Oil & Gas Investments In Opportunity Zones, With U.S. Energy

In this webinar, Matthew Iak discusses how oil and gas projects can be executed in Opportunity Zones to deliver tax benefits to investors.

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Webinar Highlights

• Overview of U.S. Energy’s history and ownership.
• State of the oil and gas industry in 2024.
• Fees, waterfall, and other offering details for USEDC’s Opportunity Zone fund.
• How oil and gas projects pair with the OZ incentive.
• How interest rates impact oil and gas projects.
• Live Q&A with OZ Pitch Day attendees.

Industry Spotlight: USEDC

Established in 1980, U.S. Energy is an exploration and production (E&P) operating company which designs and manages direct energy investments.

Learn More About USEDC

• Visit USEDC.com

Webinar Transcript

Jimmy: We have one more presenter today, and it’s a rather unique one. It’s the only one I know of of its kind. It’s an oil and gas Opportunity Zone Fund, from U.S. Energy Development Corporation. So, I’m gonna bring their presenter, Matthew Iak, up on stage now. Matt, there you are. Good to see you. How you doing?

Matthew: I’m really good.

Jimmy: Pleasure having you here with us today. Really pleased that USEDC has joined us at OZ Pitch Day. Really appreciate your support, and the time you’re giving us today to present this rather unique investment opportunity. It’s an oil and gas investment that qualifies as an Opportunity Zone investment as well. So, Matt, I see your screen. Looks great. So, without further ado, please dive in. You’re our last presenter today, so take as much time as you need.

Matthew: Okay. Well, thanks. I’ll try not to take up too much time, but thanks.

Jimmy: And if you have any questions, please let us know in the chat, or in the Q&A module, and we’ll get to those when Matt wraps up. Thanks, Matt. Go ahead.

Matthew: Great. Thank you. So, hopefully, the screen is showing, and we’re all running here. Again, thank you, everybody, for the time. I guess I’m the caboose of the show here, so I better do a decent job.

I wanna thank the last presenter, because I do wanna remind everyone that, you know, the intent of OZs isn’t just pure capitalism. It is to drive economic benefit to communities, and although not everybody necessarily loves oil and gas, there’s a pretty bifurcated view of oil and gas in the world, it does, really, in my estimation, in my biased estimation, it’s really the fuel source for most of modern technology and growth. Has been an abundant, cheap energy. And it really has positioned our country to be what we are today. So, I’m a little biased, and, you know, one of the benefits of what we do is we drive an awful lot of economic activity to a lot of rural areas that happen to be identified as Opportunity Zones.

So, at the large scale, I’ll give a very brief understanding of who we are. So, U.S. Energy, this is our second generation of ownership. We’re really proud as a family to have not only benefited from the prior generation, but really grown our operations into what is, I think, the largest investment oil and gas company in the U.S. at this point in time, in terms of the private securities and what we do. So, again, that second-generation success is something that we’re very proud of. We operate as if we were public, even though we’re private. We have a independent board of directors, outside auditors, ESG certified, 14001. We do a lot of ISO certifications. SOX, Sarbox, you name it. Even though we’re private, we do an awful lot on the governance, on the environmental, and whatnot, because we’re a large investment firm, in addition to being an oil and gas firm. So, it’s gonna sound a little weird as I talk about this, because most people don’t think of Opportunity Zones as an oil and gas investment, or even how that would work. So, part of this will be helping, we’ll deconstruct and understand what that means. And I popped in and out all day today, to listen to as many of these as I had time to afford, and I think a lot of you have probably realized, Opportunity Zones aren’t just real estate.

Now, ironically, oil and gas is real property. Not only does it work in things like 1031 exchanges and whatnot, it also works very, very well in something like Opportunity Zones. And so, we as a company, were pretty excited, when the tax law came out and the final regs came out, that part of what we already do as our business, a large part, overlaps extremely well with the law, and in some aspects, which we’ll go over, may overlap much more beneficially than other sectors, including things like real estate. So, I’m gonna go into this, and I will say this as my pitch to all of you. And Jimmy knows this, I think, my view on this. I also believe this is probably one of, if not the most powerful tax law ever created, when if individuals are not using Opportunity Zones, doesn’t have to be with any of the companies here, or ourselves, but in general, the Opportunity Zone tax law, on the B level, on the F level, is so powerful, and something that I know, as we near 2026, is probably gonna become more and more utilized. But I have helped dozens of family offices, as friends of mine opened their own… I actually referred so many to friends of Jimmy, to help actually go ahead and do that process, and not only people avoided, you know, hundreds of thousands of taxes on the front side, but the billions of dollars of growth that won’t be taxed on the backside is just immense.

