The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 73 - Oil & Gas Tax Investing Workshop w/ Patra Francis
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Curious about how you can make the most of your investments in the oil and gas industry while navigating through complex tax benefits? This episode promises to equip you with a comprehensive understanding of both the economic advantages and the potential challenges of investing in this capital-intensive sector. Hosted with a focus on interaction and learning, we guide you through the intricate world of oil and gas investments, emphasizing strategic timing and asset class selection that can elevate your investment portfolio.
Join us as we unpack the nuances of tax benefits, such as intangible drilling costs and depletion allowances, which can significantly reduce your tax implications. We engage with the critical macroeconomic trends influencing the industry, including the transition to green energy and the impact of ESG criteria on private equity. Our discussion also casts light on the current energy landscape, revealing untapped opportunities for private capital due to the funding gap in oil and gas and the ongoing reliance on fossil fuels.
To round out your understanding, we delve into the varied investment strategies at your disposal—from royalty rights to working interests—and explore tax strategies that can enhance your returns. Our conversation extends to practical advice for navigating the operational structure of the industry, the importance of consulting with a CPA, and the potential risks involved. With this episode, you can expect to leave with a well-rounded perspective on how to leverage oil and g
What's up guys? What's up guys? What's up Pete?
Speaker 2:I'm excited. This is going to be amazing. Oh, it's going to be legendary. I'm going to keep my camera off, that's all. Right. Right, what'd you say? I'm going to keep my camera off and listen. Oh yeah, that's great. Yeah, okay.
Speaker 3:Hey, pete, hey.
Speaker 1:Patrick, pastor, you ready to go?
Speaker 3:where's mike? Where's mike? Uh, I don't see I think we can just wait for people to join first no, it's to start right now just start now um, I'm joking we usually wait Like around five minutes For people to come in. Yeah, I saw One of the Clients Is here too. His name is Peter.
Speaker 2:Yeah, we have. We have a lot of people Expected to attend this one, so Good luck, guys. I'll be listening.
Speaker 3:So, basically, I am, um, we're gonna, we're gonna, I'm gonna open the floor then, and then you can, and mark gonna talk about a slide I already shared with you, and then, um, then you can ask my questions, or people can ask questions, right.
Speaker 2:Yeah people are still coming in and I imagine they'll continue coming in. So I'm going to go to the bathroom real quick and then we will riff on this. I'll talk about tax implications, you guys talk about the profit and economic benefits, and we'll rock the house.
Speaker 3:Yeah, I don't see Mike yet. That's Eric. Hey, Eric, how you yet?
Speaker 2:That's Eric.
Speaker 3:Hey Eric, how you doing, hi Eric, hey guys, how's it going over there? Hey, what's the name of?
Speaker 2:that rum, that famous rum from Guatemala, Is it called like Zacaba Zacaya or something Zacapa Zacapa? That sounds good, it's good they got a 30-year age one. It's really good they got a 30-year age one.
Speaker 1:I'll bring you guys some one day. That'd be cool. We got 15-year-old one.
Speaker 3:Let me call Mike real quick. I'm going to call Mike once again.
Speaker 2:Yeah, you know, we can give him another minute or so.
Speaker 3:That's one minute, we can keep him some time. I know that he's going to come. I'll be right back yes, hey, evig, where are you?
Speaker 1:I'm you know what, I'm across my street. We came to eat lunch over here with a couple of people, so that's what I was calling to see where you were, but I forgot, oh you you called me yeah well, I texted you. Oh yeah, because I didn't see you called me. Yeah Well, I texted you. Oh yeah, because I didn't see you when.
Speaker 2:I was on the panel I was like, oh, where's Petra? I thought you had already left for the seminar.
Speaker 3:I took a picture for you. I will send it to you. Oh nice.
Speaker 1:You know what that reminds me? Did Andy Park ever send you the other pictures?
Speaker 3:Yes, I have my V V8 sending it out today. Ah, okay, yeah, I want to see how my headshot ended up.
Speaker 1:I need a new LinkedIn profile.
Speaker 3:It looks great.
Speaker 1:It looks great. Well, thank you for coming, Petra. It was nice to see you over here.
Speaker 3:How did we? Do Of course.
Speaker 1:Did we?
Speaker 3:do okay. Of course, you look like a star. I could not stay for the whole time because I have to making sure that this webinar runs smoothly and we have some a little hiccup, so that's why if it's too loud in here, I'm gonna put it on mute, so it doesn't disturb everybody else when everybody starts looking in yeah, I'm gonna call mike, I'm gonna call my co-host.
Speaker 2:Anyway, just to make sure he has a I like this format much more than I like the uh webinar format, because we're actually talking and having conversations and like that's why we call it a workshop. It has to be a. This has to be a conversation. You know, I think people have an if you want to listen to something on your iPhone while you're going on a jog, that's a little different. That's a little different, but I think people value something that's going to be a little more interactive here. So we'll have some fun with this.
Speaker 3:Yeah, I'm going to call Mike.
Speaker 2:All right, cool. We're going to start in about probably another two minutes and you know I can start ripping on, so I have I'm going to get up my slides for the oil and gas. A lot of it is from. I trained my staff on how to advise our our clients on oil and gas back in April and there's just there's just so much cool stuff out there that when you really dive into the weeds on on things you can do with oil and gas that people don't think about, there's some really creative opportunities here by the way, guys, if I have to jump off uh halfway or there about through, I apologize in advance.
Speaker 2:No problem halfway or there about through. I apologize in advance. No problem, oil and gas All right, let's see here you know what?
Speaker 3:because he incensed your time and he hopping in right now. Anyway, he, he incensed your time, that's why a little time messed up, but it's all good, he's hopping in right now and I can can like to do an open.
Speaker 2:All right cool, so I can share some slides as well.
Speaker 3:Maybe after I open the open floor, then All right.
Speaker 2:Well, anyone can share right now their screen.
