The Physician’s Guide to Working Interests in Oil and Gas

Most physicians understand the basics of stocks, bonds, and even real estate investing. But very few know about a powerful, though lesser-known, investment vehicle: working interests in oil and gas.

For high-income professionals, this asset class can provide not only long-term cash flow but also some of the most significant tax benefits available under the U.S. tax code. Yet, because it is less commonly discussed, many physicians miss out on the opportunity to explore it.

In this guide, we will break down what working interests are, why they might appeal to physicians, the tax advantages involved, the risks to consider, and how to decide whether this fits into your financial plan.

Disclaimer: This article is for informational and educational purposes only and does not constitute financial, legal, or investment advice. Any investment involves risk, and you should consult your financial advisor, attorney, or CPA before making any investment decisions. Past performance is not indicative of future results. The author and associated entities disclaim any liability for loss incurred as a result of the use of this material or its content.

What is a Working Interest?

In simple terms, a working interest is direct ownership in an oil or gas well. As a working interest investor, you provide capital for drilling and production and, in return, share in both the revenues and expenses.

Troy Eckard, CEO and founder of Eckard Enterprises, a sponsor partner of PIMD, has been in the industry for more than four decades. He explained it in terms that physicians familiar with real estate investing can easily understand:

“Let’s put this in traditional real estate terms. Buying mineral rights is like buying land, but a working interest is like actually developing that land—putting up a hotel or shopping center and generating rental income. In oil and gas, working interest means your capital is at work. You’re drilling wells, pulling oil and gas out of the ground, and sharing in the profits.”

Unlike passive ownership of royalties or mineral rights, working interests are considered active participation. This distinction has significant implications for taxation, which we will explore shortly.

Why Physicians Should Pay Attention

Many physicians face a double financial challenge. On one hand, their incomes place them in the highest tax brackets. On the other, their professional schedules leave them little time to actively manage side businesses. This is why many turn to real estate syndications and private investments to diversify.

Working interests in oil and gas can provide:

1. Cash flow potential. As wells produce, investors receive their pro-rata share of the revenue after operating costs. Depending on the well’s productivity, this can mean steady monthly or quarterly checks.
2. Tax advantages. Few other investments allow high-income professionals to deduct such a large portion of their capital outlay directly against earned income.
3. Portfolio diversification. Oil and gas often move independently of the stock market, which can make them a hedge during periods of equity volatility.

Tax Benefits Explained

The U.S. government provides special incentives for energy production. Physicians who invest in working interests can potentially access:

• Intangible Drilling Costs (IDCs): These cover expenses like labor, site preparation, and drilling fluids. Typically, 70 to 80 percent of the investment can be deducted in the first year. In many cases, the IRS allows 100 percent of these costs to offset active income.
• Tangible Drilling Costs: Equipment such as casing and wellheads may be depreciated over several years.
• Depletion Allowance: Once wells begin producing, a percentage of the income may be sheltered from taxes through the depletion allowance, similar to depreciation in real estate.
• Active Income Offsetting: Unlike many passive investments, losses or deductions from working interests can be applied against active W-2 or 1099 income. This is especially important for physicians who are often limited in how they can offset their high earnings.

These incentives exist because the government wants to encourage private investment in domestic energy production. For doctors facing large year-end tax bills, this can be a compelling reason to explore the asset class.

Troy summarized the unique appeal for high earners this way:

“I’m a successful doctor making $2 million a year. If I put $1 million into a drilling program, I get to take that right off my gross income. Suddenly, my taxable income drops to $1 million. That’s day-one tax savings—before I’ve even seen the cash flow.”

The Risks Involved

It is important to balance the appeal of cash flow and tax benefits with an honest look at the risks.

1. Exploration risk. Not all wells produce as expected. Some may underperform or even be dry holes. Although with newer technology, this risk has been significantly mitigated versus in the old days.
2. Commodity price risk. Oil and natural gas prices fluctuate. High prices can mean strong returns, but downturns in the energy market can reduce income.
3. Operational risk. Drilling is a complex business. Choosing an experienced operator with a track record of success is crucial.
4. Liquidity risk. Unlike publicly traded stocks, working interests are illiquid. Once invested, your capital is tied up, often for years, until the well’s life cycle ends or an exit option becomes available.

Who Should Consider Working Interests?

Working interests are not for everyone. They tend to suit physicians who:

• Are already financially stable and want to diversify beyond traditional asset classes.
• Are in high tax brackets and looking for strategies to reduce taxable income.
• Have an appetite for higher-risk, higher-reward investments.
• Are comfortable locking up capital for several years.

If this is your first exposure to oil and gas investing, it is wise to start small, learn the mechanics, and work with trusted operators.

How to Get Started

1. Educate yourself. Read IRS publications on oil and gas deductions, study industry basics, and attend webinars or conferences focused on energy investing.
2. Vet operators carefully. Experience, transparency, and alignment of interests matter. Look for firms with a proven track record and references from other professionals.
3. Understand the structure. Some opportunities may be direct partnerships, while others may be joint ventures. Make sure you know how profits, expenses, and risks are shared.
4. Consult your CPA. Tax rules are complex, and not all physicians’ situations are the same. A knowledgeable CPA can clarify how deductions will impact your unique income profile.
5. Diversify. As with real estate or stocks, do not put all your capital into a single well or program. Spread risk across multiple projects if possible.

Final Thoughts

Physicians today face rising burnout, high taxes, and limited control over their schedules. Passive and alternative income streams can provide a way to reclaim time and financial independence.

Working interests in oil and gas are not a silver bullet. They carry real risks and require due diligence. But for physicians seeking tax efficiency, portfolio diversification, and potential cash flow, they deserve consideration as part of a broader investment strategy.

The combination of upfront tax deductions and long-term income potential makes this asset class unique. For the right physician investor, working interests could provide a powerful way to keep more of what you earn and move closer to financial freedom.

This post is for educational purposes only and not to be considered financial advice. As always, do your own due diligence before making any investment decisions.

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Peter Kim, MD is the founder of Passive Income MD, the creator of Passive Real Estate Academy, and offers weekly education through his Monday podcast, the Passive Income MD Podcast. Join our community at the Passive Income Doc Facebook Group.

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