[00:00:00] Speaker A: You're listening to the Preferred Way, a retirement podcast brought to you by Preferred Trust Company, the preferred custodian for all alternative investments.
[00:00:10] Speaker B: Welcome to the Preferred Way podcast. Today we have a really special guest.
He's got two first names, and I love that about people. That's how you can always tell they're really, really good people. So we're gonna have some fun today, right, John?
[00:00:24] Speaker C: Yeah, of course we are.
[00:00:26] Speaker B: John Jordan with Petro Peak.
[00:00:30] Speaker C: Petro Peak Investments. Yep.
[00:00:32] Speaker B: Perfect. And you are the managing partner.
Probably. We're the founder too, although we're, we're gonna stick with managing partner, right?
[00:00:41] Speaker C: Sure. Yes.
[00:00:43] Speaker B: And you've been in the industry a long time. Let's talk about the industry. You know, it's, it's, it goes under so many different words. Drilling, oil and gas, mineral rights, royalties. You know, talk to me a little bit about, like, all of it. Let's start from the bottom. Drilling and, and kind of go through all these different layers that are associated with oil and gas in general.
[00:01:11] Speaker C: Sure.
[00:01:11] Speaker B: What does that look like?
[00:01:14] Speaker C: All the things you mentioned are very much intertwined in the, in the industry.
I think fundamentally you can almost think of about this in terms of. Very comparable, in terms of like, real estate and let's call it an apartment building. Right.
[00:01:30] Speaker B: Okay.
[00:01:31] Speaker C: Okay. Someone owns that property, that piece of land and that building.
Likely they will rent out or lease out individual units within that property. Right. And receive monthly payments and life is good. And that's kind of the real estate world.
Yeah, it's, it's not very different in terms of oil and gas, the royalties environment that we're directly involved in, and how oil and gas operators then access the subsurface and produce oil and gas.
So there will be a true owner of what's called mineral rights. So it's everything in the subsurface, typically from below groundwater to the surf, the center of the earth, is how a lot of these properties are written. They, over the course of time, can be, can be split and bifurcated, and joint interest and severances, all kinds of nuances associated with it.
Essentially, those are owned by an individual.
[00:02:36] Speaker B: Okay.
[00:02:37] Speaker C: An oil and gas company will come in and say, you know what? We would love to drill a well in this area. We think it has high probability of success rate revenues and return. And therefore what they will do is they will seek out the landowner.
They will request to acquire a lease, an oil and gas lease to then drill and access those, those minerals.
Once that is complete said and done, the oil and gas company has the capital Fits it into their budget for the year, will then go in and actually drill an oil and gas well.
Historically in the business, a lot of wells were drilled just straight from the surface, vertically, straight down, produce the well. And that was the extent of it really over the course of the last 15 years or so. That's really where the horizontal drilling has really taken off.
And it has given operators the opportunity to, in a lot of, a lot of places that are getting drilled, drill about 7,000ft down, vertically, turn that horizontal and then drill horizontally anywhere between one up to three miles. And some companies are now even tempting the four mile barrier.
[00:03:59] Speaker B: Wow.
[00:03:59] Speaker C: In some of the plays. So it gives access to a ton of reservoir rock. You can imagine over the course of that two, three and potentially even four mile horizontal well.
[00:04:11] Speaker B: Yeah.
[00:04:12] Speaker C: Once, once the well is turned on to production, that's really where the, the oil and gas company will receive revenues from kind of midstream companies for the sale of the product.
They turn around and the first one in line for payment associated with their activity is the royalty owner. And so that's really kind of the, the niche that we've kind of gotten into in terms of the, the royalty space to, to be kind of a front runner in line for some of that revenue that's directly owed by the oil and gas companies associated with the extraction of hydrocarbon.
[00:04:50] Speaker B: Okay.
So thank you for that.
I followed you layman's terms.
[00:04:57] Speaker C: We've got the dirt.
[00:04:58] Speaker B: Right. So here's our dirt level of dirt, stuff below the level.
This level of dirt right here is really a real estate investment.
