Demystifying the World of Oil & Gas Investing

Curious about oil and gas investing? In this episode, Heidi sits down with Gulf Coast Western’s John Engel and Steve Ziemke to break down the tax benefits, risk strategies, and real returns behind one of the most misunderstood asset classes.

Guest Information:
Name: Steve Ziembe
Email: [e-mail] 
Phone: [phone] 
Website: www.gulfcoastwestern.com 
LinkedIn: linkedin.com/steve-ziemke 

Summary

In this episode, Heidi Henderson hosts John Engel and Steve Ziemke from Gulf Coast Western to discuss the intricacies of oil and gas investing. They explore the significant tax benefits available to accredited investors, the structure of Gulf Coast Western's joint ventures, and the strategies employed to mitigate risks associated with oil and gas investments. The conversation also touches on the potential returns and the impact of legislative changes on the industry, providing listeners with a comprehensive understanding of how to navigate this investment landscape.

For more information or to contact Gulf Coast Western, please visit: www.gulfcoastwestern.com, or contact Heidi at [e-mail] and mention this podcast episode for a special offer!

Takeaways

• Oil and gas investments offer unique tax advantages not found in other sectors.
• Gulf Coast Western has not drilled a dry hole in seven years, showcasing their risk mitigation strategies.
• Investors can achieve significant deductions in the first year of investment due to intangible drilling costs.
• The depletion allowance allows for tax-free income, enhancing the attractiveness of oil and gas investments.
• Diversification is key; Gulf Coast Western structures joint ventures with multiple wells to spread risk.
• Investing in oil and gas can be accessible to accredited investors with varying financial backgrounds.
• The company emphasizes transparency and communication with investors, providing regular updates and reports.
• Understanding the operational risks and commodity pricing is crucial for potential investors.
• Investors can utilize self-directed IRAs to invest in oil and gas, providing additional tax benefits.
• The oil and gas sector plays a vital role in promoting U.S. energy independence.

Chapters

00:00 Introduction to Gulf Coast Western

04:08 The Evolution of Gulf Coast Western's Operations

07:02 Understanding the Tax Advantages in Oil and Gas Investments

10:06 Investment Accessibility for Accredited Investors

13:07 Risk Mitigation Strategies in Oil and Gas Investments

15:49 Operational Risks and Market Fluctuations

19:02 The Future of Oil and Gas Investments

29:40 Exploring Risk vs. Reward in Oil Investments

31:05 Understanding ROI and Legislative Impacts

35:28 Investment Strategies and Expected Returns

40:18 Differentiating Gulf Coast Western in the Market

46:59 Advice for New Investors in Oil and Gas

56:20 Demystifying Oil and Gas Investments

56:46 Resources and Support for Investors

Episode Transcript

Heidi (00:00):
Welcome to the SlashTax Podcast, where we uncover smart

(00:03):
strategies to reduce your taxburden, unlock federal and state
incentives, and invest in taxadvantaged opportunities to
build lasting wealth. I am yourhost, Heidi Henderson, and
today's episode is a powerfulone. We are diving into the
world of oil and gas investing.This is a sector that not only
offers high upside potential,but also some of the most

(00:25):
compelling tax advantages in Theentire US tax code. Joining me
are John Engle, executive vicepresident, and Steve Zemke,
senior vice president of GulfCoast Western.
They are a leader in domesticenergy investment. Their decades
of experience and transparentapproach to structuring joint
ventures has helped thousands ofaccredited investors benefit

(00:48):
from both passive income andpowerful tax strategies. This is
a strategy that I personallyhave used to help diversify
against some of my otherinvestment accounts and some of
my real estate investments as astrategy to bring in some tax
benefits and just an alternativesource of passive income. In
this episode, we bust myths,break down risks, and get

(01:11):
specific about how oil and gasinvesting works and how a change
in administration could affectfuture opportunities. If you're
an investor, an adviser, or highincome earner looking for your
next strategic move, thisepisode is for you.
So let's dive in. So withoutfurther ado, let's welcome John
Angle and Steve Zemke to theshow. John, Steve, thank you so

(01:35):
much for joining us today.

John (01:37):
Thank you for having us.

Steve (01:38):
Thanks for having us.

Heidi (01:40):
Absolutely. Okay. So, John and Steve, to start off,
can you give us a brief overviewof Gulf Coast Western? What
types of oil and gas estimate,assets do you guys develop, do
you manage, and how do theseprojects fit into kind of the
broader energy landscape? Rightoff the bat, let's hear exactly
what you guys are doing.

John (01:59):
Yeah. So Gulf Coast Western was founded in 1970. We
did primarily our own exexploratory drilling. And then
the in 02/2007, we startedforming, joint venture general
partnerships. In essence, whatthat does is it allows us to to

(02:22):
diversify, and we're essentiallysharing in the risk, and we're
sharing in the reward of oilwell.
So from 2007 to 02/2018, we didprimarily exploratory drilling,
which is the riskiest type ofdrilling. And we pass on the the

(02:45):
tax advantages that are writteninto The US tax code for
exploratory drilling, and wepass those tax advantages on to
our partners that that that thatwant to participate with us in
those wells. And and, you know,the the tax code was written so
that for for us to develop ourown natural resources and and

(03:09):
develop our own naturalresources, the US government
understood that there was riskinvolved. If you go out and you
spend all the money to drill anoil well and you buy all the
seismic and you do everythingthat you can to make sure that
an oil well works, but you drilla dry hole, that's a huge
expenditure with zero return.And so the government understood

(03:31):
those risks.
And they put into place, intothe tax code where you can write
off through intangible drillingcosts and intangible completion
costs, the majority of thoseexpenses in the year that those
those costs were were incurred.So in in 2018, we were presented

(03:52):
with an opportunity to get intoinfield development, drilling
wells in proven areas with witha lot of production, drilling
horizontal wells in these majorresource plays in the country.
And so in 02/2018, we starteddrilling those horizontal wells
with smaller independentoperators. And from there, it's

(04:15):
blossomed year over year. Andnow we're we're working with,
know, the biggest names in theindustry, drilling the wells.
The benefit for us is that wedon't the we've taken the the
major risk portion out of out ofthe equation, which is the risk
of drilling a dry hole becausewe're drilling with major

(04:36):
operators in proven areas ofproduction. We've turned that,
the the risk of drilling a dryhole, essentially. We've taken
that out because we drillmultiple wells in each each
joint venture that we form.However, those same tax
advantages still apply. So wecan drill we can drill a dry

(04:59):
hole and go exploring for oiland maybe have a 20%, chance of
success, or we can drill in thebest field in the country and
drill the best well in thecountry, and we still get the
benefit of those same taxadvantages.
And we pass those along to ourpartners, and our partners
obviously are a lot happier withour success, since 2018 because

(05:20):
dry hole calls are not fun. Wewere

Heidi (05:23):
That's okay.

