Patriot Energy Newsroom

Read about company news, Patriot Energy in the press, industry commentary, and other press clippings featuring Patriot Energy.

Patriot Energy Black Bear Prospect

Patriot Energy Announces the Black Bear Prospect in Permian Basin

Patriot Energy Black Bear Prospect

The “Black Bear #1” extends production on 3,600 leased acres strategically located in the Permian Basin.

Patriot Energy, Inc., a Dallas-based oil and gas company, announces a new prospect in the Permian Basin of West Texas.  The “Black Bear #1” extends production on 3,600 leased acres strategically located in the Permian.

The “Black Bear #1” will be drilled to approximately 9,000 feet and is expected to intersect the Upper and Lower Wolfcamp, Cisco Sands, Canyon, Cline, Strawn, Mississippian, Fusselman, Montoya and Elleburger. This will be the fifth well drilled on the acreage, which has the potential for up to 57 offset wells.

“Many people would ask why we are drilling now,” says Michael Miller, Patriot Energy’s founder and president. “It’s quite simple, we’re finding tremendous value in drilling prices today versus even a year ago. Contractors want to keep rigs working, so we’re taking advantage of the value that has been created in the market and are putting a bit in the ground at prices we may not see again. At some point, this is going to turn so we’re taking advantage of what the market has given us,” Miller said.

Spudding is expected later this spring.

Patriot Energy is sending a prospectus to interested accredited investors.  Email info@patriotenergy.com for more information.

 

About Patriot Energy, Inc.

Patriot Energy, Inc. is a private, independent oil and gas company specializing in working interests and royalty interests for private accredited investors.  Based in Dallas, Texas, Patriot Energy is engaged in the development of high-probability, lower risk onshore oil and gas properties. The Company’s growth strategy primarily relies on leveraging management’s technical and operations expertise to offer non-operating working interests and royalty interests to accredited investors and institutions. Patriot Energy is currently focusing in the Permian Basin of Texas. Additional information is available at http://www.patriotenergy.com/.

 

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Permian Basin Outperforming Other Oil Fields

The Permian Basin Continues to Outperform All Other Oil Fields: Here’s Why

Permian Basin Outperforming Other Oil Fields

The Permian Basin is still attracting attention from those wanting to invest in oil and gas. This week, $2 Billion in new oil and gas investments in the Permian.

I was having dinner with a friend a couple weeks ago (who is an astute businessman) and the conversation eventually turned to oil. “How can we make money from these low prices,” he asked.

I hear that more and more every day now, as investors are realizing the longer this goes, the sooner we get to a true bottom, and prices begin to go back up, offering what history tells us is could be a substantial opportunity to make money from crude oil. Value investors, conditioned to look for bottoms, are shopping, and for good reason.

As the information below shows, there were five major oil price bottoms going back to 1985. By analyzing Energy of Information Administration (EIA) daily closing prices, we can see the prolific gains and time periods associated to each bottom.

Oil Price Volatility Means Opportunity for Value Investors

Oil Price Volatility Means Opportunity for Value Investors

We now live in a world of oil price volatility. I’ve been around it for 15 years now, even 2001 when oil dipped below $20. Each time, we have bounced back with a vengeance. I’ve watched investors pursue bottoms and make good money in the long run, and I’ve seen too many people sit on the sidelines and totally miss the move.

It was also interesting that just this week, Bloomberg flashed a headline, “Shale Drillers Lure $2 Billion in New Equity to Permian.”

Two Billion! I had to do a double take.

Here’s a link to the article so you can see for yourself:

http://www.bloomberg.com/news/articles/2016-02-02/texas-shale-drillers-lure-2-billion-in-new-equity-to-permian

Here’s the quote that jumped out at me, confirming the same thing we have been seeing there for nearly a decade.

From Gianna Bern, founder of Brookshire Advisory & Research, Inc, in Chicago and a former BP, Plc crude oil trader: “The Permian is a diamond in the rough. With the supply glut in the global market, these are challenging times for the entire industry, but the Permian is one place with the resources, ingenuity and engineering expertise to continue improving the cost structures.”