So, this is a quick slide of just showing us, U.S. Energy, in the space. We’re about 40% of the total market of energy capital formation in the U.S., on the private side. So, we’re a pretty significant player, if not the most significant. Profitable in and of ourselves, on a very high level, as an operating company, and even more so as an investment company. So, in our wheelhouse, in terms of our CapEx budget, of somewhere between $700 million and $1.2 billion, kind of puts us in the size of the mid majors here in the U.S., although, again, private. And we do this through a series of our co-investment. You know, we’re the largest investor in everything we do, between $100 million and $200 million, sometimes, if we have a cash flow, $250 million a year, alongside of our funds that we construct, and one of those main core funds is this Opportunity Zone Fund, and utilizing this tax law in the energy space. So, we do things on a large scale. This current fund is $150 million fund. We do $100,000 unit sizes, although, we’re darn pretty flexible.

I wanna make this statement now, and I’m probably gonna make it at the end. From our firm, we really prefer that every investor have a good financial advisor, someone they go to to look at every investment in the lens of their portfolio, because great sponsors are great investments. Hopefully, like us, can be phenomenal investment tools. But they may not be the best for your individual situation, right? You might have other tax designs that would work better for your situation, whether it be a 1031, TIC, DST. It might be something different on the tax side, you name it. So, not only from the investment side, it’s always best to have an intermediary. We work with a massive distribution system, probably the largest in the U.S., and we always find that clients get a better opportunity when using an advisor, because ultimately, they help them decide what’s the appropriate investment level, not just find a good investment. So, I’ll make that statement, and I’ll probably say it again.

I will say this. We were shocked to find out, and you guys will see this in a couple seconds, not only is the core of our primary business, which is really, drilling and developing oil and gas activity in the U.S., overlapping the most prolific zones in the U.S. for oil and gas reserves. So, Opportunity Zones overlap the Permian Basin. It’ll be 50% to 70% of the most prolific zones are Opportunity Zones. But also, the hanging chads that were coming out with Opportunity Zones, that were somewhat difficult for a lot of investors, really are abated in the natural activity of oil and gas. And a few of those with things like lack of cash flow, right? In the law, to either put something into original use, or to substantially improve it, usually means a significant period of time without generating a lot of cash flow. And what investors have seen over the last five years with us is, we actually generate so much cash flow. So, we stop our distributions, currently, at 6% per year, and we reinvest the proceeds. In the last few years, you guys will see that that’s anywhere from 20% to 50% a year, in excess of the distributions being reinvested in more and more projects in the fund, because we generate so… One of the things about oil and gas is it generates a lot of near-term cash flow.

So, the hanging chad, if I don’t, you know, I go in an Opportunity Zone, it takes such a long period of time, really doesn’t fit the mode of operations of oil and gas. We actually generate so much cash flow in the early years. The tax bill that comes due in 2026, there’s a couple of unique opportunities for a lot of funds, one that we take advantage of, typically, as well. But we also distribute 23.8%. But we don’t need to use debt refinancing. Because we generate so much cash flow, we just use the cash flow from operations to distribute in the year to help clients pay their deferred tax bill. And on top of that, what you’ll see here in a second is, all the normal oil and gas write-offs, the depletion, the depreciation, the intangible joint costs, they all stay suspended in the fund, that offset all the distributions, making the distributions during the life cycle potentially tax-free. So, they’re tax-deferred, and if you hold it for all 10 years, it’s tax-free. So, it provides for that big hanging chad that a lot of people have, “What if interest rates are higher?” We don’t care. We’re not affected by interest rates. It’s really just a cash flow in a tax-advantaged situation.

We don’t really worry about gentrification. These areas are rural areas, and they’re already the best Opportunity Zones… They’re already the best investment zones in the U.S., with or without them having been identified. So, and then, I do want investors to know that you don’t necessarily have to hold Opportunity Zones for 10 years. Think you guys know this. But what you don’t get is that maximum savings. Right? You don’t get to ten years… you hold it after 10 years, and you’re getting it all tax-free. So, you can get out of them, and you can go into other Opp Zones, and continue to take advantage of the Opp Zone tax law. So, you’re not forced into illiquidity, per se, that everyone thinks they are. But you will lose the major benefit, which is making all your money tax-free. So, just a couple of hanging chads I love pointing out to people, in the Opportunity Zone world.

