By Carole Ellis
In 2018, the total revenue of the United States’ oil and gas industry came to about $181 billion. For many self-directed investors, that metric alone is reason enough to take a serious look at investments in this industry, and when they see the eye-popping cash-flow results from oil drilling, they can’t wait to leverage their self-directed account capital toward these exciting investments.
However, the billions of dollars generated in oil and gas come with some important caveats that mean this type of investment is not suitable for all investors. Before you let the concept of being part of a multi-billion-dollar industry that powers the country turn your visions of the future all rosy, take a look at these three additional indicators that oil and gas investments might be right for you:
Indicator #1: You have capital you’ve dedicated to higher returns and higher risk.
If you are like most people, thoughts of oil drilling brings to mind “The Beverly Hillbillies” striking oil in a great big geyser shooting out of the ground. These days, however, very little in drilling is left to chance. It is an extremely scientific process that lets big and small oil companies alike optimize every well for successfully striking and extracting “black gold.” However, there is always a chance a well will not work out. When that happens, you do not get your money back (although you still reap substantial benefits that show up later on this list). If you do not have capital that you can afford to lose, then oil and gas might not be for you.
Self-Directed Investor Qualifier: Can you agree with this statement?
“I don’t like losing capital, but my portfolio can take the hit if this well is dry.”
Indicator #2: You could benefit from significant, substantial income tax benefits starting year 1.
Because of the way tax rules work for oil and gas, making an investment in this industry can slash your income tax liability quite dramatically. With almost no exceptions, people who invest in oil and gas drilling projects are able to take an income tax deduction for 100% of the money they invest in the project, nearly all of which is available in the first year of the project.
Even better, this deduction is against your earned income, such as W2 or 1099 income. Thus, an investment of $100,000 into an oil and gas deal almost inevitably leads to a real income tax savings of $25,000 to $45,000 depending on where you live.
Self-Directed Investor Qualifier: Can you agree with this statement?
“My income is such that I would qualify from a substantial reduction in my taxable annual income.”
Indicator #3: You are (probably) an accredited investor.
In most cases, oil and gas projects are only available to accredited investors. According to the SEC, an accredited investor must have an annual income of $200,000 ($300,000 if you are married) for the past two consecutive years and be able to demonstrate this income level is likely to continue or have a net worth exceeding $1 million (not including their personal residence). There are a few exceptions to this requirement, but in nearly all cases you must have that accredited investor status.
Self-Directed Investor Qualifier: Can you agree with this statement?
“I am an accredited investor or am seeking investments in oil and gas that do not require me to be one.”
Don’t Sell Yourself Short: Oil & Gas Works on Every Scale
Many self-directed investors love the idea of investing in oil and gas but think that the scale of the industry is just too big to include them. After all, the oil and gas sector saw the largest profit growth of all sectors listed in the Forbes Top 10 Profit Growth List for 2019, even beating technology and communication and the pharmaceutical industry. It is hard for many of even the wealthiest self-directed investors to imagine there is an “in” for them in this space.
However, not every oil and gas company is an ExxonMobil or a Shell. In fact, there are many companies that actually optimize their own drilling operations by following behind these behemoths and taking advantage of the billions of dollars in research and development that “Big Oil” pours into its drilling operations before the bit ever breaks ground. Never count your self-directed investment capital out of the equation before doing the research, and if you can safely agree with all three of the self-directed investor qualifier statements above, then there just might be 181 billion additional reasons to look into this industry more carefully.
Want to learn more about oil & gas projects available now, and whether you qualify? Text SDI Magazine publisher Bryan Ellis directly at 678-888-4000 for more information.