How Minerals Sellers Can Fetch Premium Prices for Their Property

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This article first appeared in the 2022 Minerals Business Report and Buyers Directory. 

As the dark days of COVID-19 are eroded by brighter times ahead, the minerals market is reemerging as an area worthy of exploration for sellers and buyers alike. Mineral owners, who’ve held their assets tight during recent times of low demand, are now reconsidering sales opportunities as the industry strengthens.

It’s a market that’s seen steady improvement within the past year. Although the first half of 2021 proved challenging, market insiders began observing a steady uptick during the second half of the year.

The trend has continued through the initial months of the new year as market hesitancy eases among both buyers—who weren’t keen to buy in a depressed market—and sellers, who were reluctant to offload their minerals for less than premium prices.

“We’re starting to see the price of minerals rebound,” said Garrett Phelan, the managing partner at US Mineral Exchange. “We're starting to see some optimism, and I think sellers are also beginning to understand that now may be a good time to remove some of the volatility and capture some of these prices. We’re optimistic things will continue to improve.”

Amid improving market conditions, sellers might wonder how to yield the maximum price for their assets during a time when certain nuances (including contract wording, timing and the right marketing) can make or break a deal.

Partnering up

An Energy Council report in 2019 highlighted the benefits of partnering with an aggregator, whose role is to consolidate and bundle together mineral rights for oil and gas development. The approach has become particularly popular among private equity investors seeking to profit from less-expensive exploration undertakings.

“A significant benefit of working with an aggregator for the mineral rights owner is that of negotiation skills and experience,” the article said. “Aggregators are more likely to be able to negotiate favorable lease terms while being able to leverage their size in comparison to that of the individual. Also, aggregators actively monitor and manage mineral and royalty interests to ensure the maximum economic benefits of the leases are realized.”

Conversely, navigating the market alone can be a daunting experience for an individual seller seeking to connect with the right buyer. And although Google can be a convenient tool for many other aspects of life, it’s not usually the right go-to place for forging market connections.

Instead, sellers could better position their assets by partnering with experts who can educate them on the process, ensure the company it is selling to is reputable and facilitate a smooth closing process.

Working with an agency to sell minerals is akin to hiring a realtor to sell a home, Phelan said.

US Mineral Exchange is that metaphorical realtor, he said, adding that the company has worked with many of the industry’s leading buyers for the past decade.

“We know who the buyers are and whether they are reputable,” he said. “They’re on our platform, and they're actively seeking properties.”

Although companies are looking to buy, they might not always be advertising their wish lists, making an intermediary with strong industry connections the perfect conduit between buyers and sellers.

Phelan said that’s why it is important to work with an expert with the ability to put the property in front of the most qualified and reliable people.

“If you spent days on the internet, trying to find all the buyers you could possibly find, you wouldn’t even scratch the surface,” he said. “A lot of the buyers aren’t even readily out there advertising that they’re buying mineral rights. You’ve got to know who to look for and who’s actively looking in your area.”

Organizations such as US Mineral Exchange have a listing platform that’s amassed thousands of buyers nationwide that are actively searching for mineral rights, he said. He likened it to a multiple listing service for realtors.

The agency also takes a multi-pronged approach by linking listings to buyers active in particular areas in an effort to facilitate smooth sales for both parties.

“We know who’s active in the area,” Phelan said. “And so, we’ll reach out to buyers and say, ‘Hey, if you haven't seen this listing, check it out.’ Sellers want to make sure they’re hiring someone who markets their property but also is fully transparent in how they’re marketing it.”

“A lot of the buyers aren’t even readily out there advertising that they’re buying mineral rights. You’ve got to know who to look for and who’s actively looking in your area.”

—GARRETT PHELAN, US Mineral Exchange

Common missteps

Failing to ensure a deal is structured properly, and includes a fair closing period, is among mistakes rookie sellers make while navigating the transaction process.

But when it comes to fetching top dollar for their assets, there’s a costlier error that’s often seen among industry experts: accepting the first offer. Although the initial expression of interest can be exciting, the thrill can also blind sellers to the fact that other, better deals are on the horizon.