Speaker 3:I'm not sharing any screen.
Speaker 2:Okay.
Speaker 3:Mike is going to share it.
Speaker 2:This will be edited down when I put it in our video library, so what I'm going to do is let's just have a yeah, so welcome everybody. We currently have 15 people on the call, which is actually a record high amount for our tax workshops, because they are so exciting.
Speaker 3:I think people are going to study. Come on. 15 people, Come on.
Speaker 2:There we go. I'm liking the spirit here. I wish that.
Speaker 2:So welcome everybody. Let's get this party started. So oil and gas investing is super cool, highly profitable, highly tax advantaged, next to real estate and sometimes it's better than real estate the tax savings opportunities here. But I know a lot of you guys have questions or maybe don't know enough about this or have objections. So luckily we have some special guests here. We have Patra Francis and Mike who are raising capital and they help people find the right oil and gas deals, not con artists they don't connect you with. They connect you with the right people who do this ethically and understand now how this works, and they're going to help you out with understanding what this investment means the profitability, the functionality and the whole process. So what I'm going to do is in just a little bit here. I'm going to let you guys take it away and I'm going to interrupt you when I want to riff on taxes because I love this stuff so much, and I'm going to let you guys leave the conversation. So, patrick, can you introduce yourself in 60 seconds or less?
Speaker 3:60 seconds, sure. So, hi everyone, I'm so excited to be here today for our workshop and my name is Patra Francis the way you pronounce it is like Cleopatra and I am excited to be a co-host today, along with Mark Perbert and we have Mike right here too and he's a head of capital development at Aspen Fund and together today we're going to team up to bring you this workshop to talk about how oil and gas investment can offer significant tax savings, and also we can have like Q&A at the end. And I also a tax advisor, but I am a little bit different than other tax advisors because I am all about return of investment and I love money. But when I said about I love money because I love like in a nice way I love freedom. So that's why I want, when I learn about something and I want to share it with everyone, and I'm planning to team up with Aspen and, with that being said, I will turn it over to Mike to dive in.
Speaker 2:Why don't you tell everybody a little bit about yourself?
Speaker 1:Yeah, you bet, well, pleasure being with you guys. Can you hear me okay? Yes, awesome, well, pleasure to be with you. Thanks for having me on. So I'm with Aspen Funds. We're a firm based in Kansas City and we're multidisciplinary, so we've got assets ranging from debt, credit funds, real estate, equity investments and then, obviously, oil and gas. So we've been operating for about 12 years and my role I head up everything capital development, I head up investor relations and work with all of our we've got four partners here that we all work together, bringing all the capital for the funds that we operate. So excited to partner with folks like Patra, who kind of bring a lot of value to her community, and excited to be here and share a little bit about this sector.
Speaker 2:All right, wonderful. In case for those who don't know me, my name is Mark Proberg. I'm a CPA and founder of Prosperal CPA. Now, a lot of these people here are our clients as well. We have exclusive workshops for our clients and we specialize in creating freedom in the lives of entrepreneurs through superior tax planning and services. You guys so also for some of our clients I'm gonna have some follow-up tax resources and work papers and video instructions to help you further evaluate the tax impacts of investing in oil and gas and additional considerations for you, and obviously we can discuss this in our planning calls. So that's some of the fun stuff that we're going to be doing. Patra and Mike, I'll let you guys take it away. You can share your screen and let's get into it.
Speaker 1:Sounds good. I'm going to share my screen. Make sure that everyone sees this, okay. Can everyone see this? Okay? Yes, Awesome, Well, we're going to. I'm going to roll through this and really leave a lot more time for Q&A, but just want to give some context for this sector for folks. This is new for a lot of people and you know, particularly on the tax side, there's a lot of shiny objects out there and we'll get into a little bit of that, but also just kind of I can speak more broadly to the sector and the industry as a whole. So hopefully, leave a lot of time for Q&A for people. So, again, excited to partner with you, Patra, on some of the things that we're that we have going on.
Speaker 2:So a disclaimer I want you to put your questions in the in the chat, and I'll, at the end, if we don't address it, we'll address every single question. I encourage you guys, with the questions in the chat, you can also we'll. We'll remove the mute speaker If you want to talk and just have a conversation on these questions as well. So if you can't talk or you're sneaking out of your office, put the question in the chat. And also, if you want to go live, just let us know, raise your hand and we'll make you go live as well. All right, continue please.
Speaker 1:Yeah, of course. Well, standard kind of disclaimers here. This is not an offer for securities, this is. You know, certainly in any investment you need to review private placement memorandums. You know there's certainly limitations. Some of the information I'm sharing in here is truly just for informational purposes only. So, and yeah, kind of standard disclaimers here.
Speaker 1:So who's Aspen? I'll just kind of give you some context for who we are. We've been operating for we're in our 12th year right now and we've raised about $250 million in investor capital and have about $600 million in assets under management. And kind of the number we're very excited about here is this $65 million in distribution since inception. So we like to send money back to our investors. But I won't share a ton about us. This is more about you guys, more about the sector in general. So really I'm going to talk kind of high level here and again we'll get into some more detail, but really a lot of this is more conceptual. So I would say rewinding to the very top would be why oil and gas for us and what we're seeing in the marketplace and in the economy globally and here nationally is a unique opportunity. So I wanted to talk about our process, what we really look at. First and foremost always is macroeconomics.
Speaker 1:We want to be an investment where the tide is under our ship, if you will. We want to be an investment where the tide is under our ship, if you will, and even if something was mismanaged, if the tides are high it's really guiding the investment into success, and so some of the lessons that we've learned over the past decade is really timing is very critical, and so that's why we study macroeconomics first and then, as we identify those trends, then we identify the best asset classes and strategies to take advantage of those trends, and then we assemble our teams and create structures that are friendly for our retail investors. So tax benefits is a lot of what you guys are here for, and certainly this is a tail that sometimes wags the dog in some sense. So I'll kind of give you some overview here. I'm not going to spend a ton of time going.
