Demystifying the World of Oil & Gas Investing
Welcome to another episode of the Healthy, Wealthy and Wise Accountant. I am your host, Heidi Henderson. And today we're diving deep into the dynamic world of oil and gas investing. This is a realm that is packed with opportunity, innovation, and, yeah, a few misconceptions along the way. Our guests today are John Engel and Steve Ziemke from Gulf Coast Western, a privately held company established in 1970 and headquartered in Dallas, Texas.
Heidi Henderson:They have additional offices in Boise, Denver, and Scottsdale as well. Gulf Coast Western has been leading the way in tax advantaged joint venture partnerships with accredited investors since 02/2007. Oil and gas investments often get a bad rap due to perceived high risks, But thanks to groundbreaking horizontal drilling technology and innovative completion techniques, finding success in this industry has never been more achievable. In fact, sophisticated investors are constantly on the lookout for opportunities that not only deliver robust returns, but also come with significant tax advantages, benefits that are hard to match elsewhere. Since 1986, the government has actively encouraged onshore domestic oil and gas production by offering generous tax incentives, creating a powerful synergy of profits and tax savings.
Heidi Henderson:Today, we're going to unpack these advantages, address the common misconceptions about risk versus reward, and explore how recent shifts in the political landscape, especially during the Trump presidency, are influencing oil and gas prices and the overall market. And so without further ado, let's welcome John Engel and Steve Ziemke to the show. John, Steve, thank you so much for joining us today.
John:Thank you for having us.
Steve:Thanks for having us.
Heidi Henderson:Absolutely. Okay. So John and Steve, to start off, can you give us a brief overview of Gulf Coast Western? What types of oil and gas estimate, assets do you guys develop, do you manage, and how do these projects fit into kind of the broader energy landscape? Right off the bat, let's hear exactly what you guys are doing.
John:Yeah. So Gulf Coast Western was founded in 1970. We did primarily our own exploratory drilling. And then the in 02/2007, we started forming, joint venture general partnerships. In essence, what that does is it allows us to to diversify, and we're essentially sharing in the risk and we're sharing in the reward of oil wells.
John:From 2,007 to 02/2018, We did primarily exploratory drilling, which is the riskiest type of drilling. And we pass on the the tax advantages that are written into The US tax code for exploratory drilling, and we pass those tax advantages on to our partners that that want to participate with us in those wells. And and the tax code was written so that for us to develop our own natural resources and and develop our own natural resources, the US government understood that there was risk involved. If you go out and you spend all the money to drill an oil well and you buy all the seismic and you do everything that you can to make sure that an oil well works, but you drill a dry hole, that's a huge expenditure with zero return. And so the government understood those risks, and they put into place into the tax code where you can write off through intangible drilling costs and intangible completion costs the majority of those expenses in the year that those those costs were incurred.
John:So in 02/2018, we were presented with an opportunity to get into infield development, drilling wells in proven areas with with a lot of production, drilling horizontal wells in these major resource plays in the country. And so in 02/2018, we started drilling those horizontal wells with smaller independent operators. And from there, it's blossomed year over year. And now we're we're working with, you know, the biggest names in the industry, drilling the wells. The benefit for us is that we don't we've taken the major risk portion out of out of the equation, which is the risk of drilling a dry hole because we're drilling with major operators in proven areas of production.
John:We've turned that the the risk of drilling a dry hole, essentially. We've taken that out because we drill multiple wells in each each joint venture that we form. However, those same tax advantages still apply. So we can drill we can drill a dry hole and go exploring for oil and maybe have a 20%, chance of success, or we can drill in the best field in the country and drill the best well in the country, and we still get the benefit of those same tax advantages. And we pass those along to our partners, and our partners obviously are a lot happier with our success since 2018 because dry hole calls are not fun.
John:I got to the point where I really I hope there's no geologists listening, but I started viewing geologists worse than weathermen because they can be wrong more often than not, and then they're on to the next project. Now by drilling wells with these major operators, I get to rely on multibillion dollar budgets, teams of engineers, teams of petrophysicists in the best fields in the country, and and I get to reap those rewards and so do my partners.
Heidi Henderson:Wow. So, John, what is your role in the company, and how how did you come onboard with Gulf Coast? What's your background with how you've gotten here and are are, you know, I guess, running this company?
John:Short answer is life is a crazy ride. I grew up in Houston, Texas. My entire family was in the oil business in some way, shape, or form. I didn't wanna be in the oil business because I lived my family lived through the the nineteen eighties, you know, oil glut and, and that that fiasco. So I went into finance out of college and ran stock brokerages and bought worked in bond brokerages.
John:And just through a circuitous route ended back up. Gulf Coast Western was opening up an office, and the opportunity presented itself. And they asked me what my background was, and I said, finance and oil and gas. And they're like, well, that's kinda what we do. Maybe you should come in and meet with us.
John:And, so I've been with the company since 02/2009. And then in 2017, I was promoted to chief operating officer with Gulf Coast Western.
Heidi Henderson:Fantastic. Well, congratulations. And, Steve, tell us a little bit about yourself. What's your role with the company, and, how did you how did you dive into the oil and gas field?
