In the oil and gas industry, royalty interest is of uttermost importance. As an investor, if you have a royalty interest, your only expense is the initial capital investment; you exclude ongoing operating costs.
However, calculating royalty interest for oil wells is not easy. You have to learn and understand formulas and the logic behind royalty interest calculations, to know if you are receiving the right amount of money.
This article provides a simple guide on how royalty interest might be calculated. However, before you calculate your royalty interest, you may have to adjust the calculations based on your state’s oil and gas laws, as well as property rights. Always inquire about how your specific deal will be calculated. This article is for discussion purposes only.
Definition of oil and gas royalty
Primarily, the law allows a mineral owner to receive a small percentage of revenue from oil and well production. This amount is what is known as a royalty interest. The royalty clause in the lease agreement stipulates the amount of interest a drilling company must pay to the mineral rights owner. Note charges and costs other than a tax are not included in the royalty interest.
Oil and gas investment companies calculate royalty interest amount as a percentage of gross production. So, it is advisable that a landowner quote a higher royalty interest before agreeing to a lease agreement. Apart from money, the mineral right owner may choose to receive royalties in the form of oil. However, it is essential to understand the status of the oil and gas market before selecting this option.
Most landowners prefer royalties in the form of cash, partly because the market price for oil and gas are difficult to calculate. As a property owner, you can request for separate payments for your royalties. Still, you can negotiate payment delay penalties, due dates, and interest fees. Note the property owner controls the terms and conditions of the royalty agreement.
How to calculate oil and gas royalties
As aforementioned, the royalty clause in a lease agreement details the amount of revenue a lessor should receive from a drilling company. The process of determining oil and gas royalties is lengthy and complex. While you can do calculations manually, using an oil gas calculator can help speed up the process. You only need to feed in the required figures, and the calculator gives you the estimated royalty amount.
Calculate the owner’s share interest
Typically, oil and gas drilling companies drill from across various properties. So, to determine the owner’s share interest from one property owner, one must take into account the spacing unit.
What is a spacing unit?
A spacing unit is a legally marked piece of land allocated to a well for drilling and production. Some rules and regulations govern spacing units, which show where the boundaries of drilling are situated. A spacing unit comprises several wells. For instance, a particular area can have a spacing unit of 1000 acres, owned by several mineral owners.
An owner’s share interest is the percentage of ownership of this spacing unit. For example, if you own say, 250 acres on a 1000 acre farm, your ownership percentage would be 25%. This is the most straightforward method of determining an owner’s share interest in calculating royalty interest.
Calculating net revenue interest formula
What is net royalty interest?
Net Revenue Interest (NRI) is the amount that remains after deducting royalty interests from working interest. Net revenue is the amount that is shared among the property owners. To determine net revenue interest, multiply the royalty interest by the owner’s shared interest.
For example, if you have a 5/16 royalty, your net royalty interest would be 25% multiplied by 5/16, which equals 7.8125% calculated to four decimal places.
Notably, private oil and gas firms commonly use 1/8 and 5/16 as royalty rate, while companies leasing federal lands pay 1/8 as a royalty rate. Royalty rates for government-owned lands vary from one area to another. For example, the state of Texas charges a royalty interest of 2%.
Royalty is equal to net royal interest (INR) multiplied by the well’s revenue. Assuming an oil and gas well makes approximate revenue of $20,000 in October, your royalty income would be $300 that month.
If you cannot determine the exact amount of revenue the well makes in a month, you can find the total revenue estimate by multiplying the well’s total production by the average price. Keep in mind oil and gas production is usually measured in barrels (BBL) or cubic feet (MCF), depending on whether oil or gas is produced.
As an oil & gas investor, it is essential to know how to calculate oil and gas royalties, more so when it comes to pooling agreements.
What is a pooling agreement?
This is a contract by which investors use their shares as a single block to create a voting trust between them and the individual or company they are transferring their voting rights to.
States such as Texas and Oklahoma have mandatory spacing regulations that define the size of spacing unit drilling companies should exploit. Also, the law requires oil and gas drilling companies to lease property of different landowners to create a single unit. However, many property owners prefer voluntary pooling, whereby all owners form a group to lease their land to oil companies, as a unit.
Sometimes, a property owner may opt out of an agreement and refuse to lease a property. This usually makes it hard for the driller to create a single spacing unit, hence interfering with production and the interest of other property owners. Because of this, individual states have enacted mandatory pooling laws that require a landowner to sign a lease agreement with an oil corporation that has already signed lease contracts with other members of the space unit.
What is mandatory pooling?
Mandatory pooling is also called forced pooling. It is a situation where the law requires a mineral owner to participate in oil and gas production unit. Oil gas firms use the pooling technique to organize an oil and gas field. Whether you were forced or willingly signed a lease contract, it is imperative to know your interests’ worth.
