Oil and Gas Royalties for Accredited Investors: Passive Income, Depletion Deductions, and the Risks Nobody Talks About

Kimbell Royalty Partners deserves a closer look for growth-oriented buyers. According to KRP's February 2025 earnings release, the partnership grew production 733% from 3,116 Boe/d at its 2017 IPO to 25,946 Boe/d including Q4 2024 acquired production. It held 91 active rigs drilling on its acreage as of year-end 2024 , equal to 16% of the entire U.S. land rig count. KRP estimates the total U.S. oil and gas royalty sector at over $700 billion in size, with most of it held by individuals and small family estates. Aggregating those fragmented royalties is KRP's entire business model.

The fixed trusts are a different proposition. PBT's distributions peaked during the 2022 commodity spike and have compressed significantly since. The trailing twelve-month distribution as of mid-2026 was approximately $0.17 per unit, translating to a trailing yield below 1% at current prices. The trust's assets are depleting by definition , no new wells, no new acreage, no compounding. You are buying a finite income stream, not a business.

Private Market Royalty Deals: Accredited Investors Only

Private royalty and working interest deals marketed under SEC Regulation D Rule 506(b) are off-limits to non-accredited investors. In exchange for that restriction, sponsors can market higher projected returns and structure deals with IDC (intangible drilling cost) deductions that can offset up to 80 to 100% of your investment in year one. That sounds attractive. Here is what you should verify before the wire goes out.

According to Accredited Energy Investments, producing Permian Basin mineral rights in core Midland Basin counties were valued at $10,000 to $30,000 or more per net mineral acre in 2026, with market pricing at a royalty multiple of 5x to 10x annual royalty income. Those multiples imply a 10% to 20% gross yield before taxes on the purchase price. In a strong commodity year, that math looks compelling. In a year when West Texas Intermediate drops to $50, it looks different.

The deeper risk in private deals is not commodity price. It is sponsor quality.

The EnergyFunders Warning: Read This Before You Invest in Any Private Royalty Platform

EnergyFunders was the oil and gas crowdfunding platform that got the most attention from 2015 to 2022. It marketed Reg D deals to accredited investors starting at $50,000 minimums, promised 10 to 12% targeted annual yields in funds like its America First Energy Fund I, and pitched direct fractional ownership in Texas oil wells. The company is a wholly-owned subsidiary of EnergyFunders Ventures Inc., which trades on the Toronto Venture Exchange under the ticker EFV.

Here is what actually happened.

A verified investor review published on Invest Clearly in January 2025 reported a loss of approximately 95% of invested capital. The investor cited non-productive wells, distributions suspended from 2022 through 2023, multiple CEO and CFO departures, and an allegedly unsecured $4.5 million loan made with investor funds that was never repaid. Most significantly: Chris Pettit, a board member connected to the platform, was convicted of client fraud and sentenced to 50 years in prison.

I am not citing this to condemn all private oil and gas investing. I am citing it because this is the kind of outcome the mainstream financial press rarely covers, and it is the kind of outcome that should reset your prior on sponsor due diligence. The geology on a Permian Basin deal can be excellent. The tax structure can be correctly documented. The sponsor can still steal from you.

Before committing to any private energy fund or royalty deal, do the following:

• Pull the sponsor's Form D filing on SEC EDGAR. Verify what they said they raised and when.
• Search PACER (federal court records) for any civil or criminal actions against principals by name.
• Ask for audited financials from a recognized firm , not just compilations prepared by the sponsor's in-house accountant.
• Confirm escrow and custody arrangements. Your capital should never touch an operating account before assets are acquired.
• Talk to existing investors from prior fund vintages before you commit to a new one.

Honest Risk Section: What Can Go Wrong

This could blow up because of four things, and you should price each of them before writing a check.

Commodity price. Royalty income tracks oil and gas prices with no buffer. PBT distributed $0.5453 per unit in 2024 and roughly $0.17 in the trailing twelve months through mid-2026 , a 69% reduction as prices came off their highs. This is not an anomaly. It is the structure working exactly as designed.

