THE ULTIMATE GUIDE TO
Buying MineralRights
Learn where to find minerals for sale, how to buy them,
some common pitfalls and more.
OVERVIEW
Let's review the basic types of non-operated mineral rights (the kind where you probably don't have to contribute to the cost of drilling and operating). | Where do you purchase mineral rights? There are multiple ways to buy minerals, the most common being at auction, from brokers, by negotiated sale, tax sales, and directly from mineral owners. |
The process of buying minerals varies depending on where you buy them. However, once an offer is accepted, transferring ownership and getting into pay status with the operator is pretty much the same. | When buying mineral rights, due diligence is essential. We'll discuss some things to look into as well as tools and resources to help. |
Owning oil and gas royalties and mineral rights is risky - especially when you fork out money to buy minerals rather than inherit them. We'll discuss some common risks and pitfalls to look out for when buying minerals. | We all know that "Cash is King," but how to do you buy minerals when you don't have enough cash? |
Types of Mineral Rights
Found in Auctions and Other Mineral Listings
When mineral interest (MI) is listed for sale, it usually refers to non-producing minerals. Mineral interest in a specific tract of land does not currently have a producing well and is not generating royalties. Mineral interest without production is often referred to as "non-producing" minerals.
When interest in a producing oil well is listed for sale, this is called "royalty interest." When an oil and gas lease is signed, the lessor receives royalty interest for the duration of the lease. When the lease ends, the royalty interest (and therefore the buyer's ownership) ends.
The combination of mineral interest and royalty interest indicates the seller is selling both the mineral interest (usually with executive rights) and royalty interest in a producing property with revenue. When the current lease ends, the buyer will still own the property.
Like royalty interest (RI), Overriding Royalty Interest (ORRI) ends when the lease ends. You will only own interest for the duration of the lease - so don't buy something that is about to be plugged!
Wellbore only interest is similar to royalty interest, but rather than receiving royalties on all wells in the lease, you will only receive royalties on the specific wellbores for sale. When well stops producing, your interest ends.
Ways to Purchase Mineral Rights
Mineral Rights Auctions, Brokers, and Listings
Accredited vs Unaccredited Investors
There are two main categories of bidders: accredited and unaccredited investors.
Some auctions, such as EnergyNet, are only open to accredited investors, and they will call your financial advisor to make sure you meet the qualifications. Other auctions are open to all investors regardless of qualifications.
Types of Auctions
The auctions that are open to all investors (not just accredited) vary considerably. Some auctions will specialize in oil and gas mineral assets while others will sever fee-simple farmland and auction the surface and minerals as separate listings. You might even find minerals included in general auctions that are selling estate goods or in local small-town auctions.
Auction Frequency
Some online oil and gas royalty auctions are on a rolling cycle, with multiple lots ending each week or even bi-weekly. Other auction houses hold quarterly events, coordinating in-person auctions with a live stream video feeds and online bidding.
Negotiated Sales & Sealed Bids
Mineral brokers often negotiate sells, acting as the middle-man between buyer and seller. Very often, sealed bid and negotiated sales are for larger properties, valued at 6-7 figures.
Negotiated sales also come into play when an auction closes without meeting the reserve. In this scenario, the account manager will try to facilitate a deal between the high bidder and seller in a negotiated sale.
Interestingly, the University of Chicago's paper, "Relinquishing Riches: Auctions vs
Informal Negotiations in Texas Oil and Gas Leasing" indicates that auctions facilitate better matches between land and the firms that can use it most productively(oil and gas companies). It would interesting to see a similar study on non-working interest minerals.