Speaker 1:We'll leave more time for Q&A on this, but generally in this space there's three main tax benefits. So the two big ones are what you'll see here is intangible drilling costs and depletion. So, as always, you should always consult with your CPA on all this. I'm not a CPA. I can't provide you tax advice. This is non-tax advice for me personally. So of course, there's people in this room that can help you. So please be sure to do that in this room that can help you. Please be sure to do that in any investment that you make.
Speaker 1:Intangible drilling costs what are those? These are really the expenses that are related to drilling In the oil and gas world. The structure of the industry in its basic terms is that you have a mineral rights owner. This is someone who owns the right below the ground to drill. Generally, that mineral rights owner will lease those rights to an operator. An operator is generally these oil and gas companies who are doing the drilling, the day-to-day setting up the rig, getting all the pumps going, doing everything that's needed to go and drill these wells. So there's a lot of tax incentive for them.
Speaker 1:And really intangible drilling cost is the big one that stands out to a lot of people because it's a very capital-intensive industry. There's a lot of equipment, there's a lot of study, there's a lot of the leases themselves can be expensive to acquire. You've got a lot of fuel costs, you've got repair and supplies, a lot of overhead. It's very, very cost intensive, capital intensive. To drill a new well that's where these incentives lie really is as a new well is being created, you can think of it as all that capital is going into the ground, literally throwing it down a hole in a sense. So along with that comes operating losses, and those operating losses the unique benefit of intangible drilling costs, when structured correctly in an investment, can be used to offset ordinary income for even passive investors, to offset ordinary income for even passive investors. So that's a known fact. We can kind of again dig into a little bit more details, but that's what those intangible drilling costs are. They're the costs associated with the drilling. So it has nothing to do with kind of the stabilized, long-term ongoing drilling. It's the setup, and so generally in this space you're going to see a lot of operators out there that are doing these drilling, that are drilling new wells, and the big carrot, if you will, on the tax side, is the big one is these intangible drilling costs. So along with that would be depletion.
Speaker 1:So depletion, you can think of it opposite. For those of you who probably know real estate, depletion is kind of the opposite of appreciation. So in real estate generally rents go up over time, right. In oil and gas it's kind of the opposite, where all of the capital that we expend to go drill and extract all these minerals from the ground, those are consumed. So they don't renew, they're consumed and then they deplete over time. So those wells aren't going to be alive forever, we're not going to be able to drill them forever and so there's more of an accelerated write-off, if you will. That reduces the tax implication for those that are producing. So for our investments, for example, we get basically about a 15% haircut off the top of the income. So if you had $100,000 in income, to use a round number, $85,000 is actually the reported income, because that depletion is a credit to reduce the tax implication for that income.
Speaker 1:So those two in tandem, the intangible drilling cost and depletion, are the very big ones. There is depreciation that can pass through on equipment, things like that. Again, this is all with the right structures in place. But those are really the big ones that pass through to investors and often what are very, very exciting for people to see. So again, there'll be more questions. We can circle back to all of this, but that's just kind of laying out what those are as a baseline.
Speaker 1:So macro trends, kind of why oil and gas? So I talked about before, what we really are looking for is looking ahead and seeing those trends, trying to see. You can't predict the waves, but you might be able to predict some of the tides and that's what we're really looking for here at Aspen is to identify those. So some of the key things that we're seeing is really a reality check for the green initiative and we're seeing, you know, through the last decade, a huge push to, you know, have a green revolution and get away completely from fossil fuels. And the reality check is we're nowhere near the supply on the basic materials needed to actually complete a transition there. So if you look at some of these copper, lithium, cobalt are a few of the key ingredients, if you will, for electric cars in particular, and what you're seeing is demand continuing to increase but supply being nowhere near that need and it's just going to take time. It's not that it can't be done. But the reality check is we can't just step off the edge of the cliff right. We need to have a plan in place and ultimately there's really no other solution at this stage to be able to move, mass and power our entire grid outside of fossil fuels. So we're seeing that in the trend is that there's just nowhere near the supply and the mining efforts that would be that are needed to actually bring that supply take a long time. So lithium, for example, is about average of 16.5 years to actually develop those mines to deliver so kind of key components when you really drill down into the numbers. Key components when you really drill down into the numbers.
Speaker 1:This is from the Paris Agreement, the IEA. What are the goals that would be needed in order to complete this revolution into fully green energy? So we need massive investment into natural resource development, resource security and just time, lots and lots of time. So this is where we are, kind of the stated policy scenario is from their Paris Agreement. What would that be needed? But long term, as they've looked at this, as we forecast out into 2040 and beyond, is how much would actually be needed to sustainably do this? And you'll see, with all of these. We're far lagging behind what the plan is, and so there's really no way at this stage to make that full transition.
Speaker 1:Kind of a tangent to that would be really the grid In some states. We're seeing some cities in particular. We're seeing a lot of electric vehicles, for example, can't even get powered because there's not enough energy supply there. The grid can't handle the amount of electricity, the amount of load that's needed to charge all the vehicles. So there's infrastructure that needs to take place, there's mining operations that need to take place. So all of that is just going to take time and in the interim, if you're reducing supply, it's creating a unique kind of opportunity here. So long way from replacing carbon. So this is as of 2020, these number, I'm sorry, as of 2022 from Zion Geopolitics I don't know if you guys follow him at all, but fantastic overview here but basically, non-carbon makes up 17% of basically all fuels, so carbon would be considered.
Speaker 1:Coal, natural gas and oil make up 83% of all fuels that are used globally. So 17% is this sliver. Solar is basically nothing of this. 17%, very, very small Nuclear, hydro, wind, solar and then other renewables. So we're just far from being able to phase out fossil fuels, should we? These are all pieces of the equation. So I think there's a lot of political push behind this, which is for each to kind of choose. But ultimately, if you look at it purely by the data, we're just nowhere near that transition.
