If we’ve chatted in our investor community or in a Facebook group, you already know that I am a very big proponent of alternative investments, especially investments in crowdfunding sites. I came across EnergyFunders a couple years ago while looking for additional ways to diversify my portfolio. I waited a while to write this EnergyFunders Review as I wanted to see how my investments would fair out first.
I made my first investment in Feb 2020 and a second one in Dec 2020. Finally in March 2021 I recapitalized my first investment into a new deal (they held back some principal and I added more) to (potentially) increase my yield.
Table of Contents
I’ll get to my specific experience with EnergyFunders in a bit, before I do, here is some info on the company.
What is EnergyFunders?
EnergyFunders is a crowdfunding site that provides easy access to oil and gas projects to accredited investors.
Who Can Invest in EnergyFunders?
EnergyFunders is currently open to accredited investors only. Investors must be accredited based on US guidelines.
What is the Minimum Investment for EnergyFunders?
EnergyFunders investment minimums may differ between deals but they are commonly set at $5,000 when the deal is first published and sometimes raised to a higher limit as the closing date approaches.
How Many EnergyFunders Deals Should You Invest in?
In order to get proper diversification across multiple wells, we typically recommend an allocation of $25,000 across five wells ($5,000 per well) as a good starting point for most investors.
How EnergyFunders Works
The EnergyFunders process is similar most crowdfunding platforms:
- You first start by browsing available projects on the EnergyFunders site .
- You then choose a project that has a risk and return profile that matches you investment criteria.
- You read carefully through all of the documents (do not skip this step).
- You watch the recorded videos and webinars.
- You commit to invest by signing all of the paperwork.
- You transfer your funds.
- Wait for closing.
- Start collecting returns.
An important thing to keep in mind and understand about EnergyFunders is that their platform is built to provide investors with direct exposure to cash flow returns and your principal is used to acquired the rights to the cashflow or interest in a well. This means there is no maturity date by which you get your principal back. You are investing into an oil & gas project and start receiving income as soon as the oil and gas begins flowing. When the well dries out, so does your cash flow. They aim to quickly return the principal amount, and also offer a compelling rate of return over time.
Between August 2020 and March 2021, my first investment, the Titan Chalk Project- Unconventional Yield Fund, has already returned 53% of the capital I put in. I recently received a letter asking if I wanted to cash out the rest of my investment or top it off and roll it over into another fund to increase my yield. I chose to continue the investment to get a better picture of how well this investment is going to do when completed. The target returns for this yield fund is 18%.
The first payment from my second investment, the Income Fund – Gonzo 1H and 2H, already made a payment equal to 4.5% of my investment. The target return of this fund is 15%. Since this is an income fund, the estimate should be fairly accurate.
More on what yield fund and income fund means down below.
The main risk with EnergyFunders is that the well dries out quicker than anticipated or in an exploration project you may find that there is really no flow of oil at all. The teams behind EnergyFunders and their partners are all well versed in the oil and gas industry and have experience in analyzing deals to help reduce risks but they can never completely eliminate them.
They offer different types of projects designed to meet investor risk and return profiles: Wildcat, Development Yield and Income.
EnergyFunders offers a decent dashboard that allows you to view your investments, earnings, documents, access tax documents and more. My only request would have been some sort of projection into the future of what earnings to expect and how each project is producing versus what was projected in the beginning.
There are a few areas in the dashboard that are completely unused and may have been planned for future offerings but having them in the dashboard just confuses thing.
One cool thing in their dashboard is that it also gives you access to all of the emails that have been sent to you by EnergyFunders. Makes it easy to find a report or payment summary you may have received.
Once you are in a live deal, it will take a couple months until your project starts producing. Once it does you can expect monthly distributions to be direct deposited into your bank account.
With each payment, you will also receive an email breakdown of how the project is doing that looks like the example below:
Congratulations! We’re pleased to inform you that you’ve received a payment of $119.74 for your investment in the project, Titan Chalk Project- Unconventional Yield Fund. We have initiated the payment on Mar 3, 2021 and depending on your bank, it may take up to four business days to be received in your account ( Schwab Checking ) .
If you feel this message to be in error, or have any questions or concerns, please contact our investor relations team at 713-300-9996 or email us from this email address to firstname.lastname@example.org.
Payment Note: Oct 2020 – Gas Sold 64,846 @ $2.23/MCF – Net to VC36 – 3,735 MCF
Oct 2020 – Prod Sold 782,00 @ $0.26/Gal – Net to VC36 – 45,043 Gal
Nov 2020 – Oil Sold 38,428 @ $37.83/ BBL – Net to VC36 – 2,213 BBL
Nov 2020 – Gas Sold 63,509 @ $2.38/MCF – Net to VC36 – 3,658 MCF
Nov 2020 – Prod Sold 751,490 @ $0.28/Gal – Net to VC36 – 43,286 Gal
Total Revenue: $189,123 less OPEX $5,119.11 = 184,004.08 paid to Fund.
The EnergyFunders Team
Oil & Gas Product Offerings
When reviewing open deals on EnergyFunders, take a look at the offering type: Income, Yield, Development, Wildcat. All of their product offerings involve oil & gas, however, the type you invest in can differ greatly when it comes to risk and rewards. Here is a quick summary.
|Target Returns||10% – 15%||12% – 20%||40% – 100%||> 75%|
|Time to cash flow||1 – 2 months||2 – 6 months||4 – 8 months||4 – 8 months|
|Tax Benefits||Depletion Allowance||IDC Expensing|
Let’s take a closer look at each type of offering.
