How to Buy Mineral Rights in 2024

Oil and gas mineral rights refer to the ownership of the actual physical oil and gas beneath the land.

Typically, mineral rights are leased to an oil and gas company, which then handles the exploration and drilling process. The company will negotiate a lease agreement with the mineral owner, often providing an upfront payment in exchange for the right to drill.  This is called a lease bonus.  Once drilling begins and oil and/or gas is extracted, the mineral rights owner receives oil and gas royalty payments based on their share of the production.

This royalty income can provide a steady stream of revenue for mineral rights owners as long as the well continues to produce. The process involves minimal effort on the part of the mineral owner, as the oil and gas company manages all aspects of the drilling and production. Owning oil and gas mineral rights can be a profitable investment strategy if you understand the risks and how to evaluate each deal.

While traditional investments like stocks and bonds are essential components of a well-balanced portfolio, buying oil and gas mineral rights offers a unique opportunity to diversify your investment strategy.

Mineral rights can provide long-term income potential with relatively passive involvement once the rights are leased and producing. For many, this type of investment presents an appealing combination of high returns and passive income.

Reasons to Buy Mineral Rights

1. Long-Term Passive Income

One of the most attractive benefits of owning mineral rights is the potential for passive income through royalty payments. When a company leases your mineral rights, you may receive upfront payments, and once oil or gas production begins, you’ll earn ongoing royalties based on the amount extracted. This steady stream of income can last for years, and often decades, depending on the productivity of the well.

2. Inflation Hedge

Mineral rights are physical ownership of oil and gas underground.  The value of your mineral rights can grow if there is high inflation due to increasing oil and gas prices. This makes owning mineral rights a strong hedge against inflation. While other assets may lose value due to inflationary pressures, oil and gas prices often rise, which can increase both the income and value of your mineral rights.

3. Portfolio Diversification

Investing in mineral rights offers a way to diversify your portfolio beyond traditional financial markets. Unlike stocks or bonds, which are influenced by market fluctuations, mineral rights are tied to physical resources with their own market dynamics. This can offer stability, especially during periods of stock market volatility, while still providing an opportunity for significant returns.

Investing in oil and gas mineral rights can be a smart move for those looking to diversify, hedge against inflation, and generate passive income over the long term.

While buying mineral rights can be a rewarding investment, it carries certain risks that potential investors need to be aware of.

Like any asset tied to natural resources, there are unpredictable factors that can influence investment returns. Here are some key risks to consider when purchasing mineral rights.

1. Market Volatility

The most significant risk in mineral rights investment is the volatility of oil and gas prices. Prices fluctuate based on global economic conditions, geopolitical events, and changes in supply and demand. A sharp decline in oil or gas prices can severely reduce your royalty income, even if your well is producing. These market changes are beyond the control of mineral rights owners, which means the income you receive can be unpredictable and vary greatly over time.

2. Flush Production Risk

Oil and gas wells tend to produce high amounts of resources early on, but as the well ages, production naturally declines. This decline is often steep during the first few years, with production rates dropping significantly.  This is called flush production.  As a result, the royalty payments you receive will decrease over time. Investors need to understand this decline curve and prepare for lower returns as the well matures.

3. Title Risk

Title issues can be a significant risk when buying mineral rights. Incomplete or unclear ownership records, fractional ownership among multiple heirs, or overlapping claims can lead to legal disputes that challenge your right to the minerals. Conducting a thorough title search before you purchase mineral rights is important to ensure the seller has ownership.

4. No Control

When you own mineral rights, you have zero control over the performance of the underlying wells.  The oil and gas operator drills, operates, and maintains ownership of the wells.  As a mineral owner, you have no say in how they produce the well or what actions are taken.  This creates a risk as an operator may choose to choke back production at any time, or even shut in a well if they want to save that production for a later date.

