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On-Demand: Oil & Gas Investing

Nov 3, 2021

In this webinar EisnerAmper & Haynes Boone discuss tax incentives, structure considerations, risk mitigation and ESG implications and planning.



Crystal Shin:Thanks, Bella. Welcome, everyone. Thank you so much for joining EisnerAmper and Haynes Boone today. Again, my name is Crystal Shin, and I'm the Director of Business Development at EisnerAmper.

Crystal Shin:In this session, we'll be covering a few important topics pertaining to the oil and gas industry, including recent tax proposals, tax incentives, as well as environmental, social, and governance also called the ESG implications. Whether you're just beginning to invest or you're a seasoned investor looking to plan for the future, this session will offer proven best practices and the current outlook for oil and gas investing. With all that, let's now dive into our program. First of all, thank you to all the panelists for being here today. And we're prepared for a rich conversation. I like to start off by having each of you introduce yourself and tell us a little bit about your professional practice. I'll start off with you, Richard, and then Michael, then Vicki.

Richard Stepler:Thank you, Crystal. Good morning, everybody. Thanks for joining us today. So my name is Richard Stepler. I am a partner here at EisnerAmper. I lead up the oil and gas Industry at our firm. We primarily focus on tax compliance, strategy, planning. We do wealth transfer, estate planning as well. We often see state international implications. And we do also some outsourced accounting work of our clients. We're primarily focused on upstream and midstream. And that's a little bit about what I do in our group here at EisnerAmper. To you, Michael, I think.

Michael Threet:Yes. Good morning, everyone. My name is Michael Threet. I'm a tax partner here at Haynes Boone. Our practice is primarily focused on transactional work mostly with pass-through entities partnerships and S Corps. Quite a bit of investment funds work in that space as well as a focus in the energy practice group. With both traditional energy sources, oil, and gas, as well as wind and solar. I cover pretty much the gambit of tax issues other than estate planning which I have done in the past and some of the employee benefits type things that would lead to those who are expert in the area. Vicki.

Vicki Odette: I'm Vicki Odette, and I'm a partner at Haynes Boone in the Dallas office, and I am Chair of the Investment Management Group. I work with sponsors on forming investment funds as well as large institutional investors. We have a particular emphasis in oil and gas working with both funds in portfolio companies on a variety of energy related matters, including drafting ESG policies for these funds and companies. Crystal.

Michael Threet:Right. Thank you. Thanks for the intro. Now. Going to our first question, with all the changes that are happening in the recent tax proposal, I assume the attendees here on this webinar are curious to know more about its impact. So that being said, Richard, what aspects of the recent tax proposals has a biggest impact on investors especially in the oil and gas industry?

Richard Stepler:Yeah. Thanks, Crystal. Yeah. This is definitely top of mind. I know I'm personally checking the news flow every day to see what newest come out. I don't believe there's been a new bill released. I think it's imminent any day, but there were some general language released last week on the updated proposals. And in general, the news was that they're looking to replace the rate increases for individuals and C corporations with corporate minimum tax of 15% and surtaxes on very wealthy individuals. The first one starts for individuals at 10 million of income and the second surtax at 25 million of income, and it's 3% and 5% respectively.

For C corporations, it'll be interesting to see how that minimum tax is structured, but it can certainly be a notable impact on the benefit of the IDC deduction such that corporations are likely, in my interpretation, would be only going to be able to expense drilling down to 15% effective rate is what they're going for rather than zeroing out income or creating NOLs, which is often seen in the C corporation context. And for individuals, the surtaxes for very wealthy individuals is certainly going to be a significant impact. Again, I think IDC deduction is front and center when you're talking about the oil and gas industry.

On the one hand, higher rate obviously, is higher tax impact, but on the flip side, I would argue it creates more incentive to drill and generate IDC deductions because effectively you're benefiting at a higher rate and as high as 48% or higher from those drilling deductions. Effectively, you can think of it as the government subsidizing almost half of your drilling costs in a sense to the extent that you can utilize those drilling deductions against ordinary income. The theme and the strategy of drilling to kick the can down the road, if you will, on the tax bill is certainly going to continue to be there. If not, there may even be a greater incentive to do so. Similar when you look at in the midstream side and you think of investors in MLPs or PTPs, the way those investments are designed, as many people probably know they are partnerships. And so you receive a K-1 as an investor in an MLP. So you may see people incentivized to purchase more shares of MLPs to generate more depreciation deductions up front and push that income that's coming through the K-1s further on down the road. It's a common estate planning technique we see with some of our larger investors that have significant investments in MLPs. It's continuing to purchase more to push that income liability further on in the future.

