So many people don't know about these facts advantages and haven't taken advantage of any of the benefits.
The wells that we're drilling right now, right outside of Midland, Texas, we're drilling 10, 11,000 foot laterals,
and finding between a million and a million and a half barrels of oil.
And those will produce out over the next 40 years.
The idea of putting $100,000 into something that one doesn't understand is really concerning.
I think it's just a great time right now to be investing in oil and gas.
Last year we had 103 million barrels of oil consumption, which was the highest in history.
Losing your money, I think that was off the table.
You aren't going to lose your money.
Welcome to the Executive Connect podcast.
Today we're going to talk about tax strategies and oil and gas.
And time with things you can use this year in 2025.
Welcome Don Hossmer, co-founder of Royal Energy, with a deep expertise in oil and gas exploration for investor benefits.
I'm so excited to have you here today, Don.
Thank you for joining us.
>> All right, Melissa.
Good. Thank you to be here for having me here today.
>> Don, I want to just kick it off with talking about some of the tax advantages
that people need to know about in oil and gas.
>> Sure.
So, really it started back in 1986 when a lot of the partnerships were setting up by and working interests
and wrapping them into the limited partnerships.
And that would offset some of the high taxes.
Back then it was about a 50% top tax bracket.
And so everybody was buying oil and gas partnerships in order to offset that high ordinary income tax.
Well, when Reagan came in, he passed what was called the Tax Reform Act of 1986.
And he brought down those high 50% tax rates.
But in turn, he eliminated the deductions from those passive investments, limited partnerships.
But they specifically exempted the working interest form of ownership in oil and gas drilling
from the passive loss rules.
And so you can deduct your entire drilling investment from your ordinary income, capital gains,
any kind of taxable event can be directly offset with an investment in the drilling operations.
>> I love it.
Let's talk a little bit about how you got into this space, Don.
Can you share with our listeners how you found the oil and gas industry?
>> Sure, I was in college still, my senior year of college and my father who was a real estate developer
of his whole life.
It kind of semi-retired and began investing in oil and gas with a former governor of Oklahoma.
And he set up a package of four wells and they went to start drilling them and
financing fell through at the last minute.
And so I went and found most of the money on that project.
And the investors got 100% right off, 50% tax bracket.
They got half their money back the first year.
And then the rest of it, they were getting 5,000 a month.
So another 50, 60,000 first year of income.
And so they got a tremendous investment on those four wells.
And so that was so much fun and so such a good investment I've been doing it ever since for
the last 35 years.
>> You know, it's interesting to me about the oil and gas space.
And so many people don't know about these tax advantages and haven't taken advantage of
any of the benefits.
So I want to kind of get your opinion on why this is.
>> The item where people not invest in oil and gas outside of buying stocks.
Is there a reason?
Is it the SEC rules?
Is there anything specific you can share with our listeners?
>> Well, oil and gas is a high risk enterprise.
And there's no doubt about that.
There's risk in geology, there's risk in pricing.
And so there's just a lot of different risks.
But the tax deductions were put in the tax code back in 1913 when they were hitting maybe
one out of 20 wells.
It was wild gang.
And the government doesn't invest in oil and gas.
Our US government, unlike most countries where the government owns the oil and gas reserves,
our country relies on the private sector.
And so these deductions were put in the tax code in order to direct capital into oil and
gas drilling and develop our energy resources.
And so that was back when it was very high risk.
Now with the advent of 3D seismic and drilling with horizontal and fracking through a continuous
accumulation of oil.
And so it's been much lower risk.
Now in fact, our current project, they drilled over 120 wells in the field and no dry holes.
So where you used to hit one out of 20, now we're hitting 10 out of 10 and we're getting the
same tax deduction.
But I think a lot of people just still equate oil and gas as a risky investment, which it
does still have risk.
But a lot less risk now with the advent of modern fracking and drilling into a continuous
accumulation of oil.
Yeah, when I think of oil and gas, I think of some of the cartoons I've watched as a
kid, you know, drill soda straw, no oil, move over, drill soda straw, no oil.
But now like you were saying with fracking, you drill runs and fracking.
It's likely that you're going to hit oil.
So the benefits substantially increase with fracking versus just drilling.