[00:05:07] Speaker C: It is correct.
[00:05:09] Speaker B: And then they come in and they drill and that's another investment.
[00:05:13] Speaker C: Yes.
[00:05:14] Speaker B: And then there's revenue on top that's exported out for the oil and gas companies. Is that correct?
[00:05:21] Speaker C: Yes, that's correct.
[00:05:22] Speaker B: In. In similarity. So from a real estate perspective, you talked about apartments for just a second. We're making some correlation there. And so from the royalties perspective, it really is a matter of the land owner taking part in those royalties when revenue is generated from the oil and gas companies.
[00:05:43] Speaker C: Is that, that is pretty accurate.
And another thing to keep in mind is really the SP split of revenue associated between the royalty owner and oil and gas company.
[00:05:55] Speaker B: Yes.
[00:05:55] Speaker C: On average it's an 80 20, 75, 25 split. It does, it does vary. There are nuances there, but in general it's kind of an 8020 split.
[00:06:05] Speaker B: Yeah.
[00:06:05] Speaker C: The oil and gas company is then coming in, they are taking, you're granting them access, they're upfronting all of the Capital. They're taking all of the drilling risks. The execution.
[00:06:16] Speaker B: Yes.
[00:06:17] Speaker C: The environment, all of those things.
And then as the royalty owner, you are retaining that 20% ownership and owed 20% of all barrels that are produced out of that well.
[00:06:30] Speaker B: Yeah.
So what percentage of drilling is actually successful?
I know it's a loaded question. It's a loaded question. But, you know, you've been in industry a long time.
[00:06:43] Speaker C: What, what have you.
Yeah, I would say when I, when I first got into industry, kind of back in the late 90s, where everything was really in a vertical sense.
[00:06:56] Speaker B: Yeah.
[00:06:56] Speaker C: The style of reservoirs that were being sought after back then are very different than what's being tackled today historically. Kind of when I got my start, a success rate might be 1 in 10. 2 in 10. Yeah. Very speculative, very exploratory in nature.
Roll forward several decades and with the advent of horizontal development, hydraulic stimulation, fracking, as most people will hear, is it is allowed the success rate to, I will not say 100%, but it is darn near 100%. Basically, the way these shale plays will work is that they get mapped in the subsurface.
So you will understand what is the extent in a given area.
[00:07:51] Speaker B: Yes.
[00:07:52] Speaker C: The question is, what is the overall quality and production expectation as opposed to what is the risk factor of success?
It's more about am I going to make 500 barrels a day to start or is it going to be a dog and be a hundred barrels to start?
[00:08:10] Speaker B: Yes. And I can tell you from personal experience, what you just described is 100% accurate.
And I would, I would even say as of the last 10 years, it's become more precisely accurate in, you know, not being as speculative. And sometimes, you know, take it back 10 years when I was investing on the drilling side, which was quite speculative still. At that time, I was probably like 4 in 10. Right. So it was getting a little bit better.
But now it's.
It's been good. Let's just say it's been good.
But let's take that real estate piece for just a second.
[00:08:55] Speaker C: Okay.
[00:08:56] Speaker B: Because I don't think most people correlate oil and gas investments as a real estate investment. They really don't. The connection maybe isn't being made. How is the royalties or the. Or the mineral rights marketed to an investor? Is it, is it presented as a real estate play or is it presented as an opportunity to invest in oil and gas?
Can you kind of define that for me? So that individuals that are looking at these investments really aren't being taken for a ride, you know, how do we really dissect that and make sure we know what we're investing in and then we'll talk about the drill.
[00:09:35] Speaker C: Sure. It's, I mean is typically advertised and marketed as an oil and gas investment.
Although on if the focus is solely on the mineral side, it is much more similar to a real estate type purchase. Yeah, it's. Yeah, exactly the same. But on a real estate purchase you're essentially looking at the surface and then structures and whatnot. Above.
Yes, surface oil and gas, minerals below. Looking at surface and everything below.
[00:10:11] Speaker B: Correct.