The royalties accrued from a spacing unit is usually shared among mineral owners as stated in a pooling agreement. As aforementioned, an individual mineral owners’ royalty is the ratio between the owner’s acreage and total acreage in the spacing unit.
As an investor, royalty interest lets you share in the success of oil and gas production without spending additional costs other than the initial investment. To understand more about oil and gas royalty interest, seek help from industry experts. You can contact United Exploration for more information.
Nothing in this article is to be considered tax or investment advice. Please consult with your attorney and tax professional.
Leases are essential when buying and selling mineral rights. They have been the staple of the industry since the completion of the first well in 1859. An oil and gas lease is a special legally binding document that is governed by peculiar rules and languages.
Oil and gas lease terms have been improving over the years to cater to the needs of mineral owners and mineral investors. The contract permits private companies to exploit minerals and property owners to retain ownership of mineral rights.
In Texas, for instance, the appellate courts have played a significant role in influencing the development of oil and gas leases by elucidating contract terms to fulfill the objectives of both the lessors and lessees. This, in turn, has fostered tremendous development in lease forms. While leases vary from one transaction to another, they share some common terms, which will be discussed later in the article.
If you are qualified accredited investor and have never participated in oil and gas lease negotiations, you must know the process can be overwhelming, but with professional tips as the ones discussed below, you can successfully negotiate your way through this business transaction.
Understand the basic terms
It is important to understand the various clauses stipulated in the oil and gas lease. Also, it is equally imperative to know their functions to ensure a reasonable and fair negotiation process.
Here are the most crucial terms to read in an oil and gas lease:
Oil and gas lease definition
In oil and gas, the term “lease” means the transfer of mineral right from the lessor to the lessee for a given period, and at a fee. The lessee owns the minerals for as long as the contract is in force. The lessor, on the other hand, holds the royalty interest accrued from the transaction.
As an investor, it is essential to know how these clauses function in a conventional oil and gas lease contract. Note a lease features primary and secondary terms. The former represents a fixed period whereas the latter is the term after the fixed period has ended. A standard contract will state, “This agreement shall remain active for a term of two years and for as long as gas, oil, and other minerals are exploited from the leased site.”
The primary term is critical. It is one of the primary subjects that the lessor and the lessee need to discuss. Also, it is not mandatory for the lessor (who is the oil and gas driller) to start operation during the primary term because it does not have any effect on the lease agreement.
According to the lease agreement, the lessor reserves the royalty interest accrued from production.
Royalty interests oil and gas definition
A royalty interest is described as the ownership of a small portion of production revenues or resources as per the lease agreement. The person or company that owns the royalty interest is not liable for drilling and production costs. Thus, the lessor receives the benefit as it is, without any deductions. A royalty interest is calculated as a percentage or fraction, which ranges between 1/8th and 1/4th.
The lessor is entitled to a bonus as consideration for lease execution. However, the bonus amount is not included in the lease but remitted when the lessor signs the contract and delivers it to the lessee. The payment is usually paid as per “net mineral acres” that the lessor owns in the property of interest.
What is a net mineral acre?
Petropedia defines mineral acres as the amount of minerals present in a given piece of land that an extractor is allowed to exploit, as per the terms stipulated in the lease agreement.
How to calculate net mineral acres
To calculate net mineral acres, multiply the number of acres in the leased property by the mineral interests owned by the lessor. For example, if you have a ¼ mineral interest in a land of 80 acres, it means you own 20 net mineral acres: in other words, you own ¼ of 80 acres. Notably, the bonus is calculated in dollars and expressed per net mineral acre. For example, if the lessee pays a bonus of $200 per acre, they should also receive $200 from the offer for each net mineral acre the lessor owns.
Know whom you are transacting with
Once you have read and understood all the basic terms, perform due diligence on your ideal mineral investment company. Google is the best place to start your search. Perform a thorough background check on the firm. This is extremely important if you are not familiar with the company’s profile.
Another place to check for a company’s credibility is on your state’s oil and gas commission site. Here, you will see the company’s history including the number of wells it operates, drilling permits, violation notices (if any), and production operations.
While navigating through the state’s official oil and gas commission site, search for current activities near your property. Look at where producing and licensed wells are located. Also, check the legal description of your land and find the right area to determine what activities are currently going on.
If you live in states such as Texas and Oklahoma, the law allows you to review spacing and pooling orders. You can search each township to see what is happening out there. Alternatively, you can use the clerk and recorder’s site of your county to check for recorded leases, to assess the current royalty rates from the mineral investment.