Steve:Kinda the same thing. I'm I'm executive, vice president in sales, and I've been with the company since the February, and I've grown with that through, like John said, the the the hard times, and now just a turning point for the company back in in 2018. Prior to that, I was in insurance. I started insurance sales. I worked up to, the assistant vice president, operations and customer service, underwriting, sales, just a a big background.
Steve:That, through layoffs, whatever that ended, and I I said, I'm gonna get back into sales. And I and I started, in oil and gas and have been, you know, there have been here since then.
Heidi Henderson:Fantastic.
Steve:Yeah.
Heidi Henderson:Well, in full transparency, I have to tell listeners, I am personally an investor with Gulf Coast Western and as my sister, my partner as well is also, an investor for a number of years. And that's one reason why I wanted to have you guys on as a guest. You know, this is a little bit of a different topic than what we oftentimes talk about on this podcast. A lot of times I'm focusing on the CPA industry and what's changing and how to be proactive. So the reason that I really wanted to have you both here is because of what you're doing and because of some of the significant tax advantaged structures that exist in the oil and gas space and really understanding the application.
Heidi Henderson:I mean, this is one of the only investment opportunities for an accredited investor that can offset active income. And there are many limitations. I mean, we talk a lot on this podcast and at Engineered Tax Services, we deal a lot with cost segregation with real estate investing and dealing with passive versus active rules and what investors are looking for. And again, looking at this, it is one of the very few investment opportunities that have those tax benefits associated with it. So wanting to have you guys on and really dive into the industry into your company specifically, but also really understanding the industry as a whole, like oil and gas to me, I've been in, in, you know, tax consulting now for fifteen years in the accounting space for almost thirty years.
Heidi Henderson:And oil and gas was always, even after having gone to multiple oil and gas conferences with some big players in the, in the space, it was so overwhelming. It feels a little bit like it's too good to be true in a sense. The risk is difficult to kind of understand. And I, again, I actually lend myself more towards the ultra conservative side. So I like to overanalyze things before I jump into certain investment opportunities.
Heidi Henderson:Alright. So let's first, if you wouldn't mind dive into the tax benefits, can you explain some of the key tax incentives that are available, like the depletion allowance and other credits or deduct and why these are really particularly attractive for investors?
John:Yeah. Steve, you wanna tackle that?
Steve:Sure. The the IRS allows and back in 1986, the Tax Reform Act is when this whole kind of it took a turn for the positive in terms of promoting domestic production of oil and gas to become more self reliant as a as a as a country, So those incentives came in there. So the biggest thing is that it's great to get a tax deduction, but if you don't have returns, then why invest to get the deduction? So what's what's been a turning point for us is is the revenue that comes in. So there's there's two two benefits.
Steve:There's benefits going into the investment of writing off the investment a % eventually, but the first year is about 85% of that investment is deductible due to the intangible drilling and intangible completion costs. Those are the labor and the more labor intensive activities that the IRS allows to write off. The rest is more equipment that's depreciated over five years or seven years. But the so go so going into the investment, we look at, we look at nice, return potentials based on comps around us, kinda like real estate. You gotta be in the right area with proven production.
Steve:So we have that going for us, but we still get the deduction like like John said. On the, revenue coming back, the depletion allowance, like you mentioned, Heidi, is 15% tax free income. So every $10,000 that we send a client, he saves about $1,500 that he's not even paying taxes on. So the rest is taxed as ordinary income, but that's okay because we're making money, we're getting the deductions on the front end, and eventually all of it, and then we're getting some tax free dollars coming in back to the to the investor. So it's very unique in the sense that it's outside of the markets.
Steve:It's treated differently in terms of, the ability to write it off, unlike, say, a stock where you have a $3,000 maximum if you have losses, and if you have gains, of course, you can't write it off. So that is unique in the sense that it's alternative investments, and that complements everything else out there. So very, very unique in that sense.
John:Yeah. Absolutely. Also, one of the one of the few investments out there that, you know, if you were to invest in a stock, you're really only making money in that stock if that stock goes up and if you decide to sell it. Other than that, it's paper, unless you happen to be in a stock that pays dividends, and good for you if you are. But in this case, you take your your our joint ventures are built around a group of oil wells.
John:We don't do single well projects. We have in the past, but I like to build in diversification in every partnership that I built. So not only is it is it multiple wells, but it's multiple miles of pipe that are placed into the oil. It's all about surface area, and most of our wells are two miles each. So for instance, if I have an eight well project and each well has two miles of pipe that's drilled and placed into the into the reservoir, I've got 16 of pipe in the oil where most vertical wells might only have 50 feet of pipe in the oil depending on how thick that reservoir is.
John:So I mitigate the risk by having multiple wells. I mitigate the risk by having multiple, multiple miles of pipe in the oil. And from those wells, depending on how mother nature cooperates with the engineers, the oil that is produced from all of those wells is sold, and it produces a monthly revenue stream back to our partners that we send direct deposited back into their bank accounts every month on the fifteenth or the twentieth of the month. At the end of the year, we usually see a rush because people meet with their accountants and they're gonna they're like, oh my gosh. I would rather put some of this money that was going to the government, which is an absolute dry hole.
