The Mark Perlberg CPA Podcast

EP 041 - Navigating the Oil and Gas Investment Terrain with Steve Blackwell: Assessing Risk, Yielding Steady Income & Tax Considerations

September 28, 2023 Mark
The Mark Perlberg CPA Podcast
EP 041 - Navigating the Oil and Gas Investment Terrain with Steve Blackwell: Assessing Risk, Yielding Steady Income & Tax Considerations
Show Notes Transcript Chapter Markers

Want to navigate oil and gas investments? Our talk with Steve Blackwell, CEO of InVito Energy Partners, offers key advice. He shares insights on assessing such investments, focusing on sponsors' and operators' backgrounds, team composition, and the ability to simplify complex evaluations and financial models. He also emphasizes the importance of low fees to ensure more of your capital is invested in assets.

Investing in oil is risky, but Steve guides us on risk assessment, discussing how to gauge project failure likelihood and wildcatting. He values historical production data and considers infrastructure crucial when evaluating investments. He also explains best and worst-case scenarios, providing a thorough understanding of possible outcomes.

Steve also explores oil and gas funds, tax considerations, and the potential for steady income from these investments. He explains fund evaluation, exit strategies, and the benefits of patience, like avoiding IDC recapture. We also delve into the advantages of oil and gas investments including tax deductions and long-term growth, and address intricate aspects of energy investments like the alternative minimum tax and intangible drilling cost deductions. Don’t miss this episode full of essential advice! For more, email: sblackwell@invitoep.com

 

Speaker 1:

So welcome to the show everyone. I'm here with Steve Blackwell, ceo of InVito Energy Partners. We're gonna talk more about oil and gas tax savings, opportunities, profitability and what that is gonna look like when it hits your 1040, especially if you also have real estate investments. This is gonna be a great conversation for some of you guys who are looking for tax savings and passive cash flow but do not want to deal with tenants, or you don't have rep status or you don't wanna go into short-term rentals. So we're gonna have a great conversation. All this If you enjoy what you hear. You wanna learn more? Hit, subscribe. Hit that like button. Subscribe to the podcast and the YouTube page. If you know any well and else who may be interested in learning about what we do with our clients or joining our team as an advisor, send them to info at markpohlworkcpacom. All right, let's get started. Steve, tell us about yourself. Give us an intro in 60 seconds or less.

Speaker 2:

Awesome. Well, appreciate the invitation, mark. I'm excited to get a chance to chat with you and your audience. But yeah, my name is Steve Blackwell. I'm the co-founder and CEO of InVito Energy Partners. Long and short of it is. I got about a 17 year career as an executive running upstream oil and gas operating companies. A couple of years ago, with a partner of mine who ran operations for me the last two operating companies I was at one I was the president, the other one I was the COO we decided to open our own company, open InVito Energy Partners which is InVito, by the way, is Italian for invitation, and there's a little bit of a story behind that. Maybe we'll get into it. But yeah, basically we saw a need or basically a place in the marketplace for a fund. There's a lot of direct energy investment funds that are out there for clients and for investors, but specifically we have structured our deals where we feel like the investors have the best chance of a proper return, which really comes down to the fee structure. So in our opinion, most of the deals on the street are extremely over promoted on the fees upfront, so you wanna have as low fees as possible, so the majority of your capital is going into the asset, so that's us.

Speaker 1:

Wonderful, wonderful. Now let's talk about this here because we had a great conversation some earlier in an earlier podcast, but there are some when you're evaluating how to invest in oil and gas, because you hear about all these wonderful things with tax savings opportunities and the profitability. But you'll also hear that people may not have such wonderful experiences, especially when it comes to the cash flow and the profitability in these endeavors. And we talked about this that you wanna be careful and do your due diligence to make sure you're investing with the right people. So can you walk us through and tell us about what an investor needs to know to make sure they're making the right decisions here?

Speaker 2:

Yeah, I mean, look at the end of the day I think you're very familiar, and probably a lot of your clients from past conversations, that direct oil and gas investments have really unique and significant tax benefits and the ability to offset ordinary income, even though it's a passive investment even any construction to offset passive income as well. So that's kind of a given and that's a great reason to consider and look at it from an investor standpoint. The challenge with oil and gas it's a very, very technical business. Compare that to not that there's not expertise in commercial real estate or multi-family is a great example. But most people, most investors, with some financial knowledge, can look at our rent roll and evaluate a rent roll on a spreadsheet and get a kind of a clear understanding of what the projections are and if those are realistic. But that's a far cry from the technical aspects of what comes into oil and gas, because at the end of the day and oil and gas when you're drilling a hole into the ground and estimating what comes out of that and there are so many disciplines that go into that, from the land side to the geology side, to the reservoir engineering side, which is essentially the discipline within the industry of taking data, dumping it into software and determining how much you think's gonna come out of each well, which is called the EUR and industry. Which is estimated ultimate recovery to the production engineering, to the operational engineering. It's the drilling engineering, completion engineering. It's extremely technical business, so that makes it difficult for the average investor to really audit with any certainty the financial projections that are given to them. So my suggestion to people always is we'll provide people a list of questions, right, we've provided this. Like there's the questions for the sponsor, there's questions you should ask the operator about the operator, and then there's questions about the deal which are critically important, and some deals the sponsor and the operator are the same. So, for example, like us, we're the sponsor and we all are as well the operator. We will invest in non-operated projects as well, but we operate a lot of our assets. So there are critical things to understand and learn about the industry. But I always tell people look, who you're investing with is always very important. So this is the sponsor and operator, that's more. So the sponsor what is their background? Not only who are. What's the background of the owners? Have they been in the oil and gas industry their whole career? Have they worked for other companies? Have they worked for large public companies? Have they worked for mid-sized public companies? Have they always just been out on their own? Did they used to be in a different industry recently? Who's their team? Do they have technical expertise on their team? And then, when you're looking at that team, what's their background? Once again, have they been in the oil and gas industry their whole life? Do they have a reservoir engineer? Do they have an engineer on their team? Do they have a geologist on their team? How do they do their evaluations? Can they even speak to how they do their evaluations? Do they have a financial model that they could share with you and say this is how we evaluate deals. Here's the model we dump it into to show how we're projecting returns. Those are great questions to ask and a lot of times, based upon those questions, you might get a good feel for what you're dealing with. So there's a lot of different ways to look at it. But who are you investing with? What's the sponsor? So I will tell you that one of the biggest things in this industry that you have to try to avoid is what I just call promoters. So the common, the common, not trying to talk down to anybody else, but look, the common promoter is some of this promoting one or two vertical wells. They're usually offering those on a turnkey contract. Their background typically has not been oil and gas. They typically don't have a technical team on staff. They're typically doing a non-operated deal, so they're just passing along to you what somebody else is telling them about their deal. And they're usually doing one or two well projects and they're typically always vertical wells and they're always sold on a turnkey project. And turnkey is one of the biggest red flags in this industry, which is a very common way of selling deals.

Speaker 1:

Tell me more about identifying what, how to identify a difference between someone like yourself and a promoter, and what is a turnkey versus what you do.

Speaker 2:

Yeah. So turnkey is very simple. Essentially. The easiest way to give the example is let's say, if you were to make the numbers easy, the cost to drill a well is a million dollars, right, they're gonna offer that. So that's the cost that they get from the operator that's actually drilling the well. So one promoters are typically they're never operators. They're always, almost always, doing a non-operated deal. When they're offering an attorney, they basically get the cost from the operator and then in their offering documents they'll say it's a million dollar, well, that's the cost. But when they pass it along to their clients it's a two million dollar. Well, so they typically I mean the small. I hardly ever see a promoter on a turnkey that's less than 50%, meaning a 50% markup. So that's a substantial cost built into the deal and that's one of the ways they make their money. So they'll say they don't have any fees upfront. But where their fees are, isn't the turnkey prospect? Now that turnkey has some risk to them because if there's an overrun from the operator they gotta take proceeds out of that turnkey to cover that cost. Because most of the time they're telling their client there's not gonna be a capital call, but turnkeys are always you can guarantee you're always paying at least 50%. It's very common to be 100% over the cost of the actual well. So that's just essentially how turnkey deals are done. So we don't do turnkey deals. We do everything at cost. The way our funds are structured, we just have a one-time fee upfront, a formal management fee of 4%. So 96% of our investor's capital goes into the ground, into acquiring working interest in the wells, and we're by far and away no one's even remotely close to having fees as low as ours. People will say they have low fees by saying they have turnkeys. They will say they have no fees upfront. But that's a very misleading statement because there are substantial fees in turnkey.

Speaker 1:

What do you say to a potential investor when they say, well, what's the risk that we lose money or have no oil in the area that we're drilling? How do you talk about assessing risk and probability of an unsuccessful project?

