By now many of us have received letters or phone calls asking us if we want to sell all or a portion of our mineral rights. Well another offer hit my mailbox today. In the past I immediatelly dismissed these offers but I often wondered why they would buy them. Especially in the current down market where the buyers return on investment will take a long time to recover.

That business model just did not make sense. The payback period is far to long and highly risky. Commodity prices are depressed and appear that these will remain depressed for the long term. Then I began to wonder if the contract terms, royalty percentage and well location were factors. After researching the principle owners in the companies that are buying these royalty rights I found these groups are a fairly energy incestuous group.

The principles of these companies have either worked for the gas companies doing business in Pa or are financially tied to these companies. My hypothesis is that these companies will promptly sell these newly acquired mineral rights to the companies who originally purchased the rights from us. Of course some sort of mark up is involved for this sale.

Now why would they do this? Well this will increases they energy companies profit margin on the acreage involved and eliminates any possible legal settlement on post production costs that might be forthcoming. If the focus of these mineral rights purchases is on high royalty percentages and lessee favorable contracts, then this makes it worth the corporate effort and dollars. It will also remove the corporations from any punitive costs assigned by the court or state, except on pre sale royalties.

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Replies to This Discussion

Hi John,

A big part of your answer is that investors look at mineral rights a little differently than a landowner who might not have put any value on their oil & gas rights 10 years ago.  Most mineral investors have a pretty long time horizon and they tend to invest in a lot of properties across multiple plays which allows cash flows to be more predictable than for an owner who owns one property in one location.  Most of these investors do have industry exposure or knowledge which is similar to successful investors in all asset types.  Many big money investors have owned or managed minerals for generations.  From what I have seen very few operating companies own or attempt to buy minerals.  Anadarko owns some minerals in our area and CHK had some kind of partnership with an equity investor to buy minerals a few years ago, but for the most part Companies do not seek to buy them.  I suspect that most of the investor letters we are getting are speculative investors seeking to buy low and profit as development continues and price goes back up in the mid to longer term.  The big driver so far has been drilling to hold leases.  now that leases are mostly held, we should see development driven by economics and have more predictable cash flows.  

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