Let me start off by saying that I’m in no way getting rich off this.
So my great grandparents owned a few hundered acres (two different properties) in Texas many many years ago. They sold off the land but retained the mineral rights. My great grandparents had one child (my grandmother) who when on to have three sons (my dad and two uncles). My dad was the only one to have a child out of the three of them so the entirety of these rights now belongs to me. If they had to be split 50 ways through the generations as typically happens, I’d probably be getting a few bucks but since it isn’t, it’s actually enough to mean a little something.
I don’t have the slightest clue how this all works. I get checks for the most random amounts at the most random times. A few months ago, a check showed up for about $5,500. A few weeks later, I got two checks in the same envelope, one for about $700 and one for about $300. They also come with the hardest to read statements that show the costs taken out (management fees excetera) and distributions. I’m frankly shocked that after 80 years or so that there is still money being generated.
Since this is about the most passive income imaginable, everytime I think about trying to figure out how it works, I end up taking a nap instead.
Now to the questions. Is there any sort of book or website or other resource that I could check out that might help me better understand what they heck is going on with this investment? I hate to not know anything about an asset I own. I’d also like to be able to look through the statements with an educated eye to figure out what sort of fees are being charged and they are reasonable. Also, I’d like to get an idea of what the mineral rights are worth and compare that the income they are generating.
Basically, you own the black gold in the ground. It’s yours, not the oil company’s.
But you can’t get it, because it’s two miles down in the ground. So it’s worthless to you.
So what happened is that the oil company said, “I’ll get the oil out of the ground for you. I’ll pay you a royalty (typically 1/8) for every dollar worth of oil we can get out of the ground on your lease. You won’t have to pay any expenses, except for severance taxes and a little bit of property tax. You’re in the best of all possible worlds. All revenues, no expenses.”
And that’s really what’s happening. If they pull up a barrel of oil, they’re going to sell it for $100. 1/8 of that is yours, and you didn’t have to do anything for it. You don’t have to pay to drill the well, you don’t have to pay to operate the well, you don’t have to pay anything. It’s free money, since it’s your oil.
If you need help deciphering the statements, PM me and I’ll walk through them with you.
Good stuff. The ASA, CFA side of me wants to try to figure this all out but the lazy side of me is completely fine blindly cashing the checks.
So the oil company typically pays me 1/8 of the price they get for a barrel of oil. Are management fees then taken out of my cut (the 1/8th) or is that part of the 7/8ths the oil company keeps?
Why does the timing and amount of the checks seem so sporadic? I could understand if checks came in quarterly. I could also understand if checks came in at random times but for the same amount (if they paid out once they hit a certain number) but it doesn’t seem like there is any rhyme or reason to this. Again, the lazy side of me is happy with any money showing up that I literally did absolutely nothing to earn but the analytical side of me would like to be able to figure out when and how much is likely to come in.
I’ve never heard of “management fees”. There are marketing or gathering fees, which are taken out of your check. There are also property taxes and severance taxes, which are both taken out of your check. But those ought to be almost all of the deductions from revenue.
I don’t know why there’s such much difference in the checks. The first one might be a lease bonus, or it might be several months’ worth of revenue checks, since the oil company didn’t know who to send them to. Plus, production varies sometimes, so it’s not uncommon to see different amounts.
(FYI about lease bonus: Say that on 4/24/11, the oil company comes to me and asks to drill on my land. They’ll usually pay me some fee to do so. But if they don’t drill on it within three years, the lease expires. So on 4/23/14, they agreeto y pay me an additional amount to extend the lease for another threee years. This is common known as a lease bonus.)
My guess is that someone buying a royalty stream like that would want to earn a low double-digit IRR. So you would need to back out a DCF model based on the estimated remaining life of the asset and your expected cashflows over that period to get an estimated value.
But then you’re getting into estimated reserves and depletion and other stuff I have no clue about. I value businesses for a living but this is all foreign to me. I wonder if the oil company has to provide any sort of info on estimated reserves and the like.
Ah Americans and owning their own minerals. Up here, the Crown (government) owns everything under the soil. They were clever bastards when creating land titles back in the day. Anyway, yes you’d have to have some kind of estimate of economically recoverable oil and what not. If the field will go dry next year, then its not worth much. I don’t know how surface rights work down there, but if there is oil but a pain in the ass landowner, that reduces value. If I were you, I’d certainly be interested in just how much oil you have. If you’re sitting on a huge pool, then maybe you could get more active in developing the field and make some real cash. If you ever want to sell down a piece of your stake, I’d be interested. Though US taxes are such a pain…
The operator should have a report that they’re sent every year that shows this kind of information. It will even show you how much the lease is worth discounted at 6%, 8%, etc. If you’re really interested, you’d have to get that info from the operator. The report is called the Reserve Report, and they usually get one per year, maybe two per year if they’re a big operator.
^ Yeah you can think its a sleepy area with declining production but then all of a sudden you have a brand new oil boom under you like what’s happening in the Bakken, Eagle Ford, Marcellus, etc. I don’t think those people in Texas with declining production were expecting to have a new, super productive play, and all of a sudden you’re getting 6 figure payments again.