Speaker 2:

Yeah. So as a guy who's been in the long gas for a long time and drilled a lot of wells and literally my career probably been a part of well over 100 wells and had essentially no dry holes the only well that didn't produce anything was a mechanical failure downhole. So, that said, when you're in oil and gas, I think it's absolutely critical to be honest with folks that this is oil and gas. We are drilling holes in the ground. There are ways to manage risk by having more multiple wells and a fund, but at the end of the day, there is a probability, there is a chance that you could lose your money. You're always gonna have the guaranteed of the tax benefits. But when you're drilling a hole in the ground and putting pipe in the ground and sometimes going four, five, six, 7,000 feet deep, maybe a mile or two lateral, depending upon if you're drilling a horizontal well things can happen downhole, you can have a mechanical failure, something can go wrong. That's not a high probability, but it can happen. From there, it just depends on the type of assets you're investing in. So this is again back to who are you investing with and what is their background, because our job as asset managers is to determine where to put the capital right. So we have a lot of experience underwriting deals, developing deals, bringing deals in, putting them through a model run on the geology, run on the economics, run on the engineering and determining where we wanna put our assets. There are different levels of risk in oil and gas. A common term in the industry is called wildcatting and that's kind of a really or hit or miss kind of a proposition. Usually when you're in a wildcatting it's a high degree of risk that you will get a dry hole or an un-economical well. But on the other side of that equation the upside sometimes can be four, five, six to one. We don't engage in any of that, especially as a fund. So we're trying to go into areas and again, if someone can't define their investment thesis right, so in the real estate space, that's what? Location, location, location right. Oil and gas isn't too much dissimilar other than I would say it's data, data, data. So when we're looking at assets we're looking to go into fields that have significant historical production, so that historical production gives our reservoir engineer and our geologists significant amount of data to map the play, to do the reservoir engineering. So we're looking out for areas that have lots of historical production. Typically that's vertical production. We particularly mostly drill horizontal wells. That's another difference between what I would say promoters and more what I would call oil and gas professionals is the promoters don't really get into horizontal wells because they don't have that. There's a lot more capital required to do that. So we're looking for areas that have lots of historical production so that the reservoir engineer, the geologists, the engineers can do their jobs and have data to dump into their systems and then from there we're looking for whatever our thesis is. Let's say, for example, that I'm going to drill a where we're at today. If I'm gonna drill a horizontal San Andres well and wherever my locations are, wherever my acreage is, I don't wanna be the first mover. So if there's not another horizontal well or a vertical, whatever I'm doing and whatever zone I'm drilling into and where I wanna produce from, if there's not something within five miles and five miles of stretching it. We typically like something within a two to three miles, but within five miles max. We're not gonna participate in that type of an asset because it's from our perspective. It's too risky that plenty of people do that in oil and gas and it depends on the type of capital they have. There's nothing wrong with that. But from our perspective, if we're investing private capital from investors, that's one of the ways we manage the risk. So we're looking for data points that prove our thesis within a five mile radius of our assets and you should be able to demonstrate that on a map to your investors as well as we're going into areas that have lots of historical vertical production to give us data for to do our analysis. And the last thing really is what's called infrastructure. So we don't wanna go into new plays again where we have to put in the roads, we have to put in the electricity. Almost all wells produce water. We have to drill the saltwater disposal well. If there's not any infrastructure in place, we will put some infrastructure in place, but we don't wanna, as a fund, we don't want to be the extra added expense of having to put out the infrastructure in place as well. So that's kind of how we do our underwriting. We're looking for historical production data. We're looking for data points within five miles to prove our thesis. So we're not a first mover and we're looking for some level of infrastructure already in place before we choose an asset to invest in.

Speaker 1:

Gotcha and you know. So what do you? So at this point? You know, because you've done a good share of this stuff, you have a decent level of confidence in the likelihood of a little generate profit. And what would you say if there's any way to measure the degree of variability that you know, if there's a way to say well, you know, we predict an ROI of, let's say, 25%, what do you think? The variability is based on uncontrollable circumstances. Would it be like a standard deviation of maybe 5%, or what can you kind of project as best case and worst case scenarios and an expected scenario?

Speaker 2:

Yeah, and just backing up to your last question, I think I probably what I said. It was a mouthful for people who are listening, right, but what I would say to you as an investor is ask them what they're underwriting and asset criteria is. If they can't give you an answer like I just gave you, that's a red flag. So you don't have to understand it all right. But if you ask the question and they stutter around it or they don't give anything that sounds very detailed, that's your first red flag that maybe you're not dealing with someone who's an oil and gas professional. The answer to your next question is that's a difficult question to answer, because here's how I would answer that If I go into a field and I drill 10 wells, and I drill 10 of the exact same wells meaning they're all the design of the well is the same, the depth, the location where we're producing, from the design and the completion, everything is the exact same Out of those 10 wells let's say that you're estimated that the EU are right that's 300,000 barrels. Okay, you literally could have a well that's 220,000 barrels. You could have a well that's 350,000 barrels. The average, what you're thinking is when you're done is around 300,000 barrels. So the statistical variance and this also varies based upon the basins you are in. But the statistical variance can vary significantly from well to well. So how do you manage that risk? If you're an asset manager investing private capital? Well, the best way to do that is to have diversification of the number of wells in a fund. So, again, a lot of the deals I see on the street are one-two well programs or one-well programs. You're going to drill this one well, you're going to drill these two wells. There's not to say that that's in and of itself is not a reason to do it, but you are. If you drill one well and something goes wrong on that one well, you have no other well or multiple well to offset the fund. So as we grow and as we get bigger, one of the advantages we'll have is to be able to diversify the fund with multiple wells. We can do that through operated projects, but also by participating in non-operated deals, and so there is a decent statistical difference between wells from well to well, oil and gas. There is absolutely no exact science. You can sit in a room with a bunch of reservoir engineers and you'll have 10 reservoir engineers and as a non-technical guy. I'm a finance and accounting guy. I've been running the company, so the asset teams report up to me. But I've sat in enough production meetings and asset development meetings and I've listened to. I could have 10 engineers in the room and I have 10 different opinions, and they'll all tell you with certainty why they're right. So, again, when you're running a financial model for an asset, development or project, you're always building in those variances, but you always have to start somewhere. So the EURs of the EURs are 300,000 barrels. You're going to run your model based upon that, but then you're going to run sensitivity analysis. So what if our EURs are 280? What if our EURs are 310? What if oil prices averaged this? What if oil prices averaged that? Another big reason you want to have a lot of data upfront is a large part of the performance of your fund in a well is how much does it cost to operate that well after it's in production, right? And so if you're not an operator, you're trusting that your operator has a good sense of what those costs will be, and the best way to have a sense of what the cost will be is to look at what the costs were for other operators in the area, right? So if you're producing a well and you think it's going to cost you $15 a barrel to produce the well which is called lifting costs right After you're producing it, and your costs are 35,. You've got a problem Now. On the contrary, you're hoping as you develop a field, you'll reduce those costs. So I don't know if that answers your question, but there's no exact answer to that question. I wish I could tell you. It's 5%. Just know that. From well to well and on gas, that's the nature of the risk difference between commercial real estate and oil and gas Commercial real estate, I mean look, you got a rent roll that's 96% occupied or 90% occupied. It's already rented. You can see the rent roll. There's a lot of confidence in what that rent roll is gonna look like. Obviously, things can happen in the commercial side as well, but that's a lot different in all gas.

Speaker 1:

Would you be able to create a fund? So let's say I have $125,000 to invest, but I'd be able to invest into a fund that has equity in multiple wells, or would I just need to invest maybe $200,000 or $100,000 at each well?

Speaker 2:

I think it would be pretty difficult for an individual investor to take. Achieve diversification by trying to find individual well projects and again, I'm gonna tell you that those are the primary deals that are being done by promoters. So that's why we've set ourselves up as a fund. So if you wanna go invest in a commercial real estate fund, you're looking at the team and their backgrounds because you're trusting that them that they're gonna allocate the capital. If you're gonna try and get the expertise yourself, that's really really difficult to call on gas. So it's critical to believe in who you're investing in and what is there. Are they all gas professionals? That's the biggest question. And really, are they all gas professionals? Look at their resumes, look at their LinkedIn profiles. Have they worked for oil and gas companies and who's on the technical team and do they have any track record with themselves if the fund is new? Like us, obviously we don't have a track record on our funds because we just started, but we have a significant track record myself, my partner, our geologist, I was the president of a company called Petromax Operating and while I was there we divested of three operated projects for over $800 million and a couple other non-op projects for another couple of $100 million. So we had a really good run while I was at Petromax and that's where my partner and I met, and the geologist that was on our team there is with us today. So I would personally I think the best way to manage risk is to put your money into a fund who's going to have diversification.

Speaker 1:

Okay, great. So let's say I wanted to invest into a fund. What would be my minimum? That I would need to invest into a fund too?

Speaker 2:

Well, there's lots of funds not a lot of funds on the street and the minimums vary. But, for example, our unit size is 50 grand and so our minimum investment is a half unit. So we will take half units for 25 grand. We don't get a lot of $25,000 investments, but mostly when we get a $25,000 investment it's somebody who just wants to dip their toe in the water. But the biggest thing about oil and gas for clients to understand is it's not a liquid asset. So whatever you're putting into an oil and gas deal, you're not going to be able to call up and get. Now some documents might try to say that there's some redemption, but I'm just telling you right now it's not going to happen and you're going to take a massive discount if you are trying to redeem it. Whatever you're putting into an oil and gas deal, you need to assume it's a long-term hold and if you sell it too early, by the way, you give back all the tax benefits the majority of the tax benefits anyways to what's called IDC recapture. So, for example, you put $100,000 with us and we turned around and sold the asset two years from now, almost all of those tax benefits that you got in year one or year zero. Basically, are going to go back through IDC recapture.

