Oil and Gas Investing

Copyright 2012 James D. Henry



Many investors don’t realize it, but there are ways of making money in the oil industry other than purchasing round lots of Texaco stock. The oil business is one of the last remaining true tax shelters in the United States, and the benefits to be derived from prudent investments can be very attractive. For the investor with a tax problem, buying directly into drilling programs or individual prospects offers certain advantages that may be just what the proverbial doctor ordered. For example, intangible drilling costs are legitimate deductions, and they can even be prepaid (and written off) in the current tax year even though drilling operations may not commence until March 31 of the following year. In the event of a dry hole, virtually all drilling costs can be expensed immediately. Should the drill bit find oil or gas, some of the drilling costs will be expensed over a period of several years, and a minimum of 15 percent of the income from the well is free of Federal income taxes forever. If the well is a poor one, a so-called “stripper,” the portion of tax-free income jumps to 19 percent. (Most wells—both oil and gas—become strippers at some point in their lives.)

But be forewarned that there are pitfalls as well as advantages to direct investing in oil and gas deals. Dry holes are an inevitable part of the game, and unscrupulous promoters are out there waiting to prey on the greedy and gullible. After oil and gas prices crashed in 2008 and again in 2015, a lot of drilling deals went sour, and the petroleum exploration business got a bad reputation with the investment community that it did not necessarily deserve. Much of the money that was lost then was invested unwisely for one reason or another, and a lot of the red ink could have been avoided by investors doing a little advance research into this risky and fascinating business. Let’s take a brief look at how the oil and gas game is played and see if it might be a suitable investment vehicle for you.

First of all, let’s learn who our PARTNERS are.