Episode Details

I am not an oil and gas investor. That’s because I am not incentivized to do so by the tax code. The only time I was really incentivized to do so was before I became a real estate professional. Now with bonus depreciation, every time I invest in real estate, I can deduct the majority of my investment off my yearly income. That’s the beauty of having the real estate professional designation. Unfortunately, most people don’t qualify and that’s where oil and gas becomes a very attractive option. You see oil and gas has a unique advantage bestowed on it by tax law. With the current Trump plan, you can typically deduct every penny of your investment against your gross income—even if that’s W2 income. So, if you are a high W2 wage earner, investing in oil and gas remains one of the few true tax mitigating investments from which you can benefit.  (Disclaimer: I’m not a CPA and not giving you tax advice!) The last time I invested in oil and gas was when oil prices were near $100/barrel. Those investments didn’t pan out very well. It wasn’t just because of oil prices dropping, it was also because of the venture in which I invested. The general partner was making much of their money up front through fees. In oil and gas, that model is especially problematic. The risk levels of drilling ventures are high. It’s not like real estate that tends to be a little bit more cushy in terms of margin of error. For a competent real estate operator, It’s typically not that difficult to return investor capital even if a value-add apartment deal goes side-ways. By contrast, investing in drilling oil burns a significant portion of invested equity in equipment and drilling. If a hole comes up dry, well…there goes your money. So, if I were an oil and gas investor today, what would I be looking for in an opportunity? Well, first of all, I would look for a business plan that did not rely solely on finding new sources of oil but also acquired working wells and used other strategies to make money. I would also look for a venture in which the general partner had significant financial skin in the game and a track record of making money for investors to boot. In short, I would be looking for an operation like the one we will be talking about on this week’s episode of Wealth Formula Podcast. I should also point out that the time for oil and gas investments right now is MUCH better than it was back when I invested in this asset class. We have seen some crazy oil prices this year. When the pandemic hit, it coincided with very significant geopolitical events as well. While oil prices have recovered somewhat there is now a pent-up demand for oil on the horizon. It may never be as good of a time to invest in oil and gas ever again—especially with alternatives on the way. To discuss all of these issues and more, this week’s Wealth Formula Podcast features an interview with Thomas Powell, Founder and Senior Managing Partner of Resolute Capital Partners. So, if you have any interest in investing in oil and gas this year, make sure to listen to the show! P.S. See attached for the white papers on tax law mentioned in the show!