Imagine transforming your financial landscape by strategically navigating tax brackets and maximizing returns. By optimizing your investments, you can discover how understanding the complicated parts of your tax situation can be the key to unlocking unexpected financial benefits and achieving your wealth goals.…

In this episode Tim and Greg along with their guest, Don Hosmer, discuss how you can gain passive income through an investment in the oil and gas industry. They explain how you can reduce taxes through such an investment, how the industry has evolved through the years, and also warn about the downsides of taking the risks of being in the business.

They also highlight the importance of having a consulting professional who can help you diversify your investments to help mitigate risks.

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5:55 Tax Benefits of Investing in Oil and Gas
11:13 Passive Income Using Oil Investment
16:07 Oil Drilling and Investment Opportunities
21:17 Investment Risks
27:13 Tax-free Wealth
31:13 The Importance of Diligence in Investing
35:57 Why Education is Vital

Tax-Free Wealth by Tom Wheelwright

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Full Transcript

Don Hosmer 00:00
So in some cases, that’ll put you in a lower tax bracket. But in any case, it will give you a, whatever your tax bracket is, you know, if it’s 30%, then you’ll get 30,000 back on 100,000. And then if your state taxes, you know, 10%, you get another 10,000 there.

Don Hosmer 00:19
In fact, we had guy, Mike Weaver call me in May of 2021. And he had just gotten a stimulus check for for $1,200. And he said, I called my CPA and I said, How did I get a stimulus check.

Don Hosmer 00:34
And his CPA told him that your royal investment, hit reduced your adjusted gross income below $75,000. And so that generated a stimulus check.

Greg Lyons 00:47
Welcome to the Passive Income Brothers Podcast.

Tim Lyons 00:50
Here, we take the fear out of real estate investing, using real life stories of everyday successful investors. Let’s go. Welcome to another episode of the Passive Income Brothers Podcast.

Tim Lyons 01:00
My name is Tim Lyons. And like always, I’m joined by two absolute rockstars, one of which being my brother, Greg, how you doing today, buddy?

Greg Lyons 01:07
Tim, it is a great day to be a passive income brother, that is for sure. And I know that today, we have an absolute home run of a guest can’t wait to kind of dive into something a little bit.

Greg Lyons 01:22
A little bit kind of newer for our listener. But another way to earn that passive income 100%.

Tim Lyons 01:29
So a couple of weeks ago, my partner Paul and I, our partner, Paul, and I took a trip to the New Orleans investment conference, which is the longest running investment conference in the country.

Tim Lyons 01:41
And I want to say, Don, it was 49 years, but so next year will be 50. Right? So they were they were making a lot of hoopla about that. But that’s right. It’s, as a real estate investor, we tend to go to real estate conferences, you know, not always coming out of our comfort zone.

Tim Lyons 01:56
And the new will New Orleans investment conference really opened my eyes because there were a ton of oil and gas providers, minerals, you know, copper, gold, silver, micro investing, I mean, collectibles.

Tim Lyons 02:13
I mean, there were so many different, you know, operators out there, that was really outside of my outside of my comfort zone. So I got to meet our guests today.

Tim Lyons 02:21
And I said, you have to come on our podcast. So I’m really happy to introduce to you from Royal Energy. Don Hosmer. How’re you doing today, Don?

Don Hosmer 02:30
Good. Thank you, Dan. Great.

Tim Lyons 02:32
So Don was nice enough to entertain my big ask to come on to the podcast. But I really thought it was powerful. Because you know, he I went to one of his presentations, you know, they have these breakout rooms where some of the operators can then really kind of drill down in a smaller setting about maybe an offering that they have or a project they’re working on, or just a maybe an overview of the company and I had a chance to sit with Don and his team over at Royal and I was blown away.

Tim Lyons 03:03
And you know, Don, being from New York, everybody’s guilty till proven innocent, in my mind is something I have to work on. Right. So oil and gas to me didn’t make a lot of sense until I sat in on your presentation. So, you know, let’s take the listeners on a journey here today. Why don’t you give him a little bit about your background in the oil and gas industry? And then we’ll jump into like, you know, some of the mechanics of how it works.

