• Mineral Rights 101
  • Frequently Asked Questions About Owning and Monetizing Mineral Rights

    Historically, most homeowners and landowners have not been overly concerned with mineral rights. Most residential areas are far from mining deposits, and most useful mining areas have already been bought up and exploited by mining companies. Additionally, most mining was carried out on government-owned land, with the government handing out patented and leased claims. However, this has changed in recent years, with advances in how geologists search for minerals (including oil and gas), as well as extraction of such valuable minerals, bringing even small landowners into the mineral market. With many small landowners now being asked if they are willing to permit drilling companies to exploit the resources under their land, it is important all landowners understand their rights and how to protect them.

    What do you own in terms of mineral rights?


    Per the case of Del Monte Mining & Milling Co. v. Last Chance Mining & Milling Co, any landowner who owns the “fee” of the land (i.e. has title to the surface) also owns title to the soil beneath the surface as far down as he or she can exploit it. This means that any landowner whose title does not explicitly state that they do not own the rights will own the rights, and that no one can extract those resources without the landowner’s permission. However, mineral rights are severable from the surface estate. This means that a landowner may sell his or her mineral rights while retaining surface rights. An example of this would be a farmer who continues to use his land to grow crops while permitting an oil company to extract the oil from underneath the farm.

    What do oil & gas companies get when they buy the mineral rights?

    What oil and gas companies get depends on the terms they provide in the contract they offer the landowner. In general, the mining company will be interested only in “leasing” the mineral rights, i.e. obtaining a right to extract the minerals in exchange for a fee paid to the landowner. However, they may buy them outright if the volume of oil or gas extracted is expected to be vast, taking many years to achieve. This also generally includes the right to install whatever facilities are required for extraction, for example an oil derrick or mining shaft. However, this does not extend to any nuisances created by the mining company. For example, the oil and gas company cannot dump its waste on the landowner’s property unless the landowner consents, nor can the mining company build permanent structures without contractual permission.

    How do landowners protect their mineral rights?


    The primary means of protecting one’s mineral rights is to engage an attorney specializing in the field and ensure they assist with the negotiations. Most oil and gas attorneys work on commission, prompting them to get the highest prices possible from mining companies, while ensuring the concerns of their client are met to avoid souring the deal. Mining companies will always seek to obtain the lowest price and the most rights they legally can, so having adequate legal protection should always be a priority for the landowner.

    If you decide to lease your mineral rights, it’s wise to keep track of your contract and royalties using some type of mineral management software, like that offered by InGauge. This app gives owners better visibility over well production and helps ensure full payment is received for extraction performed on their property. Software like this is critical for those with multiple drill sites and royalty streams to manage.

  • Mineral Rights 101
  • How to Sell Your Mineral Rights

    Landowners in the United States have the right to lease or sell all or a portion of the mineral rights under their land. You may choose to sell your rights to pay for a dream vacation, clear up estate issues, or to fund emergency spending. Companies and investors who buy mineral rights assume the risk that profitable production will occur on the property at some point. If you choose not to sell your mineral rights, you could presumably take on production yourself and make more money, but you would incur major development expenses and run the risk of unfruitful drilling. For many homeowners, the idea of a lump settlement today is better than the chance of income later.

    it's common for property owners with rights in the Barnett Shale to allow companies to drill on their land
    It’s common for property owners with rights in the Barnett Shale to allow companies to drill on their land

    Thinking about selling your mineral rights? Here are the best steps to take:

    1. Verify Ownership

    Before you can search for buyers, you need to prepare the appropriate documentation. Your first step should be verifying who owns the mineral rights under your land. You can check land records with your county clerk’s office to help you create a chain of title. Check for all instances where the mineral rights have changed hands to determine who currently owns the rights and ensure that you in fact have ownership to the rights. While this process can take some time, investors will not buy mineral rights until ownership is verified.

    1. Substantiate with Documentation

    Documentation is key to getting maximum value for your mineral rights. You will need to show buyers proof of ownership with your deed, lease agreement, division order, royalty check stubs, and any other documentation that applies to you. If you have never leased your mineral rights, you will need to provide at the very least:

    • County and state
    • Survey and abstract number
    • Number of acres you own
    There's lots of money to be made off of West Texas mineral rights
    There’s lots of money to be made off of West Texas mineral rights
    1. Hire Professionals

    While hiring an oil & gas attorney may sound expensive, having legal representation who is well-versed in the nuances of mineral rights sales contracts may save you money in the long-run. A lawyer will advocate and negotiate the contract terms on your behalf so that you don’t get duped into accepting an unfavorable contract.

    1. Find a Buyer

    The next step is finding a buyer. There are dozens of companies and investor networks that buy mineral rights, so keep in mind that you do not need to accept the first offer. When you submit your information, you will receive an offer for your rights. It is in your best interest to put your property in front of as many potential buyers as possible to get exposure and maximize your potential payout.

