Investing in energy can provide decades of passive income and strong ROI potential. Despite current lower oil pricing, direct participation in oil and gas can still be a great way for partners to potentially benefit from returns that outpace most market-based investments. But there’s more to the story than the price of oil. Improved technology and the shift to developmental, infield drilling in both proven conventional fields and unconventional shale have changed the dynamics and lowered the risk of investing. Improved success rates and smart, targeted investments in proven, producing fields with established infrastructure set the stage for strong investment performance.
As a hard asset with low correlation to stocks & bonds, energy investments could protect your portfolio from short-term market fluctuations. While no single investment strategy is suitable for everyone, exploration and/or production-based energy investments offer the potential for higher returns than many traditional investments. Direct energy investments (a portfolio with ownership in producing oil and gas properties) enjoy low correlation with other traditional asset classes and generally positive correlation with inflation. As a diversification strategy, a portfolio with ownership in such an investment may provide a buffer against fluctuating market conditions and inflation movements.
Oil and gas projects offer some of the most attractive tax incentives for investments. The IRS provides tax incentives to encourage private investments in domestic oil and gas production. For drilling program investments, approximately 60-80% of well costs may be fully deductible in year one as intangible drilling costs. The remaining amount is categorized as tangible costs and may be depreciated over time (generally between 5 to 7 years). In addition, 15% of a property’s gross cash flow is tax free in the form of a depletion allowance. An additional cost depletion allowance allows for 100% deduction of property lease costs, sales expenses, legal and administrative accounting expenses.