Speaker 1:

It's similar to the appreciation of recapture, but I imagine if you wait a little longer, where the intangible drilling costs have been lost their redemption value, then the recapture is far less if anything.

Speaker 2:

Yes. So that's why in our funds, we typically tell clients, once we get past year five, we will look for exit strategies. So when we've run the models, once you get past year five, there's not going to be a lot of IDC recapture. The way oil and gas works, it's a declining asset. So that's another unique aspect of oil and gas You're getting the majority of your cashflow early, which is why you have higher IRRs in oil and gas versus commercial real estate, and so the majority of your cashflow has come back in those first five years anyways. And so once you get past year five, it's good to look at strategic opportunities to pull the rest of that cashflow forward and distribute it to your partners. So really, when I say strategic opportunities, it depends on what you can get for it. If the market's down, maybe oil's down, gas is down, or maybe your fund size isn't big enough yet to get a good multiple, so maybe you combine it with a couple funds. Just there's multiple things that can go into that. But if you can get a good multiple, pull forward maybe three to five years of cashflow and then exit and distribute that, that's a good strategy to look at and that's what we do.

Speaker 1:

Cool. So what are typical IRRs? And, to the audience, the total rate of return is, when you consider the ROI, the return on investment, which is your profit each year and then also your future capital gains, so the increasing value that'll eventually turn into a capital gains if you add those together that's your IRR.

Speaker 2:

Yeah, the time value of money is the biggest difference, right, irrs? What drives IRRs is the time value of money how long it takes you to get your money back. So that's why oil and gas projects have higher IRRs. So, again, here's another difference, I would say, between us and what the kind of language you'll get from a lot of people that are offering oil and gas deals. And what I'm talking now is about return profiles. So when we go underwrite assets, I can tell you the criteria we look for when we're looking at an asset and I just gave you that data points historical production data points within five miles to prove our thesis infrastructure in place. Now, when I run it through a financial model, when I run it through a financial model, I'm looking for what I call price beta. So I target me personally. We favor oil deals, so we're never really going to. We could talk about this if you want, but we're not really big. I don't think we would ever participate in 100% dry gas. Well, only because we, when I look at the United States is so flush with natural gas reserves compared to oil, and when you look at the price drop price charts of natural gas versus WTI, you'll see much longer extended periods of depressed natural gas prices versus oil. Oil goes down. It doesn't stay there very long, maybe three months, four months, top six and it comes back up. As an oil and gas guy, anything above $60 is gravy for me in the oil and gas business. So if we're underwriting an asset, so with that belief, when I underwrite an asset at a $60 target, if I can deliver a high single-digit return or a low double-digit return annualize which will equate to about in the 30% IRRs, if I can hit those targets. I will at $60 a barrel, we will consider that asset. On the contrary, let's say that I need $75 a barrel to hit those numbers. There's where your price beta comes into play. If I need $75 oil just to get the high single digits or low double-digit returns and I can, anybody can pull up a price chart and see historically that's not where oil stays for any extended period of time right now. Now I think over the next five to 10 years we're in a very bullish cycle for oil, but still it's a commodity. Price is very volatile. I'm not going to bet on if I need $75 oil for that to work at those levels, I'm not going to invest in that asset. So if you look at our financial projections, when you get to the $80, $90 oils, I mean your IRRs are through the roof 60, 70% but we're targeting again this is how do I manage risk and how do I manage returns for profiles? And again, what this is not doing is staying away from what I believe is another challenge for our industry is promising. Look, I sat through a presentation. I sat through an oil gas presentation about a month ago for another company. I of course, won't say the name, but when they got to the projections of financial projections in a 12 month timeframe, in one year. What they said to the client's versus you could make 250% on your money. Yes, Okay, I'm just here to tell you that's never going to happen. That doesn't happen. So again, you can make promises like that because you can go stick any EUR you want and put any pie in the sky projection for oil prices or natural gas prices and get crazy returns. I mean, if you could go invest in that area and get 250% returns, everybody and their brother would be investing in that area. So again, if I'm looking this is an alternative asset, right, this is an out of the market asset. So if I'm looking in my personal portfolio, right, to diversify and create some hedging in my personal portfolio, to have some out of the market assets, rotate some of my stuff out of the market, have some tax benefits, have some stuff that creates passive income which I know a lot of your clients do and be out of the market, this is oil and gas is a great alternative for that, but it's a great alternative in the sense that it's not liquid. So you have to consider that and it should have its proper allocation within your alts within your personal portfolio. What do I mean by that? If your, if your allocation is 40% the alts, would I tell you to put 40% on oil and gas? No, I wouldn't tell you to put 40% on oil and gas. I would tell you to mix that between. I mean, alts is a huge umbrella right. There's private credit, there's all types of commercial real estate. Oil and gas is a great consideration and, of course, oil and gas has tremendous tax benefits and sometimes you can use oil and gas very strategically. We've been working with a lot of clients who have been. We do a lot of work with financial advisors. So one of the things I've learned myself is this Roth conversion. A lot of people are well, they're taking a lot of clients and converting their IRAs, their traditional IRAs, to a Roth IRA. The biggest downside to that is you have to pay the taxes right then when you make that conversion. So they've been combining it with an investment. If the client has the liquidity, they've been in making an investment into our fund which wipes out that tax bill. So it's a home run if it works for the client. So sometimes you could take a bigger piece of allocation because you're you're, you're accomplishing a strategic object objective. But if you're allocating 10 to 20% of your alternative portfolio to energy, I would say that's a proper allocation to a balanced portfolio. I don't know what I mean. What's your, what's your kind of thesis on that?