Hire a skilled and experienced lawyer
Oil and gas leases have different terms and conditions; hence, it is difficult to understand the specific terms of an offer. A credible lawyer will help answer your questions and analyze the lease with your concerns in mind. Often, a lawyer can add a few provisions, which may protect vital property interests, increase bonus payments, and so forth. Your attorney can also raise concerns that you may never have thought about before. An attorney can help protect you from signing an unfavorable contract.
Lease negotiation is a crucial process. A good lease can give you years of financial freedom, while a lousy one may provide you with years of frustration. There is no method of creating a good lease because terms and conditions tend to vary. However, knowing how the process works is the best way to prepare for a successful negotiation.
Lastly, if you are an investor looking for a qualified investment partnership, contact United Exploration for more information, but keep in mind nothing in this article is to be considered tax or investment advice. Please consult with your attorney and tax professional.
Investors, creditors, owners, and executives use Key Performance Indicators (KPI) to evaluate the performance of their companies and investment partnerships. However, every company has its own set of Key Performance Indicators designed to evaluate physical operations, financial status, as well as the safety of the work environment. Often, the management comes up with a set of KPIs for different categories to gauge how the company is performing financially.
Keep in mind, the primary goal of a business is to make profits and maximize value. For a company to reap maximum gains, it must lower its cost of production significantly, while generating more revenue.
So what is a key performance indicator (KPI)?
A key performance indicator (KPI) is a system of measurement used to assess or evaluate crucial factors that fuel a business. The company uses these indicators as a reference to which the status of the business and development of the organization can be evaluated explicitly.
This article details extensively the most critical key performance indicators that a company can use to measure its performance, to achieve a higher return in natural gas and oil production, as well as to ensure the business is sustainable.
Capital Spend as a Key Performance Indicator
AFE stands for Authorization for Expenditure. It is a budget document for planning a project. The form contains expenditure estimates that a company hopes to spend. Authorization for Expenditure (AFE) management is exceptionally crucial for oil and gas investments. It is a continuous process that a company needs to pursue and monitor as soon as a project starts, and even after the budget is approved.
You need to monitor the project constantly to ensure it is running within the stipulated budget frame and that it is on the right track. As aforementioned, the primary goal of Capital Spend performance indicator is to provide expenditure estimates or projections to help the senior management know how much money they expect to spend on different projects.
Return on Capital Employed KPI
Return on capital employed, also called ROACE, is a mathematical model that shows the ratio of money that a company has invested in a project (capital) against profitability. According to Investopedia, ROACE is especially helpful in the oil and gas field because it helps to analyze business performance. Notably, a business that can make supernormal profits from stringent capital will realize a higher return on capital employed, as opposed to a company that cannot convert capital into gains.
As of now, several oil & gas companies in Texas utilize the ROACE model as a KPI. To calculate Return on Capital Employed, you must consider the aggregate of opening and closing capital employed. ROACE measures how a company uses the business capital to generate more profits and future earnings.
In many countries around the world oil and gas assets belong to the government, and not the drilling company: this is as a result of the contract between the host government and the company regarding production. For example, if your company spends say, $2000 on a drilling project, you are allowed to recover $2000 back from your host government.
Upstream oil and gas investments require much capital to set up and run. You have to set apart finances for site acquisition, extraction, development, as well as production. Each of this stage has its own set of demands. For example, in the production stage, you may have to carry out new exploration projects or appraisals in the brownfields. However, such activities depend entirely on the agreement you sign with your host government.
There are two ways to finance an oil well investment. You can either borrow funds from lenders or generate your capital internally (self-financing). Each of these methods of funding has an impact on the Return on Capital Employed. Also to note, since money is injected indirectly into the business, you may have to make some adjustments to the Capital Employed. Keep in mind the Return on Capital Employed percentage is always higher than the cost of capital
Lease Operating Expenses KPI
While the demand for crude oil and gas has remained constant over time, prices have changed drastically.
For this reason, oil companies in Dallas tx rely on thin margins to survive. Lease operating expenses are the costs that you incur to keep oil production running. This amount does not include drilling and building costs. As an oil and gas investor, you should monitor these costs and try as much possible to cut on any extra spending that might strain your initial budget.
Also, it would help if you made financial decisions based on lease operating expenses projections. These projections show the economic status of your company. The high-level data extracted from LOE KPI also allows you to conduct detailed analysis in this field of interest.
Capital project efficiency KPI
The last few years has seen many oil and gas exploration companies increase their budget capital expenditure, but the problem has been funds allocation, this is according to the audit firm PricewaterhouseCoopers. Also notably, prices per- barrel oil continue to fall, which in turn, affects capex.