I’m gonna, again, kind of dive into this, and I did mention this before, about the tax benefits. The normal tax benefits that people associate with oil and gas still work in Opportunity Zones. But because when you come in with a capital gain, you have a zero outside basis, they’re in essence suspended, and used against the distributions, to make the distributions non-taxed. Right? So, you’re not using them day one. You’re suspending them. And there’s some extra benefits we can talk about in 2026, when you get a stepped-up basis as well. But those tax benefits still double up, and accrue just like they would in real estate or other sectors. They’re beneficial. So, you’re able to create 100% losses in oil and gas, and use that against all the income that’s generated on the outside of the funds. And again, what we really love is that this is now our fourth iteration of doing Opportunity Zones, and each one continues to outrun the pace of our expectations.

So, the goal of our funds is to constantly reinvest more capital than we initially raise, and you’re seeing this constant growth of the funds. And the easiest way I can try to describe this to someone is, in our… And I love this kind of analogy here. You start off with six wells, and over a couple of years, you own 50 wells. In over 10 years, you own 300 wells in a portfolio. And each of our portfolios keep growing, because you’re only distributing a small percentage of the revenue, and you’re reinvesting all those proceeds back in the ground, and growing that underlying portfolio, or, it’s basically building a mini C corp for an oil company, inside the Opportunity Zone. And I think this next slide, and I know we have to talk fast to get through a lot of this, will really kind of help you guys visualize this.

So, these are the Permian Basin here. This is the core of what they call the Delaware Basin, which is the creme de la creme of the U.S.’s reserves, and the best areas of activity. And although most companies probably can’t get into the core of the core, what we do is mostly either operate, or joint venture with publicly-traded majors, in these areas. And so, to give you guys an understanding, last year, we invested in about $2 billion of wells in the area. We owned about 30% of those wells. We operated maybe 10% to 20%, and the publics operated the other 70% to 80% of the wellbores. And just kind of looking through these zones, the irony is the most of our activity in the core of the Permian Basin falls in Opp Zones. Right? So, the best counties in New Mexico and Texas. This is Reeves. This is Lee and Eddy County. I’m sorry. This is Lee. This is Eddy. And these counties automatically would operate and do our activity on Opp Zones. And then, as a company, if we drill wells in these other great areas here in the Permian Basin, that aren’t Opp Zones, they just wouldn’t go in this style of fund.

So, one of the cool things for us is, you know, a lot of people use the QOB to extend that 70% of 90% of their capital going in Opp Zones. For us, we have nearly unlimited inventory in Opp Zones, if not billions, potentially hundreds of billions of dollars of assets that we just can rinse, wash, repeat, and keep reinvesting in Opp Zones. We were very fortunate that the governors chose these census tracts, that happened to be the best oil and gas reserves, as Opp Zones, and it plays extremely well. And the beauty for us is, the general nature of the law, when we drill the well, that’s the original use of the land. We don’t have to worry about substantial improvement. And, at the end of the day, we are driving such significant economic activity, not just in the taxes that we pay, the severance, and the ad valorem taxes, but in the communities, from the hundreds of oil and gas operators that are in the area, who are going to eat in local communities and spend money, but also the revenue, and the hundreds of billions of dollars that are being spent in drilling wells in those areas.

So, it’s kind of a great win-win for all that the Opportunity Zone overlapped in the oil and gas world, and again, is something that we really think is fantastic. And here’s the best part for us. Oil and gas doesn’t always have the biggest ROI. Meaning if I put a dollar in a well, and I make $2 from that well, I’m very happy. It’s usually a very good scenario, especially when you’re paying up to drill and participate with publicly-traded majors. You’re usually paying for safety. And you wanna be in these areas that are repeatable. And what I mean by that is in the last several billion dollars that we’ve drilled, we’re almost within a very small percentage standard deviation performance away from our analysis. They perform like the last year’s well performed, and over and over and over again, hundreds of times, they all look the same, over billions and billions of dollars.

And so, there’s a premium to be in the best areas that have that type of appeal you’re not having any geological risk, when you’re just in a printing press style. But the beauty of oil and gas is that the money comes back so quickly. Oftentimes, you’re getting your initial capital back in these funds in two and three years. And we don’t model them anywhere near that aggressively, but they’ve all achieved that and more. And what’s been really interesting is you get to reinvest that proceeds so often, into more and more OZ wells, which really compounds the portfolio. And you could basically hedge out the portfolio, and then even 1.5 times returns on the wells, over 10 years, it still gives you 3.5 to 4 times return. Not bad. And it’s 100% tax-free if you hold it for 10 years. And you don’t have to go out searching for risk, taking big geological risks, trying to hit a home run. You can just be in a printing press business, over and over and over again, in the oil and gas space.