Speaker 1:So what we're seeing kind of as a result is a lot of supply in this push to go green has been reduction in supply for oil and gas and underinvestment in a very capital-intensive industry. There's been massive underinvestment through the last decade and what that over time is doing is constraining supply. So if you boil it down to simple terms, if demand stays steady, supply goes down. What happens? Prices go up. So what we are expecting over time is that prices will pretty significantly increase globally as well as here in the US. So we're betting on that happening. I wouldn't say we're betting on that happening. I would say we're betting on that. We're preparing ourselves for that upside but really planning for a more moderate scenario. But knowing that there's at some point, if you continue to underinvest, energy prices can only go up.
Speaker 1:So these are some of the unique things that we're seeing in this kind of in this supply standpoint coming down through basically next year collapse in private equity funding. So one of the big kind of political pushes behind this is a lot of the large pension funds, very large private equity has really dominated the oil and gas and kind of the middle market space for a very long time and ESG has come around to kind of score those investments and it's creating disincentive, if you will, to continue to fund oil and gas operations and, as a result, what we're seeing is this massive funding gap again in a very capital intensive. So we're seeing unique opportunities for those in private capital and individual investors to partner with other firms that are working in the middle market to come in because there's just not as much competition. So if there's less competition and a lot of drilling opportunities, the private capital is really the solution. There's really not a whole lot of other solutions out there because the larger these firms have become, the more disincentive there is for them from a scoring standpoint.
Speaker 1:Oil and gas trends this is more on the demand side. We're expecting oil and gas to actually continue to increase through 2030, if not stay pretty close to where we are today, so very steady in terms of demand. Again, same thing. If demand stays steady, if supply comes down, what happens? Prices go up. Pricing forecasts are from some of the larger institutions out there larger banks out there is that prices are going to be pretty high over the next several years. So this would be price per barrel basically for oil. We'll just use oil as an example here. There's other minerals, but kind of how we structure all of our investments is to have a $67 kind of baseline average through a 10-year life. But really position ourselves for this upside of what we think will happen, knowing that we'll still be profitable at this kind of moderate and underwrite more to the downside, knowing that we'll kind of set ourselves up for this potential upside. That's definitely where we see things going and again, this is powering a lot of the why we would go after oil and gas.
Speaker 1:So important for everybody to understand key risks in really any investment, but oil and gas in particular. This is a commodity, so there are several things. So one you have operator risks, like who is it that is actually doing the drilling operations. The other would be the actual drilling risks. Things don't always go to plan right and liabilities can be incurred. Litigations can happen when drilling doesn't go right. They make mistakes, things like that. There's certainly environmental risks if water supplies can be contaminated, and this is a lot of stuff you hear kind of in the narrative. But these are all risks and then ultimately commodity prices are a global calculus. So there's really no way to control what does oil trade at today, what does natural gas trade at today. Those are all pricing risks that cannot be controlled. So those are important things for everyone to understand that this is a very opportunistic investment and there absolutely are risks that need to be understood and accounted for. Of course there are benefits and of course there's exciting things that people can hit in terms of return, but that's very, very important to always highlight the risks that are associated.
Speaker 1:For us kind of our strategy this is our most recent fund that we closed out last year is we partner with major operators.
Speaker 1:So these are companies predominantly that are publicly traded and multi-billion dollar type companies who are very sophisticated, well-capitalized and have a proven track record on the operations side. So this is a great way for us to kind of offset a lot of those kind of operating and drilling risks, even environmental risks, when you've got large publicly traded companies that you're partnering with alongside. So I'm not talking too much more about our structure. This is more kind of informational purposes only, but this is just to kind of demonstrate some of the key things for you guys to look at when you're assessing oil and gas investments. So Patra will kind of dig into some of this along the way. She's definitely going to have some investment opportunities for you. So, patra, you can kind of speak to this, but most of the time again, this is a quick summary, but I really wanted to highlight some of the structural things and then leave lots of time for Q&A, so I'll turn it back over to you guys.
Speaker 3:Thank you so much, mike, for the presentation. Those are great information and I think that we can open I mean, if anyone interested there a qr code that we maybe can pop up again for the qr code. You can, you know, scan the qr code and set up a meeting with me or um, put a soft commit and we will reach out to you. But, however, I want to use this opportunity, since mike is here for us, to ask him anything about. You know um, what are? You know the risks that when you get into any investment, right, there's always a risk involved.
Speaker 3:But the potential reward in oil and gas is going to be significant. The ROI is around like three to four percent, like three to four times, not percent, three to four times multiple, four times, not percent. There is a four time uh, multiple, so and um, but when, even though there is a risk involved. But, however, if you put money into your checking or saving account, you already know that you are. You can see that your risk is there because there is um. You know like the cost of, like inflation and all that. That that means your money is going to reduce in value.
Speaker 3:So this is going to be a great opportunity, and most of the time when the many people invest into real estate, and most of the time when the real estate is struggling, oil and gas tend to, you know, doing well, and when the oil and gas is not doing well, real estate tend to do well, right? So what I want you to take a look at is on the diversify, your portfolio, and this would be a great asset class for you to take a look into, so even we can. I think there are some people asking questions here, and maybe Mike, you can touch base on that, or Mark, if you have anything to say on this.
Speaker 2:Yeah. So talk about diversification. Not only that, but the thing I like about oil and gas is when it's profitable, it's treated as passive income. So if you guys don't have real estate, professional tax status and there's a year that you're not investing to the oil and gas to keep on, eventually the profits are going to accumulate year after year and you're going to have a positive income statement. Well, if you have real estate, you can use your depreciation and maximize your depreciation with cost segregation studies to offset the cash flow from oil and gas. And then it's also you're not paying FICA taxes.