John:You know? You're not typically getting a return on your investment with the government. Take some of that money, put it to work for me and my family, save some of those tax dollars from going to the government, and put it into a vehicle that can pay my family potentially for the next decade or more. So that's really what we do. We have taken a vehicle that is put in place by the government, derisked it by multiple wells at proven areas, so we we've really mitigated the dry hole risk.
John:There is still mechanical risk because we are putting on in most cases, these wells after it's all said and done, each well is 20,000 feet thereabouts, between the depth and the lateral. And you can run into mechanical issues, but we're talking about a 2%, figure of wells that might not work versus 98% that work. I'll take that risk in the oil and gas business any day of the week. So that's, again, just in case of that 2% risk factor as far as mechanical risk, that's why we build in the, the multiple wells with multiple miles of production. So, we try to structure it so that the the monthly revenues, the tax advantages, the the depletion allowance, all work together for our credit investor partner.
Heidi Henderson:Fantastic. Yeah. I I appreciate the the background because in many of the conversations I've had, when I was doing due diligence to look at investing with you guys, I was working with a number of my CPA partners and people that I trust and appreciate on the due diligence side. And risk was definitely probably the number one thing that was mentioned that was brought up and really wanted to dig into how the risk was mitigated. Before I do actually have a couple more questions on that, but I want to circle back to what Steve was saying in really defining the tax benefits associated with it and to provide some generalized examples.
Heidi Henderson:Because for me, I I'm a very, I'm like, come on, let's let's get down to the nitty gritty of how this all calculates out. And I wanna I wanna talk about this as well because when we look at the tax benefits and we look at how much we can potentially invest, the other thing or misnomer that I had had with oil and gas is that this is for people who have $10.15, 20, a hundred million dollars, and they are investing millions of dollars and, you know, diving into, you know, you know, drilling their own oil wells and getting into oil and gas. Like, this is big money. It seems like you guys have actually built a situation or a structure where this is more for the average person, still accredited investors, but the average person to be able to invest in one of these partnerships. Can you talk just a little bit about why, I guess, you have lowered the threshold for that entry point and what is that threshold?
John:Well, it's not necessarily that we've lowered the threshold. It's really a matter of realizing that everyone has different tax needs, and that's one of the reasons, you know, we don't give tax advice. We rely on the, you know, an individual's tax advisers or or accountants for that. But it it really depends on any given year. Every partner has a different tax need or has a different income level.
John:Some a lot of our partners are either retired or they own their own businesses. And from year to year, it could be completely different. To your first point, we have some partners who invest in every single project that that we, repair. And then we have some partners who might do one. They might do one a year.
John:They might do two a year. And we try to structure it so that it is an achievable goal as far as providing a nice tax advantage instrument for them that can help them with their tax situation in any given year. But we also there's no limit on how much a partner can participate in on any given project other than as long as the interest is available in those wells.
Heidi Henderson:Yeah. That makes sense. Well, and as an example, I mean, using a small example. Let's say an investor puts in $250,000. Steve was giving the example of having roughly an 85% deduction year one for the cost of, of your drilling and and the expenses going into that.
Heidi Henderson:So with a $250,000 investment, am I correct if that calculates out to roughly about a 212,000, 2 hundred and 13 thousand deduction in that year. Correct?
John:That is correct. And and in some cases yeah. In in some cases, a a partner who might be in that highest tax bracket, a reduction if they're in that that $600,000 range and that $250,000 investment in a joint venture, that reduction in reported income can drop them down, not only save them the tax money, but it might actually drop them down a tax bracket or two.
Heidi Henderson:Oh, yeah. That's that's a great point. Yeah. Because if we use that same calculation, $250,000 investment, we've got a deduction of about $212,000. In a top tax bracket of 37%, that equates to about $78,000 in saved taxes.
Heidi Henderson:That is not including state. Are the states also in the same do they have the same rules? Like, I know California in a lot of senses does not follow some of the same rules as federal. So do the states still allow for the same deduction that we see on the federal side?
John:Do you wanna handle that one? Yeah. I think for for
Steve:the most part, they do. It it drops it follows down to the bottom line. Some states do not, like, California just, I think last year changed their rule. But so it might be limited or not allowed for the state, but I would say most states, it does carry down. So if you're in a 37% bracket plus five to 10% state, it starts to really add up.
Heidi Henderson:Yeah. Absolutely. Or or 12 state.
Steve:Yeah.
Heidi Henderson:I mean, we're looking at very you know, in California and New York, some of these high tax states with high income earners who are paying up to 48% tax, $250,000 investment could save them a hundred thousand dollars in taxes. So really, you're really investing a hundred and 50, because a hundred comes back from the tax aspect, but then you're getting returns on that entire $250,000 investment.
John:Mhmm.
Heidi Henderson:Small example. But I'd like to to quantify that again because, you know, I I like the the tangible numbers. It's accountant in me.
John:Yeah. No. To the California point, you know, if you're in the highest tax bracket in California federally and then you have the the what is it? 13% income tax, you know, if you think about it on a time perspective, those Californians in that highest tax bracket are working pretty much to July for the government in some way, shape, or form, before they're ever making money for them or their families. So, I they they just adjusted that, I believe, last year, as as Steve was saying, because they realized how much money that was, being saved from going to them.
John:So they made that adjustment. But most states do allow that, that deduction to come off of the state income tax.
Heidi Henderson:Yeah. That's that's amazing.