The article mentions drillers in the Permian were getting 30 to 40 percent returns even when crude was at $40, according to Laird Dyer, a Royal Dutch Shell Plc energy analyst.

The Permian Basin has already produced nearly 30 billion barrels of oil, and some 75 trillion cubic feet of gas, making it one of the most abundant fields in the world.

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Now, thanks to hydraulic fracturing, the Basin could hold that much or more, according to the EIA in 2014. The reason Permian drillers are able to make money at these prices is because of the stacked formations. One vertical drill bit, descending some 9,000 feet, can intersect a half-dozen or more viable, oil producing formations. Some are shale and some are limestone. Some need to be fracked, others don’t. This keeps the cost of the wells substantially below their Bakken or Eagle Ford cousins, which are deeper and require long horizontal laterals to intersect as much pay as a vertical well will reach in the Permian.

That’s why the Basin is attracting capital at these prices. Investors are already lining up to put money into the turn around. Leases that expire will be snatched up overnight. Rigs that are being abandoned or sold in bankruptcy proceedings will be picked up by investors with a long-term approach, and at rock-bottom prices.

Drillers have been slashing their prices as well, as we are experiencing. A rig working is more profitable than one sitting in mothballs, so support companies have been slashing prices to keep rigs – and crews – working.

If you haven’t heard about our Black Bear prospect, give us a call or send us an email and we’ll send you information. In a nutshell, we have been able to reduce drilling costs on this prospect considerably, taking advantage of contractors desire to keep rigs turning right.

Meanwhile, as the headlines continue to paint a dark picture, we know what history tells us, and the time to position is before the turn, not after. It is at these prices where the real money is made in oil and gas.

And that’s exactly what I told my friend at dinner.

Oil markets are moving on rumors of possible production cuts from Russia and Saudi, making investing in oil now a more critical decision than ever.

Oil Markets Move On Rumors of Cuts

Oil markets are moving on rumors of possible production cuts from Russia and Saudi, making investing in oil now a more critical decision than ever.

Oil markets are moving on rumors of possible production cuts from Russia and Saudi, making investing in oil now a more critical decision than ever.

Oil markets are on the move again, amidst mounting rumors about production cuts. At this time, we don’t know if these rumors are originating with Russia or Saudi. It’s too early in the story, and details are sparse at this point.

What we do know is how continually jittery the markets are to see supply numbers retreat – however that occurs. Another thing that has become obvious is that buying will take place once supply is reduced. At one point, oil shot up 8-percent, just on the rumors that Russia might be willing to join in on the cut. Once things shift – and they will eventually shift – it’s inevitable that oil goes back up, generating yet another 3-digit multiple return, as we have highlighted graphically from substantial oil gains in the past.

Recently, T. Boone Pickens appeared on CNN and Billionaire oilman who you don’t hear from as much, Trevor Rees-Jones was in a January 2016 issue of Forbes, both talking about the future opportunities in our sector. Harold Hamm, the notable Chairman of Continental Natural Resources, also has been advocating the same position. Basically, that supply will come down this year, and as a result, prices will go back up. It was Trevor Rees-Jones who was perhaps the most bullish, stating that he sees a “Land of Opportunity” amidst these depressed prices.

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There’s no doubt that the next major direction from here should be up. Everyone tied to these prices is feeling the pain right now. Everyone. The ripple effect of this is probably something we don’t have a full comprehension of at this critical juncture. Banks are presumed to be carrying between $550-700 billion of oilfield debt. Corporate bonds tied to all aspects of the upstream sector could be in jeopardy. Countries such as Venezuela are teetering on the brink of disaster. These are precarious times, and we don’t know how close to the edge we really are.

Maybe Russia and/or Saudi really do.

Regardless, we are finding tremendous value in our acreage in the Permian Basin, as drillers are slashing prices to keep bits in the ground. Why would you drill anything at today’s prices, you might ask? There’s a very good reason – unprecedented discounts to drill wells now, then bring them online as prices return. This sets up a win/win scenario: Take advantage of this window of opportunity to drill at prices that are below anything we’ve seen since shale became viable, then position ourselves to bring these wells online when prices spike.