John (05:23):
I got to the point where I really I hope there's no
geologists listening, but I Istarted viewing geologists worse
than weathermen because they canbe wrong more often than not,
and then they're on to the nextproject. Now by drilling wells
with these major operators, Iget to rely on multibillion

(05:44):
dollar budgets, teams ofengineers, teams of
petrophysicists in the bestfields in the country, and and I
get to reap those rewards and sodo my partners.

Heidi (05:55):
Wow. So, John, what is your role in the company, and
how how did you come onboardwith Gulf Coast? What's your
background with how you'vegotten here and are are, you
know, I guess, running thiscompany?

John (06:08):
Short answer is life is a crazy ride. I grew up in
Houston, Texas. My entire familywas in the oil business in some,
you know, way, shape, or form. Ididn't wanna be in the oil
business because I lived myfamily lived through the the
nineteen eighties, you know, oilglut and and that that fiasco.

(06:28):
So I went into finance out ofcollege and ran stock brokerages
and bond you know, worked inbond brokerages and, just
through a circuitous route endedback up.
Gulf Coast Western was openingup an office and the opportunity
presented itself. And they askedme what my background was, and I

(06:49):
said finance and oil and gas.And they're like, well, that's
kinda what we do. Maybe youshould come in and meet with us.
And, so I've been with thecompany since 02/2009.
And then in 2017, I was promotedto chief operating officer with
Gulf Coast Western.

Heidi (07:04):
Fantastic. Well, congratulations. Thanks. And,
Steve, tell us a little aboutyour about yourself. What's your
role with the company, and, howdid you how did you dive into
the oil and gas field?

Steve (07:15):
Kinda the same thing. I'm I'm I'm executive vice president
in sales, and I've been with thecompany since the February. And
I I've grown with that through,like John said, the the the hard
times and and and now just aturning point for the company
back in in 2018. And prior tothat, I was in insurance. Okay.

(07:41):
I started insurance sales. Iworked up to assistant vice
president operations andcustomer service, underwriting,
sales, just a a big background.That through layoffs, whatever
that ended, and I I said, I'mgonna get back into sales. And I
and I started in oil and gas andhave been, you know, there have

(08:03):
been here since then.

Heidi (08:05):
Fantastic. Yeah. Well, in full transparency, I have to
tell listeners, I am personallyan investor with Gulf Coast
Western. And as my sister, mypartner, 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 aguest.
You know, this is a little bitof a different topic than what

(08:26):
we oftentimes talk about on thispodcast. A lot of times, I'm
focusing on the CPA industry andwhat's changing and how to be
proactive. So the reason that Ireally wanted to have you both
here is because of what you'redoing and because of some of the
significant tax advantagedstructures that exist in the oil

(08:47):
and gas space and reallyunderstanding the application. I
mean, this is one of the onlyinvestment opportunities for an
accredited investor that canoffset active income. And there
are many limitations.
I mean, we talk a lot on thispodcast and at Engineered Tax
Services. We deal a lot with,cost segregation with real

(09:10):
estate investing and dealingwith passive versus active rules
and what investors are lookingfor. And, again, looking at
this, it is one of the very fewinvestment opportunities, that
have those tax benefitsassociated with it. So wanting
to have you guys on and reallydive into the industry, into
your company specifically, butalso really understanding the

(09:33):
industry as a whole. Like, oiland gas to me, I've been in in,
you know, tax consulting now forfifteen years, in the accounting
space for almost thirty years.
And oil and gas was always evenafter having gone to multiple
oil and gas conferences withsome big players in the in the
space, it was so overwhelming.It feels a little bit like it's

(09:57):
too good to be true in a sense.The risk is difficult to kinda
understand. And I again, I Iactually lend myself more
towards the ultraconservativeside, so I like to overanalyze
things before I jump intocertain investment
opportunities. Alright.
So let's first, if you wouldn'tmind, dive into the tax

(10:19):
benefits. Can you explain someof the key tax incentives that
are available, like thedepletion allowance and other
credits or deductions, and whythese are really particularly
attractive for investors.

John (10:31):
Yeah. Steve, you wanna tackle that?

Steve (10:33):
Sure. The the IRS allows and back in 1986, the Tax Reform
Act is when this whole kind ofis it took a turn for the
positive in terms of promotingdomestic production of oil and
gas to become more self reliantas a as a as a country. So those
incentives came in there. So thethe biggest thing is that it's

(10:58):
great to get a tax deduction,but if you don't have returns,
then why invest to get thededuction? So what's what's been
a turning point for us is is therevenue that comes in.
So there's there's two twobenefits. The benefits going
into the investment of writingoff the investment a 100%
eventually, but the first yearis about 85% of that investment

(11:19):
is deductible due to theintangible drilling and
intangible completion costs.Those are the labor and the more
labor intensive activities thatthe IRS allows to write off. The
rest is more equipment that'sdepreciated over five years or
seven years. But the so go sogoing into the investment, we

(11:41):
look at we look at nice returnpotentials based on comps around
us, kinda like real estate.
You gotta be in the right areawith proven production. So we
have that going for us, but westill get the deduction like
like John said. On the revenuecoming back, the depletion
allowance like you mentioned,Heidi, is 15% tax free income.

(12:03):
So every $10,000 that we send aclient, he saves about $1,500
that he's not even paying taxeson. So the rest is taxed as
ordinary income, but that's okaybecause we're making money,
we're getting the deductions onthe front end, and eventually
all of it.
And then we're getting some taxfree dollars coming in back to

(12:24):
the to the investors. So it'svery unique in the sense that
it's outside of the markets.It's treated differently in
terms of the ability to write itoff unlike, say, a stock where
you have a $3,000 maximum ifyou're if you have losses and if
you have gains, of course, youcan't write it off. So that is
unique in the sense that it'salternative investments, and

(12:48):
that complements everything elseout there. So very, very unique
in that sense.

