The industry’s expensing culture made sense when deductions were scarce. Layer 100% bonus on top of IDCs and losses left over from the last downturn, and it has become a trap.

Oil and gas operators understand accelerated cost recovery better than almost any industry in America. Intangible drilling costs have been immediately deductible for decades. Percentage depletion survived every round of tax reform. Expensing is part of the culture.

That is precisely why the One Big Beautiful Bill Act has created a problem many operators have not recognized. Here are five hard truths most of the industry would rather not discuss.

Hard Truth One: You Cannot Use What You Are Generating

The OBBBA layered permanent 100% bonus depreciation onto the tangible side of the business: wellhead equipment, ESPs and rod pump units, compression, tank batteries, gathering lines, and SCADA and monitoring systems. Stack that on top of IDCs and the deduction pile for an active drilling program can exceed taxable income for years.

Roughly two in five mid-sized operators in our research entered 2025 still carrying net operating losses from the 2020 collapse or the 2023 gas price decline. Those losses can offset only 80% of taxable income in any year. New deductions do not replace them; they queue up behind them.

A deduction that waits is worth less. An operator unable to use a $20 million equipment deduction until year four gives up roughly $800,000 in present value at an 8% discount rate, before the 80% limit stretches recovery further. Across a multi-year development program, that erosion becomes real money.

Hard Truth Two: Your Interest Capacity Probably Doubled, and Your Model Does Not Know It

From 2022 through 2024, business interest deductions were capped at 30% of a tax EBIT figure. For a producer, where depreciation, depletion, and amortization are often the largest non-cash charges, that cap was punishing. For tax years beginning after December 31, 2024, the cap returned to 30% of tax EBITDA, with DD&A added back.

For many leveraged operators, that change can more than double deductible interest capacity and free up interest disallowed in prior years. Our research found that 44% of leveraged companies carrying disallowed interest had not re-modeled under the new rules. If your after-tax cost of debt still reflects 2023 math, you are overstating it.

Hard Truth Three: Owning Every Piece of Equipment Is a Habit, Not a Strategy

Operators own their tangible equipment because they always have. But IDCs and tangible equipment are different animals. IDCs are yours; they cannot be transferred, and they should stay with the working interest owner. Artificial lift systems, compression, tank batteries, and monitoring systems are discrete, movable, valuable assets with real secondary markets.

For an operator that cannot absorb its deductions, those tangible assets are candidates for a lessor that can. A capital partner that understands how an ESP or compressor package holds value in a specific basin can use the bonus depreciation now and reflect it in lower payments, while the operator keeps the IDCs and the cash. For equipment acquired during loss years, a sale-leaseback can turn dormant tax value into drilling capital, with gain on the sale potentially absorbed by existing losses.

The principle is simple. Keep the deductions only you can take. Let someone else take the ones they can use better.

Hard Truth Four: The Biggest Producers Got a Fix. You Did Not.

The OBBBA did address one industry-specific penalty. Beginning with 2026 tax years, IDCs can reduce adjusted financial statement income for the corporate alternative minimum tax. That relief matters a great deal to the largest producers, the ones with more than $1 billion in average annual financial statement income. For the mid-sized operator, the minimum tax was never the issue. Absorption is, and the law did nothing about that.

Refiners and processors have a separate opportunity. Interim IRS guidance defines refining to include fractionation, distillation, and cracking, which brings new or expanded processing facilities within reach of the 100% production facility deduction. Upstream extraction does not qualify. Midstream companies adding fractionation capacity should be modeling the election now.

Hard Truth Five: Your Lender Has Left Before

Every operator in this industry remembers 2015 and 2020, when bank capital retreated just as cash flow tightened. The tax benefits of the OBBBA reward operators who keep investing through cycles: drilling when acreage demands it, converting DUCs when prices justify it, upgrading artificial lift when decline curves call for it. They do nothing for an operator whose capital source disappears every time commodity prices fall.

Speed to spud matters. Acreage positions do not wait for bank committees, and lease expirations do not care about credit cycles. The most valuable characteristic of an operator’s capital, under a regime that rewards continuous investment, is that it stays.

The Bottom Line

The oil and gas industry spent decades fighting for its deductions. It now has more than many operators can use. The winners over the next cycle will be the operators who stop treating every deduction as something they must own, and start treating it as something to place where it is worth the most.