Newsletter No. 167
Good afternoon,
This week’s energy headlines point to a stronger theme taking shape: confidence is returning to U.S. oil and gas. Texas rig activity is moving higher, U.S. drillers have added rigs for five straight weeks, and deal activity across the sector continues to show that buyers are still interested in quality assets.
That matters because rig count growth and renewed M&A momentum are both signs that the market still sees long-term value in domestic production. As global uncertainty keeps energy security front and center, American oil and gas remains a critical piece of the conversation around diversification, inflation sensitivity, real assets, and supply reliability.
In this week’s issue of The Upside, I look at why rising Texas activity matters, why consolidation could strengthen the sector, and why private energy opportunities may deserve renewed attention in today’s market environment.
This Week's Headlines
Oil and Gas News
- Texas Energy Production and Exports Keep Growing
- Texas Rig Count Posts Biggest Weekly Jump in Four Years
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U.K. Families Could Pay More for Energy
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Russia May Stop Fuel Exports After Ukraine Hits Refineries
Energy Market Perspective
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Energy M&A Rebound Signals Stronger Market Confidence
- Ask the "Tax Guy"
What's Happening at King
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Upcoming Webinar: Mid-Year Energy Outlook: Oil Markets, Tax Advantages & Investor Strategy
- Don't Miss an Episode of the Oil & Gas Rundown LIVE!
Move to Watch
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Devon and Matador Spend Big on New Oil Land
Oil and Gas News
Texas Energy Production and Exports Keep Growing
Texas oil and gas production continues to show strength in the latest May update, with the state producing an estimated 5.8 million barrels of crude oil per day and 35.5 billion cubic feet of marketed natural gas per day in April. Texas remains the backbone of U.S. energy supply, accounting for more than 42% of the nation’s crude oil production and nearly 30% of marketed natural gas production.
Activity is not just holding steady, it is improving. Texas rig counts have climbed from earlier in the year. At the same time, drilling efficiency continues to improve, with producers getting more output from each rig in both the Permian and Eagle Ford. Texas energy exports also remain strong, reaching $22.1 billion in March, up nearly 15% from a year earlier, with Europe continuing to be a major buyer of Texas crude oil and LNG.
Texas Rig Count Posts Biggest Weekly Jump in Four Years
Texas added 10 drilling rigs in one week, the state’s largest weekly gain since May 2022, bringing its total rig count to 255. This marks the fifth straight week of gains for Texas and the highest statewide rig count since July 2025.
The broader drilling market also continues to recover. The Permian Basin added 4 rigs to reach 250, while the total U.S. rig count rose by 7 to 558. Oil drilling drove most of the increase, with 10 more oil-directed rigs added nationwide, while gas-directed rigs fell by 3.
U.K. Families Could Pay More for Energy
Energy bills in the U.K. are expected to go up by 13% starting July 1 because natural gas has become more expensive.
The price increase is mainly tied to the conflict in the Middle East, which is affecting global energy markets. Since the U.K. still uses a lot of gas to heat homes and make electricity, higher gas prices mean higher bills for regular households.
Russia May Stop Fuel Exports After Ukraine Hits Refineries
Russia is getting ready to stop exporting diesel and jet fuel after Ukraine attacked several major Russian refineries with drones. These attacks have damaged a big part of Russia’s ability to turn oil into fuel.
Because of the damage, Russia may need to keep more fuel at home instead of selling it to other countries. Repairs could take months because sanctions make it harder for Russia to get the parts it needs. This also puts pressure on Russia’s money, since oil and gas sales are a major source of government income.
Energy Market Perspective
Energy M&A Rebound Signals Stronger Market Confidence
U.S. upstream oil and gas dealmaking is off to a strong start in 2026, with Enverus reporting $38 billion in first-quarter M&A activity, the highest quarterly total in two years. The Devon Energy and Coterra Energy merger accounted for most of that value, but the broader takeaway is that higher oil prices are helping restore confidence across the sector.
