Broker Check

Energy Alternative Investments

Drilling Funds are designed to 1) generate significant tax deductions, particularly in the year of
investment, which can be used to offset taxable income from earned or unearned income and 2) to
complete the drilling of wells to generate cash flow potential to the investor.
There are many variables that can impact the economic success of these Funds including commodity
prices and drilling success.


A Leasebank is an investment fund formed to acquire oil and gas leases, add value in those leases by
various means (performing geological studies, drilling pilot wells, etc.), and then sell the leases at a
profit. Typically, the leases have a primary term that ranges from 3-5 years. If production is established
by drilling well, the leases continue in effect as long as production in commercial quantities continues.

Once the leases are purchased, value may be added by a number means including 1) generating and
interpreting geological and geophysical data that serves to demonstrate the likelihood of finding
hydrocarbons; and 2) drilling wells based on the interpretation of such data. The methods used to
interpret data may include 2-D or 3-D seismic data, well logs, and production data from nearby wells,
among other various techniques.

After the leases have been purchased and enhanced as indicated above, they may be sold to third
parties such as independent oil companies, institutional investors, or drilling funds. Sale consideration
usually consists of up-front cash and may include some form of retained economic interest. The retained
interest generally includes a carried working interest whereby the purchaser of the leases pays for some
or all of the Leasebank owners’ interest in drilling, completing and equipping one or more wells, and/or
an overriding royalty interest.

With respect to timing of revenue to the Leasebank Fund, revenue from pilot well drilling usually
commences within 12-18 months following the closing of the fund offering. Capital gains proceeds from
the sale of acreage may occur within 24-36 months of closing.

A royalty is a percentage of the revenue paid to a mineral owner from the production of oil and gas on
his/her property.
The Operator, often a NYSE company, drills wells in order to produce oil and gas. This
Operator pays all drilling and operating expenses; and it also assumes all operating risks and liabilities.
The royalty owner collects payments based on the monthly gross revenue from the sale of the oil and
The royalty interests that we have access to have the following important characteristics:

  • Direct title which allows investor to sell or transfer when desired.
  • Eligible for 1031 and 1033 real estate exchange.
  • No debt associated with the investment.
  • Ordinarily engineering reports support estimated 35-year life for reserves.

Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.

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