Where to Buy Mineral Rights
| Source | Accredited Investors Only? | Price Range | Focus | Auction | Sealed Bid | Negotiated Sales | Listing |
|---|---|---|---|---|---|---|---|
| EnergyNet | ✓ | $200 - Millions | All O&G Producing States | ✓ | ✓ | ✓ | |
| Oil & Gas Asset Clearinghouse | ✓ | All O&G Producing States | |||||
| Mid-Content Energy Exchange | ✓ | KS, TX, OK, LA, CO | ✓ | ||||
| Simon Energy Assets | TX | ✓ | ✓ | ||||
| Wiggins Auctioneers | OK, KS | ✓ | |||||
| Mineral Focus | All O&G Producing States | ✓ | |||||
| Mineral Marketing | 150K - 50 Million | All O&G Producing States | ✓ | ✓ | ✓ | ||
| Mineral Insight | All O&G Producing States | ✓ | |||||
| Evanson Auctioneers | KS | ✓ | |||||
| America's Choice Royalty Partners | PA, OH, WV | ✓ |
 EnergyNet is probably the most popular mineral auction. They offer a continuous mineral auction, with small properties selling for a few hundred dollars to larger properties selling for several hundred thousand dollars. During the first quarter of 2019, EnergyNet sold 6,969 assets for more than 330 million dollars at auction, through negotiated sales and sealed bids. EnergyNet is ONLY for accredited investors. They will contact your financial advisor to confirm your status as an accredited investor and verify that you have sufficient funds to meet your bid allowance. |  Oil & Gas Asset Clearinghouse has been selling minerals since 1992 and offers a continuous online auction, private sale listings, and negotiated transactions. They tend to deal with larger properties. Oil & Gas asset Clearinghouse (OGAC)has fewer properties than EnergyNet, and their deals are usually large. OGAC does not require banking information to sign up for a buyer's account, making them accessible to buyers who may not be eligible for EnergyNet. |
 Mid-Continent Energy Exchange (MCEE) offers an ongoing bid-exchange auction with periodic live auctions containing a variety of mineral rights located in Oklahoma, Kansas, Texas, Montana, North Dakota, Illinois, and other mid-content oil and gas states. Mid-Content Energy Exchange has an online bidding system so internet bidders can participate in the live auction (via simulcast) without being there in person. |  Simon Energy Associates (SEA)is an independent firm specializing in the divestiture of energy assets. SEA sells mineral rights through negotiated sales and sealed bids. Simon Energy does not require buyers to be accredited investors, but most of their properties range from $500,000 to 10 million dollars. |
 Wiggins Auctioneers is a well-known auction service based in Oklahoma. They are open to the public, and bidders do not have to be accredited investors. Wiggins run Oklahoma and Kansas mineral auctions every few months, sometimes severing the minerals from the surface and selling the minerals and surface individually. |  Mineral focus connects buyers and sellers without taking a commission or charging a fee. They list land with mineral rights as well as minerals without surface rights. Mineral Focus does not participate in the negotiation - they introduce buyers and sellers via a free online listing service. |
 Mineral Marketing follows a traditional real estate model, but for minerals. They sell minerals, operations, and equipment in transactions that range between 150,000 and 50 million. Mineral Marketing negotiates deals between buyers and sellers with occasional live and online auctions. |  Mineral Insight provides "comps" to mineral owners, so they will be in a better position to lease or sell their minerals. Mineral owners can also list their minerals for sale to Mineral Insight's network of buyers. |
 America's Choice Royalty Services (ACRS) is a licensed brokerage focusing on the Marcellus and Utica shale plays of the Appalachian Basin. ACRS has a large network of mineral buyers ranging from large hedge funds to private investors. They are often able to find exactly what buyers are looking for, providing sellers a way to capitalize on a valuable asset despite the lack of drilling and infrastructure. |  Evenson Auctioneers is a Kansas based auction service that holds periodic oil and gas mineral auctions. Auctions are open to the public, and 20% of the sales price is expected during the time of the auction. Evanson has an email list to notify buyers of upcoming auctions. |
Mineral Rights Purchase Process
1
Plan
Develop a Plan
Develop a plan or preferred location to buy minerals. For some people, it'll be whatever they can find for less the "x" number of months ROI. For others, it's a specific type of interest in a specific area. It's usually wise to diversify your mineral portfolio.
2
Browse
Browse Minerals for Sale
Look through the auctions, sealed bids, negotiated sales, and minerals for sale listings on the websites above to get a sense of what is available and see what fits into your acquisition plan.
3
Research
Perform Due Diligence
Once you find some listings that interest you, do your research. Thorough due diligence is essential. Look up the property on the state's oil and gas regulatory commission's website (and GIS viewer). View the production (if any) as well as offset production. Overlay maps of the mineral location and drilling activity. Look at the lease reports for typical lease terms. And more.
4
Offer/Bid
Make an Offer or Place a Bid
Once you have identified a good mineral right to purchase or bid on, submit your offer or place a bid. Each platform will have its own process that you need to follow.
5
Pay
Wire Funds
If you are the winning bidder or your offer was accepted, you will probably receive an invoice and have two or three business days to wire the funds and pay for your new minerals. Once the payment is received, the mineral conveyance or deed will be signed and either sent to you or sent to the county clerk's office for recording.