Speaker 2:So even when it's profitable, most of our clients invest year after year and create losses on their tax returns and it reduces their taxable income. But let's say you don't reinvest to get that year one intangible drilling cost deduction, you're likely still going to see benefits. Well, first off, you're getting more cash flow, but also it's tax advantage with your depletion deduction and you can use real estate losses even without rep status or short-term rental loopholes. The losses from the real estate, because they're also passive, will offset your profits in oil and gas. So not only do you diversify, but for some of you guys with real estate who aren't using the losses. This is your first chance to actually activate these losses and pay no taxes on the cash flow from your oil and gas, or less taxes depending on your situation.
Speaker 3:Yeah, and usually, mike, is that true that most of the time already a depreciation allowance is about 15%? So let's say that you get a distribution of random number 10,000. You only pay 8,500 versus 10,000 of your distribution. So that's not just a tax benefit upfront on the intangible dealing cost, you can also get the benefit from the depletion allowance as well.
Speaker 1:Yeah, that would come every year on those investments. So it creates a ton of. Not only can you have write-offs from the things we've been talking about, but you're also creating a lot of tax efficiency along the way for particularly ones that are already producing. So, where you're getting lots of income, that income is, on paper, being reduced pretty dramatically.
Speaker 2:I got a question. I'm going to read out and I'm not going to answer because I don't know what this is. What does STEPS and SDS stand for?
Speaker 1:So these are like scenarios. So the EIA is kind of a global energy advisory basically and they have published a bunch of scenarios, basically forward-looking scenarios, so how much energy are we going to need? So it's a model basically. So that's what those scenarios are predicting in terms of what are the demand and supply needs for particular terms of what are the demand and supply needs for particular. You know all different types of energy, right? So not just fossil fuels. So I can let me find a. I can. I think, yeah, I can reply on this one. Yeah, I'll throw the link in there, that'll kind of tie you into those. But these are kind of the global authorities on. You know how much supply, how much demand are going to be needed to meet some of the objectives, basically.
Speaker 2:Robert Leonard. Question for you, Patrick. I'm going to give this one to you, Patrick. Can investors choose when to take distributions? For example, leave funds invested until in a good position to offset taxes?
Speaker 3:Usually we pay on the potential monthly distribution and each monthly distribution. At the end of the year you're going to get the form K-1 from the fund that you are investing in and the amount it's going to be less than what you I mean you're going to receive a K-1 when you file tax. You're going to pay 15% less than what you actually receive.
Speaker 2:Right. So the amount that's taxable is less than the amount you receive, which is awesome. That's better than your W-2 job, because in your W-2 job you're paying taxes on all that that hits your account.
Speaker 3:Yeah, and I think one thing to touch base on that too with oil and gas you can offset W-2 passive active income and you don't have. I think Mark said that already. But I just want to add something more you can. You don't need to meet like 100 hours of participation, material participation, on this, so it can offset any type of income. And you don't need to be a real estate professional either, Because many times what came across is when you invest into real estate and you have, like you earn income, either you are a doctor, you are, because I have many doctors and, like many doctors, many business owners who are clients and they cannot use, even though they own real estate, they they have a passive loss but they cannot offset their earned income.
Speaker 3:With oil and gas you can offset those uh income. It doesn't really matter what type of income you receive. Um, I have a question for Mike if you can touch base on you know, like for me at the beginning, I haven't learned about it already but if you can touch base on how does it work on, like on the operating when you go drill, like the process of when you find oil and gas right, Like maybe you can start it from exploration drilling and like for people to understand more.
Speaker 1:Yeah, so I mean I think I know where your question is going. So there's, I mean there's different strategies, right, oil and gas. There's not just one. Like in any investment generally, there's not just a one size fits all. So most of the tax benefits and things that we're talking about are correlated to drilling, and so often what you'll see in this sector is a lot of like hey, I'm going to get a 80, 90% write off year one. Typically, that's an indication that that is a drilling strategy.
Speaker 1:So drilling strategy has a major tax strategy built into it. Right, that's a big part of a way to reduce the risk, because it's a very risky investment. It's below the ground. We can't see it. We can study the geology, we can go deep. So that's one piece of the puzzle, right. So that would be more drilling. Often there can be called wildcatting. There's also infill drilling, so where you already have an established fill and then we're going to go and fill more drills in this established area. So there's lots of nuance there.
Speaker 1:There's other strategies where you also can invest in what's called mineral rights. The mineral rights are, you know, I own the rights below the ground. I don't participate in the drilling, I get a royalty. I get paid, you know, for that lease and I get paid first but I don't get the tax benefits that come from that. So all the tax benefits are tied to what's called working interest. So working interest is the operation, the operator who's doing the drilling. So that lease, the lease that they have, can also get split up. The interest in that lease is like many other assets it could be the ownership of that, and the flow of money and tax benefits can get broken up in lots of different ways.
Speaker 1:So some of the other strategies that are prevalent is also buying into what's called existing wells or PDP, so proven, developed and producing wells. So this is, you know, for the things that we do. We generally go more towards PDP, where you're buying into existing production. So that strategy comes more with depletion, because we already have existing oil and gas that's being produced and so the tax benefit that comes from that is depletion and then the pass-through of depreciation of equipment. The only time we would capture IDCs and tangible drilling costs is if we're doing more drilling. So kind of our strategy has always been to buy into existing production. Where there's proven, developed and producing wells, we'll buy into that at some calculus, which is generally a pretty sizable cap rate. So there's a lot of cash flow. And then we on top of that would contribute additional capital to develop more wells. So what that creates is more intangible drilling costs that we can offset the income that we're receiving. The large amount of income we're receiving from the proven wells, the new wells, the drilling of those new wells can be used to offset that in a big way and then also compound the cash flow. Once those new wells start to produce, the cash flow starts to grow. So that's our particular strategy.