    Be careful to avoid mineral rights flippers who will offer an option agreement. These agreements may have a time frame of up to 90 days which allows the company to search for a buyer who will pay more money for your mineral rights so they can pocket the difference. You can also choose to sell a portion of the mineral rights if that is in your best interest.

    Even if there’s an offer on the table, don’t feel obligated to sell your mineral rights Take time to consider every offer you receive and make absolutely certain you are ready to sell.

     

  • Mineral Rights 101
  • 5 Things to Consider Before Selling Your Mineral Rights

    Many landowners of West Texas have opted to sell their mineral rights
    Many landowners of West Texas have opted to sell their mineral rights

    Selling mineral rights to your land should be simple, but it usually isn’t. There are some important considerations to make before you sell:

    1. What is the value of your mineral rights?

    As with any sale, it is important to understand exactly what you are selling and how much it’s worth. When property owners sell mineral rights to their property, they in effect, split their real property into two components: the surface estate and the mineral estate. The owner of the mineral estate has the right to exploit or mine any minerals beneath the surface estate. Before selling your mineral rights, you should engage a licensed geologist or professional landman to survey your property and give you an assessment of what minerals are present and in what quantities. As the mineral rights owner, knowing this information can give you a stronger position as you start negotiations with an oil company. Another option for selling mineral rights is to get quotes from companies that buy mineral rights. DGS Dallas is one of the larger buyers of mineral rights in Texas.

    1. Is it better to lease or sell?

    Some oil and gas companies will offer a lump sum to purchase your mineral rights, while others offer royalties, or a percentage of the profits made from minerals on your land, for the right to lease your mineral rights. Do some research on sales and leases in your area and see which is more common. For instance, if a given company usually pays royalties in your area and offers you a lump sum to buy you out, there may be a chance that they know you are sitting on a large volume of the oil and gas, and hope to get you to sign away your cut. In this case, holding out for a royalty might be better. You’ll also want to assess how the oil market is doing and where it’s headed. Selling can be a great option when oil prices peak because you’re guaranteed the price in the contract, while leasing can be a riskier move.

    1. How soon do you need the money?

    Beware that agreeing to lease your rights in exchange for a royalty doesn’t necessarily mean you’ll get paid, as you will only get paid after production actually begins. With most lease contracts, oil companies have years to begin drilling, and you run the risk of oil prices dropping over the life of the lease, resulting in lower royalty payments. If you need a large, guaranteed sum of money now, selling might be the better option because you’ll get paid almost immediately after signing.

    1. Impact to the Surface Estate

    In the state of Texas, when the mineral estate is severed from the surface estate, the mineral estate is dominant. This means that when you sell your mineral rights, you give the purchaser the right to use your land, or the surface estate, in order to access the mineral estate. The mineral estate owner may build roads, equipment storage, and other necessary infrastructure on your land. Carefully consider how these rights will affect your property’s long-term value and your own enjoyment of your land. Mining can destroy a piece of land if not handled correctly.

    Mineral rights give their owners the right to use the surface estate for drilling access
    Mineral rights give their owners the right to use the surface estate for drilling access
    1. Are the terms fair?

    If structured correctly, selling mineral rights benefits both parties, but oil and gas companies that make these deals on a routine basis likely have the upper-hand when starting negotiations. Do your research to find out if the payment you’ve been offered is reasonable given how similar deals in your area have closed. It’s worth investing in a lawyer who specializes in mineral rights guide you through the process and ensure that the terms of final contract are fair.

  • Mineral Rights 101
  • What is an Overriding Royalty Interest?

    Lease Contracts & the Overriding Royalty Interest

    An overriding royalty interest may mean big paychecks for a mineral owner
    An overriding royalty interest may mean big paychecks for a mineral owner

    Leasing your mineral rights to an oil and gas company makes sense if you are smart about executing the deal. As oil lease contracts involve huge dollar volumes, mineral owners may have a lot of concerns that should be thoroughly discussed with qualified legal counsel and addressed in the fine print of the lease contract. The contract should contain details about how your property is developed by the lessee, the lease term (primary and secondary terms, as well as the lease and most importantly, the royalty income you should expect to receive.

    In a standard mineral lease contract, the oil and gas development company will offer land owners an interest in the well production. This interest, otherwise known as an overriding royalty interest, entitles the owner to percentage of the production revenue. This interest is not diluted by any of the expenses of production, such as exploration, drilling expenses, or maintenance.

    Upside to the Owner

    The biggest benefit to the owner of an overriding royalty interest, is that they benefit from oil production without incurring any effort or expense. Oil production can be a huge gamble, as production companies must make a substantial initial investment in exploring and developing the land for drilling. Consider the following costs related to developing the land:

    • Production related equipment
    • Well site development
    • Drilling and completion costs
    • Legal and administrative costs
    • Salaries and wages of workers
    • Geological survey costs
    There are steep costs associated with commencing oil production
    There are steep costs associated with commencing oil production

    Oil and gas companies have access to far more working capital than the average private property owner, so while the upfront development costs may be staggering, they can afford the risk of investing in hopes of a huge return from production. While the oil company generally gets most of the return from the wells because of their investment in development, the overriding royalty interest incentivizes land owners to allow production on their land.

