MINERAL ROYALTY DEAL BASICS (OVER A GLASS OF WINE)
Over a glass of wine on a patio, when asked, here’s how I tend to answer the question. “It’s a lot like real estate . . .” Land is useful and if you own it you can do lots of things. You can build on it, you can live there, farm there, or run a business. Or, someone else might be interested in developing it or perhaps using the buildings that you’ve got on it. Being the landowner, it’s your right to allow someone to lease it. With the land there’s also oil and gas resource potential & the list of uses they have fall in parallel paths to the surface ownership, just underground, subterranean real estate so to speak.
Now, nobody wants to live in your underground real estate, they do want to access what’s valuable there in order to sell it. Energy investors are willing to take the risk and effort required to find, extract, and sell those minerals out, so they’ll take the majority of the proceeds. However, as the landowner, you’re the one that has the rights to those energy resources beneath your feet! You could get your pick and shovel out and go digging but most people won’t strike a gusher near the surface and get covered in black gold. It takes a whole lot of experience and equipment to access and sell these assets and most people who own mineral rights are just normal land-owning folk who happen to be sitting on top of a valuable resource. The mineral owners and the drilling and operating experts make up a good team and all benefit from the arrangement.
The rights as a tradeable asset in themselves
So one interesting development in the history of land ownership was the separating of the mineral rights from the ownership of the land itself. People realized that folks who were interested in minerals only needed access to the assets that lay beneath them, and they didn’t need much of the surface except for the little patch of land large enough to locate the well and some infrastructure on. So, in history that dates back to the Roman Empire, rights to minerals underground were seen as a distinct asset from the land itself. In some times and places they were entirely tied to the land and passed with ownership of the land; yet in some times and places, indeed in much of the world, the government owns the rights to all minerals, no matter who owns the land. In our context–the United States, happy for us, mineral rights are a separate and tradeable commodity. So you can have your cake and sell it to, in a sense.
This dynamic opens up a lot of economic potential for many. People who own land and the mineral rights on them work with drilling and operating companies who pay them for a portion of what they extract. Usually, in the beginning of a well’s life cycle the oil production is very high and lucrative but it quickly tails off to a period of slow steady but declining production. This means that all royalty owners eventually see their checks dwindle. They are a steady source of income but nothing spectacular. As the royalties pass down generation to generation they often get split amongst children, further decreasing each one’s cash flow. But this consistent, even though low returning, asset retains a lot of value. For many people it becomes the better move to consolidate the returns in one transaction and let go of the royalties. I’ve hardly ever bought a mineral royalty without hearing the story of what the royalties have meant in the owner’s lives and why they’re selling now. It’s a really important part of the work for me actually.
Deal making, but not like the sharks do.
When we look to acquire mineral and royalty rights and an owner is looking to sell, the key question that everybody wonders about is price–”What are ya paying?”. There is a bit of a mystery at the heart of every transaction, the object sold has to be worth more to the buyer than what they pay and less to the seller than what they receive. Or else no one would sell or buy anything. We buy royalties because we believe long term, they will produce and generate income that we can grow our branches within, being Family. Life. Investing. We use proceeds from these minerals to feed our families, to enjoy Life together and also to invest in one another, our communities and other energy endeavors..
Coming to a price we all feel good about
There is a way of coming to an agreement on value that takes everybody’s situation into account fairly. In all deal making there are trade offs. What we love finding are the trade offs that match up in a complementary way for both parties. Let me explain. Of course if I offer a price for an asset, I think it’s probably worth more than that price. But the key word is probably! Mineral royalty owning comes with risk.
Since oil and gas is only valuable because someone in the end pays to use it, the price that it sells for is really important, and it changes . . . sometimes rapidly and often times by a lot! There are many methods used to attempt to forecast (read predict) future prices of oil that have lots of great theoretical validity, but guess what? They’re all wrong in the end, always. No one can predict the future. But we have to assign value to the assets that return value over time so we use the best guess we can. So that is one of the places the risk lies for us as buyers.
There is also the question of whether or not all of the rights people have to drill and extract the oil or gas on the land will be executed. Operating companies usually lease “the right to drill” and don’t always actually do it everywhere. So we act like bloodhounds, hunting down information about the region, the history of drilling and the particular operators that own a given asset, to make a good guess as to what their movements might look like in the coming years.
When we buy your minerals, we’re not just buying oil and gas, we’re also buying risk, so we put a value to the assets that will come out of the ground (a positive number) as well as the risk (a negative number). From the sellers perspective they are selling that risk off, so that’s a gain. Instead of uncertain cash flow, hopefully captured over some uncertain time they trade that to capture a lump sum which might be less than that total amount over time, but they receive it right now which for them is more important. So the transaction is a complementary hand off of value and risk between the parties.
I love sharing my thinking with mineral sellers, as much as they’ll listen to. It’s not a mysterious black box. It is rational, understandable and in the end, fair. We can all come away feeling like we’ve gotten what we needed, and been treated wel
Value to investors
I might have painted a bit of a gloomy picture for us mineral buyers, buying risk and declining resources, but from our perspective it isn’t that at all. Since Maevlo works as a fund structure we find value in a very different way than individual royalty owners do. While the royalty checks do still matter, of course, what we are doing is on a larger scale. We bundle large numbers of small assets into a single financial instrument (the fund). Collecting those assets is our real expertise, that’s the treasure hunting I love the most. We get diversity of region, geology, drillers and operators, and more. The better we are at reading all of those variables, the better the assets we put in the fund are, and the more competitive prices we can offer mineral sellers. Everybody wins.
It’s extremely rare to meet an individual owner that has mineral assets across 5 States, more than 30 operators and collecting royalty revenue from more than 650 wells. But as we intentionally ‘pick up small bites along the way’ as Matthew often says, we’re able to aggregate a meaningful portfolio within Maevlo.
Two glasses of wine later…
If you’ve made it this far your head is probably spinning and you’re ready for a snack, but I get excited about this stuff and find that the more people know about it the more excited they get as well. Mineral sellers gain clarity about the assets they own and more agency thereby, and our investors become more like real partners who can bring their wisdom and experience to the table with us. And through it we all become better stewards of the resources that are under our care.