This is because the entire industry is moving to oil and gas sites that are difficult to drill. For this reason, therefore, it is essential to evaluate and interpret capex persuasively: capital project efficient KPI is a broad standard of measurement that ensures proper budget allocation, project overrun, and maintenance expenditure.
Cash Flow KPI
The Economic Times defines cash flow as the amount of money that a business receives or pays out. Similarly, cash flow KPI analyses the liquidity state of a company. It chronologically outlines financial data about cash flow, total revenue, and overall expense in different regions. The cash flow information contains numerical values and bar graphs that let you see the best and the worst performing cash flows at the same time. It also provides information on each region of operation.
Many activities occur during an oil and gas operation, and because these activities are hazardous, oil and gas drilling companies work relentlessly to curb their impacts on workers and the environment at large. It is vital to ensure production remains constant and sustainable. Additionally, oil investment companies should create performance indicators that can provide credible insights to shareholders and investors, so that they can understand the financial health of the company among industry competitors, as well as to be a goldmine to investors.
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The Oklahoma STACK Play
The STACK play in Oklahoma has caught the world’s attention and some of the largest energy companies looking for investors. However, individual investors have the opportunity to invest in oil and gas as well. Oil plays have been getting a lot of attention, especially the Bakken Formation, and Permian Basin. Now the less popular STACK Oil and Gas Play is slowly gaining recognition. STACK Play is situated in Anadarko Basin, Oklahoma. Its sister plays are SCOOP and CANA WOODFORD, also in Oklahoma. STACK Play stands for Sooner Trend Anadarko basin Canadian and Kingfisher. The name was derived from a geographic area and not a geological formation.
Oil and gas plays are economical, and the STACK play which is emerging fast started showing an economic promise in early 2016. Experts have observed the growth of STACK play and seen its potential. According to NYSE: IHS, which is the leading source of critical information and insight, STACK play garnered attention from operators, investors, and service companies. The analysis from IHS shows that STACK play has economic viability of oil prices less than $45 per barrel.
Factors such as lower costs have also lured investors, not to mention a hydrocarbon friendly environment in Oklahoma. Oil and gas producers such as ExxonMobil Corp., Jericho Oil Corp., and Alta Meta Resources Inc. have also shown their interest. The oil fields in Permian Basin have a constrained distribution capacity, unlike the STACK, and that gives the STACK play an upper hand. According to one of the investors, Ryan Wright, who is Tree Capital Ventures’ CEO, the wells in STACK play cost less and perform better than other developments, and the expenses for operating, transportation, as well as production tax have been lower. The investors get paid the full WTI spot price and sometimes receive a BTU bonus for the oil and gas produced.
Tremendous Opportunity for Long-term RO
Quality oil and gas investments may provide investors a passive income for decades. High rates of return and improvements in technology and developmental drilling have lowered the risks. STACK play doesn’t only enable investors to earn a passive income but also a strong return on investment. Most sophisticated and accredited investors benefit from the income tax shelter and the ongoing returns.
West Texas and New Mexico based Permian Basin is probably the most lucrative oil and gas producer, and investors always want to have a piece of it. STACK play is the second-most-active play just after Permian, and you guessed it right, investors are also rushing to cash in on it as well. The reason why investors are scrambling to the STACK play is its desirable location and potential for strong ROI even when oil prices are lower. That’s the reason STACK play has been recording an increase in oil production while other drilling areas have witnessed a decrease during seasons of low oil prices.
The oil reserves that constitute the STACK play have a sheer concentration of oil, and when they are tapped, the reserves produce more oil than other sites and cheaper than what it would have cost to create the same amount of oil and gas in different wells. Oil companies and investors are attracted to reserves that continue to provide oil even after the prices fall to reduce their risk and also maximize their ROI. STACK play is one of them. The oil from STACK play can also be transported easily, is easily accessible, and its taxed low and that helps both sophisticated and accredited investors achieve a higher ROI over the long-term.
How Smaller Investors Can Participate
The Oklahoma STACK play is the future, and it couldn’t be where it is if it were not for investors who took the risk. First of all, there are four types of oil and gas investments that you need to know. They are:
It’s up to the investors to decide which investment they would like to take, or they can have the companies they invest through decide. The most recommended way smaller investors can invest in oil and gas is through partnerships with other qualified investors. Some are using a limited partnership which has a lot of potential for decent and stable cash flow, fantastic capital gains, and high yields.
This is the most specialized field of investing, and you will be engaging your broker who is an expert in this industry. You can also deal with a company’s management directly to get a private placement opportunity. Investing in STACK play offers a lot of advantages and benefits such as profit potential and tax advantages.
The Major and Minor Players
Some of the significant oil and gas investors and players are Deloitte, Fig Tree Capital Ventures, LLC, and our company, United Exploration LLC. So, who are we?
