Are you considering buying mineral rights? The following checklist provides step by step information to help you avoid risks and acquire the best mineral rights for your needs.
1. Recognize the Risks
There are many risks associated with buying mineral rights. A basic understanding of a well’s life cycle can help you avoid investment pitfalls, such as buying early on a shale well whose production will decline sharply in the first year, or paying a 3X multiple for an older well that might be plugged in 1 year.
2. Identify What Types of Mineral Rights you Want to Buy
Want to buy mineral rights ahead of drilling projects? Consider investing in non-producing Mineral Interests. Or acquire producing minerals through Royalty Interests, Overriding, or Nonparticipating Royalty Interests.
3. Pick an Area of Interest
Understanding the unique production potential, geology, and market for buying minerals in a specific region can help you pinpoint opportunities faster. Get familiar with an area of interest, such as the Delaware Basin, Eagle Ford, Bakken, and Haynesville Shale.
4. Find a Seller
There are multiple outlets where sellers list their mineral rights, including auction sites and online brokers. Look for services that offer choice and transparency.
5. Estimate Asset Value
A common rule of thumb for mineral investors is to estimate asset value by multiplying how much the owner received over the last year by a certain multiple (for example 3- or 4-times annual income). Buyers who want to be competitive should also consider location and asset quality in their offer.
6. Check the Facts
Perhaps the most important step in buying mineral rights is researching what you intend to buy, including historical well performance and production from nearby wells. Verify that the owner has the rights to sell to you and ensure that the lease does not contain “held by production” clauses that would allow the operator to produce very little just to hold the lease.
7. Make an Offer
Understand that most sellers will be seeking multiple offers from buyers to maximize sales price for their mineral rights. Buyers who make the strongest offer based on an accurate understanding of asset value will have the upper hand.
8. Transfer Ownership
If the seller used a broker, the necessary conveyance and deed will be filed with the appropriate county courthouse and operator. Importantly, expect the operator to send you a revised Division of Interest for signature before you will receive payments on your mineral rights.
9. Keep Careful Records
Buying and building a portfolio of mineral interests requires careful management of land records and revenue statements. Be sure to store these in a digital folder for quick reference and auditing purposes.
10. Maintain and Negotiate Leases
If you are acquiring Mineral Interests and/or Royalty Interests, be aware that you are assuming the burden of maintaining and negotiating leases with oil & gas operators. In contrast, Overriding Royalty Interest, Nonparticipating Royalty Interests, and Wellbore Interests do not, however, these revenue streams end when leases expire.