For individuals in C Corps, I think the rate increases at front and center. So those are some of the ways that I would see the notable impacts to the oil and gas side. Just a few other ancillary things I want to touch on, Crystal, here before I pass it off to Michael, the loss of the QBI deduction I think would be also pretty significant for those with income over 400,000, is one of the proposals. So this would affect working interest investors as royalty interest owners currently do not qualify for QBI, but working interest do. So losing that 20% deduction would certainly have an impact.

I'll say I don't advise people to make decisions purely based on tax, but one thought is these MLP investments as I just touched on. Selling a PTP often generates more ordinary income than it does capital gain. And so to the extent your income is over 400,000, one thing I've been looking at with clients is potentially unwinding some of those positions ahead of your end assuming the proposals pass because the QBI deduction does qualify on the ordinary income portion of a sale of an MLP. So getting that 20% benefit on a large majority of the gain before we get through the end of the year is certainly something to consider.

We have a number of investors in the PE sponsored space, companies that are PE sponsored. And so the carried interest rules is certainly something that's come up in discussions. They're looking to extend the carried interest holding period to qualify for capital gain treatment from three years to five years. And then lastly, the expanded net investment income tax for S Corp owners and LP owners to the extent that those owners have been avoiding self-employment tax on the earnings portion in excess of wages or guaranteed payment. They're looking to close the gap on that and apply the 3.8% net investment income tax. So, it certainly removed some of the appeal of an S Corp or an LP structure. It'll be interesting to see the text of that bill because it actually might be more favorable to pay Medicare than it would be a net investment income tax.

So those are those are really, I think, a number of the key points that I see in the earning tax proposals. And again, excited to see the text released as they say, any day now.

Crystal Shin:Great. Thank you for that overview, Richard. Michael, anything you want to weigh in on this?

Michael Threet:A couple of things. One is Richard alluded to, it is a constantly changing landscape. Some folks say it's changing day to day, others minute to minute. There's a lot going on that we know about and a lot that we don't. A lot has happened in the past that we were expecting would come to fruition and just sort of didn't. And it disappeared between the president announcing his budget and then Ways and Means announcing what they were going to do. And then Congress, as they hash things out, a lot of things that you expect will be there and they loudly announced this is coming in fact it doesn't come. That includes some of the rate increases which they'll go out a little bit different way.

One aspect that was out there and I would mention that any proposal that's out there, even if it goes away, and we don't hear about it now, we should expect it's going to come back. That sometimes they roll things out there, because I think it's a good idea where they want to do it sometime. And if you do it enough times, eventually you'll succeed. So most of what you hear is not going to go away. It just may not happen this year or even next year. One of those is the sort of a new rule of sorts that they're looking at, saying that you could not have accredited investor required investments in an IRA. That something that they were saying trying to level the playing field.

Again, take the club to the rich folks. And then I think they've sort of realized that it's really startups that may suffer if you can't invest through an IRA in those because it's a lot of the startups that are not subject to the full SEC panoply of requirements, that they choose to go the accredited investor route. It gets harmed and even some more middle of the road investors who otherwise qualify for it may lose out. And that's something that I think right now they said would be a two year period for selling your investments. That seems a little bit short. And so as that moves forward and whatever comes out of it, that may get stretched out a little bit. But that's the sort of thing that could really affect a lot of oil and gas investments, if folks aren't having to bail out and move to something sort of from investment funds into publicly traded securities that are more, I guess, viewed more favorably by the government as far as which investments should be in an IRA.

They also mentioned in the last couple of days perhaps a methane tax. They might have different ways of describing that, but that's sort of what it is. That if you're producing oil and gas and it's releasing methane, you're going to have to pay this additional tax. And it's not really tied to if you actually are, it's just by the level of production that can be imposed on you. And so there's some murmuring and mumbling complaining about that. It doesn't matter how good you do it, how much improvement you may show, you're still subject to it. And so that's something that they may be rolling it out now. It'll go away, but then it should be expected to come back at some later point in there.

I'll also point out from the oil and gas space in general, that I believe President Biden had announced he wanted to eliminate all fossil fuel subsidies tired of handouts to the big oil companies. Ways and Means Committee came back and sort of said, "No." And effectively did not eliminate all of the fossil fuel subsidies. The two big ones is I think Richard touched on was the effective immediate deduction of IDCs and also percentage depletion. I think there may have been some recognition after the fact that those right now really apply most favorably to the smaller independent oil companies and not what we typically think of as big oil. And so there may have been some recognition that those rules are sort of intended to take the existing more favorable rules and make those sort of what big oil is currently subject to. And so I think there may have been some recognition that you're going to punish the small guys in the name of punishing the big guys. So that sort of went away.