Don Hosmer 03:27
Sure. Thanks, Greg. Yeah, that conference that we were at there at New Orleans is our first one was 1986. My father and I attended it. And so we’ve been presenting at that conference now for more than 30 years. And so long time they’ve been there. 50 years we’ve been there. All but about 15 of it. But yeah, I got into the business back in 1985 was working, going to college working at Cox Broadcasting.

Don Hosmer 03:58
My father had been a real estate developer, and kind of semi retired and he was doing some investing with David Hall, the former governor of Oklahoma, and they had put together a for well project and some of the financing fell through. And so they had already moved the rig in and we so he called me up and I went out and found the money.

Don Hosmer 04:23
Got some of the managers there at work and some of my friends and we put up the capital at the wells four Wells came in. We the first year we got about 50% of our money back in cash float plus 50% Back on our taxes. And so it was such a fun experience that quit my job and finished up school and been doing it ever since. Back my father and I formed royal energy and brought in our own geologists, our own engineers, and started put doing our own deals together. So we’ve been doing this now for 36 years.

Don Hosmer 05:05
Back in the early 80s 70s, and 80s, you know, the tax rates were higher than 50%. I think at some point, it was about 70% tax rate. So everybody was using the real estate partnerships in oil and gas partnerships, as deductions to try to offset those exorbitant tax rates. And then Reagan came in the Reagan administration. And through the Tax Reform Act of 1986, they dropped all of the tax rates, down to a top rate of 28%, which everybody loved. But at the same time, they got rid of all the deductions, they made the real estate partnerships, oil and gas partnerships, passive income, the passive loss rules. And so you could only use those partnerships to offset partnership income. But what they did at that time is they exempted the working interest form of ownership from the passive loss rules. And so that was a real gift to the oil and gas industry.

Don Hosmer 06:13
You know, Bush, from Houston, was his vice president and a lot of oil senators. And so they exempted that working interest from the passive loss rules. And so this gave a great opportunity for investors to take that working interest form of ownership and deduct it from their active income. And really, it’s the way oil and gas men, you know, invested for years, it’s buying an actual ownership in the well itself, if you buy 1%, it’s just like buying a 1% undivided interest in a property or real property.

Don Hosmer 06:52
And it was only in the 70s and 80s, that the, the brokers came in and formed these partnerships and bought the working interest and wrapped them in a partnership. And so what we do is we just leave off the partnership. And so you don’t have all that GNA, general administrative, you don’t have the management fees, you don’t have, you know, a back end from the general partner, it’s just a much cleaner, more direct form of ownership.

Don Hosmer 07:21
And then you get that full tax benefit as well, that can be used to offset ordinary income capital gains, any kind of taxable event can be offset with the working interest for ownership.

Greg Lyons 07:33
You know, Don, it’s, I think you’re speaking a lot of people’s language, cash flow, tax exemptions, you know, all things that real estate investors are, understand and look for in a deal. But I think we’re gonna have to call a timeout, because I think you need to bring it all the way back to say, Hey, I am John Q investor, I have no idea about oil and gas, how do I get involved?

Greg Lyons 08:00
And how does it work? You know, so when I say here’s my $50,000, what happens with that? $50,000? Are you looking for land? Are you looking for? Is it more of like exploration? You know, because there’s a lot of terms out there, like Wells, end exploration and production, and all sorts of things that that I would say, our audience is not quite familiar with, where there’s opportunity, I think there’s kinda like the 101 that we need to understand about wells and exploration and those sorts of things. Could you walk us through just kind of what happens when you get when you raise funds for a new project?

Don Hosmer 08:39
Sure. Well, we’ll never put anybody in one well, because, you know, oil and gas is still a risky enterprise. And so we’ll always do multiple wells, and in always in a proven area, and using 3d seismic and good well control to mitigate that risk. And so, so they would be investing in at least three wells or more, and this diversifies the investment and spreads it out and gifts, lower risk, then, so they would invest a working interest they’d buy, you know, 1% working interest in three wells.