John (12:53):
Yeah. Absolutely. One of the one of the few investments
out there that, you know, forfor if you were to invest in a
stock, you're really only makingmoney in that stock if that
stock goes up and if you decideto sell it. Other than that,
it's paper, unless you happen tobe in a stock that pays
dividends, and good for you ifyou are. But in this case, you

(13:14):
take your your our jointventures are built around a
group of oil wells.
We don't do single well projectswe have in the past, but I like
to build in diversification inevery partnership that I built.
So not only is it is it multiplewells, but it's multiple miles
of pipe that are placed into theoil. It's all about surface

(13:37):
area, and most of our wells aretwo miles each. So for instance,
if I have an eight well projectand each well has two miles of
pipe that's drilled and placedinto the into the reservoir,
I've got 16 miles of pipe in theoil where most vertical wells
might only have 50 feet of pipein the oil depending on how

(13:58):
thick that reservoir is.

Steve (14:00):
Wow.

John (14:00):
So I mitigate the risk by having multiple wells. I
mitigate the risk by havingmultiple, multiple miles of pipe
in the oil. And from thosewells, depending on how mother
nature cooperates with theengineers, the oil that is
produced from all of those wellsis sold, and it produces a
monthly revenue stream back toour partners that we send direct

(14:23):
deposited back into their bankaccounts every month on the
fifteenth or the twentieth ofthe month. At the end of the
year, we usually see a rushbecause people meet with their
accountants, and they're gonnathey're like, oh my gosh. I
would rather put some of thismoney that was going to the
government, which is an absolutedry hole.
You know? You're not typicallygetting a return on your

(14:45):
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 potentiallyfor the next decade or more. So
that's really what we do. We wehave we have taken a vehicle
that is put in place by thegovernment, derisked it by

(15:07):
multiple wells in proven areas.
So we we really mitigated thedry hole risk. There is still
mechanical risk because we areputting, you know, in most
cases, these wells, after it'sall said and done, each well is
20,000 feet thereabouts, betweenthe depth and the lateral, and
you can run into mechanicalissues, but we're talking about

(15:28):
a 2%, you know, figure of wellsthat might not work versus 98%
that work. I'll take that riskin 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 mechanicalrisk, that's why we build in
the, the multiple wells withmultiple miles of production.

(15:51):
So, we try to structure it sothat the the monthly revenues,
the tax advantages, the thedepletion allowance all work
together for our accreditedinvestor park.

Heidi (16:02):
Fantastic. Yeah. I I appreciate the, the background
because, you know, in many ofthe the conversations I've had,
when I was doing due diligenceto look at investing with you
guys, I was working with anumber of my CPA partners and
people that I trust andappreciate on the due diligence
side. And risk was definitelyprobably the number one thing

(16:24):
that was mentioned that wasbrought up and really wanted to
dig into how the risk wasmitigated. Before I I do
actually have a couple morequestions on that, but I wanna
circle back to what Steve wassaying in really defining the
tax benefits associated with it,and to provide some generalized
examples.
Because for me, I I'm a very,I'm like, come on. Let's let's

(16:45):
get down to the nitty gritty ofhow this all calculates out. And
I wanna I wanna talk about thisas well because, when we look at
the tax benefits and we look athow much we could potentially
invest, the other thing ormisnomer that I had had with oil
and gas is that this is forpeople who have $10.15, 20, a
$100,000,000, and they areinvesting millions of dollars

(17:08):
and, you know, diving into, youknow, you know, drilling their
own oil wells and and gettinginto oil and gas. Like, this is
big money. It seems like youguys have actually built a
situation or a structure wherethis is more attainable for the
average person, still accreditedinvestors, but the average
person to be able to invest inone of these partnerships.

(17:30):
Can you talk just a little bitabout, you know, why, I guess,
you have lowered the thresholdfor that entry point, and what
is that threshold?

John (17:39):
Well, it's not necessarily that we've lowered the
threshold. It's it's really amatter of realizing that
everyone has different taxneeds, and that's one of the
reasons, you know, we don't givetax advice. We rely on the you
know, an individual's taxadvisers or or accountants for
that. But it it really dependson any given year. Every every

(17:59):
partner has a different tax needor has a different income level.
Some a lot of our partners areeither retired or they own their
own businesses. And from year toyear, it could be completely
different. To your first point,we have some partners who invest
in every single project thatthat we repair, and then we have

(18:20):
some partners who might do one.They might do one a year. They
might do two a year, and we tryto structure it so that it is an
achievable goal as far as, youknow, providing a nice tax
advantage instrument for themthat can help them with their
tax situation in any given year.
But we also there's no limit onhow much a partner can can

(18:43):
participate in on any givenproject other than as long as
the interest is available inthose wells.

Heidi (18:49):
Yeah. That makes sense. Well, and as an example, I mean,
using a small example. Let's sayan investor puts in $250,000.
This Steve was giving theexample of having roughly an 85%
deduction year one for the costsof of your drilling and and the
expenses going into that.
So with a $250,000 investment,am I correct if that calculates

(19:13):
out to roughly about a 425,000deduction in that year? Correct?

John (19:19):
That is correct. And in some cases yeah. In in some
cases, a a a partner who mightbe in that highest tax bracket,
a reduction if they're in thatthat $600,000 range and that
that that $250,000 investment ina joint venture, that reduction

(19:40):
in reported income can drop themdown, not only save them the tax
money, but it might actuallydrop them down a tax bracket or
two.

Heidi (19:47):
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. Ina top tax bracket of 37%, that
equates to about $78,000 insaved taxes.
That is not including state. Arethe states also in the same, do

(20:12):
they have the same rules? Like,I know California in a lot of
census does not follow some ofthe same rules as federal. So do
the states still allow for thesame deduction that we see on
the federal side?

John (20:23):
Steve, you wanna handle that one?

