Direct Participation Oil Investments

HOT DIRECT PART ICIPAT IO N OIL INVESTMENTS Qualifications Accredited Investor Non-Accredited Investor Net worth of $1M Must have: excluding primary residence Knowledge and experience in finance and business $200K or more alone or with a representative for 2 consecutive years Capability to evaluate risks and merits of prospective $300K or more combined with spouse investments Getting Involved Direct Participation Program (DPP) oil investments can be sold by 3 entities Brokers / Dealers Oil & Gas Companies Private Offering registered Securities and Exchange the an officer the company Exempt om securities Must be the one to make registration, but requires Commission the investment offer some accredited investors -Types of Offerings. Master Limited Partnerships Non-registered Securities Fully registered securities Expensive and time consuming Rarely do DPP Regulation D offering Must register with state agencies Must follow "Blue Sky" laws Private Placement Memorandum (PPM) Blue Sky Laws also known as an "Offering Memorandum" Enforced by state attorney general "Never get involved in an oil & gas offering without being offered a PPM Anti-fraud statutes, require: All securities sold in a state must Specific outline of information to help partners learn about the firm and investment strategy be registered there or exempt from registration Proposed terms and conditions Al broker-dealers and their Legal, accounting and tax matters representatives must be registered in the state or be exempt from registration Includes information about risk of investment Risk and Reward Limited Partnerships Working Interest Passive income Active income Flow-through of profits and losses General partnership Avoid double tax (earnings / dividends) Unlimited liability (self employment income) 100% tax deductible Intangible Drilling Costs (IDCS are all non-salvageable costs) tax deductible Tangible Drilling Costs (100% in first year under Section 179, or deprecated over 7 years) 15% tax deductible gross revenue (depletion deduction - for the life of the project, from sale of oil & gas) tax rate for long-term capital gains (profits from when limited partnership dissolves, after 1 year or more) Real World Tax Benefits *Assuming a 35% income tax bracket $10OK Initial SIUUK investment B0% Intangible Drilling Costs & other deductible expenses $10OK x 80% = $8OK *Per IRS Section 469(c)(3) ZU/0 Tangible Well Equipment $1OOK x 20% = $20K *Per IRS Section 179 S10OK x 35% = $35K Soings First Year %3D Savings $10OK - $35K = S65K Net Investor Cost Breaking Ground Geological Modern technology allows geologists to locate possible oil deposits (oil traps) |Gravity Meters Magnetometers "Sniffers" Changes in gravitational Presence of oil causes "Sniffed" hydrocarbon field can indicate oil changes in magnetic field can be an oil presence Seismology Tools Thumper Truck slams plate into the ground that create shock waves to analyze Seismology Subsurface Data Explosives detonated underground to create shock waves that are then analyzed Shock waves are used Data from already drilled to evaluate location of oil sites used to find more oil Data is used to create 3D images Drilling Once geological survey is complete, mineral leases and drilling permits are acquired, drilling begins Locations are staked, land and water prepped Rig is assembled and main hole drilling begins Lengths of pipe and casing added as the hole goes deeper Cement is placed between pipe and the borehole to prevent collapse Once Total Depth (TD) is reached, tests are done on rock formations Completion After the drilling, the well must be completed in order to allow for the flow of oil Perforating - holes in casing at oil depths Acidizing - acid pumped into holes aids in flow Hydraulic Fracturing (Fracking) - water and chemical additives are pumped into the ground to cause pressure Proppants, sand, resin coated sand and man-made ceramics hold fractures open to aid in the oil flow Production After the drilling, testing, and completion oil must be extracted and commercially viable products produced Drilling and completion equipment removed Production equipment / storage tanks set up Pump Jack is installed - lever pushes and pulls a rod, suction draws oil through the well Sometimes auxiliary holes are drilled to inject steam to aid in extraction Wells can produce oil, gas and water, separated and delivered appropriately Revenue to Investors After production and raw materials are sold, then profits are distributed. In this example arrangement, revenue is realized, the state assesses severance taxes and royalties are paid. $350,000 $288.000mm Investor supplied 10 bbl/day $800/day $80/bbl Гyear 24% royalty to land owner, geologist $69,120 -$17,500 $201,380 and land man 7.5% to state severance tax Net to partnership $151,035 $22.655 75/25 split leaves gross taxable to investor Schedule C Depletion deduction 15% - for life of project to $ S128.3R0 %24 Net taxable to investor US OIL Sources: http://apps.americanbar.org/buslaw/committees/CL983500pub/newsletter/200801/fallon.pdf lwww.articlesbase.com/investing-articles/direct-participation-in-oil-and-gas-wells-part-1-securities-3825931.html http://mba tuck. dartmouth.edu/pecenter/research/pdfs/Private_placement_memo.pdf http://thismatter.com/money/funds/dpp/limited-partnership-taxation.htm http://quizlet.com/3299968/ch-13-direct-participation-programs-flash-cards/ http://www.investopedia.com/articles/07/oil-tax-break.asp#axzz1zrOR1IBN http://www.irs.govirmipart4irm_04-041-001-cont01.html http://www.irs.gov/publications/p535/ch09.htm http://ezinearticles.com/?Understanding-The-Section-179-Depreciation-Deduction&id=5991373 http://science.howstuffworks.com/environmental/energy/oil-drilling1.htm http://water.epa.gowtype/groundwater/uic/class2/hydraulicfracturing/wells_hydrowhat.cfm http://www.ourpubliclands.org/files/upload/Oil and Gas Drilling 101.pdf http://www.ehow.com/how_2141337 type-oil-gas-investment-pursue.html PROPERTIES %24 %24