Don Hosmer 09:22
And then that investment is 80% intangible drilling costs. That’s all your vendors, your drilling rig, all your non tangible costs going into drilling that well, so that 80% of intangibles you know is 100% deductible the first year. Then the other 20% is after completing the well to your wellhead, anything you can touch your kick, you know, your pipes, your wellhead, any of your equipment.

Don Hosmer 09:55
And so that normally is depreciated over five or seven Your period, but under the tax cuts and Jobs Act, that became bonus depreciation. And so you can take 80% of that this year. And so the 80% can be deducted right up front instead of depreciating. Then there’s also the Section 179, that’s also been enhanced under the Tax Cuts and Jobs Act. And that can take you up to 100% of your equipment, property and equipment.

Don Hosmer 10:30
So you can literally deduct 100% of your investment the first year, and that goes on your schedule C, it’s a standard Schedule C business deduction, because it’s an active write off, you know, even though it’s a passive investment, you’re deemed to be in the oil and gas business. So it’s an active business deduction. So that comes from your schedule, see right around to the front page, and it reduces the adjusted gross income by the amount that you put in. So in some cases, that’ll put you in a lower tax bracket.

Don Hosmer 11:04
But in any case, it will give you a whatever your tax bracket is, you know, if it’s 30%, then you’ll get 30,000. Back then 100,000. And that if your state taxes, you know, 10%, you get another 10,000 there. In fact, we had a guy, Mike Weaver, call me in May of 2021. And he had just gotten a stimulus check for for $1,200. And he said, I called my CPA and I said, How did I get a stimulus check. And a CPA told him that your royal investment had reduced your adjusted gross income, down below $75,000. And so that generated a stimulus check for you.

Tim Lyons 11:48
So want to call quick timeout right here Don. Because that is so powerful, right? I mean, we are not CPAs, Greg or I or Don, but if you listen to Don, if you are, if you’re driving, I want you to pull the car over and get a notebook out and start taking some notes, right, because in the real estate world Don, you have to be called what’s called a real estate professional in order to use the depreciable losses from your Schedule K-1, right up to an including, you know, your active income.

Tim Lyons 12:17
And if you’re not, if you’re not a real estate professional, you can only use the losses on your passive income. But what I’m hearing you say is that, say you invest $100,000, for example, that $100,000 could be deducted from your active income, because it’s a Schedule C, active write off on a passive quote unquote, passive investment, but because of the way the rules are written in the IRS code, we’re just aligning ourselves with those rules. So that now you can take that deduction off your active and passive income is Do I have that right?

Don Hosmer 12:56
Yes, that’s correct. Yeah, it’s exempt from passive loss rules. Yes.

Tim Lyons 13:02
So yeah, so like the listeners real quick. I mean, like, if that if that resonates with you, if you’re a high earner, if you had a liquidity event, if you had a sale of a property, sale of a business, and you’re looking at a pretty steep tax bill this year, for whatever reason, I mean, it may behoove you to hop on a call with Don, if oil and gas sounds good to you.

Tim Lyons 13:25
But also talking to your tax guy or tax girl, you strategist, right? I mean, this is why don’t we always talk about on this on this program, we always talk about aligning yourself with a good team, right? And a part of that team is a good CPA. And I say until blue in the face, right?

Tim Lyons 13:38
CPAs are not created equal. Right? If you are working in real estate, and you have a real estate centric CPA, they may have no idea how the oil and gas world works, right? So it’s important to align yourself with those folks that understand alternative investments, oil and gas, real estate, business ownership, farming, whatever it might be. Because at the end of the day, if you broke your ankle, Don, you wouldn’t want to go see a neurosurgeon.

Tim Lyons 14:05
Even though he has MD next to his name, right? You’d want to go see the ankle specialist because he also has MD next to his name. And it’s the same thing for the CPAs. So really, really powerful stuff done besides the tax benefits. What are some of the other benefits of working with a company like yours who are drilling in multiple sites?

Tim Lyons 14:25
In proven wells, right? Proven? I want you to go into two things. How do you do the site selection and the proven area like the 3d seismic some of the geologists that you work with, and then how does that translate into passive income for the investors?