Steve (20:24):
Yeah. Think for for the most part, they do. It it drops
it follows down to the bottomline. Some states do not. Like,
California just, I think lastyear changed their rule.
But, it must so it might belimited or not allowed for the
state, but I would say moststates, it it it does carry

(20:45):
down. So if you're in the 37%bracket plus five to 10% state,
it starts to really add up.

Heidi (20:52):
Yeah. Absolutely. Or or 12% state. Yeah. I mean, we're
looking at very you know, inCalifornia and New York, some of
these high tax states with highincome earners who are paying up
to 48% tax.
A 250,000 investment could savethem a $100,000 in taxes. So,
really, you're really investinga 150 because a 100 comes back

(21:16):
from the tax aspect, but thenyou're getting returns on that
entire $250,000 investment. Andthat's just a small example, but
I'd like to to quantify thatagain because, you know, I I
like the the tangible numbers.It's accountant in me. Yeah.

John (21:30):
No. To the California point, you know, if you're in
the highest tax bracket inCalifornia federally and then
you have the the what is it? 13%income tax. You know, if you
think about it on a timeperspective, those Californians
in that highest tax bracket areworking pretty much to July for

(21:50):
the government in some way,shape, or form, before they're
ever making money for them ortheir families. So I they they
just adjusted that, I believe,last year, as as Steve was
saying, because they realizedhow much money that was being
saved from going to them.
This is when they made thatadjustment. But most states do

(22:11):
allow that that deduction tocome off of the state income
tax.

Heidi (22:17):
Yeah. That's that's amazing.

Steve (22:19):
Well, we do sorry. Sorry. Go ahead.

Heidi (22:23):
No. Go ahead, Steve.

Steve (22:24):
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 iseight wells, and so that that
allows a person without any oiland gas experience and investing
to come in at a level below the$250,000. And then after they

(22:45):
see how it works, how weoperate, how how we communicate
as a company, the the revenuethat starts to come in when they
get their k one the first weekin March on for the deductions.
They start to, you know, seemore how it works. And then they
can go in into those biggerprojects like you mentioned,
where a partner can put in250,000 into a 30 or 40 well or

(23:07):
25 well program and and beimmediately diversified.
Because like John said, with thehorizontal wells, we have found
that it's not if you hit, it'show much. And so you get just
like, you know, stocks or realestate, you you wanna have a
group of wells because some willbe below, some will be average,
some above. So a a partner weoffer a lot of options for

(23:27):
partners based on their desireto immerse themselves into more
diversification and and biggertax advantages too. You know?

Heidi (23:35):
Got it. Okay. Yeah.

John (23:37):
And to that same point, again, diversification on any
given well pad, if I have eightwells or I have 16 wells on any
one of those, there will be athere will be a well that is the
top performer from that pad, andthere will be an underachiever
on that pad. And so that's whywe look at averages and
everything that we do. So if Ilook at it, if I don't I don't

(24:01):
ever wanna just rely on the topproducer 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 ofwhat the wells are possible or
what they're capable of in arealistic manner rather than
taking the top one or the thelowest one.

Heidi (24:18):
Yeah. Okay. That that makes sense. Gosh. I I have a
lot of questions.
So the next one, John, actuallycircling back to risk before I
wanna talk about reward. Whatother risks would an investor
need to be aware of or might beof concern? And I will preface
that with with saying that I'vehad multiple questions about the

(24:38):
potential for operational risk,for risk to the partner, which
is why this actually applies toordinary income as being active
is because you are actually apartner in this structure. So
how do you mitigate risk thatcould be carried or could apply
to the investor, as as an activepartner in a oil and gas project

(25:01):
like this?

John (25:02):
There's there's several ways. Number one, as far as the
the from the drillingstandpoint, we would be the top
of the totem pole. And so if ifour operator there's multiple
chains of insurance as far as,you know, to begin with from the
drilling and the completion sideof things, all of those multiple
layers of insurance, and they donot allow a single person on a

(25:24):
pad unless it's under an whatunless it's an employee or
someone who is under one ofthose insurance policies. So,
you know, it's a lot ofequipment. It's all run by
diesel engines, and and badstuff can happen.
And all those those employeesare covered under those
insurance policies. From a froma drilling risk standpoint,

(25:47):
we're not going to, if I see anarea of wells that is it is like
a newer part of the field, Iwill avoid it. If it's an
expansion part of the field, Iwill look in more detail. But I
typically only get into wells oragree to participate in packages
of wells where there's goodthere's good production in close

(26:10):
proximity to where these newwells are being drilled. And
with each well drilled, thetechnology improves over time.
So, you know, a a well that wasdrilled in 2017 would be an
antique as far as I'm concernedtechnology wise. It's just like
your your iPhone, you know, it'sconstantly changing and being

(26:30):
upgraded, and they're sendingupdates. The same thing is
happening in the oil field. Orif you look at aviation, you
know, the Wright brothers wereflying a, you know, a rickety
canvas covered wing airplane inin the early nineteen hundreds,
and now we have f 22 Raptorsthat can go, you know, Mach two.
It's it's it's the same leapsand bounds.

(26:51):
The same if you look at the oilindustry over the same time
period, very similarimprovements in technology have
have happened over the sameamount of time. So from from the
operational standpoint, ourpartners are protected through
multiple layers of insurance andan umbrella policy that we name
each joint venture under that'sparticipating in those wells.

(27:13):
And then we the we have not youknow, we're coming up on 300 or
400 wells. I can't keep trackbecause they're all drilling so
fast. But in since 2018, we havenot drilled a dry hole

Heidi (27:27):
Wow.

John (27:27):
In these fields. So a huge turn turn as far as, you know,
the risk. Our old projects, whenwe were exploring for oil, the
first thing out of our mouthwould be, this is oil and gas
before I go through $1 of whyeconomically we're putting the
bit in the ground. Before I gothrough any of that, you need to
understand this is oil and gas,and it is risky. We if we go out

(27:50):
and drill a dry hole, you loseyour money, and all you get is a
tax deduction.
Do you understand that? And nowit's more along the lines of the
risk has been mitigated. Yourmain risk now is commodity
pricing. Mhmm. COVID is a greatexample.
We had some phenomenal wellsdoing a thousand barrels a day
that were turned on right asCOVID hit going into $35.25, $10

(28:15):
oil. We were ecstatic about theproduction of those wells, but
no one saw that pricing. And,you know, the one day when it
was negative $38, no one sawthat coming. It was not fun to
watch, especially with somereally good wells that would
have paid our partners outimmediately. You contrast that.
We've had other wells whereprices were in the $120 range.