5. Lack of Liquidity

Unlike stocks or bonds, mineral rights are not as easily bought or sold in the open market. Finding a mineral buyer can take time, especially in down markets, meaning your investment is relatively illiquid. This can pose a challenge if you need to sell quickly or access funds tied up in mineral rights.  If you do need to sell mineral rights, we recommend finding a mineral rights broker who can quickly connect you to buyers. a Investors should consider the long-term nature of this investment and be prepared for the possibility that it may take time to exit the market at a favorable price.

The risks above are just some of the risks you will encounter buying mineral rights.  While the returns can be high, it also comes with a lot of risk which is why the returns can be substantial.

Decline Curves

Related to flush production, a well’s decline curve is critical to understanding the long-term income potential of your mineral rights investment.

The curve shows how oil or gas production drops off over time, and it’s particularly important to note the rapid decline during the first four to five years of a well’s life (flush production). This steep decline means that while initial royalty payments may be high, they will decrease significantly in the first few years as the well’s output slows.

The number one mistake we see investors do when buying mineral rights is ignoring the decline curve.  If the mineral rights are generating $3,000/month currently, but the well is only one year old, next year it could easily be generating $1,500/month.  The year after, it may be just $750/month.  If you purchase it based upon $3,000/month while ignoring the decline curve, you will make a bad investment.

Understanding the decline curve will help you predict the future cash flow from your investment.

Below you can see an example of what a modern decline curve looks like with fracking.  The process of fracking is what causes high initial production.  The decline curve will vary by location, well design, frack job, and other factors.  The below example gives you a good rough idea of the general decline curve most wells will follow.

Source: EIA

Oil and Gas Prices

The value of your mineral rights is heavily influenced by oil and gas prices, which can be volatile and fluctuate based on global market conditions, geopolitical events, and supply-and-demand dynamics. Because these prices determine how much revenue you receive from your mineral rights, it’s important to keep an eye on market trends.

A sharp drop in oil or gas prices could drastically reduce your monthly royalty payments, even if the well is producing consistently. However, when prices are high, your investment could deliver stronger returns. Understanding the market and how prices affect your income will help you make better-informed decisions when investing in mineral rights.

If you invest when oil prices are over $100/bbl and gas prices are over $10/mcf, you are investing when prices are high.  You can buy mineral rights when the price is high, but you need a discount because there is risk that the underlying price of oil and gas will move against you.  If oil is sitting at $50/bbl and $2/mcf, you have less risk that oil and gas prices will work against you because they are already lower.

Before you buy mineral rights, you could make a conservative estimate of what you think long term oil and gas prices will do, and then compare that estimate to what the price is today.  This will help you project what your future income might look like relative to the income being generated at today’s oil and gas prices.

Operators

The reputation and efficiency of the company operating your mineral rights are also crucial to the long term value of the mineral rights. Some operators are known for running more efficient operations, drilling more wells, and producing oil or gas at a lower cost, while others may be slower or charge pass through a lot of expenses to the mineral owner.

Keep an eye on how many rigs an operator is running.  This is a good indicator of how active the operator is, and how much cash they have at their disposal.

A reliable operator is more likely to drill additional wells, use advanced technology, and keep production levels steady, ensuring better returns for mineral rights owners. Additionally, some operators may take fewer deductions from your royalties, resulting in higher payouts. Knowing which operators have a history of strong performance can help you minimize risks and maximize the value of your investment.

Educating yourself on these factors will help you make informed decisions and understand the potential risks and rewards when investing in mineral rights.

If you’ve ever wondered how to buy mineral rights or asked yourself, “How do you obtain mineral rights?” you’re in the right place. Purchasing mineral rights can be a lucrative investment, but it’s important to understand the process fully before diving in.

Below, we’ll walk you through the detailed steps of how to get mineral rights, from researching properties to closing the deal. By following these steps, you’ll be well-equipped to make informed decisions and successfully invest in mineral rights.

Let’s get started!

