Why Invest in Oil
can invest in oil and gas drilling programs?
both accredited and non-accredited investors can now participate in oil
and gas projects via SEC rule 506(b), traditional Regulation D, and new
rule 506(c). Potential investors should become familiar with the new
rules concerning participation in various ventures including oil and gas
projects. If you would like to know more about upcoming Ranken
Energy Corporation projects please contact us at email@example.com
are the Advantages of investing in Working Interest Drilling programs?
most obvious advantage is the opportunity to diversify your investments
with an investment vehicle that may achieve high rates of return,
especially during periods of low interest rates. It also gives investors
a hedge against inflation because oil and gas prices and inflation can
move in tandem, which means the Working Interest Drilling program net
income may as well. Some investors want to bet on the future price
appreciation of oil and gas but don't want to get involved with the
futures market. A Working Interest Drilling program lets you do that.
Monthly distributions are directly tied to the prices of the underlying
commodity. You may be able to depend on Oil and Gas Working Interest
Drilling programs for monthly income for many years.
Working Interest Drilling program provides a tax-advantaged yield due to
depreciation and depletion allowances when filing. Depending on what tax
codes allow, there may be special tax credits applicable for oil and
gas. You will need to ask your accountant for additional details here.
are the Disadvantages of investing in Working Interest Drilling
most obvious disadvantage is the volatility of monthly net income caused
by volatility in oil and gas prices. There have been dramatic price
swings resulting in big variations, and no one can forecast the
trajectory of oil and gas prices, but keep in mind Working Interest
Drilling programs can last decades, which means you receive monthly
revenue over the entire cycle.
depletion is another disadvantage. Working Interest Drilling programs
are supported by a finite amount of resources. Once those resources are
gone, they're gone. As the resources deplete and the decline curve
becomes more pronounced, net revenue will fall and will, eventually, go
to zero. Most good wells won't hit this point for decades, but you need
to remember that net revenue will eventually contract, then end.
is a bit of tax-filing complexity associated with Working Interest
Drilling programs. Owners of Working Interest Drilling programs are
required to report their income and expenses on their tax returns. This
typically means filing Schedules E and B as well as having additional
work with Form 1040. Please discuss further with your accountant or
financial advisor for more details.
are liable for paying income taxes in the states in which the Working
Interest Drilling program generates its revenue. Different states have
different thresholds for when taxes have to actually be filed and paid,
and the likelihood of owing income tax in multiple states increases with
the size of a given ownership position.
owning Working Interest in drilling programs carries risk along with
potential for high returns. Regardless the science and regardless the
skill and success of the operator in previous ventures, risk is part of
the equation. The possibility that the amount of oil or gas discovered
could be less than forecast is ever present, even to the point of there
being none stored in the reservoir. A Working Interest Investor must be
able and willing to suffer the complete loss of his investment. It is
for this reason the successful oil and gas investor spreads his planned
investment across multiple wells to be drilled, thereby increasing his
probability of success; for one good well can easily make up for two or
Analysis of investing in Working Interest Drilling programs
all is said and done, the biggest motivator for Oil and Gas Working
Interest Drilling programs is the possibility of double-digit returns.
Working Interest Drilling program brochures highlight this, but often
gloss over some of the underlying considerations. Consider the
Interest Drilling programs are long-term investments. You can resell
ownership interests, but it will take more time and transaction costs
than with stocks or bonds.
of the brochures provide only a simplistic approach to calculating the
return on investment. They do not take into consideration the
complexities of “internal rate of return” or “zero resale
value”. These complexities are caused because a Working Interest
Drilling program is built on what is termed a wasting asset: there is a
finite life, after which all the reserves have been depleted. From a
practical standpoint, a good Working Interest Drilling program’s
projected lifetime will be decades, which means simplistic R.O.I.
calculations can be reasonable estimates.
often project monthly cash flows using optimistic future oil price. No
one can forecast oil prices. All we know for certain is the price will
fluctuate – up and down. But remember that Working Interest Drilling
programs may last for decades and could pay out during all phases of
price cycles. That means over the long term, your monthly revenue should
average out to an acceptable price for a barrel of oil.
addition to oil prices, future monthly revenue depends on current and
future production. The current producing wells follow well-known decline
curves and must be replaced by new wells tapping into the proven
reserves. Brochures will mention the upside potential for new wells but
rarely quantify the impact on timing or magnitude of future cash flow.
To get a handle on this, you should consider total reserves, monthly
production estimates going forward, and payback period. You will need to
discuss this with the Working Interest Drilling program originator.