While there’s been a lot of hand-wringing of late, we’ve been taking advantage of what the drop has offered and are back to turning it to the right.

Our representatives would be happy to talk to you about how you could take advantage of this unprecedented opportunity that we feel won’t be there for long. The market action of late certainly confirms that.

Oil Prices Spiking on Short Covering, ISIS & Money Printing

Oil Prices Spiking on Short Covering, ISIS & Money Printing

Oil prices spiked this morning on several factors including a short covering spike, ISIS attacking Libyan oil, and word of more money being printed overseas.


A lot of people are asking how to make money from these low prices. We can help. Contact Patriot Energy today for more information on how you can profit from low oil prices. Call (469) 269-5414 or send us an email at http://www.patriotenergy.com/contact.

View Video Transcript

Oil is taking off and rocketing up today, crossing back over $30 per barrel.

WHY?

For one, all the traders who were short.

Not those shorts

Yeah…more like those shorts

Are running for the door to cover their shorts.

Which means they’re buying to close their trades before the weekend.

Also, news came overnight that the money printing presses are firing up again.

Both in Asia…..and in Europe.

It seems when markets go down, countries want to print more money.

Finally, Libya. Isis fighters attacked an oil terminal Thursday, insuring it won’t be online for – quote – a long time.

All that combined is pushing oil up today.

Is this the bottom? Who knows.

What we do know is prices can move high and fast when things turn around.

Look at some of these returns from previous major oil bottoms…..and today’s prices are pretty darned low.

A lot of people are asking how to make money from these low prices. We can help. Contact Patriot Energy today for more information on how you can profit from low oil prices.

Call 469-269-5414 or go to our website at patriotenergy.com.

Current Oil Market: Where Do We Go From Here?

Current Oil Market: Where Do We Go From Here?

Current Oil Market: Where Do We Go From Here?

Global markets are in turmoil and there are no safe havens right now. However, these prices are ultimately going to offer opportunity for value investing.

2016 has indeed come in like a lion across the financial markets, mostly triggered by circumstances beyond our own borders. In this globally interconnected world, a cough in Asia can quickly become flu across the pond.

In today’s landscape, there is virtually no safe haven. Even cash, by falling behind inflation, is a bad risk. Bond yields are slightly above flat-line, stocks are being sold to raise cash for a number of reasons (margin calls included). Commodities continue their slide, and oil broke $35 and then $30 in the same week.

As we are watching the carnage together, it’s best to zoom out and consider factors that could help us make good strategic decisions going forward. For one, much of this move is already in place. Granted, we don’t know how much the market will continue to sell off, but especially as far as oil goes, most of the move is behind us.

Second, at least as far as oil supply goes, there’s some light at the end of the tunnel. According to the Energy Information Administration, the forecast spread between worldwide supply and consumption is expected to close to 570,000 barrels. We think this will occur around mid-year, perhaps before. This number already factors Iranian oil, which is the big story this week. As that gap narrows from US reductions, and other producers (like some of the smaller OPEC nations) take supply off the market, we could reach a point somewhere down the line when the headlines read that we are finally only producing what we consume. That should have a buoyant affect on prices.

Third, we continue to see signs of buying by value oil investors. Berkshire Hathaway now owns almost 13-percent of Phillips, having added another 1.6 million shares recently. Buffett obviously has a stellar track record of positioning himself in the right places when the skies are the darkest. The reason he is a billionaire is he goes shopping when assets go on sale, and patiently rides the next wave back up.

Patriot Energy 2015 Tax BookletFREE TAX GUIDE:  Do you need tax deductions to offset your income this tax season?  Click here to download our FREE Tax Savings Guide to learn more about how you can save huge tax dollars by investing in oil and gas.

 

It is also of note that producers in the Permian Basin who trade publicly have generally been fairing better than their peers who focus in other areas. This speaks to the power of the Basin, and is why we positioned ourselves there when others were chasing flashier wells. This production will always be viable, and with the pipeline infrastructure in place combined with the off-set potential, we feel the future of our production is safe there.

