Why should I invest in oil and natural gas?

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There are many reasons to invest, including the great reward potential of drilling successful wells.  There’s nothing more exciting than making a great well.  In addition, oil and natural gas wells can produce for many years, providing a long-term income stream to investors.

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With the continued demand for oil and natural gas, the U.S. Energy Information Administration (EIA) projects that world marketed energy consumption will grow by 53 percent from 2008 to 2035. Additionally, the U.S. is expected to spend at least $540 billion dollars each year to meet demands to 2030.  The more oil and natural gas that can be produced here in America, the less we have to rely on foreign imports.

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Do I qualify to invest in oil and natural gas?

 

Enterra Capital offers direct investment opportunities to accredited investors with sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of investing.

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To qualify as an accredited investor, you must have had an individual income in excess of $200,000 in each of the two most recent years or joint income with your spouse in excess of $300,000 in each of those years and have a reasonable expectation of reaching the same income level in the current year.  You may also qualify if you have an individual net worth, or joint net worth with your spouse, that exceeds $1,000,000, excluding the value of your primary residence.

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What are the risks of direct investments in oil and natural gas?

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No investment is guaranteed, and we would expect any sophisticated investor to be immediately deterred if we made such claims.  Investing in oil and natural gas wells is speculative and has its risks; however, our basic philosophy of buying smart, managing costs, and improving production enables us to maximize the value of our projects while our commitment to utilizing advanced science and geological techniques helps to mitigate risks.

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What are the benefits of direct investments in oil and natural gas?

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The primary benefit of investing in oil and natural gas wells is receiving revenue generated from successful drilling and production, or what many investors call “mailbox money.”

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The tax incentives provided by the U.S. government provide another worthwhile benefit to investors.  Tangible and intangible drilling costs are 100% deductible against active income, including about 65-80% in the year you invest.  Furthermore, the depletion allowance excludes from taxation 15% of all gross income from oil and gas wells.  Your personal tax advisor can provide more detailed information on how these tax incentives may apply to your individual tax situation.

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THE TAX INCENTIVE

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Domestic oil and natural gas development is the solution to the country’s energy crisis.  In an effort to avoid reliance on unstable foreign markets and boos production at home, the United States Congress has created tax incentives for investors of private oil and natural gas production companies.

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Maximizing Income

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The Tax Reform Act of 1986 prevents individuals from using active business income to compensate for losses in passive activities.  The act states that working interest in oil or gas investments is not a passive activity, and therefore deductions can be used to counteract active income from salaries, stocks, and business profits.

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Cost Recovery and Depletion Allowance

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Investors in private oil and gas projects can benefit from a depletion allowance of 15% of his or her gross income from the project.  A depletion allowance allows an investor to account for the reduction of reserves as oil and gas are produced.  This means that nearly 15 cents per dollar of gross income is untaxed.

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Reduced Dollars at Risk

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There are three main costs associated with drilling an oil and gas well:  intangible, tangible, and lease costs.

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Intangible Drilling Costs, or IDCs, are the labor-intensive costs of the drilling process.  Roughly 70-85% of an investment accounts for IDCs and can be written off by investors.

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Tangible Drilling Costs, or TDCs, include capitalized and depreciated equipment.  For a successful producing well, 15-30% of investment in TDCs will depreciate over 5-7 years. If an investor funds a dry hole, or non-producing well, 100% of his or her investment can be written off as a loss against income in year one.

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Lease/Well Operating Costs, or costs associated with lease or well operating expenses, are 100% tax deductible.  This includes lease purchases and expenses, accounting and administration.

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Alternative Tax Calculations

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Under the Alternative Minimum Tax, or AMT, taxpayers must compute taxes twice, once using the traditional method, and again using AMT.  When calculating with AMT, tax preference items, such as deductions for excess intangible drilling costs, are added back to adjusted gross income, less the allowable AMT itemized deduction.  Once the AMT calculation is completed, it is compared to the traditional tax calculation.  The taxpayer must then pay the higher amount calculated through the two methods.

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ACCREDITED INVESTORS ONLY

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Enterra Capital offers direct investment opportunities for sophisticated “accredited investors” with sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of investing.

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To qualify as an “accredited investor” as defined by the U.S. Securities and Exchange Commission in Rule 501 of Regulation D, you must:

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• Have an individual net worth, or joint net worth with your spouse, that exceeds $1,000,000, excluding the value of your primary residence;

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• Have an individual income in excess of $200,000 in each of the two most recent years or joint income with your spouse in excess of $300,000 in each of those years and have a reasonable expectation of reaching the same income level in the current year;

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• Be a director, executive officer, or general partner of the issuer of a security being offered or sold.

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In addition, certain other trusts, financial institutions and organizations, and entities may qualify as accredited investors.