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Working with working interests

Rebecca Pavese, CPA | Palisades Hudson Financial Group, LLC

With oil prices recently falling to post-recession lows, not many investors are looking for the best way to get into the energy sector, yet there are some interesting possibilities for those who want to go against the herd.

The simplest option, and the most common, is to buy shares of energy companies or of mutual funds that invest in them. Another approach is to lease mineral interests that you might already own, or which you acquire, to companies that want to explore and develop those resources. This is the avenue that has opened up for many landowners from the East Coast to the Rockies, where improved drilling technology has turned the United States into a leading energy producer.

But the approach that arguably offers the greatest tax advantages is to get directly into the energy business yourself. Most of us can’t do this on our own, but in some cases, there are opportunities to partner with an experienced and competent developer who is willing to share the risks and rewards of drilling with outside investors, who can provide capital. The investors take a minority interest – often just a few percentage points – in the prospects and wells that the driller develops. These so-called working interests are more complicated than many other investments, but they offer tax treatment that can make the extra complexity worthwhile. Full Story