    Pitfalls of the Overriding Royalty Interest

    With an overriding royalty interest, many mineral rights owners assume they will start seeing huge royalty checks soon after signing the lease contract. However, it may take months or even years to see any royalties from your wells. It may take a long time for the oil and gas company to determine if drilling will be a profitable endeavor. The lease merely gives them the time to explore the property and make this determination – they cannot be forced to start drilling. For property owners, this means that they may never receive a royalty check if the operator opts to not drill.

    Additionally, because the royalty is paid based upon the income from actual production, royalty payments may fluctuate wildly with changes in oil and gas market. Consider for instance, that in October of 2008, oil was selling for a record $148 per barrel, but by 2016, the price had dropped down to just $30 per barrel because of OPEC flooding the oil supply. For royalty interest holders, this means that for the same level of oil production in 2016, they would receive less than ¼ of the royalties they would have received had the oil been extracted in 2008. Timing of oil production can have a huge impact on how much income you can expect from an overriding royalty interest.

    Conclusion

    A highly-producing well can mean a steady stream of royalty checks to the oil and gas lessor. While leasing your mineral rights is a great option for many landowners, you may also risk tying up the value of your oil in an unfruitful lease contract.

  • Mineral Rights 101
  • Monetizing Mineral Rights: Leasing vs. Selling

    Many people are fortunate to own property where valuable oil or natural gas deposits are hidden underground. Upon discovery, companies can drill and extract the resources for a hefty profit, but first they have to secure the mineral rights from the property owners. Property owners essentially have two options for monetizing their mineral rights: leasing or selling. Huge sums of money could be involved, so it’s prudent for landowners to look at the profitability of two options available to them before passing their mineral rights over.

    Many property owners in East Texas sell or lease their mineral rights to big oil companies
    Many property owners in East Texas sell or lease their mineral rights to big oil companies

    Leasing Mineral Rights

    Pros:
    • Continued Ownership: When you lease your mineral rights, you are giving the energy company the right to begin drilling and extracting, but you still own the long-term mineral rights. Think of your land as a house that you lease out. The tenant can live in the house and use it, but you still own it when they leave.
    • Lease income PLUS royalties: In the case of leasing mineral rights, the lessee pays to lease your property. Additionally, the lessee pays you a royalty on the sales of any oil and gas extracted and sold. Once the lease has expired, you own whatever minerals are still left in the ground.
    Cons:
    • No Drilling, No Royalties: The lessee doesn’t have to commence drilling immediately, so you may not see much royalty income, if ever, from your lease. The lease contract will likely contain a primary and secondary term. During the primary term, the drilling company has the right to perform exploratory procedures to determine where and when they want to start drilling. Once drilling begins, the secondary term determines the remaining time left on the lease. If drilling never commences during the primary term, the contract will likely terminate, and you won’t see any royalties from drilling.
    • Risk Losing Value: The lease may promise big royalty pay-outs, but in reality, there’s nothing you can do to force the drilling company to begin extraction. If you sign a lease contract during an oil boom, you risk missing out on cashing in on your minerals at a peak time.

    The contracts that cover leased mineral rights can be confusing and downright tricky to understand. Be sure you’re not selling your rights when the intent is to lease them. The contract must contain language that spells this out clearly a lease bonus and/or royalty percentage and the length of the lease in terms of days, months or years.

    Make sure to discuss your options with legal counsel before signing an oil and gas contract
    Make sure to discuss your options with legal counsel before signing an oil and gas contract

    Selling Mineral Rights

    As opposed to leasing, when you outright sell your mineral rights, you are giving up all future claims to those minerals. You’ll receive a sum of money up-front that grants the buyer all of the mineral rights under your acreage and all future proceeds if/when these mineral rights are extracted.

    Pros:
    • Lower Risk: When selling you mineral rights, you give up all future claims to those rights, but you are also ensured that you will receive a specified dollar amount per mineral acre. Conversely, with a lease contract, most of the value to the mineral owner is promised in royalty payments, which may or may not ever happen.
    • Immediate Income: Selling your mineral rights is a great option if you are in need of immediate cash. Those that lease mineral rights may have to wait years to start seeing royalty checks of any substance.
    Cons:
    • Lower Value: Because selling mineral rights has less risk involved, you may also not realize the full value of your property. Often, buyers will pay as little as 1/5 to 1/3 of the estimated mineral value.
    • Loss of Control: Selling your mineral rights separates your land into a surface estate and a mineral estate. The company that now owns your mineral estate also has rights to use your surface estate as needed to access drilling sites. Property owners have very little control or recourse in battling what the drilling company may do on their land.

    Conclusion

    Mineral owners must carefully weigh the options when determining whether to lease or sell their mineral estate. It’s wise to speak with both a professional landman and an attorney who specializes in mineral rights prior to signing a contract. These professionals can help you assess the value of your mineral rights and provide guidance on maximizing the value of contracts with drilling companies.