I'd also note that IDC deduction and percentage depletion have both been under, I would say, fairly constant attack on the chopping block for about 100 years and they continue to be with us. They may shift a little bit as to who they apply to and how they apply and modify in some way, but those are still part of it. But also note that the oil and gas industry is generally not reliant completely on those. A lot of the studies that both sides have done have indicated that even if those went away, oil and gas would shift a little bit, but it wouldn't be sort of a game ending proposal, that eliminating those would not crash the oil and gas industry.

Richard Stepler:Crystal, I'll just add one thing on the surtax proposal that's out there. Many people might look at that and think, "Okay. That only applies to a very small percentage of people. I'm not going to worry about that." What I would say is the way the graduated tax brackets are designed for trusts, it's likely that that phasing threshold for trust could be as low as 100 to 200,000. So we need to see what the text comes out with, but there's a good chance we could see a significant number of trust and estate returns that are subject to these surtaxes.

Crystal Shin:Go ahead, Michael.

Michael Threet:I know that proposals have come out have sort of been almost immediately rejected, or scorned, and ridiculed for being overly complex. I think that maybe part of the process is to roll them out and see what the feedback is on them so that those can be fine-tuned a little bit. That there are several proposals that come out and folks will say, "How on earth are you ever going to administer that?" And I think there's also some concern about how folks might respond to it. And the government's always concerned about, "If we do this, what are people going to do to avoid it?" And so I think sometimes they put it out there to sort of smoke that out and see, what would people do if we do this? Because sometimes we all get surprised what the responses to some of those proposals are especially when they get put into play.

Crystal Shin:It seems like there's a lot of uncertainty unknown at this point. So what I hear is that tax planning is key. It has always been key, but make sure you're talking to your professionals, your CPAs, your attorneys. Make sure you have the right planning in place so that you won't be -- you won't have any surprises even though it goes one way or the other. So, Michael, while I have you, what are some of the various tax incentives applicable to oil and gas industry and its current outlook in Washington?

Michael Threet:Okay. We've touched on a couple of those. One is the percentage depletion that allows the smaller operators to effectively take depletion every year based on their sales, 15% based on your sales, rather than the more typical cost depletion that applies to the larger ones, where you take how much by units you sell that year and how much you have still in expected reserves. Take depletion that goes to zero, percentage depletion can actually go above what you actually paid for it and continue to take that deduction, but that's one of the big ones. It's very useful for the smaller startups especially, we call it mom and pops. That percentage depletion is very important to them. It has been with us a long time and gets carved down, but again it applies more favorably to smaller non-integrated producers than it does to the larger integrated producers.

The immediate deduction of intangible drilling costs, which pretty much covers everything to get ready that's not depreciable. If it doesn't have any salvage value, which includes all the services, and labor, and fuel, supplies, chemicals, that sort of thing, getting ready to drill. Those would be immediately deductible. For the larger producers, they can deduct about 70% and then they have to take that over five years for the rest of it and amortize that. In a percentage depletion, the proposal I think was to make everyone go to cost depletion and just eliminate it. So make everyone be treated like the big guys. On the IDC deduction, same thing. It was to take it to conform it to what all of the large producers are required to contend with. It sort of apply the same rules to them.

One that gets mentioned quite a bit sometimes the revenue impact of it is not as great. But one that's really helpful to a lot of folks, as Richard touched on, are the publicly traded partnerships or MLPs that are large. They look an awful lot like a corporation that are publicly traded, as the name suggests, out there. However, they are treated as partnerships because of the particular industry they're in, that this covers development of natural resources and processing, refining, that sort of thing. That they've got specified industries. And I think the history of that was certain industries, when they were talking about making these large partnerships that they say looks suspiciously like corporations being publicly traded and they're saying, "We're going to tax those as corporations." I think the lobbyists said, "Well, it's really not fair to these folks who've been in this form of business historically. They're not doing it to avoid taxes necessarily. It's just the way they do business." And so there are special specified industries related to natural resources that are allowed to continue to be treated as a publicly traded partnership.