Depletion. Every barrel produced is a barrel that no longer exists. Fixed trusts are finite-life instruments. Even for MLPs that actively acquire new royalties, the underlying physics of reservoir depletion operate continuously. If an MLP stops acquiring, its production declines on its own.

Operator risk. You collect checks, but the operator controls the drilling schedule, the maintenance decisions, and the cost allocations. PBT's 2024 10-K disclosed that Blackbeard Operating LLC refused to provide forward-looking development plans , causing the Trust to eliminate from its reserves calculation the proved undeveloped reserves that had made up 48.3% of Waddell Ranch proved reserves in 2023. As a royalty owner, you have limited recourse when the operator goes quiet.

Platform and sponsor fraud. As detailed above, the EnergyFunders case is the documented extreme. But the same structural vulnerability , illiquid investment, complex geology, investor capital mixed with operating cash, limited third-party oversight , exists across private energy platforms of every size. Sponsor character is not a soft variable. It is the primary risk in private deals.

Who Should Actually Consider This

Oil and gas royalties fit best in a portfolio where you have three things: a long income time horizon, tax exposure in the top two brackets that makes the depletion allowance meaningful, and the capital discipline to hold through commodity cycles without panic-selling at the wrong moment.

For liquid access with no accreditation requirement, KRP is the most growth-oriented vehicle in the public royalty space. For pure income with a simpler structure, the fixed trusts deliver , but you should model out the depletion trajectory before you assume distributions are durable.

For accredited investors considering private deals: the tax advantages are real, the return potential in a rising commodity environment is real, and the sponsor fraud risk is equally real. Size your position accordingly. No single private energy investment should represent more than 5% of your investable capital, regardless of how compelling the geological report looks.

For further reading on alternative income strategies for accredited investors, see our guides on private credit funds, direct mineral rights acquisition, and maximizing Schedule E passive income.

Frequently Asked Questions

What is the difference between a royalty interest and a working interest?

A royalty interest receives a percentage of gross production revenue with no obligation to pay drilling or operating costs. A working interest receives production revenue but bears its pro-rata share of all costs: drilling, completion, operations, workovers, and plugging. Working interest owners can deduct intangible drilling costs (IDCs) in the year incurred, which is a powerful tax benefit, but they also absorb losses if the well is unproductive or operating costs exceed revenue. Royalty owners have no downside cost exposure beyond losing the value of the royalty itself.

Do I need to be an accredited investor to buy oil and gas royalties?

No. SEC-registered royalty trusts (PBT, SBR, SJT) and royalty-focused MLPs (KRP, DMLP) trade on the NYSE and are available to any brokerage account holder. Private royalty funds and working interest participations marketed under Regulation D require accredited investor status: $1 million net worth excluding primary residence, or $200,000 annual income ($300,000 joint) in the two prior years with expectation of the same in the current year.

How does the 15% percentage depletion allowance actually work?

Under IRC §613A, independent producers and royalty owners can deduct 15% of gross royalty income each year as a percentage depletion allowance. The deduction is not limited to your original cost basis , it can exceed your total investment over time and continues as long as the property produces. At the top federal bracket with the 3.8% NIIT, your gross rate on royalty income is 40.8%. The 15% depletion allowance reduces the gross income subject to that rate, effectively lowering your after-tax cost of receiving royalty income. Report depletion on Part I of Schedule E (for individuals) alongside the gross royalty income.

Can I do a 1031 exchange into oil and gas royalties?

Yes, if you own fee mineral rights (real property ownership of the minerals beneath the surface). The IRS classifies fee mineral interests as real property, making them eligible for §1031 like-kind exchanges. A real estate investor with a gain on a commercial property can roll that gain into mineral rights and defer the capital gains tax. Working interests and overriding royalty interests carved from a lease are generally not eligible for 1031 treatment. Confirm the specific interest structure with a qualified intermediary and a tax attorney who specializes in energy taxation before executing any exchange.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.