Speaker 1:But on the tax side, really the key thing for everyone to understand is are you in the working interest or are you not? And the tax benefits are always tied to the working interest and so you're having to take on some of that risk. The other key thing for people to kind of understand is also the position and the risk that they're taking. So if you're going to participate in these offsets to your W-2 income, you're going to have to be a part. The structure of the investment is generally a general partnership. That partnership you get to opt in to become a general partner or a limited partner. What that ultimately means is the liabilities are either not limited or they're limited.
Speaker 1:So there's some risks that are associated with being a part of the general partnership.
Speaker 1:So that's why you need to have a pretty known understanding of the tax scenario, because you are taking on that risk, so you need to be compensated for it in a sense, and so the tax benefits are a big piece of that. And so why somebody would go just do something? That's exploratory, that we don't know if it's going to make money, but we do know it's going to get a big tax benefit. And in order for me to capture that tax benefit, it has to be structured as a limited partnership, and I'd need to be a part of the general partnership. And so part of that risk is also, if something were to happen say the fund and or investment incurred a liability that exceeded the assets of the fund then your exposure could be beyond your initial principle that you invested. So it's just important for people to understand that, versus a lot of these other pass-through investments are limited, meaning you'd be limited to the principle that you invested. So does that kind of answer where I think you were going with that question?
Speaker 3:Yes, Mike, Thank you. That kind of answer where I think you were going with that question. Yes, Mike, thank you. And I think that just to clarify about the term terminology, about intangible dealing costs and tangible dealing costs and depletion allowance, we want to because many of you, if you just knew in this industry, you may be wonder what does it mean intangible drilling cost? Intangible drilling cost is the cost of, you know, the labor cost, the services, and you can correct me too, Mike, if I'm wrong it's the cost that goes toward the cost of labor into the drilling. And intangible drilling cost is the cost that go toward the equipment, that drilling to the ground. And for the depletion allowances it's go toward like those expenses that include into the exploration, into like to do some research on the land, that where you know it's kind of like capital expenditure. So that's, those are the three key things that when it comes to tax benefit, those are the expenses that it goes into oil and gas investment. There was another good question in here.
Speaker 1:Yeah, there was another good question here, I think I saw Daniel. Hey, daniel, you said I have a question about what the tax benefit looks like in years two plus. Did you get nearly all the tax benefit year one? Do you have strategies for reducing in years two? Yeah, so, greg, it depends on the investment, right? I mean, I'm not currently promoting any specific deal right now, so I'll kind of speak more generally. It really depends on the investment. So if it's a limited raise meaning it's a closed-ended investment where we raised X amount of money to go do X drilling, generally you're capturing all that the main benefit, the main tax benefit in year one, assuming that you're doing your drilling in year one. Tax benefit in year one, assuming that you're doing your drilling in year one. So it really is correlated to the timing in which that drilling is happening. So, for instance, our strategy broadly is that we'll have ongoing development. So every year we'll develop X amount of wells. Depletion is going to happen every year. So that's something that is always going to be there as a tax efficiency.
Speaker 1:It's not that they're going to create a write-off but it will reduce the income. So really the write-off would be correlated to how much development you had done in a given year. So in our particular strategy again, we've got a lot of income that's being produced. We do a lot of new drilling which is offsetting that income and in a given year, depending on the volume of that new development will really dictate how much of a write-off or not that there is. I mean, if income is really really high and new development is low, then generally there's not going to be a write-off, there's going to be depletion to reduce the tax implication but there's not going to be a write-up. In that particular strategy versus other funds are more development-focused. Other investments might be more development-focused so they might just be continually recirculating cash into doing more development to create more write-offs through the years. So it really is correlated to the amount of development that's happening.
Speaker 2:Yeah, we have a tax question I'm going to take. Is a distribution treated as passive income or active income? Is a portion of it treated as return of capital? Actually, that last part I'll let you guys take.
Speaker 2:But what's really unique about oil and gas is, when the money comes in, it's passive, which is good. That's what you want to see. So, unlike your W-2, you don't have any self-employment taxes, you don't have any workers' comp tax and all that other stuff that hits you in the head. It's just passive and it's taxed at your marginal rates. And then it's obviously offset by depletion when it's operating at a loss, likely in year one. It's non-passive, and non-passive losses are the most desirable form of losses because they'll offset any type of income and then a little more in some other strategies.
Speaker 2:Here Again, you combine real estate with oil and gas. You create more losses with cost segregation in the real estate to offset the profits in oil and gas, if there's profits in oil and gas and you're not reinvesting to create losses. And then there's a whole other world of things that we can do here, and when your income is passive and positive, you have more flexibility and opportunities to create losses. It's just easier to create losses to offset your passive income than non-passive, especially with real estate. You can invest in more real estate. Invest passively in real estate, real estate syndications, mobile home parks there's just so many ways to create losses and if it's really really high and significant, you can even buy tax credits and there's all sorts of interesting stuff out there when you're strategic with your tax advisor you want me to tackle the kind of back half of this question.
Speaker 2:Yeah, the part about return of investment capital. I have you know we've seen a lot of our clients are investing, but I see the K-1s. What are you guys seeing is a portion of this is treated just as a return of capital, as opposed to a distribution of income opposed to a distribution of income.
Speaker 1:Yeah, again, I can't speak to other people's structures exactly. Typically, how we would structure it is return of capital is typically where there was a sale of an asset versus the actual income. So we have kind of a profit allocation which would be distribution or a dividend, whatever, however that gets categorized. But generally that's going to be an allocation from the profit and so that's based on the amount of income that's being generated from the operation of that well. And then if there's return of capital, that's generally when we've sold off an asset. Let's say we went and built the well and it started producing and a portion of the income was distributed and then we ended up selling that asset quickly and realizing profit. A portion of that would be more allocated towards the return of actual capital. So it's usually tied to for those that are doing a lot of GAAP compliant stuff are seeing that return of capital happen when a sale of an asset happens.