That's one that gets mentioned as one of the benefits that oil and gas has that should be taken away and they propose it with a somewhat regular basis to eliminate that and say that natural resources partnerships cannot be treated as publicly traded partnership and exempt and treated as a partnership for tax purposes instead of a corporation. But it continues to survive partly because there's a lot of folks who are very much invested in that in the way it works. Up in the industry, you've got a lot of expectations, you've got a lot of retirees, other folks who are invested in MLPs because of their regular cash distributions, that sort of thing. So I think that's something that gets mentioned, but it would have an awful lot of ancillary consequences to suddenly say, "Okay. Now you're going to be taxed as a corporation." That's something that they've so far not chosen to do.

There're also some credits like the enhanced recovery credit where you're injecting steam and chemicals, that sort of thing, to sort of beef up, as you would say, enhance the ability to recover oil and gas from the ground. That's something that gets attacked periodically and some folks use it. It really only kicks in as prices are lower. Right now, that's not the case. Similar to that is the marginal well credit. Again, a tax credit. And that's something for really small wells that aren't producing very much. Again, it kicks in at the lower price per barrel. And that's one that gets some pushback because they say, "If you don't have this credit to encourage folks to continue to exploit those wells, they may just stop plug it, abandon it, and now you've got an awful lot of wells out there that aren't doing anything. So it's probably good to encourage folks to continue with those wells. And that's what those credits do, whether they get used a lot or not.

And then finally, one that's sort of integral to the way things work is the treatment of working interest as non-passive. So that if your income from a working interest gets treated as active income, it can be offset any deductions there against your other active income. That's one. It doesn't necessarily generate a lot of revenue, but it's important to folks and sort of their mindset and thinking. And if they were to eliminate that, I think a lot of rethinking in perhaps shifting around would occur to take into account that it's being treated differently.

Arguments sort of both ways about why that's a good or a bad idea, but that's something that's out there as well. And in addition to these, there's sort of the typical tax benefits breaks or the way it works of depreciation on your equipment and those sorts of things. Some things get spread over a couple of years, some things are immediate. There's just a lot of rules there. I would add there that while some folks refer to these as huge tax benefits and just the outrageousness, I've heard both referred to as tax dodges which doesn't really take into account the fact that you're already out of pocket for the money. And the appreciation and these things that spread it over anything other than immediate deduction has caused you to spend money that you're not getting a deduction for in the current year. And so to the extent it gets spread out any, you're kind of behind where you might otherwise be. And that's why there's always sort of an undercurrent of folks saying whenever these sorts of things come up about carving and back is, "Hey, why don't we just go to immediate deduction for everything across the board since you're already out of pocket for that?"

Crystal Shin:Great. Richard, anything you'd like to add?

Richard Stepler:Yeah. Thank you, Michael. I think you did a good job covering all the main points. So I'll just touch briefly without being repetitive and focus more on my perspective on the outlook. As Michael suggested, I think there's a lot of heated dialogue in the media when these tax provisions come up to suggest that there's these overly generous provisions to benefit oil and gas. And certainly there are, but as Michael suggested, generally most of them benefit the smaller tax payers more so and particularly the percentage depletion. That's the only example I can think of maybe others where you can take a deduction in excess of the amount you actually paid for a property. But again, it doesn't come into play for the bigger companies. There's a phase out. Yeah. I think it's greatly exaggerated some of the dialogue that's out there. If you put numbers on some of these the IDC deduction, they're suggesting repealing that completely would generate 14 billion over 10 years, percentage depletion, they've thrown out a number of 11 billion. So, you add up the big two or 25 billion over 10 years and compare that to the price tag that they're talking about with some of these bills at 1.75 trillion, they've suggested allocating 80 billion just to the IRS to increase enforcement. So 25 billion is a very small number in terms of what would be raised from these repealing these oil and gas provisions.

Yeah. I think it fits with the climate agenda, it fits with what the particular Democratic Party is looking to do. As Michael said, it's nothing new. It's these ideas of repealing these provisions that have been out there for a long time. President Obama had a supermajority in Congress, and they wanted to repeal a lot of these, and they still weren't. So there's quite a few Democratic senators and House members in big oil states.