As the landscape changes, one of Patriot Energy’s greatest advantages is our ability to adapt quickly to fundamental changes in the market. One of the questions we get asked most is at what price are domestic wells no longer profitable? We have the ability to shift our strategy to shallow, conventional wells that still produce profitably, even down toward $20 per barrel. We have confidence in the area we are in, we understand the economics of both conventional and fracked wells, and we are constantly evaluating what the best options are for our clients. We feel we are positioned well to continue development when prices are low, and when things turn we will have done a great service to our clients by placing them in an appreciating income asset.

Should you have questions about the current market environment, please feel free to reach out to one of our representatives. We would be happy to serve as a sounding board and set some time aside to answer any of your questions.

Sincerely,

Michael Miller
President
Patriot Energy

Shift in Crude oil Production

Fundamental Shift Shaping Up in Crude Oil Production

Shift in Crude oil Production

A shift in crude oil production fundamentals is shaping up that most traders don’t have their eye on yet.

There’s a shift in crude oil production fundamentals shaping up that most traders don’t have their eye on yet. The balance between crude oil production versus demand is tightening, and 2016 could very well be the pivot year.

The Energy Information Administration (EIA) released its monthly Short Term Energy Outlook last month, showing a significant reduction forecast this year in the spread between global production (95.79 million barrels per day) versus global demand (95.22 million barrels). That whittles the gap down to only 570,000 barrels per day, a number that could easily be brought to parity, especially at today’s prices.

We have hit the breaking point where many operators won’t be able to afford to keep wells operating at these prices. Even those who are running at a loss in order to hold acreage are approaching the crisis point. That supply should start coming down, especially since producers are spooked by how quickly things dropped after the ball in Times Square did.

Also in December, OPEC’s production was down 170,000 barrels. Not much of a dent when oversupply was 2 million barrels per day, but a substantial percentage at 570,000. Other smaller OPEC producers who surely have their eye on the target, realize if they trim, and a few others trim, we could hit parity sooner than expected – welcome news to virtually all who produce and sell oil and gas for their livelihood – man and nation alike.

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Many are curious about Iran’s intentions to basically soak the market with oil once sanctions are lifted. For one, Iran realized the jawboning blunder and how their boisterous mouth contributed to the unanticipated price drop.  For another, they are now backpedaling to hopefully at least somewhat attempt to calm the markets. The other looming question on Iranian oil is who will buy it, even if they did pour it out later this year. Right now, they have one customer: China. Enough said. No other likely buyers would emerge in 2016 so good luck on that.

Continental Resources CEO, Harold Hamm, was on CNBC this week touting pretty much the same theory – that the glut should be eliminated perhaps this year, and prices could reach the $50s as a result.

The other dynamic the world is not ready for under this potential boomerang scenario, is any kind of disruption. With tensions still escalating between Iran & Saudi Arabia, if anything threatened supply, it could be devastating for the shorts. Already the conflict is spilling into Yemen and Fox News reported that Iran fired a missile from a warship in the Strait of Hormuz back in November. Although it was benign then, such an action today would virtually be seen as an act of war and one-third of the world’s daily oil flows through that narrow peninsula-passage adjacent to Iranian soil.

Meanwhile, amidst the turmoil, Wall Street reports keep coming touting the viability of the Permian Basin. Some are calling it the proverbial needle in a haystack, or the gift that keeps on giving. Analysts noting that publicly traded Permian Basin producers are weathering the storm better than their peers who are not as geographically focused. As we have continued to state, the right wells in this area can withstand the current pressure, and that’s being proven out across multiple balance sheets.

Patriot Energy Sector Update by Michael Miller

Energy Sector Update – January 2016

Energy Sector Update by Patriot Energy President Michael Miller

While much has already unfolded in our industry in this brief new year, there were some statistics of particular note to those of us who understand oil and gas investments.