6
Transfer
Transfer Ownership
Some firms send the conveyance document or deed to the county clerk where the minerals are located for recording. Others send you the original documents, and you need to have them recorded with the county clerk. If you purchased producing minerals, a copy of the recorded document needs to sent to each operator to transfer the minerals into your name. You may also want to send a copy to the tax appraisal office. Once the ownership is transferred, the operator will send out new division orders, which you need to review, sign, and send back with a form W9.
7
Manage
Manage Your New Minerals
Make sure you know what you own and keep good records. Original documents should be well organized in folders, and digital copies should be placed in digital folders. You should also have a spreadsheet, detailing everything you own. Download a free mineral management spreadsheet.
Mineral Buying Due Diligence
So, where do you start?
Experienced mineral buyers each have their own due diligence process, but most probably include some variation of the following:
- Geology review
- Production analysis
- ROI analysis
- Lease & operator review
- Royalty statement and check reviews
- Title searches
- Outgoing conveyance review
The amount of information available will also vary, depending on the source of the minerals. The more popular auctions and brokers have data rooms with pertinent documents. Smaller auctions may have less information available. When you buy from mineral owners directly, or from "minerals for sale" listing, you will probably have to spend more time acquiring relevant documents.
Geology Review
Even in known oil and gas producing counties, drilling activity and production vary dramatically from one part of the county to another. It is important to see exactly where the minerals are located.
Sometimes a quick look at the geology and production maps will tell you if the minerals for sale are worth a closer look.
Start with a few google searches - especially if the county is unfamiliar.
- Google "[county] oil and gas map" or "[county] drilling activity".
- ShaleXP production graphs and maps
- Shale play maps
Overlaying multiple maps and adjusting the opacity of each layer can reveal some interesting and insightful information. Try overlaying your most detailed maps with the Public Land Survey System (PLSS) map and the regulatory body's GIS map.
Looking at maps in this way can show you if the property for sale is in:
- the core of the basin
- a highly productive area
- an upcoming drilling area
- just outside the desirable area
- a non-producing area
Production Analysis
Once you have located the tract of land under which the minerals are located, look to see how many (if any) wells are on the property. Are they active, dry holes, or plugged wells? Are the wells vertical or horizontal?
You should be able to look at each individual well and see information such as:
- Well API
- Spud date
- Status (active, plugged, etc)
- Field
- Formation
- Operator
- Well type (oil, gas, etc)
- Well logs
- Drilling and disposal permits
- Test data
- Production data
- And more
How do the wells in this tract of land compare to the offset wells? Compare the following:
- Production history
- Well lifespan
- Peak production, 2 years later, and current production
ROI Analysis
Generally, you can estimate the monthly revenue based on the six months average, taking into consideration the age of the well. Don't assume the first six months' revenue will continue through the life of the well. Oil and gas wells decline steeply -, especially horizontal wells. You'll have to use your experience, the age of the well, and production data to make this estimate.
Divide the sales price by the estimated monthly revenue to figure out how long it will take to make a return on your investment.
If you can buy mineral rights for the somewhat standard 36 months of revenue, you'll have a better chance of getting a return on your investment.
Watch out because there are many minerals for sale that far exceed the expected life of the well. Also, wells decline steeply during the first year or two (especially horizontals). If you estimate the monthly income based on initial production revenue, you probably won't make your money back.
Lease and Operator Review
If you are considering buying producing minerals, look to see who the operator is. If they are not familiar, see if you can look at their website (many have investor information detailing their upcoming plans). You may be able to find out if they will be continuing drilling operations in the area.
You should also examine the lease in detail. Read it thoroughly and look at each clause. Unfortunately, most mineral owners do not hire an attorney to negotiate the lease on their behalf, resulting in a lease that favors the operator. For example, the lease may hold multiple tracks of land as long as a single well is producing. The lease might allow the operator to use the gas free of charge (some operators run their frack fleets at your expense). There are a lot of clauses in the lease that could potentially be problematic. You have to decide if these are deal-breakers.
The best way to avoid this is to buy non-producing minerals so that you can negotiate the lease. However, non-producing minerals are extremely risky. You may be waiting for decades (or generations) for someone to come by and drill a well - if ever.
Royalty Statement & Check Review
Title Search
You will need to trace the title back to the patent (the first time the land was granted from the government). This is why most companies take an average of 60 days to close on a mineral property. With auctions and negotiated sales, you sometimes have 1-4 weeks to do your research.
