Oil and gas royalties are a wonderful investment for small investors
Partly because the 12% – 30% returns that can be made, and partly because small one man investment shops can get into the business if they have the know-how and the financial backing.
This article will outline how oil and gas royalties can be bought. For simplicity, we must assume some givens, namely:
- You already have consulted royalty specific legal advice, such as the oil and gas law firm of Philip Mani in San Antonio, or Geary, Porter & Donovan in Dallas.
- You have established a legal entity to buy them with, either a company, partnership, or under your own name
- You have acquired funding or have a war chest to buy royalties.
Anyone who owns oil and gas royalties means they probably own the mineral rights. There are rare instances where that is not true, but you will often see ‘oil royalties’ and ‘mineral rights’ as interchangeable phrases.
Buying minerals occurs in clear phases:
Phase 1 — Find potential royalty owner sellers
Phase 2 — Solicit sellers with an offer to purchase their royalty
Phase 3 — Receive incoming calls from sellers with questions.
Phase 4 — Quickly perform due diligence on sellers who think they wish to sell
Phase 5 — Send out mineral deeds and paperwork to owners who think they want to sell their royalties. Follow up on these people immediately.
Phase 6 – After receiving deeds and paying the royalty seller, file the deed with the correct county courthouse.
On to the details…
Phase 1 – Find’em
Finding potential royalty sellers. Sounds simple. It is. However, doing so is not. In fact, the biggest problem in royalty buying is locating mineral owners who wish to sell their royalties to you. This is the brick wall many run up against. There are a couple of places to find leads on this:
a. Division Orders – If you own royalties already, you may have received a Division Order.
Division orders are documents which show who is getting what share of the royalty money. Some companies will only send you a document with your share, others will haphazardly ship you a division order with all the owners. If you got lucky and have one of these, you use those names and addresses as leads. If you don’t, you go to the second option.
b. Data Vendor with a royalty owner database
Currently, the only data vendor that has oil and gas royalty owners is us, Blackbeard Data Services out of Austin, Texas. We have all the royalty owners in Texas and Kansas. Our database is over 4 million names, plenty to get started.
Beginners should just buy a single county to start.
Phase 2 – Make Offers
With data you have from division orders or from us, you should have the following data: Owner name and address, lease name, percentage of royalty, value of royalty (you may have to derive this from the data). That is enough information to send out offers. The average royalty buyer will mail out thousands of letters with offers, counting on statistics to come.
There are three ways to make offers:
1. Send a letter offer with a Bank Draft
2. Send a letter with offer and no draft
3. Send a letter with no offer but you discuss your interest in buying royalties they have
For small offers we recommend #1, for medium offers we recommend #2, for really large acquisitions over $500,000 we think #3 would be best. We make these recommendations based on our discussions with the industry over the last 12 years.
Phase 3 — Reel them in
You should expect 3 responses for every 1,000 letters you sent. That is correct, a 0.3% response is normal in Texas. Those are merely calls, not closings. How well you close will determine if you can buy minerals from 2 out of those three or 1 out of 3. I’d count on half of them closing with you. To greatly improve your odds of closing, you need to receive the calls as they come in. Make sure they can reach a human being, provide them with answers to their concerns, reassure them they have something you will buy and that yes, you can close within 7 days and their money will be in their account.
One of the first things you should inquire about carefully, is if they are shopping this royalty to anyone else. If no, you can buy it cheaper, likely 30-40 months production (30x their monthly royalty check). If they are wise and are shopping it, they will be looking towards 60-70 months production. This is when you discuss their expectation for the buyout. Let them open their mouth first.
Phase 4 — Screen’em
“Trust no one alive, and walk carefully around the dead.” A wise proverb when it comes to humans and money. It brings out the worst in our species. Confirm they actually own the royalty they want to sell you. That may be as simple as having them send you the last 4 months of pay stubs for the royalty, or for really expensive acquisitions, a trip to the courthouse for research. Whatever you do, do it fast. Before they shop their royalty or change their mind.
Phase 5 – FIRE!
Once you’re confident they really own a royalty you want, call them up with the offer and then Fedex the paperwork once they accept. The paperwork depends on your legal advice, but it must include a mineral deed of some kind. 24 hours after they should have received it, you should call to ‘confirm they got it’ but really keeping the ball rolling before they change their mind or the price.
Phase 6 – File with the Courthouse
Your legal council will give you advice on what documents they must sign, once they return that to you, then the seller should be paid. Perhaps you are paying with escrow, either way, once you have the deed signed close the deal. Next is to file the deed with the courthouse and contact the existing oil company that was paying the royalty. It will likely take 3 months before you start getting your new royalty check. Longer delays are not uncommon due to bureaucratic delays.