The World of Oil & Gas Investing

Introduction

In this episode of the Tax Smart REI Podcast, Brandon interviews Troy Eckard, of Eckard Enterprises, a family-run oil & gas business with $850 to $900 million in assets under management.

Listen in as Troy shares his experience in the oil and gas industry, explaining how technological advancements have revolutionized the way drilling is conducted, significantly reducing risks and increasing success rates.

Oil & Gas: The Role of Mineral Rights

Troy discusses the strategic approach Eckard Enterprises takes in identifying and acquiring valuable mineral rights. He highlights the appeal of investing in mineral rights, emphasizing their passive income potential, tax benefits, and ability to balance portfolios in uncertain economic times.

He explains the differences between mineral ownership and working interest, noting the tax advantages and expected returns of each.

Technological Advancements in Drilling Oil & Gas

Troy explains how the same advanced technologies used in other industries are now utilized in oil and gas, increasing efficiency and success.

Due Diligence for Oil & Gas Investors

He also provides advice on conducting background checks and what specific information to request from potential investment opportunities. Avoiding fraudulence by verifying potential investors’ track records is crucial in the process of due diligence.

Oil & Gas Tax Benefits and Investment Structure

Troy outlines the three-year recapture rule for tax benefits and emphasizes the current economic environment’s suitability for oil and gas investments due to supply deficits and rising demand.

He details the tax advantages of both mineral ownership and working interests, including significant first-year deductions and long-term returns.

Conclusion

This episode is packed full of pertinent information regarding the strategic investment of oil & gas.

If you’re interested in alternative strategies to reduce taxes such as mineral rights and working interest, fill out this form.

Read on for the episode transcript.

Transcript

Brandon: You’re now listening to the Taxmart REI podcast, the number one tax podcast for real estate investors. Troy, welcome!

Troy: Thanks, man. How are you doing?

Brandon: Thanks for dealing with my tech issues. How are you?

Troy: No problem, at least they’re yours, not mine.

Brandon: We were trying to figure out how to go live in the Facebook group, Tax Smart Real Estate Investors Facebook group, which has about 20,000 members. We used to be able to do this through Zoom, but for some reason, it wasn’t working. I’ll have to look into that later. Thank you very much for joining me today. Why don’t you tell everybody what your background is and what you’re doing here?

Troy’s Background

Troy: Yeah, well, first off, it’s very simple. I was very fortunate to be introduced to the US oil and gas industry by way of the financial markets back in 1985. I was a licensed broker representing oil companies that were looking for capital through high-net-worth investors to drill wells, buy sites, and basically expand their business. As a result, it gave me a financial view of how the industry worked.

Then, about ten years later, I started my own investment firm and my own oil company in 1995. I quickly migrated to the asset side and have been doing that from 1995 to today. Today, we have a company called Eckard Enterprises, a family-run energy business with about $850 to $900 million of assets under management, all cash paid for, no debt. We focus on buying mineral rights for oil and gas, drilling wells, participating in oil and gas, and owning pipelines and assets that move, transport, or process oil and gas. I’ve been doing it for 40 years.

Oil & Gas Technology

Brandon: Wow, that’s fascinating. How do you identify sites where you’re going to drill? Are you raising capital, managing these assets, and then deploying them with operators, or are you guys also the operators doing the drilling?

Troy: Here’s the fun part. Your question is great if it were 15 years ago. The same technology, software, hardware, satellites, and advanced tools used in other industries, like Tesla’s driverless cars and solar satellite imagery, are also used by oil and gas. They used to have someone drive around with a truck to check every well. Now, they have solar panels that feed data to an office in Dallas or Houston, providing 24-hour monitoring. Young engineers, programmers, and computer-literate people are doing everything from drilling the wells to monitoring and processing every molecule of gas.

They use computers and microchips to guide drill bits four miles underground, just like Tesla’s driverless cars. We don’t have to figure out where to drill anymore. I always tell a story that’s very appropriate. When I was a kid doing cattle ranching, we would round up calves in high brush using cowbirds. The white birds were where the cows were. Today, it’s similar. We look at where the drilling rigs are. There are only 600 drilling rigs in the US, and they are in the highest valued, most profitable drill sites. We use technology and analytics to predict where companies like Exxon will drill in the next 12, 24, and 36 months. It’s a sophisticated approach to an antiquated business, bringing it to a modern world.

Mineral Rights Predictions

Brandon: I didn’t realize that. I guess it makes sense, but I didn’t know the technology was so precise. That’s incredible. So, you’re trying to predict the future, essentially. In simpler terms, you look at where everyone is today, where they will go, and then buy the mineral rights in those areas?

Troy: It’s even better. Oil and gas changed about 15 years ago. It went from a 7.5-inch paper plate and a geologist guessing where to drill, to now having about a 99% success rate with horizontal wells. The risk is no longer in exploration but in the best utilization of capital. We use software and engineering to analyze past well performances and identify the sweet spots, better operators, and better areas to drill. It’s all productive, but we aim for the highest rate of return.

Eckard’s Role

Brandon: What’s your company’s role in this process?

Troy: My role is simple. In any market, there are sophisticated and unsophisticated owners. 95% are unsophisticated. We have expertise in drilling, making us like the oil companies, and we know how they operate. We buy minerals inside sections of land where horizontal wells will be drilled and get a percentage of all the oil and gas produced with no liability, expenses, or holding costs. Also, we use 40 years of drilling expertise to understand the oil companies’ operations. That’s why we are beating a lot of mineral buyers.