Don Hosmer 14:43
Well, so to talk about the specifics of a project, we’re in one of the most exciting projects I’ve been in, in my career. We, you know, because of the environmental and social governance, a lot of funds are not investing in oil and gasps and so that’s left a lot of opportunity for smaller independents and individuals to come in and fill that capitalization. But Bob dimmit was drilling some shallow Devonian wells, just outside of Midland, Texas, and they play just really came around him.

Don Hosmer 15:22
But they’re now drilling. What used to be one stage fracks, they’re drilling 58 Stage fracks on these wells and getting extremely high rates. And Exxon is to our north and just acquired some more acreage to our south. Occidental just drilled the two pelo well, just two locations away from our Terry well. And so the majors are drilling all around us continental just came in and acquired 12,000 acres and drilled two wells.

Don Hosmer 15:54
But the entire play has at wells with no dry holes, and Royals drilled five of those, and all of them between 800 and 1000 barrels per day. And so this is why the majors like it, because you know, it’s a continuous accumulation, they find oil every time. And they know what their costs are. So the only risk is what is the variable price of oil, just like manufacturing, they can just line them up and drill. So we’ve drilled five very successful wells. And we’re getting ready to drill three more, we’re just now finishing the funding of that. And so this, this is a horizontal shale play.

Don Hosmer 16:39
And it’s designed to go 10,000 feet laterally into the Mississippian line formation. And so in the old days, they would just do a one stage frack across that 10,000 feet, and the pressure would dissipate. And you know, they’d get a limited amount of fracture into the rock. We’re trying to frack, crack open the rock, put a propellant in there, or a proppant in there to hold that crack open, and then the oil comes flowing through there.

Don Hosmer 17:12
But what they’re doing now, Greg and Tim is they’re going every 200 feet through that 10,000 feet of pay zone. And they’re fracking that 200 feet, so you’re getting a much stronger frat that can go several 100 feet in each direction. So you’re getting much higher rates, much bigger oil reserves, and very low risk for finding oil, because of the continuous accumulation.

Tim Lyons 17:42
So real quick, I just want to make sure everybody follows that I sat in on Dan’s presentation, so I can have a visual when he’s talking right. For the northeastern or in me, The New Yorker and me when I think of dribble and drilling and oil well done, I think I’m going straight down, right vertically. But what I learned is that through these 3d seismic if you picture a sandwich, right, and each layer of the sandwich is a different zone, right?

Tim Lyons 18:06
So you have these, they’re huge. I mean, incredible, right? Not only do you go vertically, now you start fracking horizontally, right? And you’re saying, yeah, in that rock, you fracture, open the rock, that’s called fracking, right? And as you fracture the rock, the oil comes out and right, and you just go every 200 feet, boom, 200 feet, 200 feet, 200 feet. And what I also heard you say is that the old the majors, right? Occidental, Exxon, you mentioned maybe Continental was another one. They’re all around you. Right? So even though because of the ESG, which is Environmental, Social, and Governance, you know, issues out there that people are probably familiar with.

Tim Lyons 18:46
You know, oil and gas is a is a big no, no, right? It’s a big, you know, carbon, whatever it might be. I don’t even know why they don’t like it, but they don’t. Right. So that opened up an incredible opportunity for companies like yours, right, smaller, non major, you know, Exxon companies, because I think that might be a question from investors. Like, why is Royal able to do this right, right next to Exxon and right next to accidental, right?

Tim Lyons 19:10
Yeah. But this is the reason why because if you if right now, if you were to Google, how come you know, we’re under invested in, you know, oil and gas manufacturing, you’re gonna see ESG funds, right? The big money, the big pools of money pension funds, you know, you know, big pools of money, are not spending money in this type of environment, because they don’t want to run afoul of these ESG scores that they get.

Tim Lyons 19:38
So that opens up the opportunity for companies like yours. So you kind of went through the mechanics, right? You went through a little bit of the tax breaks, you know, how does an investor if they come into a fund like this, how did they get paid? Like, take us through the process of like, you know, from the oil flowing out of the hole? You know, what happens then, and how did the limited partners in A deal like this end up getting cashflow.

Greg Lyons 20:03
Don, before you answer that, I just want to point out Tim uses the word whole. And not well, Tim, I mean, you really got to get into the, the the jargon here.