[00:10:12] Speaker C: You know, from that aspect these are essentially. This is deeded ownership recorded at the courthouse. You know, and very, very similar in terms of what you would have on a real estate side.
[00:10:26] Speaker B: Okay.
[00:10:27] Speaker C: The, the markets, the access to it. I'd say that's, that's really what is drastically different. I think everybody probably knows a realtor. Everybody knows, everybody knows Zillow, Redfin, Google, whatever you want.
You can access the real estate market instantaneously traditionally. And I would think that the majority of folks would think that for oil and gas. Oil and gas investing, this is typically for an Exxon, a Chevron.
[00:10:58] Speaker B: Yes, yes.
[00:11:00] Speaker C: Large, super large multi billion dollar corporations and they hold all the carts.
The majority of my career has been with some of these operators and I've been on the operating side and drilled wells all over the country.
And I being even being in the industry, I didn't even know that the market that I am now essentially trying to bring to the common investor was actually available.
I am now currently using some of the same brokers marketing opportunities.
It's just, it's the scale of what would be good for an oil and gas company versus what would be good for say an institutional investor versus what would be good for your average.
Every day mom and pop, somebody that just wants to write a check and invest in oil and gas. So you know, there is that giant magnitude difference between say, you know, an oil and gas company might go after something that is multi. Billions.
[00:12:04] Speaker B: Yep.
[00:12:05] Speaker C: Institutionals millions, hundreds of millions, individuals. You know, for us, we offer access to oil and gas mineral royalties for as little as $25,000 to to.
[00:12:17] Speaker B: That's really low. That's great.
[00:12:19] Speaker C: That's like. That's our starting point.
[00:12:22] Speaker B: Yeah.
[00:12:22] Speaker C: And we, you know, it's like we don't put limitations on the upside. Whatever people are comfortable but just in terms of, of access and that that access point also kind of helps to frame some of our opportunities.
So the, the things that we have recently gone after, I mean they're they're in the range of tens of thousands of dollars up to $100,000 in terms of an individual deal.
So us, we're not going after an entire lease, we're going after a fraction of that lease.
There's no difference in ownership. It's just a percent. The only difference is a, is a percentage number of ownership.
[00:12:59] Speaker B: Okay, now do you find, because when you get to the drilling side, are you seeing individuals investing with retirement accounts or cash? And why.
[00:13:11] Speaker C: With drilling? I would say cash is the preferred mechanism. And it just, it really has to do with the overall tax incentives tied directly to direct participation in the drilling of an individual well.
With that there are tax considerations for tangible and intangible drilling costs. It's an immediate write off to the investor on year one, which is, which is substantial, that it can wait. It can equate to up to like 7, depending on the operator. Like 70 or 80% of your year one investment could be a tax write off to the individual that contributed the capital.
[00:13:54] Speaker B: So for a higher net worth individual, you could either pay Uncle Sam or you could. I'm just, I'm throwing it out there. These are just opinions. This is, you know, this is, we, we do for a living, but you do. So are you seeing higher net worth individuals investing in oil and gas or the drilling of the oil and gas environment?
Maybe later in the year as they're kind of evaluating what their potential tax consequences are, tax consequence, what they owe in taxes, maybe offsetting that with investments in oil and gas to bring the level down of what they're paying the IRS versus what they could potentially be paying themselves in the Future. Granted, nothing's 100%, but if I can write off 80% of that year one, then I'm able to calculate that loss, call it a half a million dollar loss versus paying a half a million dollars in taxes. Are you seeing that happening from a high net worth individual?
[00:15:01] Speaker C: That. Yes, there, you know, in the folks that I talk to, investors that I interact with. That is a common theme as folks get kind of a better handle on what their tax burden might be for the year. Yes, there, you know, the thing is, is like you're not, you're not trying to sidestep taxes.
It's no, it's what the tax code says allows. Yeah. And again, it's like I'm not the tax professional.
[00:15:28] Speaker B: Me neither.
[00:15:29] Speaker C: Anybody that is interested in truly learning definitives here, you know, call up your account and your tax professional, ask them.