A person who has given an offer on a property that previously had minimal interest, for example, might jump at the opportunity.

“And they think, ‘Wow. That’s really great,’” Phelan said. “The question that they have to ask themselves is, ‘Is it? Is this really great?’”

Sellers often accept that first deal, worried that the offer will go away and that the opportunity will pass, but that line of thinking can be misguided. Rather than accepting the amount presented, sellers should first take the time to research whether it is a fair deal.

Otherwise, they could end up with a transaction they regret.

“If someone is willing to make the offer, in almost every situation, it's just not enough,” Phelan said. “There’s going to be more available.”

Understanding the lingo

For the uninitiated, jargon-filled sales terms (e.g., net mineral acres, net royalty acres, net decimal interest and more) can be confusing and easy to misinterpret. If sellers misunderstand the terms, they could sign an agreement they aren’t comfortable with, lower their anticipated profits or bring other unpleasant surprises.

“If sellers do not understand the agreement, they could end up at the closing table being surprised,” Phelan said. “That’s why it’s important to work with someone who understands not only how to get the best price but how to make sure that all the details are addressed.”

Knowing when to strike

Texas is—and likely will continue to be—a state where there is an insatiable appetite for mineral rights. However, the market is also picking up in parts of New Mexico, Louisiana, Oklahoma, North Dakota and Colorado. Conversely, interest has waned in other regions, such as the Marcellus and Utica.

Being familiar with the hot and cold spots du jour can help sellers determine whether it’s better to hold onto their property or pursue a sale.

Timing is a factor in the sense that mineral owners aren’t likely to get much value from land that’s not being leased. After all, if an oil and gas operator is not willing to lease a property, it means it’s not a particularly lucrative opportunity for buyers either.

Property being leased is often more valuable, contingent on factors such as the length of the lease, royalty rate and the long-term prospects of the land. Meanwhile, producing properties can cause values to spike astronomically under the right set of circumstances. Factors include the length of the lease, the amount of royalty payments and the amount being produced.

“You’re looking for property with rigs and permits and where there’s a lot of activity,” Phelan said. “That’s when you can see that it no longer becomes about revenue. It becomes about what the value is to someone who sees future potential. And so that’s where the real value is.”

However, even properties that aren’t making money right now can be sought after thanks to new technologies that are enabling further exploration. During the past year, US Mineral Exchange has successfully closed seven-figure deals for properties making minimal income that have the potential to be profitable down the road.

Beware of resellers

If sellers aren’t careful, they could leave a lot of money on the table by dealing with buyers that reap additional profit by reselling minerals at an inflated price. It is hard to know for certain what a buyer’s true intentions are until the deal is closed, but there are subscription-based resources available that can determine whether buyers hold a portfolio of minerals, which is a sign they are likely to be the end buyer. Those who make profits by flipping, however, are less likely to have any holdings on the record.

Dealing with someone who is not an end buyer can be a costly mistake. The seller could lose up to 40% of their asset’s value by signing the wrong deal.

“Eliminating all those middle people is important in a deal,” Phelan said. “We’ve seen situations where there are four or five different parties between the end buyer and the seller. All of those people took something out of the seller’s pocket.”

Conjuring up competition

The value of minerals is often determined by their worth in the eyes of an individual buyer, meaning their worth can be broad. Areas where buyers are more aggressive can drive value up, but properties in less sought-after areas can also yield top dollar with the right approach.

The key, Phelan said, is identifying and seeking out the “outlier” (i.e., the buyer who values the property more than anyone else). In all cases, though, sellers need to create competition for a property, he said.

“It’s all about creating an environment where sellers can put their interest on the market and they can have buyers make offers on it,” Phelan added. “And you want that environment to be competitive to where it’s a property that multiple buyers are interested in. Without multiple buyers interested in offering fair market value, you are just taking the value that someone gives you.”

The U.S. is unique in that mineral rights are owned by the public; in other parts of the world, they are owned and controlled by the state. It’s not always a simple procedure. Different branches of rights—surface, mineral and royalty—offer different degrees of privilege to owners. It is possible for one person to own the surface rights to a property and for another to be in possession of the mineral or property rights.