EnergyFunders Income Funds
Income Fund projects look to acquire interest in oil & gas wells and fields that are already producing. They may negotiate the purchase of an existing revenue stream such as producing mineral and royalty interests. They offer the lowest risk out of the offerings, the most predictable returns but also the lowest returns. Income funds are a great way to get your feet wet with your first oil & gas project without taking as much risk as some of the other options.
EnergyFunders Yield Funds
Slightly riskier than income funds, the yield funds are a way to provide capital for the “drill and complete” phase into low-risk probable wells. These types of arrangements are also known as DrillCo. The funds are typically used to advance drilling and completion costs only and get returns from the asset until a pre-determined preferred rate of return. Once the rate of return is achieved, the investment either owns nothing or a very small tail interest in the well. Usually these sorts of opportunities arise when a company has a large inventory of wells to drill but may not have enough capital to benefit from all of them.
EnergyFunders Development Funds
Development funds target and acquire undivided interest in conventional and unconventional greenfield development projects consisting of proved and probable reserve classified wells. These sorts of deals are usually hard to find but when a good one is located, they can provide significant returns with a moderate exploration risks.
EnergyFunders Wildcat Funds
This is the riskiest of the bunch but also the one that may provide the most returns. Wildcat funds look to acquire interest in wildcat exploration projects. These projects are usually put together with sound technical data and research. They require deeper due diligence to assess, eliminate and exclude unacceptable risks. The process itself is risky enough. To justify these investments, wildcat projects need to have significant upsides. A portfolio approach of spreading your allocation into more than one project is crucial to reduce your risk exposure.
Oil & Gas Tax Benefits
There are several oil & gas tax benefits that have been taken advantage of by the oil industry and their institutional investors for years. Thanks to crowdfunding, these benefits are now available to accredited investors in EnergyFunders.
I think it won’t be too long before the rules change again and these investments can be opened up to non-accredited investors.
Intangible Drilling Costs Tax Deduction
About 65-80% of expenses associated with getting a well to start producing are considered intangible drilling costs (IDCs). These are expenses of an oil and gas well that is non-recoverable; things that you can’t resell later. They include things like fuel, drilling fluids and wages. You can deduct 100% of IDCs in year one of the project.
As an example, if the project you invest in had $100K invested into a well and $70k of that was put towards IDC. The fund will past on this deduction to all of its members who can then deduce their share from their taxes. For illustrative purposes, say you own 20% of the project. That means you can take a $14k deduction in your taxes on year one! For more details on this, take a look at Section 263 of the U.S. Tax Code.
Tangible Drilling Costs Deduction
The remaining costs of the well are called tangible drilling costs (TDCs), roughly 20-35% of the expense. These expenses are also tax deducible. It used to be that you had to depreciate the expense over a 7 year period but a law went into effect in 2018 (expires in 2023) that allows you to take the full expense in year one.
This means that until 2023 (unless the law is extended), investors can deduce 100% of upfront costs of drilling a well from their current year’s taxes. Note: this does not mean that 100% of your EnergyFunders investment is deductible. The fund has other expenses unrelated to the well itself. Also, depending on the project type, some of the expenses may not be for well setup as that may have been completed already.
The 1990 Tax Act gave energy producers another incentive. If the producer is under a certain volume limit, they can exempt 15% of their gross income from federal taxes. This is designed to help independent energy producers and individual investors get started in energy production.
The depletion allowance only applies to producers generating less than 50,000 barrels of oil per day. As an individual investor, you qualify for the Depletion Allowance only if your share of production falls under a threshold of 1,000 barrels of oil per day or 6,000 cubic feet of gas per day.
Oil & Gas ETFs vs EnergyFunders
You may be wondering, as I did, if it is even worth investing in something like EnergyFunders instead of just buying an Oil & Gas ETF and calling it a day.
There are definite benefits of going the ETF route:
- It would be rare that you would lose your entire capital in a single swoop.
- You can sell the ETF at any time by executing a trade.
- The value of the ETF is known at all times and is publicly available.
- It is less of a hassle to invest in as you can do it directly in your RobinHood, Ameritrade or other typical brokerage account.
However there are also downsides of going the ETF route:
- An energy ETF tracks the price of crude oil as a whole, not a specific well or drilling project.
- The price of oil does not necessarily match the exposure into the industry you would get from actually being in the industry.
- To earn a return with an Oil & Gas ETF, you have to predict that the price of oil is going to go up.
- If the price of oil stays flat, your ETF may lose money from the drag associated with rolling over futures contracts across a contango curve.
Yes, there are other options of Oil & Gas ETFs that do not necessarily track the price of oil but instead they contain a basket of publicly traded energy producers. The problem here is that, in addition to taking on commodity price risk and execution risk, you’re also adding in the risk of management’s capital allocation decisions. Historically, this has been one of the biggest risks to energy investors, evidenced by the poor track record of public energy company performance.
EnergyFunders invests your money directly into individual projects and returns it back to you as production comes online – eliminating the risk of suffering from poor capital allocation decisions.
Finally, by providing you with direct exposure to individual oil wells, investors can earn tremendous tax breaks that you don’t get by investing in publicly traded corporations.
In summary, I am still learning about EnergyFunders and investing in oil & gas. In general I am quite happy with the returns I have earned to date. I am in 2 deals, one of which recapitalized into a new deal and am looking forward to the next deal to show up on the platform. I’ll keep my investments low ($5k each) to diversify but will certainly do more. I am not sure if I will jump on a Wildcat project just yet. I may leave that to deal #5 but am very interested in the Yield and Income projects.
If you are considering investing in Energy Funders or want to further discuss the investment opportunity with me or other Money Minx members, join us in the Money Minx community (open to everyone, not just subscribers).