Oil & Gas

There are two types of ownership in oil and gas:

  1. Working interests, and
  2. Royalty interests

 

Working interest investors own participating, or lessee, interests in land. Working interest owners generally pay capital expenses, operating costs and royalties to the mineral title owner: They incur all of the costs and liabilities, but share in only part of the revenue. The working interest owner (lessee) drills for oil and/or gas. If the drilling results in a successful oil or gas well, the investor receives a share of the revenues based on that production. If the drilling is unsuccessful, however, the working interest owners receive no revenues, but are still responsible for 100% of the costs in drilling and subsequently plugging the abandoned well.

A royalty interest owner, on the other hand, has the benefit of sharing in production revenue, without exposure to the capital costs, operating expenses and environmental liabilities associated with oil and gas production. Compared with working interests, royalty interests have less risk, but both have substantial risks that must be considered prior to investing.

Oil and Gas Royalty Interests may be acquired using a Section 1031 exchange.*

Potential Advantages of Royalty Interests*

  1. Royalty interests operate as a hedge against increases in energy costs.
  2. All cash (no leverage) investment does not have financing risk associated with it.
  3. Can be completed with a Section 1031 exchange.

 

Potential Disadvantages of Royalty Interests*

  1. Depleting Asset may only generate cash flow until reserves are depleted.
  2. Expensive to resell in secondary market. There is no established secondary market.
  3. Cash flow is dependent on gas and oil prices.

 

*The contents of this site constitute neither an offer to sell nor a solicitation of an offer to buy any security which can only be made by prospectus. Investing in real estate and 1031 exchange replacement properties may not be suitable for all investors and may involve significant risks. These risks include, but are not limited to, lack of liquidity, limited transferability, conflicts of interest and real estate fluctuations based upon a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Investors should also understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment. Neither Bridge Equities, Mike Bendix, nor DFPG provide tax or legal advice, as such advice can only be provided by a qualified tax or legal professional, who all investors should consult prior to making any investment decision.