Tim Lyons 20:14
I’m sorry, Don, you’re gonna have to forgive me for my ignorance, complete ignorance.

Don Hosmer 20:21
It’s right. Yeah. So that is a process where we drilled the well completed, that’s, that’s about a 30 to 60 day process. And then once into production, sell the oil for 30 days, at the end of that 30 days, the refinery pays us. And then we distribute that every month, every month, the investor can get it check either mailed to them, or ACH into their account.

Don Hosmer 20:49
But they’ll get a summary statement of the oil produced and the natural gas because these do produce and sell natural gas as well. And so that’s summarized in a statement. And then that can be emailed if they’re getting a Ach, or it’ll be with their check when they get the mailing. And so yeah, each month, you’re getting the the income from your, from the sale of oil and gas proportionate to your percentage ownership. And for all three of the wells.

Greg Lyons 21:21
You know, that’s, that’s, that’s really good. And now I have to take a step back and say, when you talk to people and say, hey, my uncle Eddie, once lost money in oil and gas back in the 80s, or I know a guy that lost his shirt in, you know, in some sort of oil and gas thing.

Greg Lyons 21:41
There could be downsides to this. Right. I think there’s governmental policies, because I think you hear a lot about climate change. And, you know, we’re getting away from more oil, it’s more solar and renewables. So can you speak just on on two things, governmental policies, and the and the stability of the investment? For the listeners?

Don Hosmer 22:03
Sure, well, it certainly is, you know, no secret that it’s not a loved industry right now. And, you know, the current administration does not like oil and gas, they, they have done all that they can, you know, to stop pipelines to stop drilling on federal lands, but there’s no ability for them to effect private lands, private drilling, and these are on private, private properties. And so, so there’s no regulation that’s inhibiting our drilling at this point. I mean, that could change the future.

Don Hosmer 22:37
But right now, you know, we’re free to drill free to frack they love fracking in Texas, there’s no problem there. And so this is created a great opportunity, you know, when they went to fund the drilling for these properties, you know, it took a lot of capital, $90 million just to get started. And so, you know, the majors have that kind of money, but when an independent, like, Eris, you know, goes to the market, you know, it’s a little tougher, the old days, they could just go to New York and get the money overnight for a project like this.

Don Hosmer 22:57
And so this gave the opportunity for Royal and its investors to come in and be part of that group that funded this project. And I’ve never in 30 years been drilling two locations away from a major Occidental Petroleum. And, you know, to see Exxon to the north of us, and then come in just last month to buy another 3000 acres to the south, just confirmed that we’re right in the fairway of this very active play.

Tim Lyons 23:38
So DOD, real quick, I mean, this all sounds great. Like I’m ready to do some push ups in the Ioway right now. But, again, as a New Yorker, like I just got to ask some questions like, what’s the downside? What’s the risks? You know, sometimes if you if you just do a simple Google search about oil and gas, you’ll come up with something called Wildcatting. Right.

Tim Lyons 23:57
And that’s one of the things or what’s, you know, is there illiquidity in the vest in the investment, right, is this specific hold period for three 510 years? You know, what are some things that can go wrong? Like, what are some of the things that investors should, especially brand new investors should kind of watch out for?

Don Hosmer 24:16
Well, over the last 30 years, Tim, when people ask me, you know, what’s the downside, I would tell them, you know, we could drill three dry holes and just get our tax write off. But in this project, I’m not telling them that because in this play, there’s been at wells drilled by all the players are all the operators, Occidental, Exxon, Diamondback, another big Texas producer, Continental and then Royals, five wells, and no dry holes.

Don Hosmer 24:47
And so because of the continuous accumulation of oil in this shale, we’re not going to hit a dry hole. We’re going to find oil. So I would say the risk is you know, how big is the welcome A B in terms of rate, production rate and reserves. And think the smallest Well, in the fields been 400 barrels a day, the largest well has been our “Abby” well 1200 barrels a day peak rate.