(28:37):
And on some of those wells, ourpartners were paid back in the
first eight distributions Wow.And made whole, not including
the tax advantages. So Mhmm.It's really that is the main
risk as far as, you know,commodity pricing.
Right now, we've seen a nicesteady $75 range given all the
turmoil in the world, even with,you know, Joe Biden going to

(28:59):
Trump, Israel, Iran, all ofthose things, Ukraine, it stayed
pretty much in the 70 to $75range. I think I think as far as
the pricing standpoint, we're ina good spot right now, but that
is one of the risks to consider.You will always meet the tax
advantage. The commodity pricesis not a known factor other than

(29:23):
it's gonna go up and it's gonnago down. But we, as far as a dry
hole risk, we're I mean, I justuse the 2% figure because that
is that is the risk.
You could run into a mechanicalissue, but it's it's few and far
between. These engineers have itdown pretty pretty well down to

(29:44):
a science up there. And theother the other factor would be
mother nature. You are stilldrilling a hole 7,000 feet down
or 10,000 feet down and thenputting a lateral in, you know,
two miles in the ground, andyou're you're hoping that ever
all the science works in yourfavor and mother nature
cooperates. And sometimes shedoesn't, but that's few and far

(30:07):
between in these fields.

Heidi (30:08):
Well, yeah, it's it's so fascinating. And, and for
listeners, when I had initiallychatted with Steve, they sent
this phenomenal marketingpackage with this really
beautiful little video thatshows some of the actual
drilling activities and someincredible diagrams of how the
process works. Very fascinatingbecause this is completely out
of my wheelhouse. Sure. But I Ithink it's so interesting.

(30:31):
So to that end, John, talkingabout the risk versus reward,
talk a little bit more about,you know, two things. One, it
it's difficult to pin down thepotential payout or payback, you
know, the ROI. Okay. I'm gonnamake this investment. Yes.
There's the tax benefits to it.Obviously, there can be a range,

(30:53):
subjective to what the actualbenefit will be as it relates to
the payouts and what's beingdrilled. But, additionally, this
transition to the Trumppresidency, it has sparked a lot
of questions about oil and gaspricing and policy changes. You
know, what is your perspective?I mean, obviously, you don't
have a crystal ball.
We all wish we did. But what isyour perspective on what we're

(31:16):
looking at for the next year ortwo years, especially with
tariffs and all thesediscussions we're hearing every
single day? Help us just kindof, if you can, quantify a
little bit of what the potentialreturns are and then how that's
impacted by some of theselegislative changes?

John (31:33):
Good question. So what I try to do when I'm putting the a
a program together is I try tostructure in based on the the
analog or the key wells in closeproximity to where I'm drilling
my wells. I try to get a goodbasis for what those wells are
capable of. What what can thatrock in that particular
reservoir produce at over aconsistent time frame. And I

(31:57):
usually look at a two yearaverage of how much oil and gas
those wells produce.
From that, I will try to build.I will take the interest that we
have available to participate inthose wells, and I'll build a
program based on right now, Iuse $75 oil, as a basis. And I
try to build in a a a middle tohigh double digit annualized

(32:21):
return, not including the taxadvantage. Mhmm. And then
overall, these wells, you know,I don't care what engineer you
talk to, you'll get a differentanswer.
But the how long will thesewells run? The the consensus is
fifteen to twenty five years.Several operators will put in
writing that they expect a wellto produce economically over a

(32:45):
twenty five year period. Wow. Sowhat the bulk of those returns
are gonna be early on in theproduction, the first five to
seven years, because that's whenthe pressures are the greatest.
Again, mother nature's pushingthis up to the surface. We're
taking advantage of it andselling it at the surface. So,
from that perspective, you know,I try to build in a a depending

(33:08):
on how much mother nature'seventually going to give us, and
we won't know until ten orfifteen years down the road. And
I try to take the conservativeapproach, and I try to take the
optimistic approach. So ourtables are calculated.
They all of our tables start atzero. That's the worst case
scenario. None of these wellswork. We didn't make any money.

(33:28):
From there, I try to build indifferent scenarios as far as
keeping a current a a the sameprice at different production
levels and different totalproduction levels.
So overall, I'm shooting for athree to five to one overall
return. All the while the theoriginal investment was a 100%

(33:50):
tax write off in the year thatthat that was, figured in. So if
a well as Steve was saying, youknow, if a well really in year
one, we tell our partners toreally look at the tax savings
as your initial return becausethat's what you're gonna be
saving on April 15 next year. Soif you're in the 37% tax

(34:13):
bracket, consider that, youknow, the first amount of money
that you're making because youdidn't write that check to the
government for that amount. Butaround that same time, you
should start to see theproduction revenues kick in.
And then the following year, youknow, you'll get your your K-1s
and everything that that goeswith that. So that's how we try

(34:33):
to build it in. You know, eachproject, if it's I understand
the the wells that we'redrilling now are are
ridiculously more expensive thanthe wildcatting wells. If you
were to drill a wildcat well youmight I might have a 12 or a 20

(34:53):
to one overall return potentialbecause we really don't know
what we have until we we hit it.If we hit it big, the
potential's there, but that bigzero at the bottom is also
there.
You get a tax deduction. Thoseprojects are are very cheap to
get into because there's notknown production in the area, so
your leases are easy to get.You're drilling a vertical well

(35:15):
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 theproven production is, where Oxy
and Chevron and Anadarko and andall these big companies are
drilling these wells with hugesuccess are much more expensive

(35:36):
to get in.
So that given that, I try tostructure it where the partners
still see a a a very reasonableand respectable monthly income
potential and over time, a nice,you know, three to five to one
overall return return potential,not including those tax
advantages.

