MAKING MONEY IN MINERAL RIGHTS
Letter from the Managing Partner
August 26, 2016
Dear Partners,
The letter I wrote regarding mineral interests last week brought forth some very interesting (and encouraging) comments and questions. It is exciting to hear such positive responses, especially when the letter was intended primarily as an informative piece. The questions gravitated around a few central points. I'll try to answer the most common ones.
Are you going to do a mineral rights program?
Yes, we are working on legal documents to bring a Mineral Rights Acquisition offering to our clients and beyond fairly quickly. Most mineral right acquisitions are seen in a more institutional environment, meaning large funds often purchase minerals in big blocks. You might even own some now, indirectly, as a part of a managed portfolio purchased by a large fund. Our upcoming offering will afford the opportunity to own minerals direct as a private individual in the form of undivided interests in the limited partnership.
How does owning minerals differ from a drilling program?
The purchasing of mineral interests is a real estate transaction. Once you own the rights, they never expire. You will own them until you elect to sell, gift or bequeath them, unlike lease terms on drilling deals which do expire. As a mineral owner, you have no drilling costs, no completion costs, and no dry-hole costs. You will pay taxes only on the revenue paid to you as a mineral owner from sales of oil and gas.
Will my money sit until we sell or "flip" the minerals?
No, no, no!! In fact, we expect to be producing cash flow within six months of beginning purchases. The timing of the cash flow and the amount all depend on how close we buy "in front of the drill bit". The first tier of purchasing will be in areas where new well permits are being issued, pooling contracts are being filed, and in-fill drilling is going on.
How does a mineral owner make money?
As a mineral owner, an oil company comes to you to negotiate terms of a lease to drill. The oil company typically pays an upfront, lump-sum lease bonus and offers a percentage of the gross revenue. The leases are done in increments of acres, either partial or multiple.
For example, if the minerals are in the desired area close to some top producing wells and on 60 net acres, you may see a $3,000 bonus (paid per acre) plus 20% of the gross revenues from the production. So, if the acreage produced $100,000 for the month in revenue, the mineral owner would "bank" the bonus fee of $180,000 and get a gross check from sales of $20,000.
Based on some fairly conservative assumptions, estimated targets for our program are to create a mid-range IRR of almost 26% and a mid-range ROI of 3.7X. (These estimates would assume an exit in year seven. There can be no guarantees of the success of future drilling by any operator).
If future drilling determines success, how do we predict that?
The answer is you don't control what others do. BUT, you can take a deliberate and scientific approach to acquiring the desired acreage. The "area of interest" is the STACK, Sooner Trend Anadarko Basin, Calhoun and Kingfisher Counties, in Oklahoma. There are large independents already drilling the area successfully and have large many committed drilling programs.
For example, large operators with considerable activity are Devon with 430,000 acres and 5,300 locations; Newfield Exploration with 210,000 acres and 3,850 locations and Continental Resources with 146,000 acres, to name just a few.
Source: Investor presentations and public filings
All of these companies have drilled wells averaging between 500-1,000 boepd (barrels of oil equivalent per day) in the area.
What happens to the owner of the surface rights if I own the minerals?
Mineral rights ownership virtually "trumps" surface rights ownership. As I had mentioned earlier, the rights to the surface have been separated, or severed, from the surface rights. As an owner of the mineral rights, the surface owner must allow reasonable access for the drilling and development of your minerals.
Are there any subscription fees to be charged associated with the offering?
No. The project is of supreme quality, and there are no subscriptions required to be bought to gain access by qualified investors.
There will be more questions, I am sure. I will be publically announcing the partnership in the next several days.
Keep a keen eye out for more news!
Regards,
Jack Nichols
Managing Partner
The letter I wrote regarding mineral interests last week brought forth some very interesting (and encouraging) comments and questions. It is exciting to hear such positive responses, especially when the letter was intended primarily as an informative piece. The questions gravitated around a few central points. I'll try to answer the most common ones.
Are you going to do a mineral rights program?
Yes, we are working on legal documents to bring a Mineral Rights Acquisition offering to our clients and beyond fairly quickly. Most mineral right acquisitions are seen in a more institutional environment, meaning large funds often purchase minerals in big blocks. You might even own some now, indirectly, as a part of a managed portfolio purchased by a large fund. Our upcoming offering will afford the opportunity to own minerals direct as a private individual in the form of undivided interests in the limited partnership.
How does owning minerals differ from a drilling program?
The purchasing of mineral interests is a real estate transaction. Once you own the rights, they never expire. You will own them until you elect to sell, gift or bequeath them, unlike lease terms on drilling deals which do expire. As a mineral owner, you have no drilling costs, no completion costs, and no dry-hole costs. You will pay taxes only on the revenue paid to you as a mineral owner from sales of oil and gas.
Will my money sit until we sell or "flip" the minerals?
No, no, no!! In fact, we expect to be producing cash flow within six months of beginning purchases. The timing of the cash flow and the amount all depend on how close we buy "in front of the drill bit". The first tier of purchasing will be in areas where new well permits are being issued, pooling contracts are being filed, and in-fill drilling is going on.
How does a mineral owner make money?
As a mineral owner, an oil company comes to you to negotiate terms of a lease to drill. The oil company typically pays an upfront, lump-sum lease bonus and offers a percentage of the gross revenue. The leases are done in increments of acres, either partial or multiple.
For example, if the minerals are in the desired area close to some top producing wells and on 60 net acres, you may see a $3,000 bonus (paid per acre) plus 20% of the gross revenues from the production. So, if the acreage produced $100,000 for the month in revenue, the mineral owner would "bank" the bonus fee of $180,000 and get a gross check from sales of $20,000.
Based on some fairly conservative assumptions, estimated targets for our program are to create a mid-range IRR of almost 26% and a mid-range ROI of 3.7X. (These estimates would assume an exit in year seven. There can be no guarantees of the success of future drilling by any operator).
If future drilling determines success, how do we predict that?
The answer is you don't control what others do. BUT, you can take a deliberate and scientific approach to acquiring the desired acreage. The "area of interest" is the STACK, Sooner Trend Anadarko Basin, Calhoun and Kingfisher Counties, in Oklahoma. There are large independents already drilling the area successfully and have large many committed drilling programs.
For example, large operators with considerable activity are Devon with 430,000 acres and 5,300 locations; Newfield Exploration with 210,000 acres and 3,850 locations and Continental Resources with 146,000 acres, to name just a few.
Source: Investor presentations and public filings
All of these companies have drilled wells averaging between 500-1,000 boepd (barrels of oil equivalent per day) in the area.
What happens to the owner of the surface rights if I own the minerals?
Mineral rights ownership virtually "trumps" surface rights ownership. As I had mentioned earlier, the rights to the surface have been separated, or severed, from the surface rights. As an owner of the mineral rights, the surface owner must allow reasonable access for the drilling and development of your minerals.
Are there any subscription fees to be charged associated with the offering?
No. The project is of supreme quality, and there are no subscriptions required to be bought to gain access by qualified investors.
There will be more questions, I am sure. I will be publically announcing the partnership in the next several days.
Keep a keen eye out for more news!
Regards,
Jack Nichols
Managing Partner