Interest drilling programs are designed to develop production. Brochures
usually document possible forecasted discounted cash flows. However,
realize that sometimes producing wells go into a monthly loss status for
a variety of reasons, such as: well workover; current oil price; field
operator issues. Discuss the details!
decide on investing in Working Interest Drilling programs
now you should realize Oil and Gas Working Interest Drilling programs
might fit into your investment planning. You should talk further with
professionals in order to make your decision. No private investor is
able to handle the nuances of petroleum engineering or financial
analysis by themselves. (Do you really want to interpret well logs or
compute internal rates of return?) You will need to rely on people you
can trust. Your best starting point: talk further with the company
offering the Working Interest Drilling program. Find out if you can
trust them to be your partner for oil and gas investing. We hope our
Investment Guide illustrates why you should consider Ranken Energy for
your oil and gas investments.
Considerations of investing in Oil and Gas Working Interest Drilling
and Gas Investments offer substantial Tax Deductions.
Although it is everyone’s civic duty to pay income tax to help fund
our government, the government provides tax deductions for situations
that contribute overall to the country’s wellbeing. You may have heard
oil and gas working interest drilling programs can help reduce your tax
bill. It is true, so let’s look into this further.
you will learn here is an introduction into the tax benefits oil and gas
working interest drilling programs provide. After reading it, you should
have a basic understanding of these deductions that can reduce your tax
bill. And we are among the first to agree that tax forms and
instructions require a bit of study to get the numbers right.
So at tax time, you might need to contact an accountant for
additional information. But for now, please read further...
U.S. government would like our country to become less dependent on
foreign resources. So in order to encourage domestic oil and gas
production, direct investments in oil and gas offer larger tax breaks
than any other type of investment.
Energy Working Interest Drilling programs today have a good probability
of striking oil, which means you the investor earn income. And your
income is partially sheltered from taxes because of a depletion
allowance. Here is why:
Depletion allowance: Because
oil and gas are finite resources that will eventually be exhausted,
depletion allowances are granted for a portion of the producing well's
gross income. These allowances can shelter 15% of the annual production
from income tax. Deductions can be taken as long as the wells are
Tangible Costs represent
substantial expenses like storage tanks, pump jacks, and casing. Tangible costs
are capitalized and depreciated over seven years.
Intangible Drilling Costs
(IDCs) are expenditures that have no salvage value – this would be
fuel, wages, hauling, contracted drilling and repairs. They typically comprise 75%
to 85% of the total well cost and are 100% deductible against taxable
income in the first year.
Intangible Completion Costs
(ICCs) average around 15% of the total cost of the well. ICCs are goods
and services like labor, completion materials, completion rig time and
fluids that have no salvage value. ICCs are completely deductible in the
year the expense was incurred.
Depreciation: The tangible
equipment and resources used to complete a well are generally considered
salvageable, and thereby are depreciated over a 7-year period. These
tangible completion expenses can account for between 25% and 40% of the
total well costs.
Lease operating expenses are
the ongoing monthly costs to operate the well, and are deductible in the
year the expenses are incurred.
Amortization of Geology and Geophysical costs
IRS tax code Section 167(h)
Amortization of Geological and Geophysical Expenditures
You can deduct these costs at 25% the
first year, 50% the second year and 25% the third!
h) Amortization of geological and geophysical
(1) In general
geological and geophysical expenses paid or incurred in connection with
the exploration for, or development of, oil or gas within the United
States (as defined in section 638) shall be allowed as a deduction
ratably over the 24-month period beginning on the date that such expense
was paid or incurred.
(2) Half-year convention
purposes of paragraph (1), any payment paid or incurred during the
taxable year shall be treated as paid or incurred on the mid-point of
such taxable year.
(3) Exclusive method
as provided in this subsection, no depreciation or amortization
deduction shall be allowed with respect to such payments.
about Taxes of investing in Working Interest Drilling programs
Unique to Oklahoma, Severance Taxes in Oklahoma have recently been
reduced from 7.1% to 2%.
Exchange Compatible. Section
31 of the IRS Tax Code allows a seller of real estate defer capital
gains taxes if they reinvest in a Working Interest Drilling program.
for IRA’s. The IRS Tax Code
allows investors to put Working Interest Drilling Program investments in
IRA’s. This lets you shelter monthly cash flow from taxes, allowing
you to reinvest more of what you have earned. However, typical banks or
brokerage companies do not handle this type of IRA. Ask your accountant
to recommend those with whom he is familiar that do.
the end, oil and gas investments offer substantial Tax Deductions but
you may need professional guidance to take full advantage of the tax
you invest in oil and gas well drilling activities, you will receive at
tax time appropriate statements from Ranken Energy Corporation
tabulating the above costs so you can take these deductions when you
file your taxes. And like we stated above, your accountant can go over
more details then.
there you have it: an introduction to the tax benefits available when
investing in oil and gas working interest drilling programs. The
Internet contains many related articles, but it is unlikely you will
find any entertaining videos on tax benefits!
If you would like additional information, please contact us at the address, phone numbers or email address on our Contact page.