How do family offices invest in oil and gas, and why do they favor direct working interests?
Why Family Offices Favor Direct Working Interests
Family offices have become some of the most active private buyers of oil and gas, stepping in as traditional private equity has pulled back. What sets them apart is how they invest: not through commingled, blind-pool funds, but through direct, non-operated working interests at the wellbore level. The reasons are consistent across the sector - control over what they own, transparency into the economics, and tax benefits that only direct ownership delivers.
The pattern is strongest among families whose wealth originated in energy. Industry data shows roughly 93% of energy-origin family offices invest in oil and gas directly, compared with about 57% of family offices overall. For these families, wellbore-level exposure is a deliberate choice, not a default.
What a Non-Operated Working Interest Is
A non-operated working interest gives the family office direct fractional ownership of a well and its production, along with a proportionate share of costs, while a professional operator handles drilling and day-to-day operations. The office gets the ownership economics and the tax treatment of a direct owner without taking on operational responsibility. This is the structure most family offices prefer for energy.
The Tax Case at Family-Office Scale
Because a family office is a taxable structure, it captures the full suite of oil and gas tax benefits - and the dollars are large enough to matter:
| Benefit | Authority | Effect |
|---|---|---|
| Intangible Drilling Costs (65-80%) | IRC 263(c) | 100% deductible in year one |
| Non-passive treatment | IRC 469(c)(3) | Offsets active income, no passive cap |
| Depletion allowance (15%) | IRC 611 | Shelters production income for life of well |
| Tangible equipment depreciation | MACRS (IRC 168) | 7-year accelerated write-off |
The non-passive treatment is the differentiator. Unlike a limited-partnership fund interest, a direct working interest produces deductions the family can apply against active income across its taxable entities.
Due Diligence and the AFE
Family offices underwrite these deals the way they underwrite any direct investment. The core items are the operator's track record and reputation, the Authorization for Expenditure (the operator's itemized cost estimate to drill and complete the well), the lease and geological economics, and the projected cash-flow multiple, which for high-quality, low-leverage assets often runs near 3x. Reviewing the AFE before funding is essential: it shows exactly what the capital buys and how much qualifies for the first-year deduction.
Co-Investment Structures and Minimums
Family offices typically commit larger amounts than individual investors - often $250,000 to several million dollars per opportunity - and frequently co-invest directly alongside the operator. Capital can be spread across multiple wells to diversify geological risk while preserving the direct-ownership tax treatment on each position. For families testing a new operator relationship, a smaller initial allocation across two to four wells is a common starting point.
UBTI and Entity Structuring
A direct working interest is an active trade or business for tax purposes. Held inside a tax-exempt vehicle - a foundation, endowment, or self-directed IRA - it generates Unrelated Business Taxable Income (UBTI) and undermines the benefit. Family offices therefore hold working interests in taxable entities, commonly an LLC, where the deductions flow through to the family's taxable income. This is the opposite of how a tax-exempt institution would approach the asset, and it is precisely why working interest fits a taxable family office so well.
How Kingdom Exploration Works With Family Offices
Kingdom Exploration structures direct, non-operated working interests in Wyoming oil and gas wells for accredited investors and family offices. Engagements include access to the offering and AFE, operator background, and allocation across multiple wells, with larger co-investment commitments structured directly. The minimum entry is $50,000, scalable to family-office check sizes. To discuss an allocation, call (307) 622-1645, and coordinate with the family's tax counsel, since a working interest is a tax-motivated position best aligned with the family's broader plan.
In Simple Terms
Family offices, the private firms that manage a wealthy family's money, usually invest in oil and gas by directly owning a piece of the wells rather than buying into a big pooled fund. They like the control, the transparency, and especially the tax benefits that only come with direct ownership. Because a family office pays taxes, it gets the full first-year write-off (usually 65-80% of the amount invested), the 15% depletion allowance, and the ability to use those deductions against the family's other income. Families whose wealth came from energy do this most of all - about 93% invest directly. The main thing to watch is that these positions should be held in taxable accounts, not tax-exempt retirement vehicles, because direct working interest in a retirement account creates a tax problem called UBTI. Larger families often commit $250,000 to several million dollars per opportunity.Legal / Technical Details
Family offices, both single-family and multi-family, allocate to oil and gas predominantly through direct, non-operated working interests rather than commingled funds, valuing control, transparency, and wellbore-level tax benefits. Industry data (FINTRX) shows roughly 93% of family offices whose wealth originated in energy invest in the sector directly, versus about 57% of family offices overall. Because a family office is a taxable structure, it captures the full Intangible Drilling Cost deduction under IRC Section 263(c) (65-80% in year one), the 15% percentage depletion allowance under IRC Section 611, MACRS depreciation on tangible equipment, and, critically, the non-passive treatment under IRC Section 469(c)(3) that lets drilling losses offset active income across the family's taxable entities. Direct working interest is acquired through joint-venture or Rule 506(c) offerings; diligence centers on the operator's track record, the Authorization for Expenditure (AFE), lease economics, and the cash-flow multiple, often near 3x. One caution: a working interest held inside a tax-exempt vehicle triggers UBTI, so family offices generally hold these positions in taxable entities. Larger allocations of $250,000 to $5,000,000-plus are typically structured directly with the operator.Real-World Example
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Investment Disclaimer
Past performance is not indicative of future results. All investments involve risk, including the potential loss of principal. The projections, examples, and estimates presented are for illustrative purposes only and are not guarantees of future performance.
Oil and gas investments are speculative and involve significant risks including but not limited to: commodity price volatility, drilling and completion risk, regulatory changes, and geological uncertainty. Returns may vary substantially from projections based on actual well performance, oil prices, and operating costs.
This content is for educational purposes only and does not constitute investment advice. Consult with a qualified financial advisor, CPA, and attorney before making any investment decisions. Kingdom Exploration offerings are available only to accredited investors as defined by SEC regulations.