Every January, the American Petroleum Institute (API) delivers a “State of the Industry” outlook for the year ahead from an energy political perspective. While much has already unfolded in our industry in this brief new year, there were some statistics of particular note to those of us who understand that oil and gas investments still can provide above-average returns amidst todays anemic interest rate environment.

Of particular note, Jack Girard, CEO of the Institute recognized the “unprecedented surplus of energy” as a result of US shale development. This has certainly translated into savings for all Americans. According to the Energy Information Administration, the average American household saved $700 in transportation fuel costs in 2015 due to the energy revolution. Savings also occurred for millions of homeowners as well. Consulting firm IHS estimates the average US household saved $1,200 in 2012 from lower energy costs, a number expected to climb as high as $3,500 by 2025.

Girard noted the domestic oil and gas industry still represents $1.2 trillion in gross domestic product, a number as large as the total economy of Mexico, according to the World Bank.

The other ancillary benefit of America’s energy revolution, directly attributed to fracking, is a substantial reduction in greenhouse gas emissions. Because of conversions to natural gas power plants and a rapid boost in natural gas manufacturing, the United States dropped its greenhouse gas emissions by nine percent in 2013 compared to 2005 levels.

According to a study by T2 Associates, the domestic oil and gas industry reduced its own GHG emissions by the equivalent of 55.5 million metric tons of CO2 in 2014. Additionally, the oil and gas industry invested $90 billion in zero and low-carbon emitting technologies from 2000 to 2014, almost matching the federal government’s investment of $110 billion during the same period.

As 2015 closed out, the Permian Basin rig count was up for the third week in a row, even amidst falling oil prices. This continues to indicate the sustained viability of Permian Basin well economics in the current oil environment.

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For high-income taxpayers, we also have equally good news because there are a few units from 2015 projects that we are making available now. These are hold-over units and because the well was drilled in 2015, you can take full advantage of the tax regulations that allow you to adjust 100% of the Intangible Drilling Costs from your 2015 taxes (the year in which the well was drilled).

As far as the rest of 2016, we see the parity between supply and demand narrowing as US production continues to decrease through the second quarter. With the increased tensions in the Middle East and the production/supply gap narrowing, we feel this could set up for a bullish outlook for oil prices later in the year. If you add an unforeseen “event” on top of that, oil prices could even have a parabolic spike if supplies were truly threatened.

Thus the words of legendary value investor Warren Buffet ring clear as we enter 2016: “Be fearful when others are greedy… and greedy only when others are fearful.”

As we reported last year, if you look back to 1986 at five major oil price bottoms, once prices reversed, the gains to the upside ranged from approximately 200-500%. We are certainly at a similar bottom that could yield significant upside returns, particularly due to the increasing potential of future supply shortages.

I would be happy to speak to you personally about our plans and goals for 2016, and particularly if you are interested in saving on 2015 taxes, I have a solution.

Feel free to call my desk at (469) 453-7002 or email at mmiller@patriotenergy.com.

Sincerely,

Michael Miller
Founder and President
Patriot Energy, Inc.

The world may be reaching parity between oil supply and demand sooner than many traders are expecting.

A Different Perspective on Oil and the Saudi–Iran Conflict

The world may be reaching parity between oil supply and demand sooner than many traders are expecting.

The world may be reaching parity between oil supply and demand sooner than many traders are expecting.

Oil traders are having a difficult time absorbing the escalated conflict between Saudi Arabia and Iran which has now spilled over to most of the Middle East. Initially, they punched buy orders to the tune of about four percent. Then, they abruptly decided that was wrong and started manic selling, even amidst the monthly American Petroleum Institute (API) and Energy Information Administration (EIA) reports showing a domestic supply drawdown of approximately five million barrels in December combined with a price hike to Asia for February shipments from Saudi Aramco.

The prevailing opinion being the escalation would hinder any potential efforts to curb supply, and would, in fact, most likely cause a boomerang effect of more supply at even cheaper prices as Saudi wields its economic weapon to cripple Iran’s attempts at selling profitable oil once sanctions are lifted.

Touché.