But you're, you're spot on. People will will certainly do that as they approach year end because that in terms of contributing capital to the drilling of a well before it is over is yes, very significant.
Direct back to the investor tax, write off tax savings for them.
[00:15:58] Speaker B: So the land and below.
[00:16:01] Speaker C: Yeah.
[00:16:03] Speaker B: What kind of investor are you seeing there? That's your investor. Right. That's your sweet spot. So when you say $25,000 as a, you know, low barrier to entry, first of all brilliant on your part because you don't see a lot of that. I mean it's, it's 50 plus plus plus plus. It's either 50 or 250. Right. But it really, there really are high barriers there. Now when you get down to the land and below, what type of investor is that? Is that, I mean, what are they investing with? Is it, is it business accounts, is it retirement accounts? Is it cash? Again, are you seeing a blend of all of those things?
Talk to me a little bit about that.
[00:16:47] Speaker C: Yeah, it's what we've seen so far. I mean it really, it really is a blend.
There are certainly tax benefits associated with just investing in, in minerals, but it is nowhere close to the magnitude associated with direct participation in the well.
And so what we end up seeing is we'll, we'll see folks. And it really doesn't matter about their potential tax sheltering mechanism. Like if they're using an IRA for an example.
[00:17:15] Speaker B: Yeah.
[00:17:16] Speaker C: Versus a cash investment. Now the benefits that we see on the tax side will not get push back into an IRA account because it's already a tax sheltered vehicle. Yeah, but in terms of the oil or in terms of the royalties, the overall benefit is associated with a depletion allowance is what's listed in the tax code. And essentially a recognition that what is being produced there is a finite resource and over the course of time it is being extracted and therefore it is less and less in terms of potential volume in the future.
As a recognition of that, There is a 15% depletion allowance tied to revenues directly related to oil and gas extraction. And therefore 15% is essentially directly. It's sheltered from any type attack. Yeah, yeah. So that's big. 15 might sound huge to some, it might not sound huge to others. It, you know, it depends on your, your, your capital pathway into it. You know, if it is, if it is cash, you realize it.
[00:18:32] Speaker B: Oh yeah.
[00:18:34] Speaker C: Which already has its own suite of tax benefits.
[00:18:37] Speaker B: Yeah, you're already getting it.
[00:18:38] Speaker C: Yeah, you're already kind of getting it anyway, so because this offering that we're making is solely on the royalty side that's why we're seeing kind of a split.
[00:18:51] Speaker B: Yeah.
[00:18:51] Speaker C: People either providing cash or providing cash via an ira.
[00:18:57] Speaker B: That's great. It's good that you have the opportunity to do both because when we talk about the drilling side we have operational expenses. And so investing in the drilling side from an IRA perspective or a self directed IRA or any retirement account for that matter isn't exactly the path you want to go down.
You are investing through your IRA because of the tax sheltered purpose behind it. And so you don't want to expose your IRA to taxes and.
Right. We just want to make sure we're, you know, so you know, from that perspective I think there is kind of a level of misunderstanding from, from an IRA perspective on the drilling side versus you know, the royalty side. And I would say, you know, investor beware because there's a lot of, there's a lot of oil and gas companies out there that don't know the difference and they don't know the consequences that they're creating by allowing IRA funds to, into the drilling aspect. And you just at that point have to really hope the custodian is pointing that out when we receive the K1 that illustrates that there is a UBIT issue and so or UDFI issue potentially if they have debt financing associated with it. So you know, that's something that I, I wish I can say to you that I, I communicate with more individuals like you that have a really good grasp of the differences between the two. I call it above the line and below the it comes to oil and gas but really understanding the difference between the two so that you're not harming anybody else.
But in both scenarios there are tax benefits to investing in oil and gas as I believe there should be.
Thank you for joining us on this episode of the Preferred Way with John Jordan. We will have a second episode where we'll continue our conversation with Petro Peak and we'll hope you will join us.
Don't forget to like, comment and subscribe. We'll see you next time.
[00:21:11] Speaker A: Thanks for joining us for another episode where retirement savers meet alternative investments. Can't wait for the next episode. To learn more visit our
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