I want to talk a little bit about breaking down what IDCs are and why they are such a game
shager for investors as a technologist.
I think of fracking like I think about technology in a way that it just increases, there's a substantial
increase in benefits to using fracking.
So by using it and able to drill more holes, how does that help investors with what they're
going to get back from these deals?
Well, you know, you've seen all the mergers, Exxon bought pioneer for 60 million, oxy bought
crown rock for 12 billion, conoco bought marathon, they're all buying in the Permian right now.
And the reason is really multi stage fracking.
It's been a game changer.
In the old days, they would frack across the entire 10,000 foot interval and the pressure
would dissipate, you wouldn't get as deep a penetration into the rock.
Well now we go every 200 feet set an iron bridge plug and track into that 200 feet oil rock.
And so you get higher rates, higher oil reserves will put as many as 60 fracks on a 10,000
foot interval.
And so it's been a game changer.
All the majors, you know, they treat it like manufacturing.
They know the oils there, they know what their costs are to drill for it.
Just what is the variable price of oil going to be?
And so it's really been a game changer out there.
Reduce the risk, increase the economics.
And then when you include that tax benefit, which is still in the tax code, you're literally
paying for your oil reserves with your tax taxes, through your tax deduction of the investment.
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Yeah, I think of it like also trying to think of how to ask this.
It's like mailbox money, right?
I think of some of the benefits of getting money every month, like I do a rental home, right?
You get somebody pays you with their monthly rent.
You take your money off that monthly rent.
Is that the same analogy with these IDCs?
Are you paid monthly?
And the kind of the second question is, the real risk sounds like the cost of oil to me
outside of any other risk that there may be.
I guess that's a two-part question.
Part one is that something that people are getting paid monthly and then part two is
the risk just really the cost of oil?
Yeah, so you're correct.
All the oil is sold each month and then distributions are made at the end of every month.
We used to call mailbox money.
Now we ACH directly into their bank account for the most part.
That's directly deposited into the investor's account at the end of every month for the
prior month's production and for both the sale, oil and natural gas.
Now on the tax deduction, that's taken right up from that intangible drilling cost deduction
can be taken immediately, the day that you invest.
So if you're making estimated quarterly, that can offset that estimated quarterly payment.
If you are at the end of the year, planning to sell a property or a business or have higher
ordinary income, that's going to directly offset that and reduce your adjusted gross income.
So in some cases, it can actually bring you into a lower tax bracket, but in every case,
it'll give you back whatever your top tax rate is.
So if you're in a 30% tax bracket, you'll get 30% back right away.
If you're a state year in, you'll get that state amount back.
And then on the income, that monthly income, 15% of that is going to be non-taxable through
the depletional outs.
It's actually a cost recovery.
In the old days, they would take the total oil reserves and then divide it out and you
would recover it over the life of the reserves.
Nowadays, they just do a straight 15% is non-taxable.
And that's an additional cost recovery for your investment.
So is that how that plays out for the entire time of the drill?
So that 15% of the gross income, that's for the whole long term, life of the wells.
Yeah.
So literally paying for your reserves through your tax write-offs.
That's amazing.
Now how long do the wells usually, can you pull from?
How long is the life of the wells?
So that's going to vary depending on how many reserves you find in the well.
The wells that we're drilling right now, right outside of Midland, Texas, we're drilling
10, 11,000 foot laterals and finding between a million and a million and a half barrels
of oil.
And those will produce out over the next 40 years.
Those will have a 40 year life.
Wow.
That's amazing.
I want to kind of circle back a little bit about people that are new to this.
So just kind of summing what you said, people could invest, they have to be accreditive investors,
right, to invest in these drills.
And what is it accredited investor in the oil and gas space?
Yeah.
So they're sold in a private placement memorandum, regulation D. And so that just requires
that investor either has 200,000 a year of income or a million net worth of assets.
If they have either one of those, they're deemed to be accredited and can invest in the projects.
Now what if they're a married couple, does that change the 200,000?
Yes.
For married couples, it's 300,000.
Okay.
And then the million stays the same for married couples, million net worth.
Okay.
Fantastic.
Okay.
I want to talk a little bit about how, you know, when I think about these IDCs, accredited
investing, like you were saying a little bit, they're more of a riskier investment.