Don Hosmer 25:15
And so I think the risk is how much oil we’re going to find not, not whether we’re going to find oil in the three wells. And, you know, so the risk of also, of course, is price, we never know what price we’re going to get. Our total finding, and lifting cost is about $30 a barrel. So we can go pretty low and still have a good cash flow. But that’s always a risk, what is our price, and death. So there are still risks, but I don’t think losing all of our money is one of the risks.

Greg Lyons 25:50
You know, for the listeners of the of the passive income brothers, this is all new. This is oil and gas all the time just used another term that you know, wildcat, something I’m so proud of you, but uh, you really dive in into this. But, you know, we always say with any investment, whether it’s multifamily self storage, oil and gas, you know, check with your professionals, your your tax account, and all that stuff.

Greg Lyons 26:17
And this is not an advertisement to invest in anything that we talked about this is just, you know, educational purposes only, but for the new investor, someone that’s listening to this podcast and going, I may have a big tax bill, or and maybe you shouldn’t invest just for, you know, to save on your taxes. But diversification play, like what do you what do you say to new investors and really kind of get them comfortable with the investment?

Don Hosmer 26:48
Well, I think the, you know, the diversification of multiple wells, and the area that we’re in, you know, it’s a, an area where it’s proven oil, and so it’s not wild, cattiness, Tim said, and it’s not, you know, going, you know, trying to get on the edge of a play, trying to get in on a play, this is in the middle of a play. And so I think, from that standpoint, the, the risk is a lot less on this.

Don Hosmer 27:19
And, you know, it is for accredited investors, you know, it’s Regulation D for those that have, you know, either a million in net worth or 200,000, or more of income. So, it is for those that that are have the ability, you know, to take that risk. But one of the, one of the things I forgot to mention also on the income, they also give us 15% depletion allowance.

Don Hosmer 27:46
In the old days, it was a cost, or, yeah, it was a cost depletion, where you recover your costs through the production. But now we just use a straight percentage depletion. So 15% of the income coming back to you is non taxable. And this is a cost recovery for your oil reserves. So not only do you get a significant tax benefit on the initial investment, but as that income comes back to you 15% of that the income is non taxable, as a cost recovery. So it’s just a beautiful tax advantage, form of ownership.

Tim Lyons 28:24
So there’s a book that I always reference here, Don, it’s called “Tax Free Wealth” by a CPA named Tom Wheelwright. And he actually talks about oil and gas, specifically in his book on top of real estate and some of the things you know, and I really, I mean, listen, I tell that book all the time, because when I started getting into the investing game, I spent a lot of time educating myself, right, I, you know, I just need to I need to have certainty in my life sometimes done, you know, and that book really helped.

Tim Lyons 28:54
And so if any of this sounds kind of like, too good to be true, or you don’t understand the terms, or you don’t understand how it works, you know, obviously, you can reach out to Don and his team, I’m sure they’d be happy to walk you through this one on one. But there’s also books out there, right. There’s podcasts. I mean, there’s plenty of resources. Speaking of that, done.

Tim Lyons 29:15
When you mentioned, the cashflow comes monthly. And you mentioned that there’s some investor communications and right now, I mean, that means a lot to people, especially in the real estate space, they want to know about occupancy, they want to know about rent increases, they want to know about issues, they want to know about the good, the bad, the ugly. What kind of investor reporting does royal provide to their accredited investors who are participating in in your offerings? And is there any, any auditing that goes on? You know, audited financials or anything like that?

Don Hosmer 29:45
Yeah. Good questions. So during drilling will always provide updates on the status of drilling the total depth and when we frack them, you know how that’s flowing back. back. So we’ll always update people regularly on any news that’s coming out of the field. Once productions established, you’ll get a monthly summary statement of all of the production, everything that’s been produced, what price we got, what your net revenue from that is.

Don Hosmer 30:18
And so you’ll get monthly statements from from that point on yearly, every January by January 31, no later will always send you your 1099 for the income, it’s not K-1, because it’s active income. So you’ll get at 1099, by the end of January to tell you what your income is spent.

Don Hosmer 30:41
And then you’ll take 15% of that gross amount as a depletion allowance. And then, as far as audits, Royal does quarterly, and yearly audits, and that’s done by an independent outside audit firm, and they make sure everything is allocated, you know, Royals, in these wells, we pay the same proportionate expenses, we get the same proportionate revenue, everything’s audited to make sure all the individual investors are getting their proportionate share.

