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
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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
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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
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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
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“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!
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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
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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.
18 Comments
Do you maintain a list of buyers and sellers?
Do you act as a broker of royalties?
We maintain a list of oil and gas royalty owners (mineral rights that are productive) for Texas, Kansas and are starting in Arkansas. We do not act as brokers.
How much does it cost?
For which counties do you have information? All of Texas? Okla? La?
I am selling an ORRI under 50,000 acres in Roosevelt Co., MT. First Bakken well drilled….multiple pay zones.
I am interested to know more about what you have. Please email me information with your phone number for contact. Thanks.
I am interested please can you email me more detail and how much do I have to spend. Thank you.
Your acquisition budget will dictate your setup and operational budget. But you could start buying a few minerals with a budget of under $10,000.
Are any of the interests producing?
I am an individual, I own some small royalties and wish to buy some more.
What about the internet auctions that seems to be complete ?
Thanks
George
How do you determine the value of a non producing mineral and royalty interest?
My client would like to sell five Oil & Gas leases he holds on one property with Chesapeake Exploration in Fort Worth. Gas flow and royalties begin the first quarter of 2012. The total royalty is projected at approximately $200,000 per month.
These 5 leases are in force for 3 years and Chesapeake client would like to increase the 3 year leases to 99 years. Owner is willing to extend.
Some questions:
1. Are you interested purchasing this stream of royalties?
2. What information do you need? Do you bid based upon the well reports or the checks presently being written? Contracts?
3. Would you help owner secure the 3rd to 99 year lease or should he finalize then offer to you?
Can you help me understand why there is a need to re-work a contract that will be held by production. (i.e. – if there is production from now for 99 years the same terms apply) What CHK is asking is to shut that in for when it is convenient for them to produce or economical for them to produce. If you are getting a royalty payment then the lease remains in effect. DO NOT renegotiate with CHK at this time – and never give a lease for over a 5 year term, and three is better.
I’m afraid we can’t help you. Please consult legal council.
I want to by some royalties please can some one help me by emailing me thank you.
We own the gas and oil rights. Have lease with Chevron in PA Marcellus are of southwestern PA. Property (30acres) is in a planned well with Cheveron but has not been drilled yet. Also rumors of Utica oil in same area. Where do we list these royalties rights for sale?
I would be interested in talking with you about purchasing your mineral rights. Please contact me at the email address provided above.
Thank you.
this site doesnt tell you how much i need to start buying royalties. who to send the check to. please give me that info. i think royalties is the way to go for me. also dividends are to. im new at this. no one telling me how to buy them. thank you .dan
How does an individual with a small amount get started?
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