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1031 Energy: Oil and Gas Handbook

Investing in Oil and Gas


Diversifying into oil and gas can provide valuable rewards and balance to your portfolio.

* The minimum investment in 1031energy.com producing O&G property is $200,000.00
* Oil and gas properties are often used as replacement property for real estate and other investments to defer capital gains taxes under section 1031.
* Purchase of energy assets can provide investors with portfolio diversification, especially if an investor has a significant portion of his or her net worth in real estate.


Diversifying into energy can provide valuable rewards––for investors seeking to complete a 1031 exchange or for simple direct investments. High net-worth individuals often turn to energy programs for the potential for attractive returns as well as tax relief.

Oil and Gas properties

Income from oil and gas properties provide accredited investors access to a diversified pool of cash producing energy assets. Unlike many energy investments, these funds can be structured to accept monies that have been previously invested in traditional retirement plans. Income from oil and gas properties generally carry no debt and are generally not subject to unrelated business taxable income (UBTI).

Energy Replacement Property Risks:

- Oil & Gas interests are only available to accredited investors
- Oil & Gas interests are subject to the usual risks of energy
- Oil & Gas interests are depleting assets
- Oil & Gas interests cash flows and returns are not guaranteed
- Oil & Gas interests involve fees that may offset tax savings
- Oil & Gas interests are generally illiquid
- Oil & Gas interests require a high level of due diligence

Monthly cash flow is generated from the sale of oil and/or natural gas produced on your property. Cash flow is usually aggregated for all wells in the investment and paid monthly based on your percentage interest. Your purchase is often diversified to include wells at various stages in their production life span from a producing well possibly has a 20 to 30 year life of production. And, many investments include rights to your percentage of any additional production developed on your property in the future. However, your investment is not used to develop new fields or drilling of new wells.

Energy replacement property value will be determined by monthly production capacity, monthly revenue, commodity pricing and engineering reports regarding future production potential. Because energy properties are comprised of a number of individual oil and gas property leases, they are often identified using the "200% rule" for 1031 exchange purposes. That is, the total value of the energy asset must not exceed 200% of the market value of the relinquished property at the date of the title transfer. In essence, this means that the value of your ownership in the oil and gas property must be valued at less than 200% of the market value of the property you are replacing.

One of the many advantages of O&G is that, unlike buying a building, an energy asset purchase can often be tailored to the exact valuation required for your exchange. Some alternatives on the market even provide the ability to tailor the exact amount of debt desired by an investor. This is of particular interest to 1031 exchangers looking to match debt to avoid boot. In addition, many energy replacement property options offer a much lower minimum investment requirement than many traditional real estate or Tenant In Common (TIC) investments. The minimum investment in 1031energy.com producing O&G property is $200,000.00. Under the provisions of section 1031 of the internal revenue code, oil and gas assets are considered "like kind" for all of the following types of real property: commercial properties, mines and quarries, multi-family dwellings, residential rental properties, restaurants, timber and timberland, warehouses and undeveloped land. Thus, oil and gas properties are often used as replacement property for real estate and other investments to defer capital gains taxes under section 1031.

To receive up-to-date information on investing in energy, sign up today.

The public portion of this site contains only general information regarding classes of products and services that are designed to meet the needs of Section 1031 exchangers and other qualified investors. In order to receive any information on actual investment vehicles you must register for our site and meet our accreditation qualifications. This is not an offer to sell or solicitation of an offer to buy any security listed herein. Past performance is no indication of future performance. Nothing herein shall be construed as tax, legal or accounting advice, you should contact your own advisor for such advice.

Like conventional Tenants in Common property (TIC), oil and gas properties produce a monthly cash flow, have intrinsic value and often project a superior initial yield. However, unlike conventional TICs, they are innately diversified both by geography and product and generally do not require investors to sign carve out guarantees. Most energy replacement properties enjoy cash flow from a combination of oil and natural gas production. They also generally minimize locale-specific economic trends and operator-specific business issues.

Additionally, purchase of energy assets can provide investors with portfolio diversification, especially if an investor has a significant portion of his or her net worth in real estate. This diversification can be prudent because there is low correlation historically between oil and gas property value and commercial real estate property value.

While O&G production properties are not risk free, risk of investment is comparable to real estate TIC assets. The monthly production capacity in any given O&G property tends to average out to a known rate, and income fluctuation is mostly dependent on energy prices—the higher the price of energy commodities, the greater the income.

Having energy assets in your investment portfolio may help distribute or diversify risk away from factors that may devalue other kinds of assets. Individual real estate properties often carry local/regional risk because they are often strongly tied to local economic and development trends whereas ownership of geographically diverse energy-based investments offers a degree of insulation from local trends. Energy investments are instead often subject to production risks and oil and gas market risk. Energy assets also can serve as a hedge against rising energy prices. Other portions of your portfolio would tend to decrease as energy prices increase (certain stocks/certain real estate). Moreover, long-term performance history of O&G properties has shown only weak (or negative) correlation to Wall Street.

Although private placements are generally limited to investors who are not buying with a view to distribution, there can be a number of situations where an investor can need or desire liquidity. Generally, energy properties are more liquid than TICs. Partial or complete divestment can often be accomplished rapidly through a variety of existing and established methods, ranging from direct transfer/sale (usually 15-30 days), to online auctions (typically lasting 30 days), to traditional auctions through specialized auction houses (typically around 60 days) or divestment/brokerage firms (usually 45-60 days). The options in the liquidity spectrum for energy assets offer turn-around that can be as little as two weeks, and put your offerings into active, highly-competitive bidding environments to optimize the sale price of your properties. To receive up-to-date information on investing in energy, sign up today.

The public portion of this site contains only general information regarding classes of products and services that are designed to meet the needs of Section 1031 exchangers and other qualified investors. In order to receive any information on actual investment vehicles you must register for our site and meet our accreditation qualifications. This is not an offer to sell or solicitation of an offer to buy any security listed herein. Such offer may only be made by written prospectus in a jurisdiction wherein the offering is duly registered or exempt therefrom. Past performance is no indication of future performance. Nothing herein shall be construed as tax, legal or accounting advice, you should contact your own advisor for such advice.

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