Heidi (35:57):
Okay. Just to clarify, a three to one or five to one,
again, if we use that sameexample of a small 250,000
investment, you're saying thatin the life of that partnership
and those wells that, you know,diversified wells within that
fund, you know, or that LLC,that a $250,000 investment could

(36:18):
pay out somewhere between750,000 to 1,250,000.00 over the
course of that. You're sayingtwenty to twenty five years
since that's the typical payout.Correct?

John (36:28):
That is what we're shooting for. Yes, ma'am. Okay.

Heidi (36:31):
And what percentage of that you said they typically pay
out the most in the the firstthree to five years since that's
when they're most highlyproducing. What is the you know,
if you look at twenty years,what is the percentage of
revenue that comes in that firstthree to five years as opposed
to, you know, twenty years is a100%. What's the percentage you

(36:51):
usually see paid out in thatthree to five year period?

John (36:54):
I'm totally dependent upon mother nature and and commodity
price. And we like I was sayingearlier, we have some joint
ventures that have paid out orgotten their our partners their
money back in in twelve months,in eight months, and some that
have taken three years. It justdepends on when they came on
COVID. You know, we we starteddrilling these wells in 2018,

(37:16):
and COVID was right there in2020, 2021. So that that threw a
a wrench in the gears, but thewells were still successful.
Everybody understood that thepricing no one had ever seen
pricing do what had what hadhappened during COVID when no
one could drive cars. Yeah. Butbut we we with Trump in office,

(37:39):
it, really, all he can do isopen up more areas to drill. So
from a pricing perspective, yes,we might see prices dip down
into the sixties for a while,but the thing to keep in mind is
all of these operators whocontrol the drilling of these
wells, they were all kind ofcaught with their pants down
when oil prices went up to 120,and they flooded the field with

(38:03):
drilling rigs. And then oilprices took a dive in during
COVID, where we're drilling mostof our wells.
There were 25 drilling rigs inWeld 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

(38:23):
with drilling rigs again withoutbeing very methodical about it.
So Trump could say, hey. You candrill wherever you want.
The that's great, but theoperators aren't gonna rush out
there because they're constantlywatching, you know, the the oil
prices. So they're not gonna goout there and just you're not
gonna see drilling activityshoot through the roof because

(38:46):
Trump's opened up, you know,different areas where federal
permits were, you know, put onhold. The operators decide when
to put those rigs, and Trump cantell somebody, don't drill the
wells, but he's not the onespending, you know, 7 to
$12,000,000 to drill thosewells. The operators aren't. So
they they are the ultimatecontrol there, they're only

(39:08):
gonna do things based on themgetting a good return on
investment just like us.
The the operators we work with,they control everything about
those wells, and that's that'sthat is a beauty of of what we
do by joining our joint venturesinto these these wells that are
operated by your I'm not gonnaname drop, but the the biggest
names in the industry. We'reable to rely on those companies

(39:31):
and their expertise, and Ihaven't had to talk to a
geologist in six years, sevenyears, and we haven't drilled a
dry hole in seven years. So I'mable to rely on that that
expertise and their their theirbudgeting and and how fast
they're gonna drill wells. Fromthat perspective, I won't put a
project. I won't put wells intoa joint venture unless I have

(39:55):
something in writing from theoperator that drilling is going
to start with a within areasonable amount of time
because it doesn't do me anygood to put build a partnership
around wells that aren't gonnadrill for two years.
Now sometimes operators move thedrilling schedules around. We
don't have any control of that.I'm operating based on what they
sent us in writing. Yeah. It's,I don't think we're gonna see a

(40:19):
big spike in oil prices.
I also don't think we're gonnasee a a huge decline in oil
prices because because all ofThe United States operators
understand that if they go outand start drilling a bunch of
oil wells, Saudi Arabia can justturn on the taps and flood the
market with oil. And then thereagain, there they are sitting
there spending all this money toproduce oil when it's being

(40:41):
flooded into the the country.Wow. So Yep. Everybody's gonna
be very methodical and verycareful about what they're doing
going forward.

Heidi (40:49):
Yeah. That makes sense. Well and, you you know, your
your explanation is taking meexactly to my next question that
I wanted to ask you, and that'sabout how you differentiate
yourselves from other players interms of mitigating risk and
maximizing returns. You know,what what is a differentiator?
Why Gulf Coast Western?
Because there are a number ofoil and gas companies. I know

(41:12):
I've really appreciated gettingto know you all and the due
diligence I've done. I do feellike you guys have some
differentiators, but will youshare those with listeners a
little bit about what those areand and and why you guys?

John (41:22):
The main difference I would say is that that our CEO,
is is a very astute businessman.He's run multiple other
businesses. He's takenbusinesses public, from nothing,
and, he always does the rightthing or attempts to do the
right thing by our partners.That being said, the operators

(41:42):
that we choose to work with, andI say, I mean that choose to
work with, are are well funded.They're either very well backed
private equity backed companiesthat in some cases might be more
valuable from a from a financialbacking standpoint than a lot of
the public companies are.

(42:03):
But we we choose to do businesswith them because they can pay
their bills and they do whatthey say they're gonna do as
well. A lot of companies, andI'm not there's nothing wrong. I
don't I don't know of a a bad abad scenario where a good
company gets invested with a momand pop type operator who has

(42:26):
something happen on a well andthey can't they can't put forth
the money to fix the well or dowhat's necessary to get the well
back into production or boostproduction. That's one thing
that we have gotten away gottenaway from because we used to
drill, you know, vertical wellsin Louisiana and South Texas and
Mississippi and Alabama and theoperators were, you know, all

(42:49):
levels of financial backing, butin this case we're working with
the majors and we're ridingtheir coattails and on a lot of
cases just through osmosis of usbeing in the field and we're
getting out that we pay ourbills on time and we're good
people to work with and be goodparticipants in the well, we're
getting deals sent to usdirectly from these major

(43:10):
operators.
Oh, wow. Yeah.

Steve (43:13):
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 theproof of production around him
and what's the timeline so thatthe the return on investment
starts reasonably soon versus,like John said, waiting for a

(43:34):
well to drill two years. We wemight come to back to that one
later, but we wanna put togetherprojects that are beneficial to
our clients from adiversification standpoint and
timeline too.

