Key Takeaways
- Oil and gas investments generally fall into two categories: mineral rights, which can provide passive income, and working interests, which involve more direct participation in drilling and production.
- For some dental practice owners, oil and gas may provide another way to diversify investments and create income outside the practice.
- Tax advantages can be significant, but they shouldn’t be the primary reason for making an investment.
- The structure of the investment matters, including what you actually own, how income is distributed, and your options for eventually selling.
- Due diligence is critical. Investors should understand the people behind the investment, their track record, the underlying assets, costs, risks, and expected returns before committing money.
- Oil and gas should be evaluated as part of your overall financial and retirement strategy, not as a standalone opportunity.
Dental practice owners looking beyond stocks, bonds, and traditional real estate may eventually come across oil and gas investments. They can offer passive income, portfolio diversification, and potential tax advantages, but they also come with risks that aren’t always obvious from the sales pitch.
In this episode of Beyond Bitewings, Ash spoke with Taylor Black of Eker Enterprises about how oil and gas investing works, why it may appeal to some dentists, and what investors should understand before committing their money.
Two Ways to Invest in Oil and Gas
One of the first distinctions Taylor made is that oil and gas investments can take very different forms.
Mineral rights are primarily an income-producing investment. The mineral-rights owner receives a share of the revenue generated when an operator produces oil or gas from the property. Taylor compared it to being a landlord: the operator develops and operates the wells, while the mineral owner receives a portion of production revenue.
Working interests involve more direct participation in the drilling and operation of wells. Investors share in the economics of production and may also qualify for significant tax benefits.
For dentists approaching retirement, the potential for passive income can be particularly appealing. Taylor used his father-in-law, a dentist, as an example. As he began thinking about retirement, he wanted investments that could help replace some of the income he received as a practice owner without replacing it with another business that required employees, management, and day-to-day involvement.
Oil and gas can also add another type of asset to a portfolio. Taylor was clear that he isn’t suggesting investors put everything into oil and gas. Instead, he views it as another option for investors who want to diversify beyond traditional markets.
How Individual Investors Can Participate
Buying and developing oil and gas properties requires substantial capital, putting direct acquisition out of reach for most individual investors. Taylor explained that Eker aggregates money from multiple investors to acquire larger assets, allowing individuals to participate with a smaller investment.
For drilling programs, the company also spreads an investment across multiple wells rather than putting everything into a single well. That can reduce the impact if one well performs below expectations, although it doesn’t eliminate the possibility of losing money.
Taylor stressed that investors also need to pay attention to what they are actually buying and what they’re paying for it. A productive well can still be a poor investment if the acquisition price makes it difficult to earn an adequate return.
Another distinction Taylor discussed is direct ownership. Eker’s investors own an interest in the underlying asset rather than an interest in an investment entity. According to Taylor, that structure provides greater visibility into what an investor owns and more flexibility if the investor eventually wants to sell. Eker provides production information, well identification numbers, budgets, and other information investors can use to monitor their holdings.
Don’t Invest Just for the Tax Benefits
Tax advantages are one of the reasons oil and gas investments can attract high-income professionals. Taylor discussed deductions associated with working interests, as well as tax strategies involving mineral rights and retirement accounts.
But he also offered an important warning: a tax benefit doesn’t turn a bad investment into a good one.
As he pointed out, an unsuccessful well may generate a tax deduction just as a successful one can. The goal should still be to invest in productive assets that generate returns, with the tax benefits considered as part of the overall investment rather than the primary reason for making it.
The tax rules surrounding oil and gas investments can also be complicated and vary depending on the type of investment and how it is held. Before investing based partly on its expected tax treatment, talk with your CPA and other financial advisers about how those rules apply to your situation.
Understand the Risks and Ask Questions
Oil and gas has a complicated history, and Taylor acknowledged that failed drilling programs and bad actors have contributed to skepticism about the industry. That makes due diligence especially important.
Before investing, understand who is managing the investment, how long they have been in the industry, and what their track record looks like. Taylor recommends asking for detailed information about the wells and assets, including budgets, production information, well identification numbers, and information about the geologists, engineers, and other professionals involved.
Investors should also understand how distributions are calculated, what expenses they may be responsible for, how they can exit the investment, and what happens to their ownership if the company managing the investment is no longer involved.
Taylor also shared Eker’s historical results during the conversation. He said its mineral-rights investments have averaged approximately 10.5% to 12% annually, while working-interest investments have averaged roughly 30% to 33% annualized. He emphasized that results vary by investment, location, production, and commodity prices. Those figures represent Eker’s reported historical experience and should not be viewed as guaranteed future returns.
Where Does It Fit in Your Financial Plan?
Oil and gas may offer another avenue for dentists looking for passive income, diversification, and tax-planning opportunities, particularly as they begin thinking about life after practice ownership. But it isn’t an investment to make solely because the projected return or tax deduction sounds attractive. Consider how it fits with your other investments, liquidity needs, retirement plans, risk tolerance, and long-term financial goals.
As with any significant investment, do your homework and involve your CPA, attorney, and financial adviser before deciding. The question isn’t just whether oil and gas can be a good investment. It’s whether a particular opportunity makes sense as part of your larger financial plan.
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