This second report in our series about modern traditional and modern alternative investments addresses Direct Participation Oil & Gas (DPOG). And it’s likely not how you thought people invested in this dynamic asset.
But first, we thought it might be useful to distinguish outdated investments from modern traditional and modern alternative investments.
Outdated traditional investments include:
- Mutual Funds
- Variable Annuities
Although these traditional investments might be suitable for some people, they can put a drag on investment performance because of high (typically hidden) expenses, high correlations with each other, and punitive tax liabilities.
Modern traditional investments include:
- Custom Stock & Dividend Strategies
- Bond Ladders
- Direct Participation Real Estate (DPRE)
- Hybrid Annuities
Modern traditional investments apply new strategies using traditional security types to help manage risk, expense, and taxes. They also potentially improve diversification with low- or non-correlated relationships to each other and to other kinds of investments.
Modern alternative investments include:
- Tactical Investments
- SIPs & IUL Strategies
- Hybrid Multi-Asset Strategies
- Direct Participation Oil & Gas (DPOG)
Modern alternative investments use newer methods with attributes investors generally did not have access to a generation ago. The methods include proactive approaches to improving potential returns, managing risk, using asset types not correlated with paper assets, and using strategies capable of limiting tax liabilities.
This second in our series is about the modern alternative investment, Direct Participation Oil & Gas (DPOG).
Investors seeking the potential benefits of participation in oil & gas markets generally have only a few main ways to invest:
- They can purchase shares of stock in oil & gas companies. This is one of the outdated traditional investment methods.
- They can trade futures or options on oil & gas.
- They can purchase actual interest in specific oil & gas wells. This is DPOG.
DPOG possesses certain characteristics that distinguish it from other investment types, mainly:
- DPOG is ownership in one or more specific oil & gas drilling projects. Prospective owners can visit the projects and learn the potential productivity and risks of sites they are interested in.
- Investors participate directly in the operations’ cash flows.
- Unparalleled tax benefits.
What’s So Special About DPOG?
All investors want one or a combination of the following benefits:
- Growth in principal value
- Investment income, which can include dividends, interest, rent, royalties
- Preservation, which is growth in principal at least at the inflation rate
- Tax advantages, incentives and/or efficiencies
DPOG can potentially deliver all four of these benefits, though only accredited investors[i]can participate. Additionally, to earn these benefits, investors use certain methods in hopes of managing risk, minimizing expense, and achieving an acceptable rate of return. DPOG fits within methodological frameworks that can achieve these outcomes. Here are the added benefits many accredited investors can gain with DPOG:
- A dual income source, which means an investment in wells can produce income from both oil & gas as well as a preferred rate of return.
- After a DPOG investment has paid enough income to match the original principal, subsequent income can continue, and the risk of loss of principal is eliminated. We call this “Risk-off Income” because the initial risk has been removed.
- No other investment has the tax benefits of DPOG. (dollar for dollar write-off of active income)
Tax benefits present an extraordinary advantage for many accredited investors. We encourage you to seek competent tax advice (we don’t give tax advice), but we want to highlight three benefits here. To get a more complete story on DPOG and tax benefits, text “DPOG” to 555888.
The U.S. Congress, driven by its interest in developing domestic oil independence, granted investors and others special tax advantages related to Direct Participation Oil & Gas investments:
- The first 15% of gross income is tax-free for most investors and small producers.[ii]
- Intangible drilling costs[iii]derive from wages, fuel, supplies, survey expense, and other expenses in preparation for drilling. Investors can usually deduct 100% of these costs in the first year.[iv]
- Tangible drilling costs derive from the direct cost of drilling equipment, which are also 100% deductible, though the expense must be recognized over a seven-year period.[v]
For many accredited investors, the combination of DPOG’s special properties and its absence of correlation with paper assets (e.g., stocks, bonds) render DPOG worthy of careful consideration.
[i]Find the SEC’s definition of “accredited investor” here: https://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=8edfd12967d69c024485029d968ee737&r=SECTION&n=17y220.127.116.11.18.104.22.168. State laws can also apply.
[ii]Known as the “Small Producers Exemption”: https://www.law.cornell.edu/uscode/text/26/613
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