So a lot of times, you know, women are less risk adverse and men are more comfortable with
risk.
So in your opinion, if people are investors of stocks and IRAs and rental and other
than crypto and all these ways to invest, what percent of people's portfolio do you think
IDCs could be for an investor now that have high ordinary tax income?
Well, it really depends on what your investment goals are.
You know, if you're looking for, you know, tax deduction, how much tax deduction do you
need?
If you're looking for income, you know, a lot of our investors are selling a business and
retiring, probably 30% of our clients are retiring and taking money out of their IRA or 401K,
which creates a taxable event.
So they'll take 100,000 out of their retirement account and put 100,000 in the drilling and
it completely offsets that taxable event and then creates a monthly income for their retirement.
So it really just depends on what your specific investment, you know, goals are.
Yeah, that makes sense.
That's a tough question.
I'm curious as like our new president has some very specific roles.
I keep replaying in my head, drill, baby, drill.
I know that's something that spends, you know, he talks a lot about.
So there are there any tax policy changes or proposals this year that could positively
affect oil and gas and maybe something that investors should consider with our current
investment.
So the last time President Trump was in office, he passed the Tax Cuts and Jobs Act of 2017
where he enhanced the tangible well-hit equipment.
We used to depreciate it over five years and he put in what's called bonus depreciation,
full expensing.
Now that's reduced now down to 40% bonus depreciation, but he also enhanced the section
179, which allows you up to a million dollars of expensing of property or equipment.
And so unless you're depreciating over a million dollars, you can take the full expensing
the first year through the 179 election.
But as far as what he's proposing now, you know, we haven't seen anything, you know, in
terms of what he might or might not do with tax taxation on oil and gas.
Yeah, and I know that you have to have a large amount of cash up front to invest in some
of these deals, some of these oil and gas deals are hundreds of thousands of dollars to
invest.
So it's capital intensive.
So we're recording this in March of 2025.
Is there anything that would draw investors in right now when they're trying to decide?
Do I put a hundred thousand dollars into the stock market versus oil and gas versus all
the other investments one could invest in?
Is there something that we could talk about that would interest people to put their money
more in oil and gas now versus some of these other investments within the stock market?
Well, with oil, you know, of course, you've got a hard asset that is stored in the ground
and produced out for monthly income.
And so if you're concerned, you know, about the stock market collapsing or maybe a bank
failure or something, you've got a hard asset stored in the ground.
You've literally owned oil barrels and natural gas in the ground.
And so that is produced out.
We'll always be produced out.
People will always use it for, you know, heating their homes, electricity, transportation.
So we'll always have a market for the oil.
We import, you know, 50% of our oil right now.
It's a nation.
So we'll always have a market to sell that into.
So you've got cash flow and I think safety of your, holding your asset in the ground.
Yeah, Royal Energy Focus is mostly on domestic production.
And I know living in Austin's sustainability and renewables are really trending.
Where do you see oil and gas fitting in today's energy mix?
Sure.
So we're seeing a great deal of demand increase for electricity, you know, AI and all the electronic
components that are being used now.
And so energy overall is increasing pretty dramatically right now.
Oil and gas is 80% of that demand.
And so you're going to have demand growth.
In fact, the International Energy Agency says that we'll probably have 2% per year for the
next five years.
And last year we had 103 million barrels of oil consumption, which was the highest in history.
And so we could well be over 110 million barrels per day of consumption within five or ten
years.
So we think there's a strong demand for it.
And you know, it's just a good time to own oil and gas right now.
Yeah, it sounds like it.
Now, I want to circle back to maybe one thing for people that have never heard about oil
and gas.
I know if you've not heard about IDCs and investing in some of these drills, the idea of putting
$100,000 into something that one doesn't understand is really concerning.
So is there one thing that we could point people to or boil it down for them to give them
confidence that oil and gas is a safe place to invest right now, no matter what year it is,
even if gas is a little bit lower next year than it is this year?
Yeah, so we think it's a good time right now because in our case, the advent of multi-stage
fracking, we're in a 20,000 acre play right outside of Midland, Texas.
Next sign is drilled several wells to our north.
They just went and bought another 3,000 acres to the south.