But not so fast. We may be a lot closer to parity between supply and demand than expected. Let’s pull the covers back and look at a broader perspective. At the turn of the year, we were over-producing by some 750,000 barrels per day. Already, OPEC’s December numbers shrunk that by 170,000 barrels. The United States, which has now become the world’s true swing producer, should reduce output another 500,000 barrels by spring. If those numbers hold, you’ve virtually eliminated almost all over-production.

What about Iran, you may ask. Aren’t they chomping at the bit to dump 500,000 new barrels of oil on the market? Perhaps, but there has to be a buyer for that new supply. Currently Iran is selling exclusively to China at steep discounts. With China’s bleak economic news – resulting in their stock markets halting trading the first business day of 2016– don’t expect them to sponge up that much supply. In fact, as their strategic reserve fills up, they could slash orders later this year. Who else around the world is going to buy this oil – and at what price? Saudi Arabia is fully aware of this.

Each of the last three years, the US increased production by around 500,000 barrels per day. Although that number will shrink in 2016, there are over 3,000 wells that have been drilled domestically that could easily be fracked and start producing rather quickly, but that won’t happen until prices broach the low 60’s, at least.

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What about exports? They probably won’t affect this dynamic either way. All that is doing is moving a very small amount of light sweet crude to refineries that are immediately capable of producing it.

Oil markets are always nervous about potential disruptions in the Middle East, and will initially react accordingly. However, as the macro market conditions that have already been put in place continue to play out, the world will move closer to parity between supply and demand and that should ultimately have a bullish skew for prices.

Commodity traders are a rather shortsighted bunch. They only consider what is immediately in front of them. Right now, it’s all they can handle to predict how these latest tensions might play out. But eventually, more US supply declines will hit the news, and they’ll consider that a positive. Then, probably in Q2, the news will come that we’re not over producing any more. And that will be even more bullish. Then, if you throw a supply disruption “event” on top of that, prices could spike parabolically.

Or, the more likely scenario parlays the opposite of how we talk about gasoline prices. The adage is that gasoline prices rocket up but float down like a feather. With the oil recovery, prices are more likely to float up like a feather, and from a producer’s perspective, we’d be tickled to see that.

Use Intangible Drilling Costs to Save on Your 2015 Taxes

Got a 2015 Tax Burden? Put Intangible Drilling Costs To Work

Use Intangible Drilling Costs to Save on Your 2015 Taxes

Many taxpayers find themselves at year’s end without enough tax deductions. Oil & gas investments can help accredited investors reduce their 2015 taxes.

It’s the last week of the year and you have a tax problem. A good problem of sorts: You’ll be writing a big check to the IRS next spring, minus some kind of quick intervention. In this final week of 2015, what options do you have that could substantially reduce your tax burden?

Let’s consider President Ronald Reagan, and go back to the year 1986. Congress passed a bipartisan sweeping Tax Reform Act and President Reagan signed it into law as the second of the “Reagan Tax Cuts.” In the bill, specific tax considerations related to domestic oil and gas development were established, creating what Newsweek would later say “is the very best tax advantaged investment.”

Specifically, Intangible Drilling Costs (IDCs) were allowed to be deducted against active income. Typically, oil and gas exploration was considered a passive activity for most investors. That changed under President Reagan, at least from a tax perspective.

For the typical taxpayer, passive activities (real estate investing, rental income, etc.) create larger deductions than active income (salary, commissions, sales of goods or services). Therefore, many high-income taxpayers leave money on the table, because they generally end up with more active income and not enough active deductions. The Tax Reform Act of 1986 provided an excellent alternative to this dilemma.

Intangible Drilling Costs comprise about 80-percent of the total cost of a drilling project and include such things as labor, drilling mud and supplies. Think of it as all the costs incurred that don’t drive away when the hole is completed. This substantial part of exploration can be deducted against active income, 100-percent in the year they are incurred.

Back in the late 1980’s and 90’s this caught on as one of the best tax breaks for wealthy individuals that had ever been created. In other words, it worked exactly as President Reagan and Congress anticipated. In the early and mid 80’s, oil prices were way down, similar to today, and drilling had come to a near halt. This Act re-stimulated domestic oil exploration, as tens of thousands of high-income earners jumped into domestic oil and gas working interest ownership, reducing their tax burdens, and in many cases, creating consistent monthly income from producing oil and gas wells.