Stronger commodity prices are making asset sales more attractive for private operators while supporting continued consolidation among public companies. As more private E&Ps consider bringing assets to market, especially in high-quality areas like the Permian Basin, M&A activity could remain an important signal of where long-term value and institutional capital are moving in energy.
Ask the "Tax Guy"
This week, we want our EVP of Tax, Rex Gifford, to break down an important tax question for oil and gas investors: when an investor is admitted as a partner in a partnership that owns a working interest, how are current-year deductions treated? Specifically, we’ll look at whether deductions allocated in the year of admission can be carried forward and claimed in future tax years, and what investors should understand about basis, passive activity rules, and other limitations that may affect deductibility.
Q. When acquiring indirect ownership of an oil and gas working interest by being admitted as a partner in a partnership, can current-year deductions be carried forward and claimed in future tax years?
A: Acquiring indirect ownership of an oil and gas working interest through partnership participation generates pass-through taxable income and deductions. Generally, an investor becomes a partner by making a capital contribution to the partnership. This capital is used to develop oil and gas mineral leases through drilling, testing, completing, stimulating and equipping wells. As these capital contributions are expended, significant current-year deductions are generated, primarily from intangible drilling costs (IDCs) and tangible costs eligible for bonus depreciation.
The key question is whether these current-year deductions must be claimed in the current tax year or can be carried forward to future years. The character of these current-year deductions must be determined as either active or passive.
- If the partner elects to be admitted as a limited partner, the deductions are subject to the IRC Section 469 passive activity loss rules. They can only offset passive income and remain suspended until sufficient passive income is available. IRS Form 8582 is used to calculate current-year passive losses and the amount of suspended losses carried forward.
- If the partner elects to be admitted as a general partner, the deductions are considered active. They may offset any type of taxable income, except passive income. IRC Section 469(c) (3) provides an exception that allows this active classification.
If active deductions exceed current-year taxable income, a net operating loss (NOL) is created. This NOL may be carried forward to subsequent tax years. Alternatively, under IRC Section 59(e), the taxpayer may elect to amortize intangible drilling costs over a 60-month straight-line period. Thus, current-year active deductions can only be claimed in future years through one of these two methods.
When carrying forward a NOL, either IRS Form 1045, Schedule A of Form 1045, or IRS Form 172 are typically used. The NOL carryforward amount is reduced by any excess of nonbusiness deductions over nonbusiness income. Additionally, certain itemized deductions must be recomputed, which may further reduce the value of the NOL carryforward.
In some cases, a current-year NOL may trigger alternative minimum tax (AMT) issues, as intangible drilling costs can become a tax preference item reportable on IRS Form 6251, Line 2t.
In summary, current-year deductions from indirect ownership of oil and gas working interests are significantly more valuable when claimed against current-year taxable income than when carried forward. Due to the time value of money, immediate tax savings have much greater economic benefit than deferred deductions.
Have a tax question you’d like covered in a future issue? Email it to theupside@kingoperating.com.
DISCLOSURE: For educational purposes only. Not tax, legal or accounting advice. Please consult your tax professional before making any investment or tax-related decisions.
Happening at King
Don't Miss an Episode of Oil & Gas Rundown LIVE
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Move to Watch
Devon and Matador Spend Big on New Oil Land
Devon Energy and Matador Resources spent a total of about $3.7 billion to buy drilling rights in a valuable part of New Mexico’s Permian Basin. Devon spent about $2.63 billion, while Matador spent about $1.14 billion.
In simple terms, these companies paid a lot of money now because they believe the land could help them drill more wells and produce more oil in the future. Some analysts think the price was very high, but the companies believe the acreage is worth it because it is close to their existing operations and could support long-term growth.
If you'd like to talk to someone about King and are an accredited investor, you can fill out your information here or schedule a Zoom conversation with one of our SVPs here and someone will reach out.
All the best,
Jay
