The United States government is trying hard to compete with other nations like China on the manufacturing, energy, mineral, and technology front. In June the Senate approved a $250 billion bill to boost government spending on technology research and development. This bill includes spending to dig up and process critical minerals here in the U.S. and with allies.
Meanwhile, demand for minerals like petroleum and natural gas continues to be huge. For example, in 2020, the U.S. transportation sector depended on petroleum for 90% of its energy. Read that again. 90%.
So, big picture? Minerals are a big deal, and owning mineral rights can mean big business. Below we’ll explore what mineral rights are and how mineral rights investing works.
- Having “mineral rights” means you own the natural resources under the surface of a piece of land.
- Just because you have mineral rights to a piece of land doesn’t mean you have rights to ALL the minerals.
- Investing in mineral rights can be a great way to earn a monthly cash flow and grow assets long term.
What are Mineral Rights?
Mineral rights refer to the right to extract a mineral—or receive payment for the extraction of minerals—from the earth. In this context, minerals generally mean fossil fuels like oil and gas, metals like gold and iron, and rock products such as limestone or salt. Minerals could also include raw materials like sand, gravel, or peat.
In the United States, mineral rights work like property. They can be sold, transferred, or leased, and they can be separate (“severed”) from the actual land use (“surface rights”). Minerals rights can be owned for an entire parcel of land, infractions, for specific types of minerals, or to a specific depth interval.
How Mineral Rights Work
Mineral rights work like this. Let’s say you own some 128 mineral acres in the middle of the Woodford shale trend in the Anadarko Basin. If you lease it to an oil company for three years, you could get $2,000 per mineral acre as a lease bonus ($256,000 total). On top of that, you could also receive 18.75% of all future revenue for oil and gas produced and sold from your 128 mineral acres. As wells are added to your drilling unit, you would get more revenue streams added to your net income. As a mineral owner, you would pay $0 for exploration, $0 for production, and be responsible for 0% of the liabilities.
If you want to invest in mineral rights to generate passive income from the real property but have limited time or experience, you could partner with an existing mineral rights investment professional. In this scenario, you need to be a high net-worth individual or an accredited investor. You would have direct access to and ownership of intangible assets without the pain of trying to untangle mineral rights laws on your own.
Benefits of Owning Mineral Rights
Owning mineral rights has lots of benefits. First, mineral rights owners get royalties. These are paid by energy companies that lease the rights and develop the minerals. In this situation, a very typical royalty is 12.5-25% of the revenue generated by the minerals on that land. It’s quite lucrative!
Conveniently, mineral rights owners don’t have to pay for the cost of drilling, developing land, or maintaining equipment. Also, the mineral rights owners don’t take on the liabilities that, say, the actual oil company that does the drilling. This makes mineral rights ownership a low-risk, high-yield, passive income. Plus it’s more liquid than general real estate, and it usually generates recurring income.
Another advantage to mineral rights ownership is being able to use tax code 1031. This lets you defer capital gains taxes on any real property sale by reinvesting the proceeds in mineral properties.
Successful Mineral Rights Investing
Wondering whether mineral rights will make money? Let’s look at history. From 1907 to 1927, the petroleum development in the Osage Reservation produced more money than all the American gold rushes combined.
During that time, the Osage maintained collective ownership of mineral rights, which meant that each tribal member received “headrights” equal to mineral rights income from 658 acres. That meant that by 1939, an individual Osage had received more than $100 million in royalties from oil. That’s more than $1.5 billion in today’s dollars if we take inflation into account.
So what’s happening today? Mineral rights remain a strong income earner. The National Association of Royalty Owners estimates that eight to 12 million people in the U.S. receive royalties from oil and gas production. Montana State University economists estimate that in 2014, only six major shale plays generated $39 billion in private royalties.
Mineral rights can mean a small fortune. To oversimplify, the surface land is the wrapping paper, but the subsurface mineral rights are the actual present.
Considerations for Investing in Mineral Rights
The world of mineral rights investing is complex. Before investing in mineral rights, be sure there are proven reserves in the ground, and verify the existing cash flow. Find out who the oil company is, the geology, the success of wells, etc. Also, do your research in each state and each transaction. Here’s why:
Mineral rights investing isn’t the same in every state. For example, in Oklahoma, you can’t assume that all minerals under the surface are included when investing in oil and gas minerals. Be sure to research whether all minerals under the surface are included before signing on the dotted line.
If you already own land or plan to buy land with mineral rights, don’t forget to confirm ownership of the mineral rights. County or municipal records won’t necessarily include mineral rights on the title, so you’ll need to hire a professional landman to search for any record of a mineral rights transaction or separation of rights.
How Mineral Rights Impact Your Money
To say that the stock market did some interesting things in 2020 is an understatement. The ups and downs were historic; however, that’s not necessarily what you want when it comes to your financial planning. Most people want to know that their investments will bring a good return and that they’ll stand the test of time over the long haul.
Guess what? There will always be a need for minerals. Period.
At Eckard Enterprises, our goal is to use our deep expertise in oil and gas to maximize investments and returns. Let us be your guide. We’ll provide you with the expert resources and background necessary to make insightful energy investments. Contact us to learn more about mineral rights investing today.