You may be aware that you can invest in the oil and gas industry, but did you know you have options beyond exchange-traded funds that track crude or stocks in specific oil companies? Public equities can provide exposure to the energy industry, but they can also endure volatility from outside catalysts. What if there was a way to invest directly in the development of domestic and tangible energy interests? As it turns out, you can through oil & gas royalties. You can even do so with your self-directed IRA, 401(k), and Health Savings Account.
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How Oil & Gas Royalties Work
The purchase of oil and gas rights is very similar to a real estate investment. An oil company leases a plot of land from a “surface owner” (a farmer, rancher, or another such property owner). The investor then purchases, on a per-acre basis, rights to the oil and gas resources below the surface of that land. The rights are then leased to the oil company, which conducts the business of extracting and selling the natural resources. The oil company retains its share of the revenue but also distributes monthly royalty payments to the true owners of those mineral rights – The investors.
Like those who invest in property, mineral rights holders may encounter an opportunity to sell their rights for a profit. Upon doing so, the investor—which, again, can be your self-directed retirement account—will retain 100% of the profits generated from the sale. As with other investments in a self-directed IRA, any capital gains would be completely tax deferred.
Understanding the full scope of possibilities with an interesting yet unfamiliar investment vehicle can help you make informed decisions. Please keep the following in mind:
- Very little (if any) expertise related to the oil and gas industry is required to get involved in and profit from these royalties.
- The lease of mineral rights to an oil company is not a manual process on the part of the investor. The investor simply purchases mineral rights and collects royalties; the investment providers who help execute these transactions take care of the rest!
- Investing in mineral rights does not involve the ongoing costs that typically characterize residential or commercial real estate investments (maintenance expenses, a mortgage, etc.). The oil companies that work and manage the land bear these costs, not the investors.
- Your self-directed IRA can collect royalties from multiple oil and gas fields at the same time. You could allocate $100,000 to one investment, $25,000 to four separate investments, etc. Therein presents the chance to further diversify your portfolio.
Ready to Learn More?
To pose questions about your self-directed account, please don’t hesitate to give us a call at 877-742-1270 or submit a secure message to our staff through your Client Portal.