United Exploration, LLC is Texas-based independent oil and gas company that participates in drilling and development of approved oil and gas fields such as the Oklahoma STACK play, to generate a long-term income. Our management team has played roles in developing over 150 wells in North Dakota and Texas Gulf Coast.
As one of the major players in the oil and gas industry, we value our partners, and we believe that the partnership should benefit all investors. Please contact us if you have an interest in the Oklahoma STACK play and you are looking for an oil and gas company that is experienced, has top-notch drilling prospects, and friendly to do business with, we are just a call away.
The Oklahoma STACK Play
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While environmentalists and industry enthusiasts scrutinize and monitor oil and gas investment companies, sophisticated investors have a different view of the industry. Oil and gas companies have become popular over the years for reasons that make this particular investment unique above all other forms of investments.
Here are four reasons why qualified investors are choosing oil and gas companies.
Serious investors are always in search for the best return on their investments. One way to do this is by looking for opportunities that offer tremendous tax incentives. The US government continues to play a significant role in providing tax exemptions and benefits for investors and producers to foster the production of oil and gas in the country. The tax code does not have any other investment venture that offers robust tax advantages than oil and gas investment. The US government hopes that by providing generous tax benefits to investors, domestic production of oil and gas will increase, thus curbing reliance on foreign fuels.
If you would like to invest in oil and gas, you are set to enjoy significant tax benefits and exemptions such as the ones discussed below.
Both tangible and intangible oil and gas tax deductions cover about 90 percent of drilling costs. This means you are relieved of most of the drilling costs. Moreover, you will still receive incentives even if you don’t extract any oil from the ground. Note that there is no relationship between oil production and drilling deductions.
To qualify for this tax benefit, you must not produce more than 50,000 barrels of oil or 6 million cubic feet of gas per day. Depletion allowance takes into account depletion of gas and oil at a particular site for a given period.
The interesting thing about the oil and gas tax benefits discussed above is that they have very few limits. The only notable limitation is the small producer limit. This means that tax credits and exemptions from investing in this industry are the best options even for high-net-worth individuals. As an investor, you can earn a lot of profit if you own at most 1000 barrels of oil per day, and you can be exempted from most of the tax credits and exemptions discussed above.
Return on Investment
Sophisticated investors understand investing in investing in oil and gas has high return investments. Currently, however, there is an oversupply of the oil and gas although the industry still provides a window of investment opportunities for accredited investors, and it is expected to remain constant for some time. Oil and gas investments continue to offer stable returns when compared to other types of investments, where most of the profits are paid out to investors.
Long-term Passive Income Generation
Oil and gas allow potential investors to tap into a financially lucrative venture with long-term high yield return on investments. Furthermore, you do not need to be actively involved in the business. Plus passive income attracts low taxation.
The workings of the oil and gas industry have always been different from the general economy. When the economy is not performing well, your business can experience huge financial losses, but the demands and supply shifts in the economy do not affect the prices of oil and gas. In fact, as the prices for natural gas and oil rise, their stocks increase simultaneously. Thus, investments in the oil and gas sector can protect you against slowdowns in the economy.
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Texas Oil: The Best Tax Sheltered Investing
Oil investments in Texas oil remains an exciting opportunity for accredited investors. Oil prices are showing strength. For the first time in over three years, West Texas Intermediate oil prices traded over $70 a barrel earlier this year.
So, while supply is falling due to various international issues, demand is rising. And there’s no reason to believe it won’t continue to do so. The U.S. economy is hitting on all cylinders, which is good news for the oil industry, in particular, Texas.
Why Texas Oil Investing?
Despite all the excitement over solar, wind and other green energies, most countries are still using oil to power homes, cars, and industries. Texas is still one of the best areas for oil production, with the state producing 4.2 million barrels of oil per day - almost four times what the state was creating a decade ago. In fact, Texas produces three times more oil than any other state.
Texas has helped make the U.S. one of the leading producers of oil, thanks mainly to the largest oil-producing region in the U.S., the Permian Basin. The U.S. is still behind Saudi Arabia and Russia when it comes to oil production, but with the amount of oil coming out of Permian expected to double over the next half-decade, the U.S. will become the number one oil producing country in the world. In fact, IHS Markit says that the Permian will be producing 5.4 million barrels of oil per day in just five years, which is more than country today, other than Saudi Arabia.
How To Get Into Texas Oil?
Oil well investment opportunities in Texas is still underrated for many oil investors, yet it’s one of the great opportunities when it comes to protecting and growing wealth. Most notably, thanks to the tax breaks and incentives. Oil wells start generating income relatively quickly and can keep making money for years. All the while, investors get to write off the costs of extracting that oil.
