The old adage across the plains of West Texas is to “Never Sell Your Mineral Rights!” And for good reason, the ownership of mineral rights provides families with a generational wealth preservation tool that surpasses many investment opportunities in the current marketplace.
Mineral ownership is a perpetual ownership of the real estate under the surface of the earth. Often severed from the surface, mineral rights are held like any other real estate investment. The major benefit of mineral rights is the ability to produce royalties through oil and gas lease bonuses and production.
A royalty is a cost-free share of the production revenue from an oil and gas well or lease. Where the owner of the mineral rights receives a share of the production revenue without having to pay any of the exploration or operating costs of the project.
Investing in mineral rights and royalties can provide wealthy families, trusts and family offices valuable exposure to the oil and gas industry without the risks associated with exploration and production. The income from oil and gas royalties currently also enjoys a depletion allowance under the tax code. The combination of the tax structure and the “mailbox money” aspect of royalties makes them an attractive investment for many individuals.
There are multiple approaches to investing in royalties, certain exchange traded funds (ETFs) and master limited partnership (MLPs) provide investors with some exposure to the royalty market. Another route is a direct investment in mineral rights and royalties through a private limited partnership. These can provide individuals direct “access” to the ownership of the royalties and the most potential to harness the upside and generational wealth protection and preservation provided by them.
Among the many benefits, royalty ownership can also provide a hedge against inflation. With governments around the world printing money to feed their appetites of cheap cash, there are many that believe the inevitable result will be higher inflation. Royalties, and oil and gas generally, have traditionally been a good hedge against inflation.
In fact, many consequences of governmental and federal bank decisions including higher taxes, monetary easing, and raising the interest rate, all provide avenues to increase the value of oil and gas and in turn, the cash flow to royalty owners.
The United States is in the middle of an energy revolution. The vast amounts, of once un-producible, oil and gas are being discovered and produced at a rate and amount not seen in many decades. Thanks to technological advancements in horizontal drilling and hydraulic fracturing, American oil and gas producers are able to find and develop oil and gas in parts of the United States that have had very little oil and natural gas production prior.
There has been a vast amount of wealth created, and there will be much more created by the ownership of royalties in the areas that are a part of the shale drilling “bonanza”. There are 1.44 billion acres of privately owned mineral rights in the United States. According to Blackbeard Data Services, in Texas alone, the proved producing reserve value of royalties is approximately $35 billion. Nation-wide Blackbeard estimates the yearly transactional value of oil and gas royalties to total $500 million. These amounts are growing daily and present a valuable investment opportunity to individuals seeking asset diversification and wealth creation and preservation.
Oil and gas operations are commonly found in remote locations far from company headquarters. Now, it's possible to monitor pump operations, collate and analyze seismic data, and track employees around the world from almost anywhere. Whether employees are in the office or in the field, the internet and related applications enable a greater multidirectional flow of information – and control – than ever before.