Steve:Well, we do sorry. Sorry. Go ahead.
Heidi Henderson:No. Go ahead, Steve.
Steve:I was gonna say, back to your point about the different types of investments. You know, we have core projects, which are right now, our current one is eight wells, and so that allows a person without any oil and gas experience in investing to come in at, a level below the $250,000 And then after they see how it works, how we operate, how we communicate as a company, the, the revenue that starts to come in when they get their K-one, the first week in March on for the deductions, they start to, you know, see more how it works. And then they can go into those bigger projects like you mentioned, where a partner can put in 250,000 into a 30 or 40 well or 25 well program and and be immediately diversified. Because like John said, with the horizontal wells, we have found that it's not if you hit, it's how much. And so you get just like, you know, stocks or real estate, you you wanna have a group of wells because some will be below, some will be average, some above.
Steve:So a a partner we offer a lot of options for partners based on their desire to immerse themselves into more diversification and and bigger tax advantages too.
John:Got it. Okay. Yeah. And to that same point, again, diversification, on any given well pad, if I have eight wells or I have 16 wells, on any one of those, there will be a there will be a well that is the top performer from that pad, and there will be an underachiever on that pad. And so that's why we look at averages and everything that we do.
John:So if I look at a I don't I don't ever wanna just rely on the top producer on a pad. I wanna I wanna have a blended average. That's where that diversification comes in. So it gives us a good idea of what the wells are possible or what they're capable of in a realistic manner rather than taking the top one or the the lowest one.
Heidi Henderson:Yeah. Okay. That makes sense. Gosh, I have a lot of questions. So the next one, John, actually circling back to risk before I want to talk about reward, what other risks would an investor need to be aware of or might be of concern?
Heidi Henderson:And I will preface that with saying that I've had multiple questions about the potential for operational risk, for risk to the partner, which is why this actually applies to ordinary income as being active is because you are actually a partner in this structure. So how do you mitigate risk that could be carried or could apply to the investor as an active partner in a oil and gas project like this?
John:There's there's several ways. Number one, as far as the the from the drilling standpoint, we would be the top of the totem pole. And so if if our operator there's multiple chains of insurance as far as, you know, to begin with from the drilling and the completion side of things. All of those multiple layers of insurance, and they do not allow a single person on a pad unless it's under an unless it's an employee or someone who is under one of those insurance policies. So, you know, it's a lot of equipment.
John:It's all run by diesel engines and and bad stuff can happen, and all those those employees are covered under those insurance policies. From a drilling risk standpoint, we're not going to if I see an area of wells that is it is like a newer part of the field, I will avoid it. If it's an expansion part of the field, I will look in more detail. But I typically only get into wells or agree to participate in packages of wells where there's there's good production in close proximity to where these new wells are being drilled. And with each well drilled, the technology improves over time.
John:So, you know, a a well that was drilled in 2017 would be an antique as far as I'm concerned technology wise. It's just like your your iPhone. You know, it's constantly changing and being upgraded, and they're sending updates. The same thing is happening in the oil field. Or if you look at aviation, you know, the Wright brothers were flying a, you know, a pickety canvas covered wing airplane in in the early nineteen hundreds, and now we have f 22 raptors that can go, you know, mach two.
John:It's it's it's the same leaps and bounds. Let's say, if you look at the oil industry over the same time period, very similar improvements in technology have have happened over the same amount of time. So from from the operational standpoint, our partners are protected through multiple layers of insurance and an umbrella policy that we name each joint venture under that's participating in those wells. And then we the we have not you know, we're coming up on 300 or 400 wells. I can't keep track because they're all drilling so fast.
John:But since 2018, we have not drilled a dry hole. Wow. In these fields. So a huge turn as far as the risk. Our old projects, when we were exploring for oil, the first thing out of our mouth would be, this is oil and gas before I go through $1 of why economically we're putting the bit in the ground.
John:Before I go through any of that, you need to understand this is oil and gas, and it is risky. We if we go out and drill a dry hole, you lose your money, and all you get is a tax deduction. Do you understand that? And now it's more along the lines of the risk has been mitigated. Your main risk now is commodity pricing.
Heidi Henderson:Mhmm.
John:COVID is a great example. We had some phenomenal wells doing a thousand barrels a day that were turned on right as COVID hit. Going into $35.25, $10 oil, we were ecstatic about the production of those wells, but no one saw that pricing. And, you know, the one day when it was negative $38, no one saw that coming.
Heidi Henderson:Yeah.
John:It was not fun to watch, especially with some really good wells that would have paid our partners out immediately. You contrast that. We've had other wells where prices were in the hundred and $20 range. And on some of those wells, our partners were paid back in the first eight distributions, and made whole, not including the tax advantages.
Heidi Henderson:Mhmm.
John:It's really that is the main risk as far as, you know, commodity pricing. Right now, we've seen a nice steady $75 range given all the turmoil in the world even with, you know, Joe Biden going to Trump, Israel, Iran, all of those things, Ukraine. It stayed pretty much in the 70 to $75 range. I think as far as the pricing standpoint, we're in a good spot right now. But that is one of the risks to consider.
