:
How Oil and Gas Investments Can Reduce Taxes and Deliver Monthly Cash Flow
Discover actionable insights and strategies shared by Courtney in her webinar.
In this engaging session, you’ll learn:
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Tax benefits of oil and gas investments.
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How to create consistent monthly cash flow.
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The role of oil and gas in a diversified portfolio.
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Actionable strategies to secure lasting financial freedom.
Transform your financial future through Oil & Gas. Whether you’re looking to reduce your tax burden, create consistent cash flow, or diversify your investment portfolio, we can help you get there.
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 W2, active, passive and capital gains income, unlike depreciation from real estate which can only offset passive income from real estate activities or are available to those with Real Estate Professional status.
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)
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Costs associated with drilling and completing a well, but don't have a physical component
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Examples: fees, wages, site preparation costs, services
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A large portion of O&G investment are IDC
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60-85% deductible in the year paid
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Actual deductible amount depends on nature of project
TANGIBLE DRILLING & DEVELOPMENT COSTS (TDC)
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Costs associated with pysical components used in drilling and completing a well, such as drill bits, pipes, casings and cement
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100% tax deductible amortized and depreciated over 5-7 years
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Allows investors to compare different drilling projects in terms of cost-effectiveness, and protect themselves from unexpected expenses
DEPLETION ALLOWANCE
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Also called “Small Producers Tax Exemption”
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15% of any investor’s gross income for an oil and gas property classified as tax free, subject to certain limitations
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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
Marginal tax rate: 35%
Tax Liability: ($113,441)
Take-home income: $386,559
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
Marginal tax rate: 32%
Tax Liability: ($90,415)
First Year Tax Savings: $23,026
Take-home Income: $429,585
CASH FLOWS BEFORE AND AFTER OIL & GAS INVESTING
$ 400
$ 500
$ 600
(Thousands)
$ 300
$ 200
$ 100
$ -
Incremental Cash Flow: $43,026 (8.6% cash-on-cash return)
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.
DOWNLOAD 2-Pager
O&G’s INCREASING DEMAND
Why have the world’s richest men including Elon Musk and Warren Buffet invested in oil and gas, with Musk going as far as saying:
“Civilization will crumble” if the world halted the use of oil and natural gas and called for continued drilling and exploration of fossil fuel sources.1
— Elon Musk
As much as the world is seeking renewable energy to solve ongoing ecological crises, petroleum and natural gas still account for the lion’s share – 36% and 33%, respectively – of the world’s total energy sources. This is spurred on by many reasons, chief among them 1/ petroleum’s many uses as noted previously, ranging from use in plastics, paint, and crayons to the being an ingredient of asphalt and propylene products, 2/ its relative abundance throughout the world, 3/ internal combustion engine automobiles continuing to be prevalent, 4/ the relative costly infrastructure required to generate renewable energy.
OPPORTUNITIES TO INVEST
There are three primary ways to invest in oil and gas:
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Stocks, ETFs, and Mutual Funds - You can buy shares in companies like Exxon, Chevron, or the funds that trade in those equities.
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Mineral Rights – This refers to ownership rights to resources beneath land and can be bought at auctions, brokers, oil and gas companies, and more. Typically, the land is leased out to an oil company that drills on the land. Then, revenue is produced from the oil and gas that is extracted and sold. The mineral rights owner is entitled to a percentage of that revenue through a royalty interest.
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Direct Participating Programs (DPP) - This is one of the best ways to invest directly into oil and gas. It is the best combination of minimizing risk, maximizing tax deductions, yet having significant upside potential.
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