I'd say inevitably, there probably will be some change, some phase out, some repeal over time, but as we know, this is not an energy switch, it's an energy transition that's happening and it's going to take some time to really have some moment in this area, especially when the revenue raised really at the end of the day isn't that significant compared to some of the other proposals. Last thing I'll say, some of these more ancillary credits that Michael touched on the marginal wild credit, the enhanced oil recovery credit, those can be pretty significant. You all say the marginal well credit in 2020 could be as high as $4,300 per well. So if you're talking about a couple 100 wells, I have one client that benefited over 120,000 from that credit in 2020. And the enhanced oil recovery credit is based on the prior year prices. So they've already announced it for 2021. It's fully phased in, if you will. It will apply for 2021 even though prices have taken off as we've seen in 2021. So that will continue to be a benefit for the 2021 tax year. I've seen some notable benefits for taxpayers on that credit as well. And both can be taken on amended returns. So it's always something to be thinking about and looking at even if it's been missed in a prior period.

Michael Threet:Richard, I'd also follow up there. Keeping in mind that everything that's pretty much in the tax code is in there for a reason, that somebody thought that was a good idea at some point. And a lot of it has to do with what are you trying to encourage? That they say if you want more of something subsidize it, if you want less, tax it. A lot of these tax credits came in at a time when it was really, really important. It may still be useful, but perhaps the behaviors that are being encouraged are not behaviors they want to continue to encourage and therefore it may go away. And that's something that I think we see a lot with the tax code and its use, some would say misuse, is that different industries, different investors, different sort of retirement plans, some are favored and some are disfavored over time. I think it was the 86 Act that decided that real estate had had it good for long enough and sort of kneecapped them, and we saw some of the fallout from that.

Right now, oil and gas is probably not a favorite industry. Some of that stuff may be getting carved back. High net worth, high income individuals and investors are not favored. And therefore, some of what they get carved back. And that's what some of the changes that get applied may, as we've seen here, apply to high-net-worth individuals or a high-income earning individuals at least initially. That may come back down once they've sort of got the camel’s nose under the tent. The rules are in place. Now we'll just decide who they're going to apply to. And we've seen several of those provisions, I guess, where they've said, "The rule is still in place. However, it's only going to apply to folks making less than 400,000 a year or this rule will apply to those making more than 400,000 a year." And that's certainly a threshold that can be changed, but that's where again, things develop. And it kind of depends on who's favored or disfavored at a particular time as to what's going to happen.

Tax rates are always subject to change. The general expectation is they're going to go up. And even from the global picture of tax rates up and how much money we're going to get from this and the other, you also have the various communities corporations versus partnerships, for the most part, saying, "Those guys are getting too much benefit. Why can't you put the screws to them a little bit more and make our lives better?" That's where some of the things have come in to sort of equalize the playing field between corporations and partnerships.

A lot of what those communities do is talk about the other community, and how much better they have it. Why can't you treat us at least as well as you treat them? And so that's why a lot of these proposals have been out there a while, they will continue to come back whether they get put in place this time. And even things that are out there may get modified, carved back, or otherwise changed to get something passed because a lot of these, from Congress's perspective and the folks who are putting that, some of it is very much values driven. We're trying to cause certain behaviors. We want less oil and gas drilling to protect the environment and so they're pushing for that. But sometimes also, it's just a number and I think Richard touched on that. They know how much each of these proposals is expected to raise or cost. And so they plug in sort of modules. Here's what we need to get it to add up on both sides. And they do that. So some of it is less values-driven and more purely financial. Okay.

Crystal Shin:Great. Michael, let's talk a little bit more about the different types of investments. So what are some of the different ways for someone to invest in oil and gas and why might someone choose a particular type of investment over the other?

Michael Threet:Starting off, just a quick overview of sort of the industry, and I think Richard touched on this as far as where EisnerAmper generally focuses in the industry. I just generally thought of as having three segments upstream, which is exploration and production, which a lot of folks when they think of oil and gas, that's kind of what they're thinking about. It's rigs, and sweaty guys out there, and things exploding, and a lot of excitement, and that sort of thing. And that's where it can really be feast or famine. Thugs make fortunes and lose them out there in sort of the exploration and production segment. That's where the real glamor and excitement is. If you're thinking John Wang, he's going to be exploration in production. And that's the upstream.

Midstream is more of the pipelines. You have trucks, storage facilities, that sort of thing. It's sort of taking it from out in the field back to civilization and to get it refined and get it sold. And that's sort of the midstream. And then the downstream is retail, wholesale, those kind of folks who are sort of getting it out to the public during the refining and then sending it off where it needs to go to get it sold. And then there's sort of the integrated which is, companies, which is what oftentimes you think of the really large ones that they've got their exploration, arms, and then they've got trucks usually that will move it around, and then they'll may even have retail stores. They usually move in and out of retail when they realize that may or may not be where they want to be. But that's really sort of the integrated. That cover a lot of these and can do it economically for themselves. By not having different segments, they can control it all themselves.