John:You'll always get the tax advantage. The commodity prices is a not a known factor other than it's gonna go up and it's gonna go down. But we as far as a dry hole risk, I mean, I just use the 2%, figure because that is is the risk. You could run into a mechanical issue, but it's it's few and far between. These engineers have it down pretty pretty well down to a science up there.
John:And the other the other factor would be mother nature. You are still drilling a hole 7,000 feet down or 10,000 feet down and then putting a lateral in two miles in the ground. And you're hoping that ever all the science works in your favor and mother nature cooperates. And sometimes she doesn't, but that's few and far between in these fields.
Heidi Henderson:Wow. Yeah. It's so fascinating. And then for listeners, when I had initially chatted with Steve, they sent this phenomenal marketing package with this really beautiful little video that shows some of the actual drilling activities and some incredible diagrams of how the process works. Very fascinating because this is completely out of my wheelhouse, but I think it's so interesting.
Heidi Henderson:So to that end, John, talking about the risk versus reward, talk a little bit more about two things. One, it's difficult to pin down the potential payout or payback, you know, the ROI. Okay. I'm gonna make this investment. Yes.
Heidi Henderson:There's the tax benefits to it. Obviously, there can be a range subjective to what the actual benefit will be as it relates to the payouts and what's being drilled. But additionally, this transition to the Trump presidency, it has sparked a lot of questions about oil and gas pricing and policy changes. What is your perspective? I mean, obviously, you don't have a crystal ball.
Heidi Henderson:We all wish we did. But what is your perspective on what we're looking at for the next year or two years, especially with tariffs and all of these discussions we're hearing every single day? Help us just kind of, if you can, quantify a little bit of what the potential returns are and then how that's impacted by some of these legislative changes.
John:Good question. So what I try to do when I'm putting the a a program together is I try to structure in based on the analog or the key wells in close proximity to where I'm drilling my wells. I try to get a good basis for what those wells are capable of. What what can that rock in that particular reservoir produce at over a consistent time frame? And I usually look at a two year average of how much oil and gas those wells produce.
John:From that, I will try to build I will take the interest that we have available to participate in those wells, and I'll build a program based on right now, I use $75 oil, as a basis. And I try to build in a a a middle to high double digit annualized return, not including the tax advantage. And then overall, these wells, I don't care what engineer you talk to. You'll get a different answer. But the how long will these wells run?
John:The consensus is fifteen to twenty five years. Several operators will put in writing that they expect a well to produce economically over a twenty five year period. So but the bulk of those returns are gonna be early on in the production, the first five to seven years, because that's when the pressures are the greatest. Again, mother nature's pushing this up to the surface. We're taking advantage of it and selling it at the surface.
John:From that perspective, you know, I try to build in a a depending on how much mother nature's eventually going to give us, and we won't know until ten or fifteen years down the road. And I try to take the conservative approach, and I try to take the optimistic approach. So our tables are calculated. They all of our tables start at zero. That's the worst case scenario.
John:None of these wells work. We didn't make any money. From there, I try to build in different scenarios as far as keeping a current a a the same price at different production levels and different total production levels. So overall, I'm shooting for a three to five to one overall return. All the while, the the original investment was a % tax write off in the year that that that was, figured in.
John:So if a well as Steve was saying, you know, if a well, really in year one, we tell our partners to really look at the tax savings as your initial return because that's what you're gonna be saving on April fifteenth of next year. So if you're in the 37% tax bracket, consider that, you know, the first amount of money that you're making because you didn't write that check to the government for that amount. But around that same time, you should start to see the production revenues kick in. And then the following year, you know, you'll get your your pay ones and everything that that goes with that. So that's how we try to build it in.
John:You know, each project fits I understand the the the wells that we're drilling now are are ridiculously more expensive than the wildcatting wells. Mhmm. If you were to drill a wildcat well, my I might have a 12 or a 20 to one overall return potential because we really don't know what we have until we we hit it. If we hit it big, the potential's there, but that big zero at the bottom is also there. You get a tax deduction.
John:Those projects are are very cheap to get into because there's not known production in the area, so your leases are easy to get. You're drilling a vertical well to test and see what you have. So they're comparably much cheaper to drill a wildcat well, but your success rate is nominal. These wells where the proven production is, where Oxy and Chevron and Anadarko and and all of these big companies are drilling these wells with huge success are much more expensive to get in. So that given that, I try to structure it where the partners still see a a a very reasonable and respectable monthly income potential and over time, a nice, you know, three to five to one overall re return potential, not including those tax advantages.
Heidi Henderson:Okay. So just to clarify, a three to one or five to one, again, if we use that same example of a small 250,000 investment, You're saying that in the life of that partnership and those wells that, you know, diversified wells within that fund, you know, or that LLC, a $250,000 investment could pay out somewhere between 750,000 to 1,250,000.00. Over the course of that, you're saying twenty to twenty five years since that's the typical payout. Correct?
John:That is what we're shooting for. Yes, ma'am.
Heidi Henderson:Okay. And what percentage of that you said they typically pay out the most in the the first three to five years since that's when they're most highly producing. What is the you know, if you look at twenty years, what is the percentage of revenue that comes in that first three to five years as opposed to, you know, twenty years is a %? What's the percentage you usually see paid out in that three to five year period?