So, a little bit harder, natural gas. We love natural gas as a company. Wanna be clear here. We’re very pro-gas, and I think the long term’s great. It’s a little harder in OZs, because most of the most prolific gas, outside of what’s called the Haynesville Shale in Texas, most of the big formations, the Utica, the Marcellus, are throughout the Northeast, and there’s very few rural areas that were chosen Opportunity Zones. They’re mostly urban centers. So it’s very hard to find anything we can’t drill in New York, but in PA, or in Ohio, or even down the Appalachian Trail, it’s harder to find good gas zones that are Opportunity Zones. It’s much more heavy of an oil play in Opp Zones, both in the Permian Basin, up in the Powder River Basin, in, like, Wyoming, and other plays, the DJ Basin. There’s less gas… Now, there’s some down in the Eagle Ford, and some over in the Haynesville, in Texas, but outside of the Texas region, it’s probably harder to do heavy concentrations of Opportunity Zones, in large scales, which is what really diversifies risk, in natural gas. It’s much easier to do it in oil, under the current census tracts that were chosen. So, I know that’s a lot of data to throw out quickly, Jimmy. Am I doing okay on time?

Jimmy: You’re doing great on time, Matt.

Matthew: Okay. So, again, I love, and I cannot emphasize this enough, if individuals don’t understand the true power of an Opportunity Zone, you don’t have to just run out, in your 180 days, and find a great fund to participate in, or a series of funds to participate in. But you can call Jimmy tomorrow, and I don’t mean to pitch Jimmy, but, and ask him for help, and who you can talk to in designing your own QOF. And then take your time in finding sub-QOZBs inside of the F, and really run your own operations to… I’ll give you a narrative for this. I know how hard it is, in the sense that we bought our headquarters in an Opp Zone. So, we’re building in the stockyards, right at the top of the stockyards in Fort Worth. Beautiful old building. It’s been three years of work to develop that. If investors participated with us, they probably would be frustrated, not because the investment isn’t gonna be spectacular, it will be, but ultimately because the timeframe in which they would get cash flow, right? It’s three years to rebuild that facility, and get it up and running for our employees to move into, right? It should be done this November. And it’ll be great for us as an investment as a company, but will be bigger than that is we also use it as a center of our Opportunity Zone business.

So, many of the businesses that I’ve established and created, and as a family office, that we invest in, are now in, in essence, 100% tax-free enterprises, where after 10 years, any of those assets we divest from, and I don’t wanna divest them, I wanna hold them all the way to 2046, can literally turn into a insane amount of tax-free wealth, and you can do these in estate plans. They don’t have to be outside. So, for future generations of my kids, these are mega-Roths. These are businesses that I run already, just under the OZ law. So, not to pitch the whole concept, but I really want everyone here to understand, it is by far the greatest tax law ever written, and if you’re not using it, at least for a fund, or for harvesting capital gains, or taking advantage of short-term gains that you’ve had, at least use it for yourself, in the business side if you can do so.

So, that’s my two cents. Again, I will put up a kind of a territory map of my employees, but I cannot emphasize enough, as an investor, fund sponsors are what we are. We design what we do. Hopefully, we all do a phenomenal job. But how it fits in your portfolio is really about having a good advisor look through that. Right? Find out what’s appropriate for your portfolio, help you out. And we work with so many investment firms across the U.S., thousands of investment firms, that we can, if you don’t have an advisor who already uses us, and you probably do, we can probably steer you to one, because we would rather have you know your net tax position, and which is more beneficial than not, than just invest with us. So, that’s my two cents, Jimmy.

Jimmy: A tremendous pitch on the Opportunity Zones program, in general. I love it. Matt, really appreciate your support, also, of OZ Insiders, that membership community you’re a part of, and thanks for your support of OZ Pitch Day today as well. Great to have you on, and great to hear this presentation. Oil and gas deals aren’t very common in this space, and, but I agree with you, though, Matt. I think Opportunity Zone’s the greatest tax incentive investing program ever created. That’s what I said at the very top of the day, and I’ll continue to beat that drum as loud and as long as I can. We did have a question in here from John. John asks, he agrees with what I just said, actually, “Looks like OZ plus oil and gas strategy has many advantages. Is there any reason why this isn’t more commonplace in the market?”