Step 1:  Where to Buy Mineral Rights

The first step in learning how to get mineral rights is knowing where to find them. You can buy mineral rights for sale through various sources, including online listings, auctions, private sales, or mineral rights brokers.

The best source to find mineral rights for sale is an oil and gas mineral rights broker.  A mineral rights broker will help you avoid the hassle of finding deals on your own.  In addition, a mineral rights broker will have screened the seller to ensure they are serious about selling mineral rights.  A mineral rights broker is by far the best option to find mineral rights for sale.

Here are some ways to find mineral rights for sale:

How to Buy Mineral Rights Directly from a Mineral Owner

MineralHolders.com:  A website that lists individual mineral owners in the state of Texas.  You can contact these mineral owners directly with offers to sell.

How to Use A Mineral Rights Broker

Another great option to find mineral rights for sale is to google search “mineral rights for sale” and see what options pop up.  You can easily find good mineral rights broker who offer mineral rights for sale.

Step 2:  Due Diligence when Buying Mineral Rights

Before making an offer, conducting due diligence is crucial. This involves researching the property’s production history, potential for future drilling, existing leases, and evaluating the decline curve against the age of the well.   You’ll want to estimate the future value from this oil and gas royalty income.  Typically, a mineral buyer will offer between 4 years and 6 years times the most recent average monthly income being generated.

You can use the RRC website to learn more about production history for wells.  You can also pay for specialized services liked Drilling Info that can help you understand the wells and what is going on in the area.

Step 3:  Offer to Buy Mineral Rights

Once you’ve completed your research, the next step is to make an offer to buy mineral rights. This is typically done either in writing or verbally, detailing the price you’re willing to pay and basic conditions for the sale.

It’s essential to negotiate the terms and ensure both parties are on the same page before moving forward.   Once the basic terms have been agreed upon, you will want to put the property under contract using a purchase and sale agreement.

Step 4:  Mineral Rights Purchase and Sale Agreement

After reaching an agreement, both parties will sign a mineral rights purchase and sale agreement.

This contract outlines the terms of the sale, including the purchase price, any conditions, and closing procedures. It legally binds both the buyer and seller to the agreed terms and serves as the basis for completing the transaction.  The typical due diligence period is 30 days, which gives a buyer time to run title before purchasing mineral rights.

Step 5:  Title Research / Due Diligence

Performing title research ensures that the seller has clear ownership of the mineral rights and that there are no outstanding claims or disputes. A title search will review public records to verify that the seller can legally transfer the rights to you.

You will also want to ensure that the mineral owner does not have any past due property taxes or other claims against the mineral rights during the due diligence period.

When you buy mineral rights, deciding whether to have title run comes down to risk. The size of the deal will determine whether you should run title or take the risk. The reason is that title can cost a few thousands dollars to run.  The cost to run title outweighs the benefit.

• If you are buying mineral rights valued under $25,000, a lot of mineral buyers will skip running title.
• If you are spending between $25,000 and $100,000 on a purchase, deciding to run title is a judgement call based on your risk profile and how comfortable you are with the ownership.
• If you are spending over $100,000, you should always be running title to ensure there are no issues.

Step 6:  Mineral Rights Deed

The mineral rights deed is the legal document that officially transfers ownership from the seller to the buyer. Once the deed is signed and notarized, it must be filed with the county clerk, to make the transfer legally binding.

Step 7:  Post-Closing Steps

After closing, there are a few post-closing steps to finalize the transaction. Ensure the deed is properly recorded with local authorities, update your records, and notify any operators if the mineral rights are leased or producing.

Next, you’ll want to notify the county appraisal district of the change.  The county appraisal district is responsible for updating the tax records.

Keep all documentation in a safe place for future reference and track the ongoing production and royalty payments for your investment.

If you want to buy mineral rights, reach out to our company at the link below.  We can point you in the right direction to find mineral rights available for sale.