John:Totally dependent upon, mother nature and and commodity price. And we like I was saying earlier, we have some joint ventures that have paid out or gotten their our partners their money back in in twelve months, in eight months, and some that have taken three years. It just depends on when they came on. COVID, you know, we we started drilling these wells in 2018, and COVID was right there in 2020, '20 '20 '1. So that that threw a, a wrench in the gears, but the wells were still successful.
John:Everybody understood that the pricing no one had ever seen pricing do what had what had happened, during COVID when no one could drive cars. With Trump in office, with really, all he can do is open up more areas to drill. So from a pricing perspective, yes, we might see prices dip down into the cities for a while. But the thing to keep in mind is all of these operators who control the drilling of these wells, they were all kind of caught with their pants down when oil prices went up to a hundred and 20, and they flooded the field with drilling rigs. And then oil prices took a dive in during COVID.
John:Where we're drilling most of our wells, there were 25 drilling rigs in Weld County, Colorado. Now there's a very consistent 10. The operators, just because oil prices pop up here and there, are not gonna go flood the field with drilling rigs again without being very methodical about it. So Trump could say, hey. You can drill wherever you want.
John:That's great. But the operators aren't gonna rush out there because they're constantly watching, you know, the the oil prices. So they're not gonna go out there and just you're not gonna see drilling activity shoot through the roof because Trump's opened up, you know, different areas where federal permits were, you know, put on hold. The operators decide when to put those rigs, and Trump can tell somebody, go drill the wells, but he's not the one spending, you know, 7 to $12,000,000 to drill those wells. The operators are.
John:So they they are the ultimate control there, and they're only gonna do things based on them getting a good return on investment just like us. The the operators we work with, they control everything about those wells, and that's that's that is a beauty of of what we do by joining our joint ventures into these these wells that are operated by your I'm not gonna name drop, but the the biggest names in the industry. We're able to rely on those companies and their expertise, and I haven't had to talk to a geologist in six years, seven years. And we haven't drilled a dry hole in seven years. So I'm able to rely on that that expertise and their their their budgeting and and how fast they're gonna drill wells.
John:From that perspective, I won't put a a project, I won't put wells into a joint venture unless I have something in writing from the operator that drilling is going to start with a within a reasonable amount of time. Because it doesn't do me any good to put build a partnership around wells that aren't gonna drill for two years. Now sometimes operators move the drilling schedules around. We don't have any control of that. I'm operating based on what they send us in writing.
John:Yeah. It's I don't think we're gonna see a big spike in oil prices. I also don't think we're gonna see a a huge decline in oil prices because because all of The United States Operators understand that if they go out and start drilling a bunch of oil wells, Saudi Arabia can just turn on the taps and flood the market with oil. And then there again, there they are sitting there spending all this money to produce oil when it's being flooded into the the country. Wow.
John:Yep. Everybody's gonna be very methodical and very careful about what they're doing going forward.
Heidi Henderson:Yeah. That makes sense. Well, and you you know, your your explanation is taking me exactly to my next question that I wanted to ask you. And that's about how you differentiate yourselves from other players in terms of mitigating risk and maximizing returns. What what is a differentiator?
Heidi Henderson:Why Gulf Coast Western? Because there are a number of oil and gas companies. I know I've really appreciated getting to know you all and the due diligence I've done. I do feel like you guys have some differentiators. But will you share those with listeners a little bit about what those are and, and and why you guys?
John:The main difference, I would say, is that our CEO, is is a very astute businessman. He's run multiple other businesses. He's taken businesses public from nothing, and, he always does the right thing or attempts to do the right thing by our partners. That being said, the operators that we choose to work with, and I say I mean that, choose to work with, are are well funded. They're either very well backed private equity backed companies that in some cases might be more valuable from a financial backing standpoint than a lot of the public companies are.
John:But we we choose to do business with them because they can pay their bills and they do what they say they're gonna do as well. A lot of companies, and I'm not there's nothing wrong. I don't know of a a bad a bad scenario where a good company gets invested with a mom and pop type operator who has something happen on a well, and they they can't put forth the money to fix the well or do what's necessary to get the well back into production or boost production. That's one thing that we have gotten away away from because we used to drill vertical wells in Louisiana and South Texas and Mississippi and Alabama. The operators were, you know, all levels of financial backing.
John:But in this case, we're working with the majors, and we're riding their coattails. And on a lot of cases, just through osmosis of us being in the field, and we're getting out that we pay our bills on time and and we're good people to work with and be good participants in the well, we're getting deals sent to us directly from these major operators.
Steve:Wow. Yeah. And the thing is too is that with the way our CEO works, he looks out for the partners. And so John gets John and our CEO gets a lot of, you know, deals coming at him, and and it's, you know, what is the the proof of production around them and what's the timeline so that the return on investment starts reasonably soon versus like John said, waiting for a well to drill two years. We might come back to that one later, but we want to put together projects that are beneficial to our clients from a diversification standpoint and timeline too.
Steve:You know?
John:Yeah. The timeline's important because if operations don't start by March 1 the next year, that puts those tax deductions in jeopardy for that year. They would just get pushed to the next year. So we try to structure it so that everything's timely. And that's one thing, you know, to understand in the oil and gas business, it is it is not it's not a get rich quick overnight scheme.