Don Hosmer 31:13
So yeah, that’s a big part of it. I always tell people, you know, don’t go with a private company, because you don’t know how they’re allocating their expenses, or how they’re allocating their, you know, their revenues. And so this way, it’s got an independent third party, look at all of that.

Tim Lyons 31:34
So that’s huge, right? For me because, you know, as a registered rep of a broker dealer, you know, we’re into due diligence, we’re into reporting, we’re into documentation, we’re into underwriting, that’s, those are like, things that we have to check on our boxes, right.

Tim Lyons 31:48
And in the real estate space, there’s people raising capital that maybe shouldn’t be, right. There’s people running properties that maybe shouldn’t be. And we’re trying to, you know, stay away from those folks. And I’m sure it’s probably the same in oil and gas, or in a lot of other things, right? You have to, you know, know who you’re working with know what kind of reporting but they’re doing the auditing to me is huge. And I remember you talking specifically about that. And that meant a lot to me as a registered rep, right?

Tim Lyons 32:16
Who likes to have, you know, some of this diligence and know that you know, what, we’re working with a reputable firm, they’re doing their, their, their, their audits, quarterly and yearly, I mean, that is huge, right? Because some of the smaller firms don’t. And you could probably talk more about this, they may not do auditing, right. So you may not know how the fees are being disproportionately applied to limited partners versus general partners or something like that.

Tim Lyons 32:41
So that’s why we brought Don on to talk about this type of investment, because he’s been doing it for I don’t know, what do you say? 36 years? Yes. I mean, yeah, it’s not his first rodeo. Like that. I slipped that one in there. Greg, the Texas rodeo. You know, so it’s all about working with the best in class operators. So Greg, you want to stack on top?

Greg Lyons 33:05
You know, as we make our last laugh around the oil rig here? That was terrible dad joke. Yeah, dad joke. I mean, I’m so good at those or something done by by the last question here is, what kind of hold period? Are we looking at? You know, there’s monthly distributions and so forth. But how long does an investment like this last? Is there a return of capital? Kind of what happens with the investment as it goes along? Yeah.

Don Hosmer 33:36
So these wells that we’re discovering here at Pradera, forego field have around a 20 year reserve. So that production will produce out over a 20 year 20 year plus life. And so the hold period, you know, we are held by production leases. So as long as we’re producing, we own the wells.

Don Hosmer 34:14
Now, if you want to sell the well, in between that time, every year, we do a reserve audit. And so we know what our reserves are, so you can sell those reserves, you know, back to the company, you know, we would make an offer for them. There’s websites, auction sites where you can sell your working interests.

Don Hosmer 34:35
A lot of people are looking for income producing assets. So wells that are already in production are very high in demand. So you can go online and sell your working interests online. So that it’s not, you know, readily transferable. It’s more of a negotiated transaction, but it can be sold. So personally, so

Greg Lyons 34:55
So when you say it’s a 20 year investment Are you getting monthly income over those 20 years?

Don Hosmer 35:03
Yes, absolutely. Yeah. Anything that’s produced out? You get the monthly income from that? Wow.

Tim Lyons 35:10
Yeah. Awesome. Well done. I have about a billion more questions. And I’m sure this listeners, we’re gonna have questions as well. So at the end, we’ll definitely have them. You know, I’ll ask you how to get in touch. But right now, I want to ask, I want to transition the show into the last three questions, the short answer part of the show where we just kind of lob a question into you, and you take a swing at it and give us whatever comes to the top of your mind sound good? Okay, sounds good. Alright, so first one is a quote by a guy named Jim Rohn. And he said that, you know, you are the average of the five people you spend the most amount of time with. And we talk about it a lot here on the show, because we want to surround ourselves, but a tribe that are you know, going to elevate our game. So what does that quote mean to you?

