Sophisticated investors looking to make big investments are increasingly faced with limited opportunities.
The bull market for stocks is six months away from being the longest bull market in history. Stock prices are at all-time highs and catalysts that can push them even higher are running low. Then there’s fixed income, where yields on bonds, Treasuries, and savings accounts are at decade lows.
But one area is still enticing; oil wells remain some of the best investments for accredited investors, especially with the big tax breaks offered.
You’ve probably heard of the lucrative oil wells in Texas. The worry might be that oil well investing is “played out.” Rest assured, there’s still plenty of investment opportunities here. Texas calls home to big name billionaires for a reason. The state houses the biggest oil finds in the country. Most of Texas’ billionaires got their start in the oil industry, including Robert Rowling, who used his oil money to buy both Omni Hotels and Gold’s Gym. Jerry Jones parlayed his oil and gas profits into buying the Dallas Cowboys. Jones also got back into oil after last month, investing $75 million into Comstock Resources, a Texas oil driller, and explorer. But, with the help of President Donald Trump and his administration's new policies, there are plenty of new oil well opportunities for investors. The government is opening up new areas for drilling, which include Alaska and Utah. And there’s already been strong demand from oil investment companies to drill in these areas. Oil Drilling Investments Are Tax-Advantaged
But why do billionaires choose to invest directly in oil wells instead of using mutual funds and the like?
The biggest reason is tax breaks. Now, these don't tax loops, these are tax deductions and exemptions that the Federal government wants you to use. First - oil companies can deduct intangible drilling costs. These intangible costs are all the costs to drill, except the actual drilling equipment. They include labor and chemicals costs an average 75 percent of the total drilling costs. All tangible drilling costs are 100 percent deductible thanks to a tax provision that’s now over 100 years old. Regardless of whether the well produces oil or not, these deductions are still allowed. Second - there are the tangible drilling costs. This is the actual drilling equipment costs, also 100 percent deductible, but depreciated over seven years. For high net worth individuals investing directly in oil wells, they can use any losses during the early years of oil drilling to offset other sources of active income, such as capital gains and salary. Third - there’s the most prized asset for oil drilling investments, known as the depletion allowance. The 1990 Tax Act allows 15 percent of an investor’s oil well gross income to be exempt from federal taxation. As long as the individual limits their ownership to 1,000 barrels of oil per day, they’ll get this 15 percent tax exemption. The Newest Big Tax Breaks
Tax breaks for the oil industry are getting better and better as the Trump administration continues to push for energy independence in the U.S. The goal is to encourage the buildout of a strong energy infrastructure, and oil companies need capital to do that. The government is making investments in oil companies even more tax-advantaged to attract that capital.
Passed just before the New Year, the tax laws got their first major reform since the 1980s. The corporate tax rate has moved from 35 percent to 21 percent. But the bigger news for oil investors is that the rate for pass-through entities is now capped at 20 percent, instead of being taxed at the personal income rate. For investors that can’t invest directly in oil wells, this makes partnership investing a viable opportunity. The government also kept all the original tax breaks mentioned above intact. Oil drilling investments are looking better than ever. Oil prices have found a floor of sorts, although we’re still only a couple of years removed from the quick crash in prices. But with the now staple price environment, companies that have been putting off investing will likely look to deploy capital in new oil well opportunities. It should be considered the fortuitous timing for investors as well, especially now that the big tax breaks are safe following the tax reform.
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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. Oil and Gas Investor Tax Benefits
Tax-advantaged investments aren’t just for the ultra-wealthy. There are opportunities for accredited investors within one particular industry - oil and gas. Yes, the industry took a major hit when oil prices tumbled in 2015.
Things have since stabilized, and after a flushing out of the heavily indebted and inefficient operators, what remains are the more stable companies. Investors now have the opportunity to invest in an industry that still looks undervalued, with many investors avoiding the market all together. The U.S. actually wants investors to help with funding for oil and gas projects. They have created vast tax incentives for oil companies. It’s an industry where accredited investors can create tax shelters by tapping into large tax deductions not found in any other industry.
There are plenty of deductions for oil and gas investors. Most of the tax deductions afforded to investors are able to be used immediately. These include intangible expenditures like labor, drilling expenses, and chemicals. Called ‘intangible drilling costs’ these are all deductible immediately and can make up 80% of the well cost.
Then there are the ‘tangible drilling costs,’ such as the cost of the drilling equipment, which is also 100% tax deductible but has to be done so over a seven-year period. There’s also depletion expense that will reduce income, but the biggest advantage to investors comes thanks to the 1990 Tax Act. This Act allows oil and gas companies that produce less than 50,000 barrels of per day (and/or less than 1,000 barrels of gas) to exempt 15% of their gross income from federal taxes. No other industry or company can tap into such a tax break. Is It A Good Time To Invest In Oil?
From an investment perspective, the oil and gas industry hasn’t looked great - at least when you view it from the stock market angle. But, as mentioned above, investing directly in oil and drilling operations provides benefits that go beyond that of the stock market.
Investing directly in oil and gas is one of the best, and relatively unknown, accredited investor opportunities. When oil prices fell in 2015, many investors fled the industry and haven’t looked back. That’s their loss. Oil companies are being ignored, even as worldwide production has been reigned in, helping stabilize prices as supply normalizes. The worst appears over and the U.S. is still on its quest to be energy independent, giving big incentives to oil and gas companies that need to attract investors. Geopolitical uncertainty will continue to be a driver for independent oil and gas production within the U.S. As a country, the U.S. doesn’t want to be beholden to overseas turmoil. Lest we forget that despite the talk of renewables oil and gas still account for over 60% of energy production in the U.S. Best Oil And Gas Investments
It might be time to invest in oil. The opportunities in oil and gas industry are somewhat vast, with plenty of oil and gas drilling stocks that investors can buy via major stock exchanges. There’s also oil and gas-focused mutual funds. However, neither of those offer the tax shelter benefits that investing directly in oil and gas wells provides.
But don’t confuse investing in oil and gas wells with royalties. Royalties are paid to landowners. Companies that invest in, and own, land where oil and gas wells operate get paid a percentage of revenue from well production. However, royalty investors get none of the key oil tax deductions. The best way to capitalize on the oil tax deductions is via working interests and direct participation. By owning an interest in a well, investors get all the major tax benefits - including the 1990 Tax Act - and can even use losses to offset wage income and other capital gains. Tax advantages aren’t just for the ultra-wealthy. Oil and gas is still a greatly under-appreciated and tax-advantaged investment. This industry can act as a tax shelter for investors. The U.S. government offers direct tax benefits. And the big thing that separates the oil and gas industry tax breaks from other industries is that they are up-front and immediate. Ask us about the partnerships in the lucrative Texas oil fields that we just opened up to investors. We look forward to speaking with you today and becoming your investment partner. Contact us today.
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