John:It is it is the wells take, you know, from start to finish a lot of time to put together between permitting and getting all the the different loopholes that these operators have to jump through depending on what county they're drilling in to get all that put together, schedule the rig, drill the wells, get the wells into completion, and then place them into production. That can take, you know, a year to six months. So that's why I try to structure them as far as timeline. I wanna put together a project where the the operations are set to begin very soon so that the, the partners aren't sitting there going, when are the wells gonna drill? When are the wells gonna drill?
John:Because it they they do have a timeline, and once a well goes into production, it takes some time because the oil wells start producing, and it takes a month to get a a full thirty days of production. And those oil sales are paid on typically a sixty day contract. And the natural gas produced from the wells is typically paid on a ninety day contract. So we get those revenues from the operators typically four months down the road from the month that the wells were producing. So it's it's just but once that happens, it's a monthly revenue stream.
John:It goes out every single month that those wells were in production. So, yeah, the the lot of moving parts, we try to simplify it. And you were saying, you know, it's it's fascinating and it's mind boggling, and and it is. And I go up to the field a lot, and I learn something every single time I go up there. And, I I love it.
John:And I don't know how many times I go, I'm like, wow. I did not know that they did that. Again, it's constantly changing, but the the the amount of work that goes into these is tremendous when you're you're talking about some holes in the ground that are gonna be, you know, making fluid that we sell and then generate revenues, all the, all the inner workings are are just yeah. They are. They're mind boggling.
Heidi Henderson:Yeah. Well, it's been fascinating. I mean, I really appreciate, first off the communication, you know, I'm getting constant updates of what's being drilled. There was a new drill, or a new well drilled here, and this has gone into service and kind of updates on what's happening. And then I was also pleasantly surprised with how quickly we started to see payouts on some of these investments.
Heidi Henderson:So you, you guys definitely have a very streamlined process for making sure that you've got the infrastructure in place. That's allowing for those tax deductions in the year of investment, and then having a relatively quick payout of distributions again that come monthly, which also I think is really surprising with how you pay that out with the consistency and the easy, easy, automatic deposits. It's pretty amazing. Before we close, I want to get a final piece of wisdom for our audience from both of you, as it relates to not only diversified investments, how to really look at having diversification and how this can play a part in that, but also what advice would you offer for anyone just starting out to explore this asset class and especially in terms of balancing the promising tax advantages with risks? Do you have any thoughts?
Heidi Henderson:I mean, I know you guys have a little bias since this is what you do, but I would love your perspective and love for you to share that with our listeners.
John:Go ahead, Steve.
Steve:Yeah. So for the right person, this is an excellent vehicle to diversify one's investments and to put tax strategies together. It's for accredited investors, so they have to either have 200,000 a year income and or a million dollar net worth without their primary house. So for the person that has their financial house in order, this is a way that they can take a certain percentage of their liquid assets, and that would be a combination of stocks, bonds, IRAs, whatever that number is to say, okay, is it 50,000, 1 hundred, 3 hundred, and have them build their portfolio of oil and gas. And that's my job for my clients is to not just put them into six or seven or eight wells, but if they're capable is to expand that so that they're protected among the variation of the wells and also to put their tax strategies to work.
Steve:And the same thing, we work with a company called Entrust, and we can do IRA, set up self directed IRAs and do IRA rollovers, and so it's a nontaxable event, the rollover, and you don't get the tax deductions because it's a traditional pretax IRA, but then the following year, people do Roth conversions and save substantial dollars there, and then the money grows tax free on a Roth. So there's different vehicles for the, Entrust to set up self directed IRAs. That's a a decent percentage of our business, actually.
Heidi Henderson:Wow. I had no idea. I learned something.
John:Oh, yeah. The the IRA is a thank you, Steve. That's a a very good, example of some of the things that are available to the partners. You invest through a traditional IRA, which most of our partners most accredited investors, five percent of them have IRAs that they're really not touching, and they're really not generating a lot in the way of revenues. So we use Intrust out of Oakland, California.
John:They are a nonstandard asset self directed IRA company. And so it allows our partners to invest in oil and gas joint ventures, precious metals, and and real estate. Just gives them a different vehicle to invest through that IRA where a Merrill Lynch or a Charles Schwab is not set up to handle handle, standard assets or nonstandard assets. What Steve was referring to on the Roth conversion is after those k ones come out at the end in the following year that the investments made, those k ones reflect that the money was spent the majority of that money that was invested was spent on drilling oil wells. So the value is significantly different on the ending capital balance than what was invested.
John:And so if a partner decides to convert to a Roth at that point, let's say it's 10% of what they originally invested because the money was spent to drill the oil wells. If they convert that asset to a Roth in the following year, they're gonna pay tax on that 10% balance. But those revenues go tax deferred or tax free rather than even if you invested in cash, you're getting 15% tax free. It's it it you you have to look at each each, scenario differently. But I used to be in charge of handling the IRA transactions, and every March, I would get inundated with these Roth conversion requests.
John:And I'm like, what is going on? And, it was actually one of our one of our partners was an ex IRS attorney, and he's like, here's what's going on. And I was like, that makes all the sense in the world. So, that's that's just another way of participating. And ultimately, the government put this in place with multiple tax advantages to help develop our natural resources.
