My background is limited, but I did my own taxes for two year in which I had a few hundred stock trades and some oil and gas investments. That was about 150-200 hours of my life each year that I can't get back.
Okay -
The tax side of these deals changes the denominator of the return calculation. The top federal rate is 35%, and 33% is just under that.
At a 33% federal rate, if everything can be classified as IDC, the after tax cost of the investment is only 66% of the nominal, and the return will be improved about 50%.
There were two or three tax incentives for different types of rework, I think one of those is still around.
There is also the 15% depletion allowance, which will not be taxed. At a 33% rate, that adds another 7.5 % to the moneys returned. That might multiply the ROI by 1.075% or more for net royalties. For a working interest, where the depletion is figured on the production units, and then there are costs that are deducted before the investor gets their money, the depletion allowance can be a very large factor.
So for an ORRI there should not be any costs, Net Royalty may have certain costs, but you should not be assessed to for more capital.
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If there a track record that is similar to this deal, and the deal has a large number of similar wells, the odds of failure may drop enough that a lower return can be okay. If twenty wells on both the east and west side XYZ field were successfully reworked, and those well have a track record online with the RRC and this is 20 wells in the middle, with the same crew, same equipment, etc.
That's something that is easier to sell.
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The National Association of Royalty Owners has some info, their online store has some basic books,
naro-us.org
These guys will be happy to sell you a $155 book -
onlinestore.cch.com
And of course...
irs.gov |