Sometimes it's a bit more difficult to keep all of those segments moving in the same direction, but they still can. And then there's also sort of this other oilfield services part of it that does a lot of the manufacturing of parts, and pieces, and equipment, and also does sometimes things out in the field to aid it. So they're not directly affected by oil and gas and a lot of the oil and gas tax rules, but they are affected by the industry. And for some folks that's sort of an alternate investment that tracks generally what's going on in oil and gas, but it's not only gas, it's a little bit more derivative of that. And then as far as the types of investments we touched on, the first one you often think of is publicly traded stock. Very easy to get into, low cost to get into, very liquid, you can sell it anytime. The risk is spread among many assets. You've got a liability shield because you're in an entity with limited liability. The SEC has a lot of oversight. And so the chances of something getting horribly out of whack and somehow getting oppressed by those in charge is somewhat reduced. It's not reduced to zero, but the SEC puts a lot of effort into oversight of corporations, the big ones.

Whatever tax incentives they are, as an investor, you only get the indirect benefit of those, thus the corporation that's going to take those and then whatever comes out of that. And as with any large public company investment, there are a lot of other factors that go into it beyond just the oil and gas industry and sort of the tax rules. There's a lot about that ebb and flow. One of the keys that a lot of folks find attractive is the simple tax reporting. You get a 1099 from the companies that you're invested in. And that's pretty easy to carry over to your tax return. And one sort of derivation of this, I guess, is also mutual funds, which are effectively a collection of publicly traded companies. And so rather than just having to invest in one stock or a couple, you can effectively invest in a lot of stocks and get much the same benefits. With tax reporting and that sort of thing, just you get sort of an extra layer and you have someone there sort of helping you choose which stocks to invest in once you've chosen what your mutual fund or exchange traded fund is going to be.

Another really big area of investment are investment funds. Generally not as big as a publicly traded companies. They'll focus on fewer assets, but still generally multiple assets, you've still got the liability shield because you're in an entity, you still have some SEC oversight. It's a little bit different. And this is where you get into the accredited investor issues that if you're accredited investor, you're considered to have enough knowledge, wealth, income, that the SEC is not going to look out for you quite as much. And so some of the compliance costs insider less and your ability to influence is a little bit different. It's ordinarily somewhat illiquid. They usually do have some liquidity to them, but it's certainly not like a publicly traded security that you can get. Here the tax incentives are more directly tied to you. And so they make their way to you fairly directly. Tax Reporting is very complicated because you have a K-1, but you do get a single level of taxation there.

We touched on before the MLPs, which are sort of a combination. They're still a partnership and they get all the benefits of a partnership, but they also get the benefits of liquidity, and public trading, that sort of thing. They look a lot like a corporation, but they in some ways feel a lot more like a partnership, which is how they are taxed, usually regular distributions. So you're getting money out of it pretty regularly, and that's what makes it attractive for a lot of folks. And then finally, you have sort of direct investment in wells or drilling programs, those sorts of things, which are much smaller. It may be conducted through a partnership or you may have a limited liability entity that you used to invest in these. These are generally the riskiest way to go. Fewer assets, but as some folks say, no guts, no glory.

Again, this is more likely where you're going to see fortunes being made and lost when you get closer to it because you've got so much more at stake and fewer to send that out to and just spread that across. These are generally illiquid. You do get sort of the more direct benefit of the tax incentives. Back to the more complicated Schedule K-1, but you do get a single level of taxation. So that's what lays out in my mind, sort of where the choices are, and some of the pros and cons, or at least the features of those are.

Crystal Shin:Perfect. Thanks for the great summary, Michael. I think we're going to now switch gears a little bit. So we've been talking about the recent tax proposals, tax incentives, the different types of investments, and different ways of investing in oil and gas. Now we're going to shift it a little to the ESG portion, where I know it's one of those hot topics, environmental, social, and governance. You hear it at every other oil and gas conferences and all that. Vicki, I know you're very involved in the ESG initiative. So how do you determine if a company is committed to ESG? And what type of due diligence can you do as an investor?

