Why Invest in Oil and Gas?                              Return

Who can invest in oil and gas drilling programs?

Specifically, 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 rcoy@ranken-energy.com or cbrown@ranken-energy.com.  

What are the Advantages of investing in Working Interest Drilling programs?

The 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.

A 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.

What are the Disadvantages of investing in Working Interest Drilling programs?  

The 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.

Reservoir 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.

There 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.

Owners 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.

Finally, 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 more disappointments.

Financial Analysis of investing in Working Interest Drilling programs

After 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 following:

*Working 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.

*Most 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.

*Brochures 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.

*In 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.

*Working 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!

You decide on investing in Working Interest Drilling programs

By 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.

Tax Considerations of investing in Oil and Gas Working Interest Drilling Programs:

Oil 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.

What 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...

The 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.

Ranken 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 productive.

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!

 §167. Depreciation

h) Amortization of geological and geophysical expenditures

(1) In general

Any 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

For 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

Except as provided in this subsection, no depreciation or amortization deduction shall be allowed with respect to such payments.

More 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%.
The complex and difficult to manage Severance Tax legislation was replaced by a 2% tax levied for the first 36 months of production on newly drilled wells. After 36 months the tax rate returns to 7.1%. This grants those who own the well 5% additional revenue for the first 3 years of the well’s life, which often will insure the financial success of marginal discovery wells but represents a windfall for those who drill exploratory wells with the potential for significant initial production rates!

*1031 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.

*Suitable 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.

In the end, oil and gas investments offer substantial Tax Deductions but you may need professional guidance to take full advantage of the tax laws.

If 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.

So 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.

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