John:And when you, when you figure this, probably it's one of my favorite things about it is that our partners are helping produce oil and gas for our country for the most part. And when you look at oil from Saudi Arabia, Iran, Venezuela going on these oil tankers that might burn 30 to 60,000 gallons of fuel oil a day just to get their oil to our markets, which their oil typically takes more to process than our own oil, and we produce it much cleaner than anywhere else in the country. I just I I like all of the aspects of what we do. We give our accredited investor partners access to multiple tax advantages that aren't available in most other vehicles. We provide them with monthly revenue, and they're developing our own natural resources and promoting our energy independence.
Heidi Henderson:That's amazing. I mean, I appreciate that perspective. You know, I I may I may be a little bit biased, but, my husband retired from Nucor Steel, and that was a huge issue when he was working there. Nucor is a massive producer of steel within The United States. They actually are the largest recycler in The United States as well, and they produce the cleanest steel on the market.
Heidi Henderson:You know, rebar, angle iron, all kinds of things that they're producing, and yet there was times when China was dumping that here, you know, with massive amounts of pollution and utilizing so much to pull it into The US. And when our legislative groups really help support US manufacturing, you know, I, I, I do personally, you know, politics aside, certainly promote the fact that The US is supporting those industries, support, supporting US manufacturing development, you know, through R and D credits, where we do a lot of that as well to support companies that are doing research, doing development, keeping and paying jobs in The U S and really supporting The U S economy. And oftentimes what we produce in almost every industry is exponentially cleaner and more sustainable than anywhere else in the world.
Steve:Yeah.
Heidi Henderson:And, so if we can do that from a competitive price point as well, I I think it's really phenomenal and, I think it's a it's a kudos to how The United States leads, leads the world, really, in terms of sustainability and and energy resources.
Steve:Yeah.
Heidi Henderson:So we could continue. Oh, go ahead, Steve. Like, you know, do you guys have any final comments? I know I've I've kept you long enough, but I think the information is so fantastic.
Steve:No. We we really appreciate it. And I was just gonna say that our clients, because it is new to most people, they have never done this. So my job is to keep them very well informed, updated. They have a blog on to our website, a a partner portal that where they can see their production numbers, the reports that are posted.
Steve:The day before money goes into their account, like you've experienced, Heidi, they they get an email statement, very transparent on all the revenues made, all everything you know, what the bottom line comes to their account. And just mainly to kinda, especially their first time through, hold their hand and just make them feel comfortable because it's it's an unknown, like you said. It's it's all kinda out there is what is this all about, you know? So we try to make it, very comfortable for them.
Heidi Henderson:I agree, Steve. And you've been a fantastic resource. I actually did want to pinpoint that when you were talking about the IRA discussion, because I think that's something a lot of people need a little bit of guidance with. And I appreciate your expertise and the support you've provided to many clients with going through that process.
John:John? I was just gonna say, you know, a a lot of times, like you were saying, it is new to everyone. And I don't know if Steve's brought it up before, but, you know, we do about two to three. We try to do it quarterly, but winter in Colorado is something we avoid. But we do offer our partners field trips into the field, and I'll take them up.
John:And we spend the day in the oil field, and you get your boots dirty, and you wear hard hats, and we show you everything from from what a a pad looks like before it's got a an oil derrick on it, and then through every stage of the process so that by the end of the trip, by the end of the day, everybody is, they're all oil and gas experts. And, I really enjoy doing that because it it's it's a good way you know, we're based in Dallas, but we have partners spread all over the country, and it's a good way for us to get to spend some time and get to know our partners in the field, you know? So and and no question is a stupid question. Like I said, I learn something on every trip, but we do offer that as well.
Heidi Henderson:That's fantastic. Okay. Well, I expect you guys to put me on the schedule once the snow melts because I don't wanna go in the snow. I'm a snowbird for a reason.
John:We'll get you on a
Steve:we'll get you on a on a summer trip.
Heidi Henderson:Okay. Sounds good. So put me on your agenda. We'd love to come meet with you guys and come and see the operations as I know my husband would be thrilled to see it all as well.
John:There's lots of steel out there.
Heidi Henderson:Oh, good. Well, and he'll appreciate that too. He'll be, he'll be inspecting it for Nucor stamps. So, Hey, John, Steve, thank you so much for being on the podcast. I hope listeners enjoyed, the information.
Heidi Henderson:I will be sharing your contact information as well as links, for listeners in the show notes. So you have plenty of ways to access and contact likely Steve who can be a great resource for helping you navigate potential investments and look and see if this may be an opportunity beneficial for you. John, Steve, once again, thank you so much for joining us today.
Steve:Well, thanks and happy to join us.
Heidi Henderson:That wraps up this episode of Healthy, Wealthy and Wise. I hope you found our discussion valuable and discovered new ways to simplify the world of tax incentives and deductions. Remember with the right knowledge and strategy, you can make a lasting impact on your client's bottom line while still maintaining harmony in your own life. If you enjoyed the episode, please be sure to subscribe, rate, and review the show. You will also find helpful links in the show notes.
Heidi Henderson:For more resources, insights, and tax updates, head over to engineeredtaxservices.com or follow my social media at engineered tax advice on all platforms. Thank you for tuning in and I will see you next time on the Healthy, Wealthy, and Wise Accountant.