Vicki Odette:Sure. So in the public company space, it's pretty easy because public companies have prospectus, they have SEC filings, they do quarterly reports, there's brokers who have different software that they use to determine how folks are doing, even Morningstar publishes ratings on ESG. But when you're dealing with a private company, it can be a little bit more challenging. And so typically, what you would do is ask them what is your ESG policy? Is there anything on their website that discusses it? Do they incentivize their employees by providing bonuses or something of that nature for achieving ESG goals? You can also ask if there's some reports that they'd be willing to provide to you to show you what they've done or give you specific examples. For example, we exclusively used electric fracking fleets, we reduced our emissions by X percent. X percent of our workers are female or diverse. We donated X to charity, we decreased our skill rate by x. So have them give you some pretty specific examples of those kinds of things that will be helpful for you to make your determination whether it really appears like it's something they really care about or whether it's just kind of lip service.

Crystal Shin:That's a great point. Richard, anything you would like to add on to this?

Richard Stepler:Yeah. I'm just going to expand a little bit on Vicki's point that I think you do see a lot of window dressing out there, if you will. It's a hot topic. Everybody's talking about it. So everybody's adding a tap to their website for ESG to jump on the bandwagon, if you will. Certainly I feel confident the more I hear about ESG in 10 presentations that it's a hot topic, but I'd say it's certainly not a fad. I don't I don't see it going anywhere. I think it's going to develop more over time. There's been a lot of discussion about the SEC getting involved writing regulations. And just from an investor side and the younger generation, this is something that is important to people and will continue to be important going forward. So I've heard both sides.

Barbara Corcoran, one of the sharks on Shark Tank, gave a presentation to our firm. She was a little bit more dismissive, but she did feel that just shouldn't be more altruistic than you can afford, I guess it was her point, especially in the startup phase. Focus on your business and achieving profitability before you venture too far into the space. So I think that's smart. You want to be responsible about how much you make it a priority in your business, but at the end of the day her point was there'll always be a time for being a good steward to -- I mean the environment is big, obviously, for oil and gas, but you can't overlook the social and governance factor of your employees and your business structure.

Vicki Odette:I'd like to add that we did a deep dive of 30 mid-size public oil and gas companies to see what their ESG policies were and what kind of things they were implementing. I'm happy to share that with anyone who would like a copy of it to see because what the public does will guide you as to what private companies are looking to see what should they do to prove up their ESG strategies.

Crystal Shin:And talking about ESG strategies, Vicki, I'm curious to hear what actions are you seeing in oil and gas companies to be friendly with ESG?

Vicki Odette:So we're seeing companies really focused on becoming carbon neutral. And that's where the admissions that they cause are balanced by an equivalent amount of carbon savings. Now, typically, people are doing this through buying carbon offsets or carbon credits. And those are generated from funding renewable projects to do things like build wind or solar farms. Anything that is going to reduce carbon emissions. There's more just mundane things like planting trees and et cetera, but there is a big market out there for these carbon offsets. They're also doing things like cutting their methane admissions, cutting their flaring, cutting the carbon intensity of their products, and they're also trying to cut direct admissions. They're focusing more on natural gas, biofuels, and electricity, they're purchasing more energy efficient equipment, they're trying to go into more energy efficient buildings. And one of the real keys is technology. There's some really great technology out there that is designed to help energy companies become more efficient in the fuels that they create to become cleaner. And so I think that's where some of the hot investing is going to be in the future is in the technology associated with ESG.

Crystal Shin:Yes. Definitely, on the technology side, I don't think it's going away. It's always going to be there in various aspects of the different industry, but especially in the oil and gas. That being said, Michael, anything you would like to add on to this?

Michael Threet:A couple of things that I had heard recently was some gas company trying to move toward an all-electric truck fleet. That's the sort of thing that you can hold out there and look what we're doing to do it. And so a lot of, as Vicki touched on, are moving toward adding alternative energy. Some because they thought it was a good idea, some because they got some folks on the board elected who said, "We think you should not be in the oil and gas business. You should be in the alternative energy business." And they start moving toward that. And so there's a certain sense that you get inoculated and it's certainly a positive when you do the alternative energy. As that moves on and folks who are looking at it closely start to see these things, but one of the things I think some oil and gas companies are doing indirectly is also pointing out that, hey, alternative energy is not a perfect answer either. They may be better than us, but they still have some problems like with the wind farms and solar farms.

There are a lot of bird issues with those that can be a little awkward and uncomfortable. The scenic putting wind farms, solar farms at what were previously scenic vistas can get some pushback and that sort of some negative points there. And then you look deeper at some of the components of these alternative energy sources. Maybe, I guess, manufacture with forced labor. And that sort of gets you a negative social score. The environmental impact of manufacturing, some of these they're using a lot of chemicals and metals that can be an issue as well as the cost of disposal of some of these. There's an awful lot of windmill blades that are gone after 10 years. I think they've gone now to oftentimes pulverizing those and putting them in as concrete filler. There's a lot of dangerous chemicals, metals, that sort of thing. And just the disposal of that much stuff can be an issue as well.