Occidental petroleum is drilling right on our eastern edge and continental for the largest
producers in Texas are drilling right around our acreage.
In fact, we've received two written offers from two of the major producers out there.
So this is an area where the risk is low, we haven't had any dry holes.
They're all high rate between 813,000 barrels of oil per day and long life reserves.
As I mentioned earlier, diesel produced for 40 years.
So this is just a unique opportunity.
You know, in my 35 years in the business, I've never been 100%.
You know, we always have a dry hole here or there.
And this played because of the continuous accumulation of oil in that shell, we have not had any dry holes.
That's amazing.
Now how does Oklahoma and Texas compare to other parts around the United States?
Is it have more oil or less or how would you say they compare?
Well, first of all, they're much more friendly to oil.
You know, we were a California producer primarily.
And here in California, it's become much more difficult to do business in the oil and gas arena.
So, well, Oklahoma and Texas certainly more friendly.
And it's in the case of the Permian Basin, that's got 12 different layers of oil.
And most of those have been penetrated and drilled vertically with vertical wells.
But now with this modern, multi-stage fracking, we're going back into shell formations that
were not economic previously.
And so it's just opened up a whole new area.
The majority of the undrialed wells is right there in the Permian Basin.
That's great.
Now as we kind of any final thoughts or predictions you want to share with our listeners on oil and
gas as we continue to head through 2025?
Well, I think the current administration is going to make it much more friendly and less
regulatory.
It will lower our overall costs of doing business.
It'll open up more areas certainly.
You know, federal leases were off limits under the previous administration.
So federal leases will become more active in drilling.
And so I think the whole environment is going to be just much better.
I think we'll have more demand for oil and gas going forward, less regulation on using
it.
And so I think it's just a great time right now at this early stage of the new environment
to be investing in oil and gas.
I love it.
I know we talked a little bit about this before.
I know a lot of times oil and gas, you know, from a tax standpoint, CPAs don't really
understand how to navigate IDCs or how to take these write-offs because it's not a popular
thing.
Is there any advice you can give to our listeners who are presenting oil and gas investments
to their CPAs and the CPAs are telling them this is a bad investment or a risky investment
or I don't know anything about it?
Is there any advice that you could share with those listeners?
A lot of CPAs think they're talking about a partnership and right away when they say oil
and gas, they think partnership, which is not deductible against ordinary income.
But if we give them our tax book, we have a tax book, we can send out to anybody electronically
or hard copy.
But that will identify the tax code and show them exactly where that's legitimate write-off.
So it's a standard schedule C business deduction, your deemed to be in the oil and gas business
when you own a work in interest in an oil and gas well.
So to that extent, you write it off on your schedule C and then that comes around to the
front page and reduces your adjusted gross income by the amount that you put in.
Back in 2021, I had a guy, Mike Weaver, out of Tucson, Arizona called me and he said,
I received a stimulus check in the mail and he said, I call my CPA and I said, how in the
world did I get a $1,200 stimulus check?
And his CPA told him, your oil investment reduced your adjusted gross income below $75,000
and that's what generated the check.
And so it's a great way not only to recover your drilling costs through the tax refund, but
it also reduces your overall tax bracket in some cases.
That's great.
I love that you guys have that book to share with our listeners.
Don't anything, I know we covered a lot quick, rapid fire.
Is there anything you want to leave with our listeners or any final closing thoughts?
Well I think if you, you know, not been in oil and gas because of the risks, you know,
there certainly is still risk.
I don't want to let anybody know there's not, but a lot of those risks are mitigated now by
using 3D seismic, which we have on all of our drill sites.
And then good well control and then using modern multi stage fracks.
I think when you mitigate the risk in those three ways, you've reduced your risk quite a
bit.
You've reduced the risk of, you know, prices, you can't reduce the risk of pressure or,
you know, different production risks.
But overall, I think losing your money, I think that is off the tape.
You aren't going to lose your money.
You're going to get your tax right off and get monthly income.
And that's what we all love, monthly income and decreasing our tax burden.
So thank you so much, Dawn, for being here today and sharing with our listeners all about
IDC, oil and gas investing.
I know you're a busy man.
That is the Executive Connect podcast.
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