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EnergyFunders Review

Summary

EnergyFunders is a niche Reg D platform offering investments in oil and natural gas wells. Investors get quarterly cash flow and substantial tax benefits, but investments are high-risk, structurally complex, and typically require additional capital at some point (capital calls).

Investor OverviewCompany Information

Pros

  • Multiple substantial potential tax benefits
  • Low correlation with stocks and other asset classes
  • Very detailed investment packets (including geological data)
  • Long-term quarterly cash flow

Cons

  • Must be an accredited investor
  • High risk, very low liquidity
  • Relatively complex from tax and legal perspective
  • Typically requires further capital at some point (20-30%)
  • Some investment types open up investors to liability
EnergyFunders logo

EnergyFunders Overview

EnergyFunders is a Houston-based niche Reg D investment crowdfunding platform offering investments in oil and gas wells to accredited investors. Investments like this are common in Texas and other areas of the South, but traditionally have required direct connections with well operators and relatively high investment amounts. EnergyFunders is following the lead of other investment crowdfunding platforms in reducing minimums for an alternative asset class and opening up the investor pool much more widely.

Types of investments EnergyFunders offers

EnergyFunders is among the more exotic platforms we've profiled, offering what's known as "wellbore working interest" in an oil or natural gas drilling project. This differs from an investment in a royalty interest in a well in that investors are liable for ongoing drilling expenses, as well as entitled to a share of the profits (while it varies based on the specific well, investors typically end up contributing an additional 20-30% during the lifetime of the well).

Investors are buying into a Limited Partnership interest in the revenue from a single or series of natural gas or oil wells. Investors receive quarterly distributions of whatever revenue the well earns (less the carried interest) for the lifetime of the well. Natural gas projects typically payback their investment amount sooner than oil wells, though also don't last as long overall.

Investments in oil and gas projects involve detailed and specific legal, technical, scientific and tax considerations that set them apart from most of the alternative assets covered on this site.

What do you get when investing with EnergyFunders?

As with most other Reg D platforms, EnergyFunders uses a Special Purpose Vehicle, in their case a Limited Partnership, and investors receive units in the Partnership. Notably investors have the option of investing as either Limited Partners or General Partners. General Partners are exposed to theoretically unlimited liability (though in practice various layers of insurance provide some protection), and in exchange are entitled to more generous tax treatment than Limited (General Partners are automatically converted to Limited Partners once drilling is completed).

EnergyFunders fee structure

EnergyFunders receives 10-20% carried interest on the investment returns. They don't charge a transaction fee or an annual AUM fee, though reserve the right to deduct a pro-rata share of ongoing management expenses of the LP from each investor's capital account.

Potential returns and cashflow

As they state on their website, oil and gas drilling is a "high-risk, high-reward" investment. Investors receive a pro-rata share of the revenue generated by the well (minus the carried interest to EnergyFunders), paid quarterly. There are also substantial potential tax benefits associated with these investments that can have a major impact on the overall return.

As an example, an investment in an oil well might pay back the investment amount in 36 months at current oil prices, and then be expected to continue producing oil (and therefore revenue) for another 10-15 years. The specific payback period and overall return are dependent primarily on the market price of the gas or oil, as well as the timing and amount of additional capital required.

Prospective investors should know that delays are common with oil and natural gas wells, especially early in the project. It is not unusual for up to 6 months to elapse between an investment closing and the well to actually begin producing (and therefore earning revenue).

Breadth of offerings on EnergyFunders

As of this writing, there are no open investments available, though once registered you can browse 10 recent investments. According to the company, they have multiple projects currently in their due diligence pipeline and expect to post more soon.

Regulatory framework and due diligence expectations

EnergyFunders falls within a category of Investment Advisers known as an "Exempt Reporting Adviser", which means that while they are not required to register with the SEC, they still must pay various fees and participate in FINRA. Their investments are offered under Reg D, and are only available to accredited investors.

EnergyFunders performs their own due diligence on submitted projects, including reviewing detailed drilling plans, financial projections, and a range of legal documents including leases. According to their website, most projects take 45 days for due diligence. A platform's review process, however thorough, is never a substitute for your own due diligence, and prospective investors should understand that oil and gas well project investments are very complex relative to other alternative investment types.

Final thoughts

EnergyFunders is probably not for the casual investor, though patient investors with an appetite for learning the nuances of energy projects and the related IRS tax rules will find much to dig into. There are substantial potential tax benefits to this kind of investment (even more so than real estate), though taking advantage of them will almost certainly require assistance from a tax professional.

EnergyFunders Screenshots
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  • Editor Rating
  • Rated 3.5 stars
  • 60%

  • EnergyFunders
  • Reviewed by:
  • Published on:
  • Last modified: October 9, 2017

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