Of course, when you bid in a mineral rights auction, you run the risk of having done all this research only to be outbid. It's a common problem and one of the bigger challenges with buying minerals at auction.
Outgoing Conveyance Review
Sometimes a listing will be for royalty interest (RI), but when you look at the conveyance language, mineral interest (MI) and royalty interest (RI) are conveyed. Sometimes wellbore only interest is listed as a royalty interest.
You can't assume the outgoing conveyance (or even the source conveyance) means the seller owns the minerals. Anyone can create a mineral deed or conveyance, but it doesn't mean the minerals were not previously reserved or deeded to someone else.
Be especially careful when dealing with Relinquishment Acts Lands in Texas, where the state probably owns the mineral rights.
Pitfalls to Avoid
Buying Interest in New Wells
New oil and gas wells decline sharply (especially horizontal wells). The royalties from the first few months of production should not be used to value the property. It is quite common for a 1-year old well to produce 1/2 or even 1/3 of its initial production. Value the minerals using the first 6 to 12 months of production will result in dramatically overpaying for the interest, and you may never get a return on your investment.
Buying Interest in Old Wells
Hydrocarbons are finite resources. Successful conventional wells generally produce smaller amounts of oil and gas for long periods of time. The newer horizontal wells produce large quantities of hydrocarbons, but only a few years. Buying interest in a well that is near the end of its life is risky. It may be plugged and abandoned before you get a return on your investment. And if your interest terminated with the lease, you no longer have the ability to generate income in the future.
Buying Non-Producing Minerals
New oil and gas wells decline sharply (especially horizontal wells). The royalties from the first few months of production should not be used to value the property. It is quite common for a 1-year old well to produce 1/2 or even 1/3 (or less) of its initial production. Valuing minerals using the first 6 to 12 months of production will result in dramatically overpaying for the interest. You may never get a return on your investment - especially during this industry-wide oil and gas slowdown.
Poor Due Diligence
More often than not, mineral owners don't really know what they own. The onus is on the buyer to do conduct extensive due diligence before purchasing minerals. Poor due diligence may result in your purchasing minerals from someone who doesn't actually own any minerals (or who owns only a small fraction of what they thought they owned). It's risky - especially when buying non-producing mineral rights.
Poor Lease Terms
Most mineral owners do not hire an attorney to negotiate lease terms. This is a huge mistake and causing them to leave money on the table. One of the many terrible, but common lease terms is giving free gas to the operator in order to run the well. Some operators have started running their frack fleets on natural gas, and guess who is financing that? Buying mineral rights with poor lease terms exposes you to additional risk.
Buying Working Interest
If you don't thoroughly understand the different types of mineral rights and buy working interest, you now have the responsibility of operating the well and paying all the expenses (including the mineral owners)! Non-operated working interest owners are not involved with the day-to-day operations but are still obligated to pay their share of the expenses. For this reason, a lot of buyers stick with mineral interest (MI), royalty interest (RI), overriding royalty interest (ORRI) and non-participating royalty interest (NPRI).
Cash is King
Most mineral purchases and auctions require payment in full within two or three business days (sometimes with 20% down on at the time of the auction).
Oil and gas purchases are so risky that the most popular auctions and brokers only sell to accredited investors. It makes it difficult for non-accredited investors to purchase minerals at a reasonable ROI.
Under federal securities laws, an accredited investor is a natural person:
- With an earned income that exceeded $200,000 (or $300,000 together with a spouse)
- Who has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
That being said, there are Acquisitions and Divestiture (A&D) firms and publicly traded companies that use private equity to finance mineral purchases. There are also groups of individuals and companies that join together to purchase a bigger property together - each receiving a proportionate share based on their capital contribution.
1031 Exchange
Because like-kind property is defined according to its nature or characteristics rather than quality or grade, there is a broad range of exchangeable real properties. Vacant land can be exchanged for mineral rights. Commercial properties can be exchanged for industrial property, and so on. However, the property must be an investment property - not something for personal use or resale.
To execute a 1031 exchange, the replacement property should be of equal or greater value and must be identified within 45 days of selling the original property. The exchange must be concluded within 180 days.
You must meet one of the following rules:
- The three-property Rule: Identify three properties as potential purchases.
- The 200% Rule: Identify unlimited replacement properties (as long as their cumulative value doesn’t exceed 200% of the value of the property sold).
- The 95% Rule: Identify as many properties as you want as long as you acquire properties valued at 95% of their total or more.