Sort of related to that, as you move toward electric green cars, there's a lot of batteries involved there, a lot of metals, chemicals, a lot of mining to take place to cause this to happen. And then you've got a lot of batteries that when they reached the end of their useful life have to be disposed of. And that's why with some of these, there's additional, more advanced calculations and wide ranging showing that some of the green alternative energy sources may have a larger carbon footprint than first realized or acknowledged. And so I think some of the oil and gas efforts aren't showing. We're not as far out of the mainstream as you think. And also I think they tried to do a better job of getting the story out about here are the things we are doing, here are the things we've always done that they hadn't previously put a lot of effort into thinking about sort of the public relations aspect of it and getting it sort of out there.

I think there's also some movement toward the more they can get laws, guidelines, expectations, development, that developed so that everyone sort of moving that direction I think they feel that it makes their lives a little bit better. I think, as Richard touched on, you have to realize your business first and don't be more altruistic than you can afford. And so I think there's a certain aspect of, if we can require everyone to be as altruistic as we are, it won't put us at a competitive perhaps financial disadvantage if everyone's going to be subject to those same rules. So there's a certain sense of making it, if not required directly, but sort of indirectly because this is the industry standard and you try to get everyone to, in some way, suffer as much as you do and be subject to those same requirements and expectations.

Crystal Shin: Yeah. I believe there's a lot of different frameworks for ESG at this point, but I won't be surprised if we don't somehow consolidate or come to a consensus together. Like you've mentioned, industry standards. I think that'd be very helpful for all the companies to succeed on this ESG initiative. That being said, to bring it home, here's my last question for all of you. If there was one piece of advice you can give to an oil and gas investor who's planning for the future, what would it be? I'll start off with you, Michael, then Vicki, then Richard.

Michael Threet:I would say study hard and really polish up your crystal ball because there's just so many issues that nobody knows how it's going to turn out. If you look back a couple years, how much different it is now. You've really got to think hard. And I would say, look to as much, talk to as many people as you can to get a sense of which way it's headed and how you might best take advantage of that.

Crystal Shin:Sweet. Vicki?

Vicki Odette:I think people sometimes assume that ESG is not profitable. And I think that's actually not a correct assumption. So don't discount companies, particularly oil and gas companies who say they're ESG friendly because they are focusing on a lot of the technology, which as I previously stated, I think is going to be one of the real keys for investing in the future. It's looking for these companies that can actually turn dirty water clean easy, quick, efficiently, clean air, that create efficiency in equipment in buildings and operations. So I think there's a lot of exciting investments out there. And I wouldn't shy away from me ESG as being not as profitable.

Crystal Shin:Great. Richard?

Richard Stepler:Yeah. Probably I don't need to tell this audience, but it's a supply and demand industry. So prices are constantly fluctuating. We've seen it go from negative prices a year and a half ago to where they are today. I caution anybody to jump in with two feet at any one time. But more importantly, as I said before, we wouldn't make decisions based on tax, but it's a constantly evolving landscape, as Michael touched on. While the incentives have appeared to be going through these proposals unscathed, if you will, they're going to continue to come up. So I think it's just important that again, you don't make decisions based on tax, but it's definitely important to have some tax years at the table to make sure that you're taking advantage of what you can and staying on top of the changes.

I also think it's going to be interesting to see, as I alluded to earlier, with the currently 80 billion allocated to the IRS and the proposals. And what that does to enforcement I saw an article last night from Dave Carter, the former IRS commissioner, who suggested that that is too much money to give to the IRS that they can't handle that much. And so I thought that was interesting perspective. But he did say that in about a year, he'd expect seeming things go through, that we should expect to see a pretty substantial increase in IRS audits and in about 18 months. It takes some time to train their people, hire people, and so forth. So knowing how fast the IRS moves these days, I wouldn't be surprised if it takes longer than that. Anyway, I just think it'd be interesting to keep an eye on how the IRS evolves, especially with the current amount that's been allocated to beef up their operations.

Crystal Shin:Great. Thank you so much. I really enjoyed our session today. And I learned so much about it. So thank you to all the panelists. And thank you everyone for joining us today. With all that I'll hand it over to you, Bella, now to wrap it up.

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Richard Stepler

Richard Stepler is a Partner in the Private Client Services Group and leader of the Oil and Gas Services Group.

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