How Fractional Ownership is Revolutionizing Energy Investing

How Fractional Ownership is Revolutionizing Energy Investing

The modern day investing experience is easier and more accessible than ever before. Alternative investments that were previously reserved for institutions and the extremely wealthy like commercial real estate, private credit, fine artwork, and farmland are now accessible online at the click of a button. Energy investments, a multi-trillion dollar asset class which offers high cash flows, inflation protection, and portfolio diversification, are now part of this investing revolution. Today’s world of alternative investments has been made possible by the combination of innovative regulation via the Jumpstart Our Business Startups (JOBS) Act in 2013, the fractional ownership model, and the internet. The democratization of investing has made previously exclusive high-value assets accessible to a broader range of investors, allowing for easier portfolio diversification and exposure to non-traditional markets.

What is Fractional Ownership?

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Fractional ownership allows individuals to invest in partial shares of assets. By fractionalizing the underlying asset, more investors are able to participate due to lower investment minimums, and each investor is left with more capital to deploy at their discretion. For example, fractional ownership allows investors to enjoy the benefits of investing in a $100 million commercial real estate building in downtown New York at a fraction of the cost.

How Fractional Ownership Works in the Oil and Gas Industry

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For years, oil and gas firms have shared ownership of their leases¹ to spread the costs and risks of exploration and production. The two primary forms of fractional ownership in the oil and gas industry are royalties and working interests. Royalties are the ownership of a well’s revenues only. Investors who own royalty interests do not bear the asset’s operational expenses. In contrast, working interest owners receive a share of profits. Since working interest owners bear a pro-rata share of revenues and expenses associated with operations, working interests typically trade at higher expected rates of return compared to royalties.

How does fractional ownership in energy assets benefit investors?

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Fractional ownership in traditional oil and gas energy markets lets investors take advantage of the following three benefits:

• Lower Investment Minimums
• Better Diversification
• Higher Tax Deductions
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i. Lower Investment Minimums

Lower investment minimums increase investor accessibility by allowing more people to access the economic benefits of the investment with lower capital requirements.

ii. Better Diversification

Fractionalized investing allows investors to spread smaller amounts across multiple investments, which can increase portfolio diversification. This helps to minimize the impact of market fluctuations or poor performance of an individual asset on the whole portfolio.

iii. Higher Tax Deductions

Another perk of fractional ownership in oil and gas is the tax benefits. For example, intangible drilling costs (IDCs) allow investors to deduct project capital expenditures which investors can use to write-off up to 80% of an investor’s income. Another tax benefit investors can take advantage of is depletion allowances. This form of tax deduction allows for 15% of an asset’s gross income to be deducted from taxable income. Depletion tax deduction will last until the asset no longer maintains positive net income. 

How to Get Started Investing in Traditional Oil and Gas Energy Assets
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At Energia, our purpose is to give more people the opportunity to build wealth by making energy investing more accessible. Our team of data scientists and engineers use the power of AI in our proprietary technology platform to curate energy assets including traditional energy projects like cash flowing oil and gas wells to create better energy investment options. To learn more about energy investing, visit https://www.energia.com/learn.

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¹ Lease/leasehold ownership refers to the rights to explore and extract natural resources, such as oil and gas, from a specific geographic area or leasehold. In the context of fractional ownership, companies sell fractions of these leasehold rights to spread the costs and risks of drilling, exploration, and production.