John (43:45):
Yeah. The timeline's important because if operations
don't start by March 31 the nextyear, that puts those tax
deductions in jeopardy for thatyear. Maybe just get pushed to
the next year. So we try tostructure it so that
everything's timely. And that'sone thing, you know, to
understand in the oil and gasbusiness, it is it is not it's

(44:05):
not a get rich quick overnightscheme.
It is it is the wells take, youknow, from start to finish, a
lot of time to put togetherbetween permitting and getting
all the the different loopholesthat these operators have to
jump through depending on whatcounty they're drilling in to
get all that put together,schedule the rig, drill the
wells, get the wells intocompletion, and then place them

(44:27):
into production, that can take,you know, a year to six months.
So that's why I try to structurethem as far as timeline. I wanna
put together a project where thethe operations are set to begin
very soon so that the the thepartners aren't sitting there
going, when are the wells gonnadrill? When are the wells gonna

(44:49):
drill? Because it they they dohave a timeline.
And once a well goes intoproduction, it takes some time
because the oil wells startproducing, and it takes, you
know, a month to get a a fullthirty days of production. And
those oil sales are paid ontypically a sixty day contract,
and the natural gas producedfrom the wells is typically paid

(45:11):
on a ninety day contract. So weget those revenues from the
operators typically four monthsdown the road from the month
that the wells were producing.So it's it's just but once that
happens, it's a monthly revenuestream. It goes out every single
month that those wells were inproduction.
So, yeah, there's a lot ofdifferent parts. We try to

(45:32):
simplify it, and you weresaying, you know, it's it's
fascinating, and it's mindboggling, and and it is. And I
go up to the field a lot, and Ilearn something every single
time I go up there. And, I Ilove it. And I don't know how
many times I go.
I'm like, wow. I did not knowthat they did that. Again, it's
constantly changing, but the thethe amount of work that goes

(45:55):
into these is tremendous whenyou're you're talking about some
holes in the ground that aregonna be, you know, making fluid
that we sell and then generaterevenues. All the, all the inner
workings are are just yeah. Theyare.
They're mind boggling.

Heidi (46:11):
Yeah. Well, it's been fascinating. I mean, I really
appreciate, first off, thecommunication. You know, I'm
getting constant constantupdates of what's being drilled.
There was a new drill, or a newwell drilled here, and this has
gone into service and kindaupdates on what's happening.
And then I was also pleasantlysurprised with how quickly we
started to see payouts on someof these investments. So, you

(46:34):
know, you you guys definitelyhave a very streamlined process
for making sure that you've gotthe infrastructure in place
that's allowing for those taxdeductions in the year of
investment and then having arelatively quick payout of
distributions again that comemonthly, which also I think is
really surprising with how youpay that out, with the
consistency and the the easyeasy, automatic deposits. It's

(46:59):
pretty amazing. Before we close,I want to get a final piece of
wisdom for our audience fromboth of you as it relates to not
only diversified investments,how to really look at having
diversification and how this canplay a part in that, But, also,
what advice would you offer foranyone just starting out to

(47:19):
explore this asset class? Andespecially in terms of balancing
the promising tax advantageswith risks, do you have any
thoughts?
I mean, I know you guys have alittle bias since this is what
you do, but I would love yourperspective and love for you to
share that with our listeners.

John (47:34):
Go ahead, Steve. Yeah. So for

Steve (47:36):
the right person, this is an excellent vehicle to to
diversify one's investments andto and to put tax strategies
together. It's for accreditedinvestors, they have to either
have 200,000 a year income andor a million dollar net worth
without their primary house. Sofor the for the person that has
their financial house in order,this is a way that they can take

(47:58):
a certain percentage of theirliquid assets, and that would be
a combination of stocks, bonds,IRAs, you know, whatever that
number is to say, okay. Is it50,000, a 100, three 100, and
and have them build theirportfolio of oil and gas. And
that's that's my job for myclients is to not just put them
into, you know, six or seven oreight wells, but but if they're

(48:21):
capable is to expand that sothat they're they're protected
among the variation of the Wellsand also to put their tax
strategies to work.
And the same thing, we work witha company called Entrust, and we
can do IRA set up self directedIRAs and do IRA rollovers. And
so the it's a it's a nontaxableevent, the rollover, and you

(48:41):
don't get the tax deductionsbecause it's a traditional, you
know, pretax IRA. But then thefollowing year, people do Roth
conversions and save substantialdollars there, and then the
money grows tax free on a Roth.So there's different vehicles
for the nTrust to set up selfdirected IRAs. That's a decent
percentage of our business,actually.

Heidi (49:02):
Oh, wow. I had no idea. I learned something.

John (49:05):
Oh, yeah. The the the IRA is a thank you, Steve. That's a
a very good, example of some ofthe things that are available to
the partners. You invest througha traditional IRA, which most of
our partners, you know, mostaccredited investors, 95% of
them have IRAs that they'rereally not touching, and they're

(49:26):
really not generating a lot inthe way of revenues. So we use
interest out of Oakland,California.
They are a nonstandard assetself directed IRA company. And
so it allows our partners toinvest in oil and gas joint
ventures, precious metals, andand real estate. Just gives them
a different vehicle to investthrough that IRA where a Merrill

(49:50):
Lynch or a Charles Schwab is notset up to handle handle,
standard assets or nonstandardassets. What Steve was referring
to on the Roth conversion isafter those k ones come out at
the end in the following yearthat the investments made, those
k ones reflect that the moneywas spent. The majority of that
money that was invested wasspent on drilling oil wells.

(50:12):
So the value is significantlydifferent on the ending capital
balance than what was invested.And so if a partner decides to
convert to a Roth at that point,you know, let's say it's 10% of
what they originally investedbecause the money was spent to
drill the oil wells. If theyconvert that asset to a Roth in
the following year, they'regonna pay tax on that 10%

(50:35):
balance, but those revenues gotax defer or tax free rather
than even if you invested incash, you're getting 15% tax
free. So it's

Heidi (50:44):
Wow.