Sample Deal

Brandon: Walk us through a sample deal. You identify the owner, raise capital to acquire the mineral rights, and then what do you do? How much capital are we talking about for each deal?

Troy: Our company, Eckard Land and Acquisition, has professional land companies with armies of landmen who are experts in identifying minerals, filing deeds, and conducting title searches. We use our geologists, engineers, and landmen to identify where to buy. We then run those minerals through our engineering software to predict cash flow. Eckard actually buys them first. We keep 5 to 20% of every portfolio and invite our partners to co-own the rest. Our average portfolio used to be around $5 million, but now it’s between $15 and $40 million. We’ve done $85 million this year and are pushing close to $850 million in total capital over the last 40 months. We will probably exceed a billion dollars this year.

Mineral Rights Appeal

Brandon: What do your partners find appealing about mineral rights? It’s not a common asset class.

Troy: There are three major appeals. First, it’s the best passive income asset. No expenses, property tax, or liabilities. It’s purely passive with 12 distributions a year and a 1099. Second, it’s great inside a self-directed IRA and qualifies for 1031 exchanges, allowing tax-deferred growth. Third, energy balances a portfolio, especially with rising inflation and low bank liquidity. It’s an attractive asset class in uncertain economic times.

Brandon: And it seems like you’ve structured this to minimize the risks associated with drilling wells.

Troy: Exactly. 15 years ago, we hit 60% dry holes. Now, with advanced technology, dry holes are rare. We have about a 99% success rate. Oil companies are tenants, and we are landlords. We get big tax write-offs in the first year and attractive returns from the wells. It’s no longer about guessing but ensuring the best rate of return. We target 30 to 40% cash-on-cash return for drilling and about 15% for minerals across 100 portfolios.

Tax Benefits of Oil & Gas

Brandon: Can you talk about the tax benefits? Specifically, the first-year tax write-off and 1031 exchanges?

Troy: Yes. If you invest today in drilling, you get about 60 to 75% of every dollar invested deducted from your taxable income this year. So, if you make a million and invest a million in drilling, you reduce your taxable income by $600,000 to $750,000. This deduction is generated from drilling costs, equipment, and lease costs. The largest portion is deductible in the first year. High-income earners use this to defer taxes and grow their wealth. We aim for high returns without the risk of dry holes. Minerals provide 15% of income tax-free due to depletion, offering a higher yield.

Longevity of Oil and Gas Investment

Brandon: How long do these investments last?

Troy: Minerals last forever until you sell them, similar to real estate. Drilling investments depend on the well’s life expectancy, which has increased with better technology. Wells last 20 to 50 years. We have wells from 2010 still producing strong cash flow. It’s about managing the assets and maximizing returns over time.

Oil & Gas Ownership

Brandon: What types of ownership are there, and what are the benefits?

Troy: We have two types of investors: those who want passive income with no risk and those seeking tax benefits and willing to take drilling risks. Mineral owners receive passive income without expenses or liabilities. Working interest investors take drilling risks but get significant tax write-offs and high returns. Both types have advantages based on their financial goals and risk tolerance.

Investment Track Record

Brandon: How do you verify the track record of these investments?

Troy: You need the API number, like a social security number for oil wells, to verify each well’s details. Look for transparency and clarity in the drilling and investment process. Ask for the operator’s information, itemized budget, and fees. Ensure all details are provided in writing to avoid fraud. It’s crucial to understand the industry and ask the right questions.

Investment Fees

Brandon: What are the normal fees for these investments?

Troy: Our minerals have no fees. We buy low and sell to our partners at a fair price, and we may charge a small management fee in the future, but so far, we haven’t. Eckard focuses on providing value and transparency to our partners. We distribute checks regularly and ensure compliance with all regulations.

Oil & Gas Recapture Rule

Brandon: What about the three-year recapture rule for tax benefits?

Troy: The IRS requires a three-year holding period to avoid recapture of deductions. If you invest today and take deductions, you need to hold the investment for three years to keep those benefits. After three years, you can sell without recapturing the deductions. This rule encourages long-term investment and ensures stability.

Oil & Gas Considerations

Brandon: Why should someone consider oil and gas investments in this economic environment?

Troy: This is one of the best times for oil and gas investments. We have a major supply deficit and geopolitical risks affecting the market. The US strategic petroleum reserves are depleted, and we have about 11 days’ worth of supply. Demand has increased by about three and a half million barrels in the last four years. The break-even price for oil companies has risen, and we’re likely to see oil prices at $95 to $110 a barrel. Oil and gas investments are a strong hedge against inflation and economic instability. Energy is essential, and as demand continues to rise, investing in oil and gas can provide stable returns.

Brandon: Thank you so much for that explanation, Troy. Where can people contact you if they want to learn more about investing in oil and gas?

Troy: I’m probably the most proactive chairman you’ll ever meet. My cell phone number is 469-422-1781. You can text me, tell me who you are, and ask any questions. Alternatively, you can reach me through my email at troy@eckardenterprises.com. We also have a website, eckardenterprises.com, where you can sign up for Eckard Insights, our app that provides educational resources and helps you manage your investments. Our team of salaried wealth managers can assist you in developing an energy investment strategy tailored to your needs.

Brandon: Awesome. Thank you so much, Troy. We really appreciate you coming on today.

Troy: Thank you, Brandon.

Brandon: Thanks, everyone, for tuning in. Take a look at the links below this video. We’ll see you next time.

Troy: Thank you. See you guys.