Oil and Gas Royalties
Small or starting investors should take a look at oil and gas royalties. If you are willing to put in the homework and have the financial backing needed, these can net 12-30% returns.
When considering oil and gas royalties there are some things you will be expected to have gotten in place prior to getting started.
- As with any investment you must exercise your due diligence, consult with a royalty specific attorney for legal advice. A well-known firm in San Antonio would be Philip Mani or in Dallas there is Geary, Porter & Donovan. Even if you are not in their area they would be able to refer you to someone equally as competent in your area.
- You will have to establish a legal entity specifically for purchasing. Whether you utilize a company, partnership or just your name, your attorney will be able to advise the best option for you.
- You have your own rainy day fund, nest egg, or have lined up your own financial backing to be able to proceed.
Once you have got your basic structure in place you will want to follow this 6 step process to get going.
Anyone who owns oil and gas royalties means they probably own the mineral rights. Although rare, in some instances this may not be true, however oil royalties and mineral rights are usually synonymous phrases.
Phase 1. Find potential royalty owner sellers.
Phase 2. Make an offer to purchase the seller’s royalty.
Phase 3. Take any and all calls from potential sellers to answer questions.
Phase 4. Quickly perform due diligence once you determine a seller is serious about the sell.
Phase 5. Send out mineral deeds and paperwork to owners who think they’d like to sell their royalties. Be sure to follow up with these people immediately.
Phase 6. Once you receive the deed back and have paid the seller, file the deed with the correct county courthouse.
Locating potential sellers sounds simple, however you will find it is pretty challenging. There are a couple of ways to go about this:
- One internet site that is somewhat of a Craig’s List (if you will) for oil royalties, whether you would like to buy or sell, royaltyexchange.com.
- If you already own royalties you should be receiving a division order. This is the document that shows you who gets what of any monies. While it’s not common practice, it may also provide you the names and address of those who share in the funds…..hence your new leads. Remember it never hurts to ask, the worst will be a simple no and even then you have lost nothing.
- A data vendor who actually sells lists of royalty owners. One that comes to mind and has a complete list for Kansas and Texas would be Blackbeard Data Services. They boast a healthy 4 million plus list. Newbies are encouraged to start with one specific county first and see how that works for them.
If you have a division order you will not only have the names, address, lease name, percentage of royalty, and values of the royalty. It’s not uncommon for a “wanna be buyer,” to mail out thousands of offers, banking on the laws of statistic to pay off.
When mailing offers you might send a letter offer including a bank draft to show how serious you are and ready to deal, a letter simply stating your offer or a letter that lets the owner know you are interested to purchase if they are interested to sell.
Realistically you should expect about three responses for every 1,000 letters you mail. These are calls mind you not done deals. Of those calls you will have a good shot at closing half. Be sure to take all of your calls. An answering machine quickly squashes the urgency and authenticity of your offer. People like to have their questions answered. Let them know whether it is yours or someone else you plan to purchase within 7 days. Your money is in hand.
If an owner is entertaining more than one buyer, the owner may be looking towards 60-70 months production. If you are the offer you should get 30-40 months of production.
Check Them Out
Do your homework. I can’t push that point enough. Be sure the party you are dealing with really owns the royalty they are going to sell. Have them provide four months of paystubs for the royalty. Take a trip to the courthouse and check the records, they are public. Regardless of your method get it done and get it done quickly before your seller changes their mind, or decides the grass may be greener elsewhere.
Get ‘er Done
Once you know the seller really owns the royalty you want, and they have accepted your offer, FedEx the paperwork ASAP. Be sure your attorney has provided you both a mineral deed as well as a contract. 24 hours after they have signed and received your package follow up.
File at the Courthouse
I’m sure your attorney will let you know where and what to sign, once you get your package back and by all means get the seller paid. A contract isn’t binding until your seller has been paid. After you receive your documents get your documents filed at the proper courthouse and contact the existing oil company who has been paying the royalty. It normally takes about three months before you will start receiving your royalty checks.
Start a Business?
A buddy of mine gets royalty checks and used them to start a business. That’s a great way to extend the earning power of those dollars IF you know what you’re doing. He started a construction business, which is a sector that is pretty resilient and he’s doing well. If you need bathroom remodeling in Columbus, Ohio, look him up. 🙂