Few public companies focus on Texas oil wells, and the other hangup is that investing in stocks and public companies doesn’t offer investors the tax advantages of direct investment. And forget mutual funds or royalty interests, to get the tax benefits, investors must own active interests in oil wells, allowing them to offset income, such as wages and capital gains, with any net losses from oil wells.
As well, investors can shelter some of their income with oil well investing. That is the depletion expense. This expense, also called a depletion allowance, can be used to reduce investors’ taxable income.
Investing in oil wells, to some extent, relies on oil prices. Higher oil prices could be on the horizon. The major Organization of the Petroleum Exporting Countries (OPEC) continue to keep supply in check. There are supply distributions in other oil producing countries like Venezuela, Libya, and Nigeria, which means oil prices could continue to rise as other countries with growing economies increase demand.
Tax Sheltered Investing
The U.S. government encourages investors to take a look at the oil industry. The government offers substantial tax breaks. And it’s paid off, with the U.S. now a powerhouse when it comes to oil production.
Investors can deduct just about everything oil well related to reduce taxes. This includes intangible drilling costs, such as labor and chemicals, and tangible costs like equipment, which is depreciated over some periods.
The costs, tangible and intangible, are 100% deductible for investors. This is allowed whether the well produces any oil or not. Any expenses beyond drilling are deductible, which includes leasing, legal and accounting costs.
Then there’s the depletion tax break, which allows investors in smaller oil production companies to have 15% of gross oil well income excluded from taxation. Think of this depletion allowance as a special tax break, one of the greatest that the U.S. government has to offer. As long as your ownership is limited to smaller oil producers, investors can exclude 15% of gross oil well income from federal taxes. A somewhat significant tax break.
Direct oil well investing, of course, doesn’t come without risks. Accredited investors, however, are generally well-equipped to deal with the risks and have interest, capital gain and related income that can offset with any oil-related losses. Oil well investing might be considered one of the riskier ways to invest in the oil market, but it does offer the most significant return on an investment opportunity while providing a substantial tax shelter.
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Drilling for oil in the U.S. continues to be a boom. However, finding opportunities isn’t as easy as it once was. The stock prices of many publicly-traded oil companies have not returned to pre-2014 oil crash levels.
Still, there are smaller oil well drillers that survived the oil crash of 2014 and are now stronger than ever. And the tax benefits of investing in oil are also stronger than ever. The overhaul of the U.S. tax code last year left in place all the key tax breaks provided to investors owning a direct stake in oil wells.
Directly investing in oil wells remains one of the best tax advantaged investments around, especially as oil gets closer to $100 a barrel. Accredited investor opportunities in the current market still include the likes of real estate and the stock market, but if you’re looking for tax-deductible investments, the best place to look is oil drilling.
Shale companies drilling prolific wells in the fast growth Texas areas, including the Eagle Ford shale and Permian Basin, are still investing heavily in finding new wells. There are still opportunities to be found.
Oil output in the U.S. is at all-time highs, hitting 10 million barrels a day and closing in on the dominance of Saudi Arabia and Russia. This presents accredited investors with a unique opportunity.
U.S. Oil Stronger Than Ever
The U.S. has managed to take global oil market share as the powerhouses, Russia and Saudi Arabia, have cut supply. Venezuela’s oil production has fallen off a cliff over the last three years, further opening the door for U.S. oil production. Then there’s the near-term catalyst that can give U.S. producers another boost, Iran. This is a top 10 oil producing country, but it’s facing sanctions by global superpowers that threaten to put pressure on the oil supply in the Middle Eastern country.
The U.S. is more than making up the slack. Oil being drilled from U.S. shale plays has more than offset the international decline. With more declines in international oil production expected, the U.S. is poised to continue increasing production.
One catalyst for U.S. oil drillers is the continued infrastructure investments. U.S. oil investments like pipelines will help bring even more supply to the global market in the future.
The Benefits Are Real
The tax benefits afforded to oil investors are some of the best among all investment opportunities. The top three reasons for oil investing among accredited investors include three very appealing tax benefits. The first is probably the most exciting, the depletion allowance for small producers. If you invest in an oil well that produces less than 50,000 barrels of oil a day, the U.S. tax code will allow you to exclude 15% of your gross oil income from taxes. That’s not a deduction against taxable income, but an outright exclusion.
Then there are the drilling costs. The cost of drilling and producing the well can be used to reduce oil income. Along those lines, the second major tax benefit is intangible drilling costs. These costs make up the majority, over two-thirds, of the typical cost to drill and produce a well. Included here are labor, chemicals, and other expenses. All these expenses are 100% deductible in the year incurred. Investors can actually get the benefit of these intangible costs in the first year even if the well doesn’t start producing oil.