Speaker 1:

As far as how much is allocated to the energy. I mean, that's I mean alternatives in general.

Speaker 2:

I'm curious what you're, you know how, what do you see? Where do you kind of balance your own personal portfolio in terms of in the market, out of the market? I have some clients that are 100%. They don't want to go anywhere near the market.

Speaker 1:

Yeah, well, you know I mean me personally. What I'm doing with my cash and my long-term planning is, you know, as far as retirement and my nest data is, I'm going to eventually phase myself out of my business and the the equity and the valuation of the business will be significant. And also I want to invest in short-term rentals because the tax savings is really good for short-term rentals right now, as soon as depreciation fades down. It's not that exciting if we get to $0, most appreciation, unless you have cashed about multi-billion dollar properties which STR. So you know I likely will consider things like oil and gas and also I'll be looking into charitable structures to further reduce my tax and then invest into things like oil and gas and other opportunities like maybe index funds and maybe even real estate syndication systems. Or it would be wonderful to have passive income through ownership interest in other businesses, which would be working. Interest in oil and gas is that we'd be legitimate passive income that I can offset with passive real estate loss.

Speaker 2:

Yeah, yeah, I think a great way to look at oil and gas is a like a long-term strategy in the sense, and what I mean by that is you don't look at it just as year one, right? If you're over a five-year period, you're making a certain level of investment into oil and gas at a certain point. As that time rolls on in your investment after investment, you're obviously always going to get that initial tax break and then, of course, you know the depletion allowance that comes with, which is another tax break, where you don't pay 15, pay tax on the first 15%. But now you're going to start to build up a nice cash flow stream, right, and so that's a nice way to build up passive income, without a doubt. So royalties is another way to do that in oil and gas. The only difference between royalties is you don't get the upfront tax benefits. I think it's a great tool using the right way. I think it's just, you know, I think it's proper that. I just think it's very important that people understand the risk associated with oil and gas versus a commercial real estate deal, and I think it's very imperative that my advice to anybody would be is just, really, you know, ask the hard questions don't get sold. Then Ask the hard questions for yourself and who it is and what their background is, and then dive into the PPM, dive into the offering documents. If it's very difficult when you're reading their documents to understand how they're getting paid and if they're aligned with you, I'm just going to tell you that's a red flag because it's not hard to disclose that A lot of the PPMs I read are. You know you got to track it from page 40 to page 250 to understand all the fees. You know our PPM is on one page. It's not hard, you know. I mean we have a 4% fee upfront and then we get 13% of the revenue off the wells and the clients get 87. And after payout that goes to 25 and we stay we go to 25 and they go to 75. That's where it stays. I mean it takes like four paragraphs. I mean it's not hard to explain that. So I think it's critical and that creates alignment, right? So that's the other thing in oil gas deals, which it is in every private placement deal, right? You don't want the sponsor making their money upfront off of you. So if you're giving someone $100,000 and they're taking 20, 30, 40 grand and sticking it in their pocket, I think Flo vest and then taking the rest and invest in it, I would just suggest, regardless of whether it's oil and gas or any type of a deal, that's probably not an appropriate investment because you're not aligned with the sponsor.

Speaker 1:

Yeah, so well. Have you seen anyone investing your funds with retirement accounts, whether Roth or traditional IRAs, solo or low case, self-directed or low case?