Speaker 2:Cool, let's see what other questions we have here. Okay, I don't see any other questions here. I do have some other things to consider on the tax side, unless we have any other questions I'm going to share with you. I'd like to share with you some other thoughts here on the tax side. So when you really dive deep into oil and gas, there are some other more advanced things you can do here.
Speaker 2:So we started off specializing in real estate, and it still is our niche. So if you are looking to pivot out of real estate or let's say you just can't find a good deal, or let's say you just want to get rid of this property it's too high maintenance you can 1031 into oil and gas. So you go from potentially paying capital gains tax to actually rolling your funds into oil and gas and going to an investment that's truly passive and gives you tax benefits. For some of you doing capital gains planning, you're going to have capital gains on your stocks. You can't use oil and gas working interest to directly offset cap gains, but it'll still offset your taxable income from your W-2s or your ordinary income, and you're going to get back your principal from the stock as well.
Speaker 2:So you may find you have a capital gain event. You get back your principal and your profits from your stocks. You put it to capital gains and the net effect is actually going to be a reduction in your taxes potentially here, which is really cool. And then there are qualified opportunity zone funds investing in oil and gas that are really, really exciting and it really just plays on the intangible drilling costs offsetting all of the profits and you're getting untaxed distributions and really the idea here is to have an untaxed massive capital gain after you've held it for 10 years and then you can even invest in oil and gas in your retirement accounts to offset a Roth conversion and offset 50% of the taxes and move it into a Roth IRA where it can grow and profit tax-free in a Roth. So there's lots of versatility and creativity when you really dive deep into all these exciting oil and gas tax strategies.
Speaker 3:Yeah, and one of the things that I would, the way that I do my due diligence when I invested to oil and gas, also, instead of investing into just one well, I would like to invest into multiple well in one fund. So that's also going to reduce your risk and um and helps um, you know, like, because when we're talking about investment, everything that's like we mentioned before, that is, everything is about this, but how can we manage our risk to make it, uh, better, right, so with that? And then you also want to take a look at what type of that track, like that track record of the operator who you are working with, um, like with aspen, the. The reason why I, like um, want to partner with them, that's because they have a big team and their communication is very great and they have been doing this deal quite some time already. So that's one of the things that when I look into investment, I want to work with reputable company or operators.
Speaker 2:But I have a question for you guys, patrick or Mike. So you have your royalty rights interests right when you don't get the intangible, tangible drilling cost deductions. What's the opportunity here? Why would someone decide to do this if they can't reduce their taxes? Is the profitability enough to justify going that route?
Speaker 1:it's really passivity. Um, you know generally where those work. Excellent is that they they found oil in the ground right and I, without having to do anything, I get a. I get a royalty on everything pulled out of the ground like clockwork. So it's really. It's not a tax play, it's a passive income play. But it only really works if there's oil in the ground or gas or whatever the mineral is. If there's no production, then there's no royalty.
Speaker 1:So that's kind of the trade-off. So it's a much lower price of acquisition and much less risk. There's no operating risk. You don't share in any of the drilling risks, you don't share in any of the commodity price risk. It's truly just, hey, I happen to own this. It almost be like owning land, like owning land and having a gross lease or an enterprise lease with a farmer. So it's based on the amount of production. But I don't have to do anything and I share no liability. So it's just a more passive, lower risk way to get exposure.
Speaker 1:And then if there is a lot of production, then you can make a lot of money doing it, as long as you have a great operator there. So the other piece of it is if it's not a great operator, you do have rights as a member rights owner. So you could say company A comes in and they're really not doing a great job and there's proven reserves on the ground and they're just not doing and they're not hitting a certain minimum. I can actually force them out and bring in a new operator. So you have some rights to protect the downside in a situation where there's proven reserves without results. So it's just a different strategy. There's really again, it's not a tax play at all- I have a question for Patra.
Speaker 2:Patra, if people are interested in doing this stuff but they don't know where to get started or who to trust or how much money to put in, or you know they're just totally lost right now, what does someone do to get started in this?
Speaker 3:They can set up a meeting with me. We can set up a 15-minute meeting and to see how I can help you, and there is a QR code that I can pop up real quick. Give me one second, let me grab the QR code. You can set up a meeting with us.
Speaker 2:And what's that process look like when they decide to move forward? Do they just do they, you know, give you a bucket of cash? Do they wire you? What does that look like?
Speaker 3:So, first of all, currently we are still working on the opportunity for the end of this year. I know that we are going to. We are excited to have an opportunity coming in January and what we the process. The next step is there is a QR code for you to do a sub-commit Once you fill out the fillable form. We will reach out to you and then we will send you the information. Is that the?
Speaker 1:one Patra. Is that the right one?
Speaker 3:That's actually for the subcommittee form. You can also fill out that form and I will personally reach out to you or I have my assistant reach out to you to schedule a time and we will have like the Patra to. I think, mike, you probably answer this one better. On the process of, on the process of after the subcommittee, we have the PPM for them to sign an operating agreement.
Speaker 1:Yeah, just like any investment, you'll fill out a subscription agreement, patra, she'll have a PPM for you to review. You'll execute that and then, basically, once you've done that and made sure that you've submitted your accreditation verification with her, then funding instructions come from there and you're off to the races.
Speaker 3:Yeah, and Mike, I think we got a great question here. Since we only have five minutes, a pro forma for sample project would be helpful. Do you have your last project that we can show to our audience? Sure, like maybe talking about the return and Absolutely, yeah, happy to.
Speaker 1:I didn't want to impose too too much, but I'm always happy to talk about what we're doing, so um let me pull up a little bit while you are, while you are pulling up the information.
Speaker 3:What I want to talk about also is this oil and gas is only currently only open to accurate investor, and what is accurate investor? Accurate investor is for people who make over than $200,000 as an individual, or $300,000 verified jointly, or you have an asset over than $1 million. So this one is open to accredited investor only currently. But if you are unsure about your accredited status, you can reach out to me.