Patriot Energy 2015 Tax BookletFREE TAX GUIDE:  Do you need tax deductions to offset your income this tax season?  Click here to download our FREE Tax Savings Guide to learn more about how you can save huge tax dollars by investing in oil and gas.

 

Parallels To 2015

We’re in a similar situation today. With prices down, drilling companies are cutting substantial deals that haven’t been seen in over a decade in order to keep rigs and crews working. That brought the cost of drilling down, and is a reason why there continues to be more crude oil production coming from the United States. The shale revolution is far more substantial than anyone initially expected.

Today’s oil prices are creating a significant buying opportunity for both investors and taxpayers. From the tax perspective, the entire drilling operation is eventually written off your taxes (IDCs at 100-percent in the year incurred and the remaining tangible drilling costs are amortized over 5-7 years). From an investment perspective, once prices turn, history indicates there will likely be a substantial reversal to the upside. So if you were investing in oil and gas, would you rather buy at the top, when prices are high but likely to turn down (monthly income goes down), or begin participation when prices are low, with the expectation that in coming months, monthly check sizes could increase?

Going back to 1985, using the Energy Information Administration’s closing price data, there were five major oil price bottoms over the last thirty years. In each case, when prices turned back up, the gains ranged from nearly 200-percent to over 500-percent. Where we go from here is anybody’s guess, but the more likely trajectory (and even OPEC now agrees) is up.

 

Only A Few Days Left To Act

We have a current prospect with units available that was drilled in 2015 that could save you money on this year’s taxes. But there are only hours remaining for you to take action.  December 30th is the last day to act!

To find out more about the Cole prospect, call or email Patriot Energy today at (469) 434-3057 and we will rush you a prospectus.

Year End Write Offs With Oil and Gas Investments

Drill for Year-End Write Offs With Oil and Gas Investments

Exploring for a year-end tax deduction? Sinking some dollars into an oil and natural gas drilling deal can be risky but the rewards can be huge. Such investments can offer robust returns as well as write-offs as well.

Year End Write Offs With Oil and Gas Investments

High net worth individuals often need end-of-year tax breaks and thanks to President Reagan, oil and gas provides several tax savings.

In 1986, President Ronald Reagan gave high net worth investors a unique gift that still, 29 years later, stands alone in the US Tax Code as one of the most favorable tax benefits available. Like today, oil prices were low in 1986 and Congress was looking for ways to stimulate drilling, and thus the economy. They drafted a Tax Bill that allowed investors to put money into oil and gas prospects, and write off a substantial amount in the year of the investment, and the full amount over 5 to 7 years.

What’s even better is that these deductions can be applied directly to active income, where most investors leave tax breaks on the table, because normally only (generally smaller) active write offs can apply to active income. Intangible Drilling Costs can be written off against active income in the year they are incurred.

Here is how it works:

  • Intangible Drilling Costs: These costs include everything but the actual drilling equipment. Labor, supplies, chemicals, mud, grease and other miscellaneous items necessary for drilling are considered intangible. These expenses generally constitute up to 80% of the total cost of drilling a well and are 100% deductible in the year incurred. For example, if an investor contributed $100,000 to drill a well, and if it were determined that 75% of that cost would be considered intangible, the investor would receive a current year deduction of $75,000. Furthermore, it doesn’t matter whether the well actually produces or even strikes oil. As long as it starts to operate by March 15 of the following year, the deductions are allowed.
  • Tangible Drilling Costs: Tangible costs pertain to the direct cost of the drilling equipment itself, i.e., the drilling rig, motors, tanks, etc. These expenses are also 100% deductible, and will be depreciated over seven years. Therefore, in the example above, the remaining $25,000 could be written off according to a seven-year schedule.
  • Active vs. Passive Income: The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income, such as wages, interest, capital gains, etc. This is significant because high net worth investors frequently have more passive write offs but higher active income; therefore, many deductions are never utilized. Not so in oil and gas investing.
  • Small Producer Tax Exemptions: This is perhaps the most enticing tax break for small producers and investors. This incentive, which is commonly known as the “depletion allowance”, excludes from taxation 15% of all gross income from oil and gas wells. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels of oil per day is ineligible. Entities that own more than 1,000 barrels of oil per day, or 6 million cubic feet of gas per day, are excluded as well.
  • Lease Costs: These include the purchase of lease and mineral rights, lease operating costs, and all administrative, legal and accounting expenses. These expenses are 100% deductible in the year they are incurred.
  • Alternative Minimum Tax: All excess intangible drilling costs have been specifically exempted as a “preference item” on the alternative minimum tax return.

