Natural Gas Investing
Natural gas is often overlooked when it comes to exploration and drilling partnerships. Oil often gets the spotlight. But, with the recent administration changes, it could be time to take a closer look at what natural gas wells can offer investors.
Natural gas has come a long way, formerly being a byproduct of oil production — something that was burned off while drilling for oil. Now, gas wells are just as lucrative as oil wells. This comes as the demand for natural gas and liquefied natural gas is booming.
It’s time to take a closer look at natural gas investing. Specifically, investing in natural gas partnerships, which not only offer exposure to a booming industry but also provide generous tax breaks.
Best Investment Opportunities In The Oil And Gas Industry
When considering accredited investor opportunities, oil and gas offer the best tax incentives among all the industries in the U.S. But natural gas, right now, looks especially enticing. This comes as low natural gas prices have helped boost demand nicely.
Natural gas is low-cost resource that’s abundant in the U.S., making the country a great exporter of the commodity. And there are plenty of buyers. Major countries are shifting toward greener energies as natural gas burns much cleaner than coal energy.
The ability to invest in natural gas wells in the U.S. looks to be an underrated opportunity right now. The U.S. is expected to be the number one exporter of liquefied natural gas over the next several years. The country has a massive base of natural gas shale reserves, but also has the technology, thanks to horizontal drilling and hydraulic fracturing, to extract natural gas quick and efficiently.
Trump Administration Is A Tailwind
Donald Trump and his administration will continue to be a tailwind for the oil and gas industry. First, there is the new tax reform bill signed into law just before the new year. There are new tax rates that will be very advantageous for the oil and gas industry.
However, it’s the Trump administration’s energy policy that could make investing in natural gas royalties very lucrative. Trump is a major supporter of increasing natural gas exports. Last year, the U.S. became a net exporter of natural gas, having sold more natural gas to other countries than it used.
Trump’s administration wants to make America energy dominant and building a strong natural gas export program is the first step. He’s been building terminals and infrastructure to export natural gas across the globe. The widening of the Panama Canal is a big step for opening the door for more gas exports out of the Gulf of Mexico to Europe and Asia. Beyond the energy reform, there’s also the tax reform.
The oil and gas industry has long held some of the best tax-advantaged investments. The oil and gas tax breaks can help accredited reduce their taxable income. These tax advantages have gotten even better following the new tax reform.
The tax benefit of oil and gas investments has long included special deductions, with the best ones being Renewable Fuel Standard and the depletion allowance. Both of these were kept in the new tax bill. The Renewable Fuel Standard offers a depletion allowance for intangible drilling costs like well preparation. Then there’s the depletion allowance, which allows 15% of oil and gas well income to be completed excluded from taxation.
The tax reform keeps both of these intact for oil and gas well investors. But it also adds a new twist — a very positive twist — for investors. The tax rate for pass-through entities, including oil and gas partnerships, will now be even lower. Instead of previously being taxed at the personal income rate, pass-through tax rates will now be 20%.
Investing in gas wells will continue to provide tax-sheltered income, but it also offers enticing upside beyond other industries in the energy sector. This starts with the implied backing of the President of the U.S., but natural gas will also be a sound investment for decades. The U.S., and the natural gas exploration and drilling partnerships, are uniquely positioned to benefit from a growing demand for greener energies.
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ROI is an acronym that’s used in just about every industry, including Texas oil and gas drilling. ROI stands for “return on investment.”
It’s one of the easiest ways to compare returns across industries and investment opportunities. It shows you the percentage return on your investment, considering the amount of capital you put at risk.
So, if you invest $100,000 in an opportunity, and end up making $150,000 over the life of the project, the ROI is 50%.
Now, we’ve been in a low-rate environment for a while now, so a 50% return probably sounds absurd. The current 30-year Treasury offers a yield of 3.1%, which is well below the historical average, and at the same level, it was five-years ago.
Decent yielding investment opportunities for accredited investors are getting harder to find, likely feeling impossible. That has led many investors to take a look at the oil and gas market, where returns can be impressive and correlation to the stock market is low. That can mean higher returns and fewer ups and downs.
Now, most advisors tout the tax benefits of oil and gas well investing - and these tax breaks are very enticing - but another aspect is the strong ROI you’ll find from many of these projects. One of the big questions many accredited investors ask when looking at investing directly in oil and gas projects is; where are oil prices headed from here?
Oil Prices Are Only Half The Story
The oil price environment has been tough for a couple years; although, oil prices are showing signs of stabilizing. It’s been almost two years since oil traded at nearly $30 a barrel. With supply cuts and the rightsizing of drilling, oil prices have doubled.
Still, while it’s tough for individual oil and gas well drillers to manage oil prices - other than with hedging - accredited investors can benefit from increased ROI thanks to new drilling techniques and a management team that, well, knows what they’re doing.
When it comes to generating a strong ROI, Texas oil and gas production companies are able to boost the ROI for projects with strategic land choices and choosing the appropriate drilling technique, whether it be unconventional shale or conventional filed drilling.
Historically, oil and gas wells are able to generate outsized returns for investors. But this assumes that the oil and gas investment company has a strong management team.
Understanding The Oil And Gas ROI
For oil and gas investors, there’s more than stock prices and dividends to consider. Investors that have an active ownership in oil wells have greater upside potential, but also have a more vested stake in the inner workings of their investment. That is, there are many components that investors should consider when hoping to get the highest ROI.
When considering investing in oil wells, the biggest part is how efficiently and quickly the commodity can be extracted. When looking for the best ROI deal, investors should consider the technology and drilling techniques used. A capable management team is very important. It’s necessary to look for managers and leadership teams that know how to target wells that can produce n the shortest timeframe, which means they know how to set up infrastructure fast and effectively to get oil flowing as quickly as possible.
So, if you want the best ROI deal when it comes to selecting the best oil company to invest in, look for a proven manager.
These days, just investing in oil wells is only half the battle - yes, you’ll get the massive tax deductions, which includes the 15% of income that’s completely tax-free and you’ll get a large deduction for oil well expenses that can be used to offset your ordinary or other investment income. But finding the best ROI deal also means looking for opportunities where new drilling technology and techniques can be used to start generating money faster from your oil well investments.
Then, couple this with the tax breaks and your ROI - compared to that of investing in an oil and gas stocks - becomes even more attractive.
Stock market returns can be volatile for years. But with investing in oil wells, you can do a little due diligence to get the best ROI deal and then you’ll be set with years of passive income that also provides very beneficial tax deductions.
We look forward to speaking with you today and becoming your investment partner. Contact us today.