Making Money in Mineral Rights
A letter I wrote, as Managing Partner for Redhawk Minerals Fund I, about owning mineral interests a while back, brought some very interesting (and encouraging) comments and questions.
It was exciting to hear the positive responses, especially as the letter was intended as an informative piece. The questions gravitated around a few central points. I’ll try to answer the most common ones.
It was exciting to hear the positive responses, especially as the letter was intended 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 another mineral rights program anytime soon?
Yes, we are working on legal documents to bring our second Mineral Rights Acquisition offering to our clients and beyond fairly soon, hopefully in early 2018.
Most mineral right acquisition opportunities are found in a more institutional investment 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 for the independent minded investor to own minerals directly as a private individual in a limited partnership format.
Yes, we are working on legal documents to bring our second Mineral Rights Acquisition offering to our clients and beyond fairly soon, hopefully in early 2018.
Most mineral right acquisition opportunities are found in a more institutional investment 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 for the independent minded investor to own minerals directly as a private individual in a limited partnership format.
How does owning minerals differ from a drilling program?
Purchasing 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.
Purchasing 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 earning nothing until we sell or “flip” the minerals?
No, no, NO!! In fact, we expect to be producing cash flow within six to twelve months of beginning purchases. Our Fund I investors received cash distributions in the first quarter.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.
No, no, NO!! In fact, we expect to be producing cash flow within six to twelve months of beginning purchases. Our Fund I investors received cash distributions in the first quarter.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-cash lease bonus and also 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 (60 acres X $3,000) and get a gross check from sales of $20,000 ($100,000 revenue X 20% Royalty).
Based on some fairly conservative assumptions, estimated targets for our Redhawk Minerals Fund II are to create a mid-range annual yield in excess of 20% and a mid-range ROI of over 2.5X.
(These estimates would assume an exit in year five. There can be no guarantees of the success of future drilling by any operator).
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-cash lease bonus and also 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 (60 acres X $3,000) and get a gross check from sales of $20,000 ($100,000 revenue X 20% Royalty).
Based on some fairly conservative assumptions, estimated targets for our Redhawk Minerals Fund II are to create a mid-range annual yield in excess of 20% and a mid-range ROI of over 2.5X.
(These estimates would assume an exit in year five. 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 right in our area of interest 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 over 500–1,000 boepd (barrels of oil equivalent per day) in the area with the largest, at this writing, of 6,000 boepd!!. We will be buying acreage in anticipation of their directed progress.
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 right in our area of interest 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 over 500–1,000 boepd (barrels of oil equivalent per day) in the area with the largest, at this writing, of 6,000 boepd!!. We will be buying acreage in anticipation of their directed progress.
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.
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.
There will be more questions, I am sure. I will be publicly announcing the partnership within the next few weeks. Keep a keen eye out for more news, or visit us here on our website, www.redhawkinvestmentgroup.com, and see the latest postings or you can email me at [email protected].
Regards,
Jack Nichols
Managing Partner
6060 N. Central Expressway, Ste. 302 | Dallas, Texas 75206
Office direct: 844.952.7363 | fax: 888-537-3586
e-mail: [email protected]
Visit our website at www.redhawkinvestmentgroup.com
Regards,
Jack Nichols
Managing Partner
6060 N. Central Expressway, Ste. 302 | Dallas, Texas 75206
Office direct: 844.952.7363 | fax: 888-537-3586
e-mail: [email protected]
Visit our website at www.redhawkinvestmentgroup.com