The third tax benefit is being able to reduce the tangible drilling costs. This is direct costs of oil drilling. Investors can use the cost of equipment to reduce income, to the tune of 100% of the cost, depreciated over several years.
Accredited Investors Have A Powerful Advocate
The U.S. government supports the development of oil independence. When it comes to investing in oil wells, it doesn’t matter how much money you have, in fact, the more the better. There are no limitations on income levels when it comes to taking advantage of the tax benefits oil well investing.
The U.S. government offers enticing tax breaks to convince investors to buy directing into wells and small oil producers. The drive to become energy independent is real. And U.S. oil companies are expected to keep churning out oil. New technology and innovations are making well drilling quicker and more efficient.
Sure, you can “invest” in oil with stocks or mutual funds, but this isn’t direct oil well ownership. Thus, you don’t get the tax advantages. The best investment opportunity for accredited investors remains in oil wells.
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We could finally be back on a path to over $100 a barrel, a number we haven’t seen in almost half a decade.
While $100 oil doesn’t sound like a positive for your daily commute, it is good for oil investor portfolios.
Oil prices have been in a tough place since the mini-crash in 2014. What’s helping push oil higher now is a right-sizing of supply-and-demand.
Many of the major producers in the Middle East have curbed production, and production from other international sources could fall even further.
Venezuela’s oil output is falling the country continues to experience unrest. Once a top 10 oil producing country, the U.S. Energy Information Administration (EIA) shows that Venezuela’s oil production has fallen 30% in the last two years. A decline that’s expected to continue as the country struggles to keep oil companies happy given delayed and missed payments.
Then there’s the recent U.S. withdrawal from the Iran nuclear deal, which could further lower global oil supply. With U.S. sanctions of Iran back in play, the demand for Iranian oil is in jeopardy.
Oil demand is expected to outpace supply heading into 2019. This could push the price of oil to above $100 a barrel in the next year.
But this comes even as U.S. shale production is still growing at a brisk pace. The U.S. is now producing over 10 million barrels of oil per day for the first time since 1970.
Texas Oil Well Drilling Still Booming
Production is booming in Texas oil wells and across the major U.S. shales. Oil produced from U.S. shales, which is part of the country's onshore oil production, is expected to break a record in June, with the Energy Information Administration (EIA) projecting 7.18 million barrels per day in production.
Driving that growth in Texas.
Texas oil wells have been a boom, calling home to in the most productive U.S. shales. This includes the Permian Basin, the largest shale in the country. Oil production from the Permian is expected to account for over 45% of the U.S. shale oil output next month. More pipelines in the Permian basin are coming online in the next couple years, which will support the ability to bring even more Texas oil to market for meeting demand.
The second largest U.S. shale, the Eagle Ford in South Texas, which will hit 1.39 million barrels of oil in daily output next month. This is the most oil coming from the Eagle Ford since February 2016.
But it’s not just Texas, there’s the Bakken shale in North Dakota. This shale will hit its highest output since June 2015, with expected production of 1.24 million barrels a day.
Tax Smart Oil Investing
For investors looking to take advantage of higher oil prices, directly investing in oil wells offers the best tax breaks in the industry. More importantly, these are the best tax breaks of nearly any industry you’ll find.
The government doesn’t offer such aggressive tax incentives for any other industry. That’s because the government encourages oil industry investing. The idea is to encourage investors to invest directly in oil wells, ultimately to help the U.S. become energy independent.
But you won’t get these type of benefits from investing in large oil companies. These tax breaks and incentives are reserved for small companies. The government encourages direct investment in small oil companies.
The rewards, or tax breaks, for investors include hefty deductions that can reduce income, and in some cases offset wage taxes or capital gains taxes of other investments.
To start, oil wells investors can take advantage of the intangible expenditures of drilling. This includes chemical and labor costs, which can be upwards of 80% of the cost of a well. All of these are 100% tax deductible for investors starting in the first year the money was invested. Then there are the tangible drilling costs, which includes equipment and can be deducted as depreciation over a period of years.
But perhaps the most prized tax break is the oil depletion tax deduction.
This is one of the most important tax incentives for oil companies. The 1990 Tax Act allows investors who have invested directly in small oil companies to exempt 15% of their income from federal taxes.
Investing directly in oil wells is one of the best investments for accredited investors, especially considering the ability to tax-sheltered income. It reduces an investor’s tax burden, but also provides unique upside as oil prices chart a course for getting back to over $100 a barrel. As oil prices head higher, it’ll also bring stronger returns on investment for oil wells. A win-win for investors; higher returns and unrivaled tax breaks.