John (50:45):
It it you you have to look at each each scenario
differently. But I used to be incharge of handling the IRA
transactions, and every March, Iwould get inundated with these
Roth conversion requests. AndI'm like, what is going on? And,
it was actually one of our oneof our partners was an ex IRS
attorney, and he's like, here'swhat's going on. And I was like,

(51:06):
that makes all the sense in theworld.
So, that's that's just anotherway of participating. And,
ultimately, you know, thegovernment put this in place,
you know, with multiple taxadvantages to help develop our
natural resources. And when youwhen you figure that that is
probably it's one of my favoritethings about it is that our

(51:29):
partners are helping produce oiland gas for our country Mhmm.
For the most part. And when youlook at, you know, oil from
Saudi Arabia, Iran, Venezuelagoing on these oil tankers that
might burn 30 to 60,000 gallonsof fuel oil a day just to get
their oil to our markets, whichtheir oil typically takes more

(51:52):
to process than our own oil.
And we produce it much cleanerthan anywhere else in the
country. I just I I like all ofthe aspects of what we do. We
give our accredited investorpartners access to multiple tax
advantages that aren't availablein most other vehicles. We

(52:12):
provide them with monthlyrevenue, and they're developing
our own natural resources andpromoting our energy
independence.

Heidi (52:18):
That's amazing. I mean, I appreciate that perspective. You
know, I I may I may be a littlebit biased, but, my husband
retired from Nucor Steel, andthat was a huge issue when he
was working there. Nucor is amassive producer of steel within
The United States. They actuallyare the largest recycler in The
United States as well, and theyproduce the cleanest steel on

(52:42):
the market.
You know, rebar, angle iron, allkinds of things that they're
producing. And yet there wastimes when China was dumping
that here, you know, withmassive amounts of pollution and
utilizing so much to pull itinto The US. And when our
legislative groups really helpsupport manufacturing. You know,
I I I do personally, you know,politics aside, certainly

(53:05):
promote the fact that The US issupporting those industries,
support supporting USmanufacturing and development,
you know, through r and dcredits, where we do a lot of
that as well to supportcompanies that are doing
research, doing development,keeping and paying jobs in The
US, and really supporting The USeconomy. And oftentimes, what we
produce in almost every industryis exponentially cleaner and

(53:29):
more sustainable than anywhereelse in the world.

John (53:31):
Yeah.

Heidi (53:31):
And so if we can do that from a competitive price point
as well, I I think it's reallyphenomenal. And I I think it's a
it's a kudos to how The UnitedStates leads leads the world
really in terms ofsustainability and and energy
resources. Yeah. So Hello. Wecould continue.
Oh, go ahead, Steve. Let youknow, do you guys have any final
comments? I know I've I've keptyou long enough, but I think the

(53:53):
information is so fantastic.

Steve (53:54):
We we really appreciate it. No. I was just gonna say
that our clients, because it isnew to most people, they have
never done this. So my job is tokeep them very well informed,
updated. They have a a a log onto our website, a a partner
portal that where they can seetheir production numbers, the
rip the reports that are posted.
The day before money goes intotheir account, like you've

(54:16):
experienced, Heidi, they theyget an email statement, very
transparent on all the revenuesmade, all everything, you know,
what the bottom line comes totheir account, and just mainly
to kinda especially their firsttime through, hold their hand
and just make them feelcomfortable because it's it's an
unknown, like you said. It'sit's all kinda out there is what
is this all about. You know? Sowe try to make it very

(54:37):
comfortable for them.

Heidi (54:39):
Agree, Steve. You've been a fantastic resource. I actually
did want to pinpoint that whenyou were talking about the IRA,
discussion because I thinkthat's something a lot of people
need a little bit of guidancewith. And I appreciate your
expertise and the support you'veprovided to many clients with,
you know, going through thatprocess. John?

John (54:57):
I was just gonna say, you know, a lot of times, like you
were saying, it is new toeveryone. 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 itquarterly, but winter in
Colorado is something we avoid.But we do offer our partners,
field trips into the field, andI'll take them up. And, we spend

(55:19):
the day in the oil field, youget your boots dirty, and you
wear hard hats, and we show youeverything from from what a a
pad looks like before it's got aan oil derrick on it.
And then through every stage ofthe process so that by the end
of the trip, by the end of theday, everybody is, they're all
oil and gas experts. And Ireally enjoy doing that because

(55:41):
it's it's a good way. You know,we're based in Dallas, but we
have partners spread all overthe country. And it's a good way
for us to get to spend some timeand get to know our partners
field, you know, so and and noquestion is a stupid question.
Like I said, I learn somethingon every trip, but we do offer
that as well.

Heidi (56:00):
That's fantastic. Okay. Well, I expect you guys to put
me on the schedule once the snowmelts because I don't wanna go
in snow. I'm a snowbird for areason.

John (56:09):
Get you

Steve (56:10):
on we'll get you on a on a summer trip.

Heidi (56:12):
Okay. Sounds good. So put me on your agenda. I would love
to come meet with you guys andcome and see the operations as I
know my husband would bethrilled to see it all as well.

John (56:20):
There's lots of steel out there.

Heidi (56:22):
Oh, good. Well and he'll appreciate that too. He'll be
he'll be inspecting it for Nucorstamps. That's right. So hey,
John, Steve.
Thank you so much for being onthe podcast. I hope listeners
enjoyed the information. I willbe sharing your contact
information as well as links,for listeners in the show notes.

(56:44):
So you have plenty of ways toaccess and contact, Likely
Steve. They can be a greatresource for helping you
navigate potential investmentsand look and see if this may be
an opportunity that could bebeneficial for you.
So, John, Steve, once again,thank you so much for joining us
today. We wish you a fabulousafternoon.

Steve (57:00):
Well, thanks, and happy to

John (57:01):
join us.

Heidi (57:04):
And that's a wrap on today's episode of the SlashTax
podcast. I hope thisconversation helped demystify
the oil and gas space, and itgave you clarity on how to
conserve as both a strategicinvestment and a tax saving
powerhouse. If you're curiousabout how this could fit into
your portfolio or your clients,check the show notes for a

(57:26):
special access link exclusivelyfor SlashTax listeners. You'll
find more resources and a directpath to connect with the team at
Gulf Coast Western. Don'tforget, follow the podcast,
leave us a review.
And if you found it valuable,we're here to help you slash
taxes, grow wealth, and makesmarter moves every step of the
way. Thank you to our sponsor,Engineered Tax Services, and

(57:49):
thank you for listening. We'llcatch you on the next episode of
SlashTax.