Don Hosmer 36:00
By surrounding yourself with the top people, I would say that, in our case, Royal, you know, was formed by my father and I, 35 years ago, about four years ago, we merged with a group of private, privately owned company called Matrix. And these guys are former petroleum engineers, geophysicists and geologists that were with the majors, Johnny Jordan was with Exxon, Jeff Kearns was with Mobile, J’Chevelle was with Shell Oil. And so these top notch oil men had oil properties. My father and I were primarily Natural Gas Producers.

Don Hosmer 36:44
And so they had about 14 oil and gas fields. And so royal, in an all stock merger merged with these guys. And it was through Johnny Jordans contact with eras relationship with eras that got us into this play that we’re in right now. That’s in the middle of the majors. So these, these are top notch petroleum engineers and geologists that that are a part of it.

Greg Lyons 37:13
That’s fantastic. You know, surrounding yourself with the right people is, is definitely something that you’ve cornered the market on, that’s for sure. Our second thought is, you know, we kind of covered it a little bit earlier. But, you know, in a quick synopsis, what do you say to people when they say, investing in oil and gas is too risky?

Don Hosmer 37:36
So, you know, I won’t argue with oil and gas is risky, you know, that you’ve got geological risks, you’ve got price risk, you know, you’ve got engineering risks. So oil and gas is is risky, I won’t deny that. I think we mitigate that risk through the, through the area that we’re in, through the multiple wells that we put into the program.

Don Hosmer 38:00
So if we hit a smaller, well, you know, we’ve got another well, that will hit a bigger one. And so I think we mitigate that risk quite a bit by the area that we’re drilling in. We also turn key the drilling. So if there’s any mishaps in the operations, we don’t do cash calls, we don’t come back and ask you for more money on the drilling or the completion. And so we try to mitigate as many of the risks as we can we carry insurance, for all that non operators, we also indemnify them in our memorandum. And so we try to mitigate the risk as much as we can.

Tim Lyons 38:40
I love that answer. I mean, dude, there’s risk, but we’re gonna mitigate them, right? I mean, that’s how we that’s how you run a business. I love that. All right, the final one is one of my favorite ones to ask. It’s also by this guy, Jim Rohn, that I just can’t stop talking about. And he says that a formal education will make you a living and a self education will make you a fortune. What does that mean to you?

Don Hosmer 39:03
Well, that that’s a great quote, you know, just experiencing what we’ve experienced through the 30 years, you know, knowing who to who to deal with and in the industry, and how to operate, you know, you hit, you hit some bad wells, you hit a dry hole, and you’d learn from it. And so we’ve we’ve learned how to spread the risk and mitigate those risks.

Tim Lyons 39:34
Love it. So Don, I mean, this has been a little bit of a masterclass on oil and gas, I’m positive that we’re gonna have to have you back on because we’re probably gonna have a lot of questions about this type of investment. So in the meantime, if people want to learn more about Royal and Don and all the good things about the the oil and gas industry, what is the best way for them to get in touch with you and your team?

Don Hosmer 39:58
So you can always email us, It’s just four letters,, ir for investor relations, so IR at, or call us, you can call us at 619-383-6600. And we’re always there to help you answer any questions, we can also send you our tax book, which gives the backup for that tax code for the for the working interest exemption from the passive loss rules. We also give you examples, schedule, see examples how to deduct that.

Don Hosmer 40:47
And so that’s a very useful tool, a lot of people like to give it to their accountants and their accountants like that as a resource. So we can say the tax book, we can also send you our memorandum on the current project. And so that is available for accredited investors also.

Tim Lyons 41:06
Love that. So I actually had that written down down as a thing I wanted to talk to you about, because that was so impressive, you are able to hand out a basically a book, like you said, that you can give to your accountant, and it shows them exactly basically, why did the duction where it is, how to use it, how to apply it, where it goes on the on the schedule, see how it comes to the first page.

Tim Lyons 41:28
So that was really powerful stuff. And I really want to commend you and your team for providing that education for folks. So we’re gonna put all that information in the show notes done. And I really hope that you continue to have your success in that fairway play in where you guys are working. And we really enjoyed you, you know, spreading your knowledge and coming on our show. So thank you for that.

Tim Lyons 41:53
That’s gonna do it for this week’s edition of The Passive Income Brothers podcast and we look forward to serving you again next week.