Investing in oil and gas working wells can be financially rewarding and lead to large tax benefits.  
However, this is an often confusing and misunderstood area that we will work to clarify.

The tax code rewards oil and gas investors in several ways.  The first thing to understand is your investment MUST be in a private placement deal (not a public equity) and you will be structured in a Flip Partnership in which you are on the GP side of the deal in year 1.  

These investments are a great way to quickly offset a high tax bill without a ton of extra effort but we should understand the financial risks and overall return before making this decision. 

Let's explore the financial side of an oil and gas deal, followed by tax benefits.

As the wells begin to return natural resources, the partnership will begin to make quarterly distributions.  However, the actual amounts of the distributions are somewhat uncontrollable based on the following factors:

1. Commodity Prices - Oil is a commodity.  Thus, the market factors control the prices and strong fluctuations here can affect your ROI.
2. Well Production - this is where many consider oil a risky investment.  How much will the actual well produce?  Fortunately, the days of the wild wild west are gone and the use of AI and technology gives relative assurance to the drilling companies about the resources underground. 
3. Capex and Opex - obviously the more capital and operating expenses needed to operate the well will affect your ROI
4. FEES - the sponsor ultimately is partnering with you to make money.  Fees are part of this.  However, we encourage investors to ASK the sponsor about their fee structure and ensure it is transparent.  Most sponsors will charge a management fee (up front) and then operate through a promote structure (meaning once capital is return, they will split upside).

Much like a real estate development deal, returns can be hard to pinpoint based on the above factors.  However, the best sponsors are targeting the following metrics:

IRR: 30-60%
Return on Capital:  1.5-3X - NOTE this INCLUDES your year 1 tax benefit.

1. Intangible Drilling Costs (IDCs): These costs are fully deductible in the first year, providing a significant upfront tax benefit.  Normally, this is 75-85% of your INVESTED CASH.
2. Tangible Drilling Costs (TDCs): These costs are depreciated over several years, typically seven, spreading the tax benefit over time.  
3. Depletion Allowance: A percentage of the gross income from the well can be deducted annually, which helps reduce taxable income.  Normally 15%, this operates similar to QBI, offering a haircut off the top. 
4. Active Participation Benefits: GPs can offset losses from oil and gas investments against other forms of income due to their active role in the operation.  This is one of the only investments where you can OFFSET W2 AND BUSINESS INCOME DIRECTLY.

As an example, you have a 30% tax rate.  You invest $100,000 in a deal in 2024.  You will receive:

• $80,000 in tax deductions for 2024
  • = $24,000 in CASH tax savings
  • = 24% Cash on Cash Return in Year 1
• Future Years = income distributions, partially taxable (depending on drilling costs and depletion)

If you are interested in exploring this investment further or applying to your situation, please send a note to your Project Manager in Soraban and we will help connect you!