Direct Participation Programs
The area of energy resources has attracted considerable interest from investors over the past few years. However, Direct Participation Programs (DPPs) represent a form of energy investment that can provide a variety of benefits to qualified investors but has been often overlooked.
Energy DPPs can benefit portfolios in a variety of ways. Since the cash distributions are generated from a non-traditional source that benefits from inflationary and other traditionally unfavorable economic environments, energy DPPs can stabilize income and offset other income sources that suffer during adverse economic cycles.
The investment in this asset class itself provides diversification and can stabilize the overall portfolio return. When investors allocate their assets over a number of asset classes that do not respond the same to various economic environments they reduce their investment risk and increase their investment income. Depending on the cycle, tangible asset investments can benefit a portfolio during an otherwise negative climate for traditional investments.
Energy Direct Participation Programs (DPPs) are investment programs that pool individual funds to acquire direct interest in oil or natural gas drilling projects. Investors get a chance to participate alongside other oil industry partners. After the drilling phase of the energy activity, when successful, income is generated in the form of cash distributions related to the partnership's sale of theft oil and gas production.
Each investor can be treated as a general partner for tax purposes if they so choose, generating substantial tax benefits which flow directly to individual investors. Investors may receive tax deductions in the first year, and additional write offs are possible during subsequent years. For most investors, percentage depletion and depreciation of tangible equipment costs are available to shelter ordinary income or passive income at an avenge rate of 26% of partner's allocated annual net revenue.
There are basically two types of programs — exploratory and developmental drilling. The more conservative of the two is developmental drilling, which involves drilling new wells close to existing wells that are already proven. These developmental wells have a much greater likelihood of being productive than wells from exploratory drilling.
Prudent investment in sound, well researched oil and gas drilling programs, though still considered HIGH RISK, may offer a significant monthly cash flow from the sale of production from oil and gas wells, and very significant tax advantages. You need to recognize that while the returns are possibly very high, the risk is also very high, so you must balance the risk and the reward.