Speaker 2:

You can but nobody does, because you lose the tax benefits. Right, and this is where you have the royalty, where there's, the benefits aren't as Royalties would be a great way to do an IRA, invest through an IRA, because it's not you know. The whole thing on oil and gas, just so people understand, is which you're an account, so I'm probably telling you what you already know. But oil and gas has the IDC deduction and of course, we can take advantage of bonus depreciation from the tax cut or tax cut jobs app, which is starting to sunset this year. But the code of the sector is like I think it's 469c3, which basically says even though this is a passive investment, if you are investing in a way that doesn't limit your liability upfront, that's why you get to offset ordinary income. That, right there is what separates the oil and gas. That's what makes the oil and gas investment so unique. Yeah, so that's the critical one, and that again means that you should be investing as a GP upfront. You start out as a GP and, again, if your client, if whoever, can't explain to you what that is or how that works and or how, as an operator, you manage that risk for the client, again I would say that's another red flag because technically, what GP means is you are at risk, right. So, but there are really easy ways to explain to an investor how an operator and how a sponsor manages those risks for the client, so that that's a very de minimis risk. And then, for example, like in our documents, once the last well is in our partnership agreement, once the last well is put into production, the conversion automatically happens from GP to LAPI. So, but that's the big, big carrot that the Congress put into the code a long time ago to incentivize capital to flow towards oil and gas investment in the United States, which, of course not that we want to do a history lesson, but the reason why that was all done is, if you go back to the 70s when it was put in place, right, we're producing about 3 million barrels a day and importing 17 million barrels a day from around the country, primary of the Middle East. It's a huge security risk for the United States. And so, as they do with the code right, they use the code our Congress does to incentivize behavior, sometimes more for political reasons than for, maybe, the right reasons, but whatever. But that's why it's been in the code and it gets talked, it gets bantered around every election season but it never gets changed. And the reason they won't change it is because it would. It would put a big crush onto the industry, and energy independence is, regardless of what anybody thinks, is the big deal for the United States. So we're the largest producer in the world now, which is crazy to think where we've come from. And that's all due to the Shell Revolution and horizontal drilling and the new fracking technologies. That happened about 15, started about 15 years ago. It's a pretty amazing story.

Speaker 1:

Yeah. So in some other considerations from a tax perspective is some other interesting things. There's something called a C store. So yeah, if you have a store on a gas station, 100% of that qualifies for bonus depreciation, or at least now it's, 80% of it will get that favorable bonus depreciation. Another tax incentive for energy development there's also we'll probably have another talk on solar energy. Tax credits is a wonderful opportunity for where you've exhausted all our options in the same client. It was like a couple of hundred thousand in taxes. We say, instead of paying taxes, why don't we buy tax credits for solar energy and a discount, then generate cash flow from the access we're purchasing using leverage. And then another consideration when you're investing in oil gas and this is why you really wanna collaborate with an accountant. I always say this time and time again do not want a DIY or own tax plan because you don't really know and there's just too much complexity. And when it comes to how much you can deduct as indetainable, drilling costs approximately 80 cents per dollar. But you also have to consider alternative minimum tax which may restrict the amount of tax deduction. So that's another consideration from a tax perspective, which is why it's so important to collaborate with your tax advisor through this process.

Speaker 2:

Yeah, I agree 100%. The AMT in my experience rarely comes into play. The only time I've seen it come into play is some of these Roth conversions. So when you're doing, if you're gonna use the strategy of combining oil and gas investment to do a Roth conversion, you should always do your AMT calculations anyways. And you're 100% right, you should always just have an accountant anyways doing this, a CPA. And I always tell people look, the IDC deduction is just basically partnership account. So I guess you could yeah, you could figure that out yourself, but you're not gonna figure out depletion allowance on your own. So if you wanna take advantage of that depletion allowance, you are going to need a CPA and you're gonna need a CPA that is willing to do the work. Not that it's hard, but they're gonna have to do the work to understand how to calculate depletion allowance, to take advantage which is a big advantage to not pay taxes on the first 15% of the income you receive. So I will reinforce your statement mark that a CPA and a good CPA is a critical piece to anybody's financial health, and a CPA who's willing to not just do returns right To think through things and come up with other ideas which those are hard to find by the way yeah most CPAs are what I call 1040 factories.

Speaker 1:

Yeah, who is this folks reporting what happened that they don't really advise you to be proactive through the year and when you're a certain income level and paying over $100,000 in taxes? You need a little more than that to have a game plan.

Speaker 2:

Yeah, it's. Finding a good account is good CPA partner is not only from your business standpoint, from the personal standpoint is massively beneficial. So call mark.

Speaker 1:

That's right, you're ready here, awesome. Now, steve, before we go, I want to give you the opportunity. You have any call to action for the audience. Here's your chance. And also, how can they learn more about you and connect with you and maybe consider some of your investments? Yeah, so we currently have a fund open.