Speaker 1:I can help you with that as well alright, I've almost got this pulled up here, for some reason.
Speaker 2:Come on, another thing I just want to. Another little tax nugget here that I think is really cool here is you can use if you have a sole proprietor, you can, and that is subject to FICA tax. I'm not sure if I said this, but you can offset your FICA taxes as well with oil and gas. In that case you want to make sure you invest in the name of the husband or wife who is actually incurring self-employment tax and then it'll net against that and that's an extra 15.3% tax savings potentially Really cool stuff there and that's an extra 15.3% tax savings potentially Really cool stuff there.
Speaker 3:Oh, that's awesome Because there are many times that many clients they cannot elect to be in S-Corp in the current year, so they can use O&G to offset those income.
Speaker 2:And sometimes physicians aren't even allowed to. They get like 1099 income. They can't even use an LLC or an S-Corp, so just an extra little bonus there.
Speaker 3:Oh yeah, that's wonderful.
Speaker 1:All right, I'm going to share my screen. All right, can you guys see this Okay?
Speaker 3:Yes.
Speaker 2:Yeah, they're in the process. They should be out soon.
Speaker 1:All right, so this is from our last fund. This is called the 116 Upstream Energy Fund 6. Super, super long name. The next fund we have coming out is the same name Upstream Energy.
Speaker 3:Fund 7. Okay, how are you doing? Sorry for the wait.
Speaker 2:I'm trying to see who's talking, I think that's Lee Okay.
Speaker 1:So this for the way I can.
Speaker 3:Um, I'm trying to see who's talking okay, so this, yeah, I think uh lightly lightly don't yeah all right, here we go.
Speaker 2:We're good, thank you okay, cool, uh.
Speaker 1:So the next fund is is the upstream energy fund seven. It's the same strategy, same strategy. We can get into a bunch of details here, but if you're looking for pure pro forma base, this is what we're looking at. So how we've structured this type of investment is that we've got 100% of the cash flow in the first year is reinvested into drilling. So that allows us to capture as much tax benefit as possible in the first year. So there will be cash flow. We're not going to distribute that, we're going to put that to work.
Speaker 1:This particular portfolio we have interest in over 250 wells where we're part of the working interest. It's called non-operating working interest, meaning we're not the operator. So we buy into that existing production where there's a lot of income, and again we do additional development on top of that to compound the cash flow. So this you'll see cash on cash, because we're ramping up over time where we hit some pretty staggering numbers. And then behind the scenes what we're doing strategically is we're rolling up a portfolio. So we're buying assets in the middle market at $10, $20, $30 million each, rolling those into a portfolio, and then we'll look to sell those. Along the way we'll develop more wells that are very valuable.
Speaker 1:New, young wells that are producing are very, very valuable. So we're increasing the overall volume and well count and then selling that off when prices are high. That's generally when you have a lot of buyers. So, from a basic metric, what this is looking at this is a 10-year hold. This portfolio is targeting a 31% IRR over those 10 years, which translates to an 8.45x equity multiple. So you throw 100 grand in over those 10 years. You come out between the cash flow and the equity realization is $845,000.
Speaker 1:So this is very high yield, very high total return. The average cash on cash would be 26%. So very, very high cash flow, very, very high total return and again, all these kind of tax benefits along the way. Our particular strategy is more about total return and income, with tax efficiency and tax benefits along the way, because we're buying into existing production. There's a lot of income, so in order to offset all of that, we'd have to have a lot of development. So this is our particular strategy. There's other strategies out there that are more development heavy, where there's not existing income to offset and that's where you get the bigger write-off in year. One is typically those. But we'll still have all of them. We'll still have all those things, but they'll be offset by the amount of income that we're producing. So this will just give you a snapshot of the type of thing.
Speaker 1:So this is based on oil at $67.32 over 10 years. So this is kind of what we call a moderate forecast. We've modeled a downside which is kind of the next slide. I won't bore you guys with that, but we kind of modeled the downside which is the next slide. I won't bore you guys with that. We model the downside, we model the moderate, while positioning ourselves, like I talked about earlier, for the upside of what we actually think will happen. As price is likely to go up, these numbers get even a little bit better Well, potentially a lot of it better. Who knows if that will happen for sure, but we feel confident that if we're wrong about oil and gas, we're going to make 31%. If we're right, then the numbers could be a little silly.
Speaker 3:That's great and I can tell that the 67.32, that's pretty like on the conservative side right, yeah, that's the Bank of Oklahoma's.
Speaker 1:it's called Bank of Oklahoma Strip, and so they have a 10-year pricing forecast. That's exactly what we use to model this.
Speaker 3:Yeah, because normally I mean if the more oil you can produce and the higher the price of gas, that's how you can get the higher return. So by using 6732, that's already on the conservative side, which is good.
Speaker 1:So I know we're at time. I don't want to take anybody else's time. I appreciate you guys having me on and let me know if I can be a resource.
Speaker 3:Yes, thank you so much, mike.
Speaker 1:You're welcome, mark. Thank you so much, I appreciate you.
Speaker 2:Thanks.
Speaker 3:Thank you.
Speaker 2:One more thing for our current clients. I'm going to give you some additional resources in the school library on how to look at this and evaluate the tax component of this. And also, when you look at a prospectus, how does that impact you personally on your 1040 when the money comes in and you create the tax deductions? And also Patra's contact information. If you want to explore, look at the private placement memorandums and see what's available, or connect and do a free consult where you learn more, all that information will be in our school library and also you guys will get uh, obviously you patra has your information.
Speaker 3:she'll send you everything you need as well yeah, I will send slides to everyone and also um a link to book a time. Yes, all right, I think that's it. Thanks everybody for showing up.
Speaker 2:Yeah, thank you we'll keep in touch. Have a wonderful rest of your day yes, you too, bye.