Matthew: Yeah, I think oil and gas is not as strong at creating investment vehicles. So, historically, when my father-in-law, I came to my father-in-law 20 years ago in the business, most oil and gas companies weren’t really good investment companies. And I gotta be honest, usually it was either a good syndicator with bad investments, or a good oil company that didn’t know how to structure investments. And all the best reserves in the U.S. are really owned by publicly-traded majors, and they don’t have an interest in structuring QOF. Right, that’s just not what they’re doing. Now, they may be utilizing it for their offices, or for other purposes within their corporate structure, but they’re not designing it as funds. So, I think a large part of our advantage is that not enough people know about it. And I don’t think they’re as adept as they are as real estate syndication. You have a marriage of a thousand great real estate companies that are also good investment companies. In the oil and gas world, there’s, like, two of us. That’s it. I mean, there’s hundreds of them, but they’re not that good. And there may be two or three really good ones. And we’re very fortunate, and it’s created a massive advantage for us. They don’t know other than to copy someone else’s formula. So, I think part of it is just the nature of the industry, is 30 years behind the real estate industry. Fortunate for companies like ours. But, you know… I’d also respond to this, Jimmy. It’s the same as why aren’t more people constructing their own QOFs? I don’t know. Like, it boggles my mind. I had a dear friend who I referred to you last year, and I helped him open his own QOF, and he moved $300 million of his $500 million business sale into it.

Jimmy: Yeah.

Matthew: And you ask him, “Why not $500 million?” He said because he was scared the IRS would come after him. But the law is unlimiting. There’s no, you know, not to be inappropriate. You can’t be half pregnant. Like, it’s just right. But people are so nervous that, “What if it’s not…? It can’t be. This is too good to be true. This can’t be true.” It’s true. It exists. Go use it. And it’s not even…this isn’t like a conservation easement, where you have to worry about the IRS challenging. This is law. This is there. And it’s there to be used. You’re crazy not to use it.

Jimmy: Yeah, it’s written into the statute. Section 1400Z of the Internal Revenue Code. You can’t miss it. Let’s see, we got a couple more questions here in from…we got one from Ashley Tison. Looks like he hopped off, but we’re gonna answer his question anyway. He says, “Hey, Matt, when will that QOZB be ready for investments from QOFs? Are we gonna make the June 30th deadline?” he wants to know.

Matthew: So, yeah. A lot of family offices have asked me. Yeah. So, yes. We do have investments, massive investment tools that people can utilize with us. But I have helped a lot of family offices construct Bs, so they can vest this from their own QOFs.

Jimmy: Right.

Matthew: Right, which is kind of that… And yes, hopefully, I’ll be done by June 30th, and he’ll be able to utilize that. And I think that’s growing, where a lot of people have opened their own family offices, and now they’re looking for sub-investments. Most of ours have been Fs. And in the current laws, an F can’t invest in another F. So, you can’t form an F and invest in my F. You can form an F and invest in one of my QOBs. Which is basically the sub-entity of my F.

Jimmy: Right. The qualified… Just to translate, the Qualified Opportunity Fund cannot invest in another Qualified Opportunity Fund. It has to come into, directly into the underlying assets of that Qualified Opportunity Fund, which are Qualified Opportunity Zone Businesses. Those are the Bs and Fs that he’s talking about. But, so, Patrick has a similar question that Ashley just asked. He wants to know, “Does USEDC,” does your group, “have its own sponsored QOF, as well as do you allow personal family office QOFs, or captive QOFs, to invest into your deals?”

Matthew: So, the answer is yes. And actually, in theory, they own the same things. They’ll just be two different joint venture partners. So, my goal as a company, let’s just say I’m investing in 400 wells this year, and 200 are in Opportunity Zones. The 200 would get split between all of my family offices that invest in the Bs, as well as my own QOF. So, I don’t want to create separate ones. I want everyone to have maximum diversification, just like I… I put 20% of every well with my own dollars. And I do it across the board. I don’t use one or the other, and I want the same thing for all of our investors. I want maximum diversification. So, if someone comes into a direct B from their F, then it’ll have the same asset allocation as my F will have in my B.

Jimmy: Makes sense. Makes sense. Well, we’re out of time. We’re actually a little bit over time. And we ran out of questions. But Matt, again, thanks for your support. Thanks for support of OZ Pitch Day. Thanks for being an OZ Insiders member, and hopefully we can get to you on another one of these at some point down the road.

Matthew: Yeah. That’d be great. Thanks.

Jimmy: All right. Thanks, Matt.