One benefit provided by the tax code is an upfront tax deduction. “Often, a large portion of your investments may be deducted in the first year,” said Chris Christensen, a certified financial planner in Dallas. In other types of business, more of the costs must be written off over long time periods through depreciation schedules.

The amount you can deduct would vary according to details of the transaction. But suppose you invest $25,000 in a drilling deal this year. With Intangible Drilling Cost credits you get to immediately deduct $18,000 from your 2010 income. In a top 39.6% federal tax bracket, that deduction would save you more than $7,000 in tax payments.

If your drilling investments produce oil and gas, you will likely begin receiving revenue in early 2016. Then your taxable income will be reduced by depletion allowance. That’s a second tax break to encourage energy exploration. It takes into consideration that the well in which you’ve invested loses value as the energy resource is pumped out. You can treat part of your revenue as a non-taxable refund of your original investments rather than as taxable income. The exact amount will vary each year, depending on factors such as the amount of oil and gas produced and income reinvested. This tax shelter can go on as long as the oil and gas keeps flowing.

A third reason to consider making this type of investment is for the sake of diversifying your portfolio. There were six major oil bottoms going back to 1985 and in each case, oil prices rose between 200-500% from the bottom.  If history repeats itself a seventh time, we are currently positioned for a substantial upward price movement, which makes the investment all the more valuable.

Another thing to consider is the type of drilling that will be done. Pure “wildcat” exploration looks for previously undiscovered petroleum. On the other hand, “developmental” drilling takes place near fields already producing oil and gas.  These wells are typically less risky and seldom produce “dry holes.”

“Ask to see a map of the area to be drilled and ask them for surrounding production information,” Christensen said. “There will be less risk if the wells are in the middle of a producing oil or gas field rather than on the outskirts. And check with your tax pro. “IDC deductions are a great way to avoid tax for high income individuals,” says Mark Mathers, a partner in an accounting firm in Midland, TX. “Individuals in high tax brackets that need deductions should definitely look at oil and gas drilling programs with heavy IDC costs,” Mathers said.

Here’s another potential tax advantage concerning Roth IRA conversions. Regular IRA’s may be converted to Roth IRA’s and then transferred into oil and gas drilling programs. However, deferred income taxes are due upon conversions.

Mathers notes, “You can eventually withdraw all of the money in a Roth IRA tax-free after the latter of five years of age 59 ½.  You are eligible to convert only in a year when your adjusted gross income is $100,000 or less. “The first-year deductions from a drilling income below $100,000 for the year. Nevertheless, the underlying economics are critical, so you should pay attention to the investment’s potential as well as the tax advantages,” he adds.

Oil and gas drilling prospects may be available through some brokers, financial planners, accountants and other advisers or directly from the sponsoring oil company.   Buying directly from the oil and gas company provides the most “bang for your buck.” You should invest only in direct working interest. Then you own the interest directly in the wells and the risks are limited only to your percentage of ownership.

Very few investments enjoy the pure tax shelter benefits by investing in drilling for reserves of oil and natural gas. In a successful drilling deal you may have your cake and eat it too, from the upfront tax deductions to ongoing tax sheltered cash flow.

Our team is standing by ready to help you!  To learn more about how you can save on your 2015 year-end taxes, contact a Patriot Energy representative by email or call (888) 251-7644.