Most of the investment community is a day late and a dollar short when it happens to be the prime time to invest. Sitting on the sidelines and vacillating about investment decisions can cost individuals successful opportunities.
In 2008, 90% of investors missed out on the rebound of the stock market. As prices plummeted, great deals with great returns were offered at pennies on the dollar. Many investors who did their homework took advantage of this opportunity and reaped the rewards.
At a time when crude oil prices are down, what are the sectors of the oil and gas industry that individuals can invest in and still make a return? The answer is minerals, minerals, minerals!
Minerals are owned in perpetuity. You own minerals forever! And like owning real estate, mineral ownership involves real property and real assets. This type of ownership offers investors a direct flow through of economic benefits derived from the success and quantity of extracted hydrocarbons from that associated mineral.
Mineral ownership offers several advantages to other typical investments:
Mineral owners are paid a lease bonus which is where lessees pay for the right to develop and produce the oil and gas from your mineral interest
Mineral owners retain a royalty interest in the minerals of which they receive their pro rata share of all revenues from every barrel of oil and MCF of gas extracted
There are no development costs tied to minerals
Minerals are owned in perpetuity and tied to a contracted lease with terms and time restrictions
Minerals are more easily traded and sold which offers a higher liquidity
Finding the right mineral investment
When finding the right minerals for your financial portfolio, an investor must always think location, location, location. Anyone can buy minerals, but an investor must know the upstream elements when making an investment decision.
The Geology: knowing what is and will not be economically viable for specific reservoirs under the minerals in question
Operational Expertise: understanding the nature of who will operate the wells developed on the minerals, as well as operator efficiency to maximize quantities of hydrocarbons recovered
Commodity Price Maximization: knowing what operator has better transportation agreements to gain the highest value for the royalty owner
Trend Economics: being aware who will drill where, why, and for what formation based on commodity price is key
The time is now
When oil companies spent billions of dollars in the last 3 to 4 years, most leases were taken on 3 to 5 year terms. Those same mineral leases are going to expire.
Think of purchasing mineral leases like renting an office space. In roughly 3 to 5 years your rent is going to be up, and you will have the option to rent another building for different pricing in a different location. When a mineral lease expires, that mineral owner will get to lease to a new party, negotiate and receive a lease bonus (like a rental receives a deposit), receive brand new income, and have brand new terms.
There are going to be millions of mineral acreage available to buy from those mineral owners who are a little discouraged due to the downturn, or desire to sell half and keep the other half for liquidity for their families.
Individuals who are educating themselves are taking advantage of the lower pricing and are making money in the oil and gas industry even in the price downturn. When looking at minerals, an investor needs to ask a lot of questions, do their research and understand the multiple benefits of being a mineral owner.
With no exposure to costs, lifetime ownership and royalties on every barrel and MCF of gas, minerals are an excellent investment for individuals to boost their portfolios and reap financial benefits over the next several months as prices inevitably rebound.