“Sellers who fail to have someone review the documents often end up selling more than they thought they were.”

—SHAYNE MOSES, Moses, Palmer & Howell LLP

Legal advice

Moses, Palmer & Howell LLP is a law firm based in Fort Worth, Texas that works on oil and gas-related business transactions. Among its other areas of practice, the firm serves as counsel to landowners, working interest owners and operators within the energy sector.

Firm partner Shayne Moses suggested that those looking to sell their mineral rights seek legal guidance to obtain the best possible price while avoiding common paperwork mistakes.

“Sellers who fail to have someone review the documents often end up selling more than they thought they were,” Moses said. “Purchasers often include omnibus language that results in the seller conveying minerals they did not intend to convey. They also provide a greater warranty than they should. We recommend the seller put the burden of determining the title on the purchaser and give as limited a warranty as possible.”

His firm is often called upon to review sales agreements and conveyances by sellers in the process of closing a deal. It also assists in earlier stages of the sales process by helping mineral and royalty owners shop their assets to known purchasers.

Failing to seek alternative offers is a pitfall sellers should avoid, as is rushing to make a decision because the prospective buyer claims the offer will expire quickly, Moses added.

“If you are told the offer will go away on short notice, there may be a problem with it,” he said. “Anytime someone is rushing a decision, they are often seeking to prevent an informed decision. That is never prudent.”

John Grand, a partner at Vinson & Elkins, said owners must come to a full understanding of their holdings before pursuing a sale. He said while a property that’s fully developed is likely to have a stable value, the worth of an underdeveloped property could be more promising.

“When a new horizontal well is drilled on a property, the value of the property could skyrocket,” Grand said. “Mineral buyers will have a sense if an oil and gas company is close to drilling in the area and will try to swoop in and buy minerals before new wells are drilled.”

“Don’t rush to sell. Oftentimes, the first offer is not the best offer. Don’t be afraid to counter and ask for more. Also, get multiple bids from multiple potential buyers. Competition drives price.”

—JOHN GRAND, Vinson & Elkins

The right time and place

Timing is also a factor that could determine whether a property is sold at a premium, Grand added.

“Don’t rush to sell,” he said. “Oftentimes, the first offer is not the best offer. Don’t be afraid to counter and ask for more. Also, get multiple bids from multiple potential buyers. Competition drives price.”

Grand said if only one offer has been received, search the internet to see who else is buying minerals in that specific county or parish. “It is easy to call these other companies, let them know that you are interested in selling and ask if they have interest in making you an offer,” he said.

Just as in the housing market, values can vary depending on the location of a site, said Brian Bauer with Ohio-based Mossy Oak Properties.

“In Ohio, we have a large shale play happening,” he said in a January report by the company. “Minerals in certain counties can be worth 10 times the value of the surface tract they lay under. If someone is looking to purchase land in a certain area to build a home, start a farm or for recreational purposes, they may not be able to even afford the property because of the market value of the underlying minerals.”

State and municipal regulations also play into mineral rights valuations nationwide. Some states, including Maryland, New York, Vermont and Washington, have banned fracturing, making mineral rights less lucrative.

Proceed with caution

Mineral rights expert Joseph DeWoody, co-founder of mineral rights management company Valor, said he has heard of people losing millions of dollars in mineral sales without even realizing it.

“These people didn’t understand what they had, or what they agreed to in the lease agreements they signed, and they never realized they were leaking money like an old car leaks oil,” DeWoody shared in a 2020 Forbes article.

He laid out how some buyers intentionally take advantage of uninformed sellers and use numerous manipulative tactics to underpay owners. Tactics include lying about well production and profits as well as dolling out incorrect royalty checks.

To avoid being scammed, he said sellers must equip themselves with the knowledge necessary to negotiate a fair deal by understanding what they are signing and understanding the market.

DeWoody said sellers should also partner with a reputable adviser, become comfortable with industry math and learn to use relevant online systems.

“Data will set you free,” he said. “Knowing what you have, how much you have, how it works and having the most information possible (plus, understanding it all) is the best way to avoid getting scammed or missing out. Not just in the world of mineral rights, but in life in general. Knowledge is power.”