Texas Oil and Gas Investment Opportunities
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Oil and gas demands continue to increase due to most countries relying on this form of energy to run vehicles, businesses and many other industrial sectors. Investing in energy sources such as oil and gas can create a substantially high ROI. Besides financial gains, investing in oil and gas also has great tax benefits, and investing in oil and gas is critical to ensuring that the growing populations has access to the energy that will be needed in the future.
The Growing Demand for Oil And Gas
Oil and gas currently are and will continue to be the foundation for the global energy supply for many decades to come, despite the growing transition to green technologies for energy production. With the predicted energy demands by 2040, oil and gas will still have to meet 22% of this demand. The dependency on oil and gas resources will be the highest in about two decades from now.
To Increase the Production Power
With a growing demand for oil and gas resources and a decrease in production, the oil and gas industry has to continue to find new resources to meet the need. The oil and gas investments in Texas enable shale owners to increase their drilling and fracking activities to find more reservoirs and create a balance between demand and supply in future.
To Reduce CO2 Emission
Natural gas, when used instead of other fuel sources such as coal can reduce the CO2 emission into the atmosphere by half, and become a more environment-friendly way of producing electricity. Gas can also be used with other renewable energy sources such as solar or wind to increase energy production in tandem as well.
United Exploration, LLC leverages decades of industry knowledge to provide high-yield investment opportunities to its oil and gas investment partners. If you are interested in how to invest in oil and gas, contact us today by filling out the form on this page or give us a call.
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The best accredited investor opportunities often include tax-advantaged investments. One of which is oil well investing. The U.S. is quickly growing into an oil powerhouse, with the country expected to overtake Russia as the world’s largest oil producer by 2019. The growth in Texas crude oil production volume is almost single-handedly driving this growth.
There’s never been a better time for accredited investors to invest in Texas oil wells. Well, other than say 1901 when the first Texas oil boom started with the Spindletop oil field. But as the Chinese proverb goes, "The best time to plant a tree was 20 years ago. The second best time is now."
The U.S. Becomes Oil Powerhouse
We’re now seeing a steady growth in oil production volume coming out of Texas following the mini-oil price crash from 2014. The road back to $100 a barrel oil may well be shorter than expected.
Oil prices are now at the highest levels since that crash a few years ago. There are a few things working in oil’s favor here. First, renewed geopolitical worries from overseas are lifting oil prices as buyers get worried that supply could be hampered if there is upheaval in major oil producing countries like Saudi Arabia. As well, potential U.S. withdrawal from the Iran nuclear deal could lead to renewed sanctions on the major oil exporter.
Meanwhile, the U.S. is still going strong when it comes to oil production. There’s virtually no geopolitical risk and there’s a lot of oil still in the ground, especially in Texas. So the U.S. is poised to pick up the slack as other countries see a decrease in oil production.
Texas Oil Production Volume Stronger Than Ever
For accredited investors, Texas oil wells continue to be an enticing way to invest large sums of money. And not just because of the tax breaks that oil wells provide. Next month is expected to bring another consecutive month of rising U.S. oil production and Texas is leading the way.
The U.S. Energy Information Administration, the authority when it comes to energy production in the U.S., says that record production is being driven by growth in the Permian Basin in Texas. Digging into the numbers, this could be an understatement.
Oil Plays In Texas
The Permian, which covers most of west Texas, is the largest oil play in Texas, but more importantly, it’s the largest in the U.S. The oil production coming from the basin is nearly 3.2 million barrels per day. That’s the most oil coming from the Permian since they started keeping records in 2007.
Then there’s the second largest shale play in the U.S., which is also in Texas. The Eagle Ford shale, covering southern and parts of eastern Texas, is currently producing over 1.3 million barrels a day.
Texas oil is huge. For context, total U.S. oil production is running at about 7 million barrels per day, and just these two Texas shales are generating nearly 65% of the entire country’s output.
Texas is the top oil-producing state in the country and has been for years. There are oil fields spread across the entire state and with its abundance of sunny days, there are no drilling bottlenecks related to adverse weather, like you might find in in the Bakken Shale up in North Dakota.
Reserve wise, there’s still plenty of oil well opportunities within Texas. Texas has nearly 13 billion barrels of oil reserves, which is the amount of oil that’s estimated to still be in the ground and about 40% of the entire reserves in the U.S.
Texas’ stat sheet when it comes to oil production volume speaks for itself.
The investor opportunities in today’s markets are a bit limited given the all-time highs of the stock market. For accredited investors, investing in Texas oil wells is still very interesting. Oil wells are tax-advantaged investments that provide ways to tax shelter income while offering exposure to one of the best oil markets in the world.
Oil and Gas Investment Opportunities
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