Attention Oil and Gas Folks: Investment Opportunity or Scam?

Question

Totally out of my depth on this and interested to learn more.  I have an opportunity to invest in the Working Interest through a Participation Agreement on an oil and gas "development".  However, no drilling is required and costs are to refurbish a dozen of the existing sites with about 20 operating.  The terms are 1% of the net revenue of after lease and operator expenses for $9,000.

How common are participation agreements in Texas and other heavy oil states?  Is this a scam or a great opportunity?

What prevents the operator from taking the money and just provide a story over the course of a few months with no oil to show for it?

Do most operators use banks to raise capital on performing assets?

The "innovative" idea... One could buy the 1% shares equal to their federal income tax bill.  Before years end you execute the agreement and write off 100% of the cost of the shares.  Best case:  It's profitable and you turned your tax bill into an income stream; Worst case: It produces no profit and you don't have a tax bill so no different than just paying the income tax.  Is this idea viable?

Account Closed · Answer

@Dave Foster

The operator's fast talk and overall bubbly personality were making me a little suspicious.  Could be a great operator or an industry scammer (I don't think he is) but very difficult for me to know the difference at this point.  Flipping rocks and learning more.  Didn't know you could 1030x these investments.

Dave Foster · Answer

Account Closed, They have a saying in TX - "All hat and no cattle"!  You can do a ton of due diligence on your operator.  Interestingly enough the Texas Railroad Commission is the governing authority on oil and gas in that state.  IN OK it's the Oklahoma Corporation Commission.  And in ND it's the ND Industrial Commission.  Go figure.

Dave Foster · Answer

Account Closed, Vet that operator like they were asking to marry your daughter!!!  Operators are the key.  They can gum up a good well in a moments notice.  But word gets around.  So do your due diligence x 3.  But that's the bad news.

The good news is that both working and royalty interests in oil/gas/ and mineral resources are considered like kind to real estate.  So you can sell real estate and buy interests in oil and gas using the 1031 and defer all tax.  Many times the exchange to oil and gas will give you much more depreciation benefits - in working interests from the Intangible Drilling Costs and the depletion allowance in royalty interests is pretty healthy as well.

It's not for the faint of heart.  But there's many folks who regularly 1031 both back and forth from real estate to oil/gas and within oil and gas.

Bruce Lynn · Answer

WI means you could be called on to contribute more capital as needed.  Some of my working interests are now asking me monthly for money due to low oil/gas prices....so instead of getting a monthly check, you write them a check for the privilege of being a WI owner.  There's really no limit to the downside.  ...and when it comes time the well is no longer economically viable and no longer producing...who gets the privilege of paying to plug the well?

What's the current revenue?  What's the projected revenue after the rework?  Have they given you the proposed expenses to rework the wells?   Where do you think oil and gas prices will go?  Up-Down-Sideways.   Is the operator doing the work themselves or are they hiring it out?

There are lots of scams out there....so be careful.

Don Konipol · Answer

@Joe Mercer

As per your income tax idea

1.  Even if allowed the total loss of investment, that total may be deducted from income, not from the tax owed.  In other words it’s at best a deduction (from income), not a tax credit.

2.  Specific rules apply as to

A.  When an investment is allowed to be considered a loss

B.  What type of income an investment loss or passive loss may be written off against

C.  Capital losses may only be deducted from capital gains, except for $3,000 per year of excess capital losses that may be deducted against earned income.

As an example

You’re income is otherwise S100,000.   You pay $15,000 in taxes.  You make a 15,000 investment and lose it all.  IF you are able to utilize the $15,000 as a deduction, you would subtract it from the $100,000 in income.  Your income is now $85,000 and you would pay tax on the $85,000.  More likely you would be able to deduct $3,000 of the $15,000 loss per year, and pay tax in year 1 on $97,000.

Account Closed · Answer

@Bruce Lynn

The agreement was offered by the Operator. Dry well from the 50's.  He's confident he can get something out of it and illustrate it in a prospectus. Not moving forward with this particular agreement, rather trying to learn new ways to invest.  Royalties look a lot more interesting or less risky.

Account Closed · Answer

@Don Konipol

Thanks Don.  I was thinking about it as a tax credit and not a deductible.

Joe Splitrock · Answer

This could easily be a scam. I would shy away because there are better ways to invest.

Attention Oil and Gas Folks: Investment Opportunity or Scam?

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