Speaker 2:

So our website I mean you can see it right there is INVITOEPcom. You can go on there and click on current opportunities. Again, that'll take you to we house all of our fund on another thing to kind of differentiate. So we want to be as institutional looking as possible, so our fund is housed on a fintech platform where everything's digital. All the compliance stuff, all the compliance, due diligence documents are in there. I have background checks. That's another thing. By the way, I would ask for background checks on your sponsor and ask them if they'll provide it. So we pay. Those were 1500 bucks a pop for pretty extensive background checks on myself and my partner. You want to know look, you want to know we're not criminals. But more importantly, you want to know we don't have tax liens, bankruptcies, if we're managing your money. Not to say that someone had that, it would kill a deal, but you'd want it explained, right. And then all your investments online. You can track your investment online, so it's easy to invest and it's easy to track it afterwards. Other than that, I would say, if you want to follow me on LinkedIn, I try to put out a lot of publishing. I just wrote an ebook on wealth and taxes. I try to add value other ways. If you have a deal, I make this offer every time to any one of your clients. Mark, if you want me to, if they're looking at an oil and gas deal, I'll look at it for free. I'm not going to do a technical, a deep technical analysis of the asset. I will give a, I will give a cursory review of that and since we've been around a long time, we pretty much know. But the biggest thing I will do for you is I have read, you know, dozens and dozens of PPMs. I'm pretty skilled at reading PPMs and oil and gas offerings right now. So the biggest thing I can do for people is I'll read it. I can do for people as I'll read the PPM and make sure you understand the fee structure and maybe things to look for. So no problem doing that for free for anybody, but we'd love for having anybody to be partners with us. You know this year's fund is going well. We're hoping we have subscriptions available today we're going to it'll be a mixture of operated and non-operated assets Because of our you know long backgrounds in the industry. We have a lot of relationships, so our non-operated projects are always under some of the major operators so we're able to get into, get small participations and some of the bigger publicly traded operators so we blend that into our fund to create diversification. So, other than that, more than happy to talk to anybody more about oil and gas if they want it. You know, I just did a webinar recently the thing called the Money Show, which was 30 minutes on just purely navigating oil and gas investments. Didn't talk about our fund at all of them to say we had one at the end. More than happy to forward that recording to anybody that's interested in listening to it. So, education I'm a big believer in educating people in our industry and the advantages, but I also think it's proper for people to understand and in the investment, the risks that are associated with it so they can go into it eyes wide open.

Speaker 1:

Awesome. Well, hey, Steve, what do you do outside of work and what do you do?

Speaker 2:

Well, I used to do things outside of work until I started my own business, so not all I do is work. I'm hoping that change. Look, I, you know, I'm 54, man, so working out is critical to stay healthy mentally and physically. So I try to get into the gym on an act on a regular basis. I used to play golf. I still would like to play golf. That has fallen off. I have kids, so I've got, you know, I've actually got a 30 year old and I have a granddaughter. And then my daughter just graduated high school, had to off the college next month in Florida, and then my son will be a senior in high school. So when I'm not working man, I'm usually at home with the family. I'm blessed to have kids that actually like to hang around the house and do stuff with parents. And you know, other than that, taking trips and then I and I, you know I'm a football season is one of my passions. So you know I already got a multiple football trips planned. I went to central Michigan and we played Notre Dame this year. So I'm I think I'm headed up to the Notre Dame game for sure, and my wife went to OU, so we usually go to a couple of games. I love college football, so that's always on the agendas and Saturdays If I'm not at a game in Saturday, I'm usually in front of the TV on a on a Saturday, which which my wife may not exactly like, but that's usually what I like to do. So awesome.

Speaker 1:

Yeah, I don't watch as much as I used to do as I'm a business owner, but I'm going to have a safe buck, so those are a lot of fun, a lot of fun games to watch.

Speaker 2:

Yeah, the college football is. I love the NFL to you, but I love the atmosphere of college football is just different, so I really enjoy it. It's a good time, the college football is awesome. So, but yeah, man, and maybe I'll make it out to Atlanta in all these days and we'll get to go out and dinner, as we talked about before.

Speaker 1:

Absolutely. We'll have a tax deductible meal together.

Speaker 2:

And there's limits on that right. It's percent. There you go. It's why you need a good account right To remind you of your limits. So yeah man. And again, my offer is there. Totally, man, if you have clients that are interested in learning more, more than happy to do whatever it takes to help them, whether it's one on one we're one on one with someone or put on another webinar, I'm happy to do that.

Speaker 1:

Awesome, steve. Thank you so much for your time. You guys found this valuable. You got Steve's information in the show notes. Subscribe if you want to continue listening and again, if you own anyone use our services or you're interested, email info at markbrilbertcpacom. Thank you very much.

Speaker 2:

Thank you, mark, appreciate it.

Oil and Gas Investment
Assessing Risk in Oil Investment
Investing in Oil and Gas Funds
Oil and Gas Investing for Income
Tax Considerations for Energy Investments