Seller Beware!!! The Pitfalls To Be Aware Of In Mineral Sales
Over seventeen years of advising on the sale of Haynesville Shale minerals, I’ve learned a thing or two about the process. I see and participate in enough sale offers and negotiations to have a pretty good idea of the value of minerals by specific location. Details matter as to fair market value. Not just by location but by the terms of the underlying lease or leases.
Most recently, it has become clear to me just how interconnected are the mineral companies that make offers to purchase your mineral rights. For those with professional assistance, this is likely no surprise but those without that assistance are likely unknowing in how mineral companies communicate and cooperate with one another to make a purchase.
Several instances that I have been witness to lately confirm this interconnectedness. When companies compete for the same mineral interest, they often talk about it among themselves. The focus is to pay as little as possible. That is because they flip those acquisitions to other companies for a profit. That makes acquiring mineral rights as cheap as possible the means to achieve the highest profit. A mineral acquisition may get flipped multiple times before it ends up with a mineral company that seeks to hold it long term.
When an interested seller shares the amount of offers received and the company or companies that have made those offers, the connection and cooperation between mineral companies can become a problem for achieving the best sales price. I think for many this is not obviously a potential problem so they freely provide that information. Here’s what mineral companies can do with that knowledge. Think of the mineral space as a pyramid with a small number of buyers at the top with tremendous amounts of capital to deploy. At each lower level are other mineral companies who are funded by those at the top of the pyramid. The offers you receive come from the lowest level of that pyramid. Those companies follow the acquisition menu provide by those at the top and do the basic research to find mineral owners with assets that fit the acquisition strategy. Then those lowest level companies send offer letters or make phone calls to mineral owners.
When an offer receives a response, the mineral companies seek to strike up a dialogue to determine if there is a willing seller and just how little the offer needs to be to get an agreement to sell. Where there are multiple offers, the mineral companies want to learn as much as possible about the companies under consideration and the amount of their offers. Think about what happens when two companies are pursuing the same sale and are funded by the same mineral company higher up the pyramid. That funding company does not want to be bidding against itself. Therefore, the collusion begins. I have seen companies stop making better offers so that an associated company can be the top offer. If you were to follow the mineral deeds recorded in the public record as I do, you would see how those companies share in the purchase of mineral rights. One company will make the offer and get the purchase but the mineral deed will split the minerals among two or more companies. Then those companies will assign all or a portion of the minerals they acquire to one or more other companies. The mineral acquisition makes its way up the pyramid. I can follow multiple assignments from the company that buys the minerals to the company that does the funding and holds the minerals long term.
The collusion that exists in the mineral space works to keep sellers from taking the middle men out of the equation in search of a better sales price. I’ve experimented with attempting this as have some of my savvy mineral clients who have the benefit of deep knowledge and the help of experienced professionals. Neither they nor the average mineral owner has a chance to accomplish this. The cooperation and interconnectedness of the mineral space does not allow for it.
If you ever consider a sale, be wise. Get professional help and do not under any circumstance share detailed information with mineral companies making you offers.
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Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on
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I've had two instances in the last week where someone contacted me after receiving an offer to purchase certain mineral interests. Both cases are multiple interests with small acreages. The offers were for only some of those interests. The problem for mineral owners that fit this description is that there are hurdles to selling small acreage interests. Often the offers are for sections where new wells are indicated in the public record. A buyer wants that section but not others. I call it cherry picking. The problem arises with the fact that all mineral buyers are strict about running title on the mineral ownership. The cost of title review can be expensive. Much more than any mineral seller might imagine. The chain of title can be simple and straightforward or it can be lengthy and complicated taking an attorney to provide an opinion. Buyers often pass on making offers for small tracts 3 to 5 acres or less because of the cost of title review. Example: a mineral owner has small interests in three sections. They sell two of the three and the third being say 2 acres is now too small for many mineral companies. There are a few companies that buy those small acre tracts but they are likely to discount their offers significantly or take a cursory look at the title to decide if they can have it done cheaply enough. When a mineral owner finds themselves in this situation it is best to require an offer for all they own and/or to seek some professional help.
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Permalink Reply by Skip Peel - Mineral Consultant on
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There is no such thing as a “mineral appraisal”!
A recent incident brought this to mind and I thought it was worth sharing. I performed about ten hours of research for a new “client” and got stiffed on payment. This stems from his mistaken thought that I or anyone else can perform an appraisal like a real estate appraisal. I’ve mentioned numerous times how the mineral space is so unlike any other business category. And those with significant business experience and possibly successful careers think they can navigate mineral deals like other forms of business. With very few exceptions, they can not and it can get them into trouble.
There was actually a somewhat similar instance by someone who was a GHS.com member many years ago. These two instances are similar in that they thought there was such a thing as a mineral appraisal. When most people think of an appraisal, they are thinking of a real estate appraisal. A real estate appraisal is based on “comparable sales” and the prices of those sales contained in public records. An experienced real estate appraiser knows how to find like comparisons for properties – residential, business and industry properties. A good appraiser also takes into their calculations locations, age and the variances in details related to use.
There is no public record of mineral sale prices so there is no way to know what is being paid. And mineral values are not easily made comparable across great variations in rock quality, existing production volumes, decline rates, the prospects for future wells or operator drilling schedules not to mention the wide variations in the price of natural gas. Someone knowledgeable about the particulars of the Haynesville/Bossier unconventional basin and is involved in numerous sales can provide an opinion as to an “estimated value” that is a snap shot in time and that changes over time based on the price of natural gas (supply and demand), the development plans of a particular operator, spare pipeline capacity and other issues.
Someone who is erroneously expecting an “appraisal” of their mineral interest will be disappointed that there is no way to put together one like a real estate appraisal. That was the situation in the recent case I describe. The other instance long ago was by a GHS.com member who was a real estate appraiser. He performed his own appraisal. Based on what I have little idea. He was bent on selling his interest but was flummoxed by getting no offers that approached his idea of the value. He contacted several members of the website including me looking for offers that met his expectations. He found none. He eventually hired a law firm that put together some details of his minerals and requested offers from mineral companies. He paid dearly for that representation and auction and ended up getting about the same or a little less than what I and others had informed him was the value at sale.
It is important for interested sellers to get help. That can be from someone like myself or a law firm with an extensive O&G and mineral practice.
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Permalink Reply by Skip Peel - Mineral Consultant on
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As competition among mineral companies has increased, I'm seeing more offers in sections where there is one old well that is paying modest acreage interests low royalty. Those royalties may be so low that they are paid only once or twice a year. Mineral lessors may not be aware of new wells in the pipeline. I can assure you that mineral buyers know. A mineral buyer will look at a unit with low monthly production reported on the database SONRIS and then perform a little more due diligence. They will see if the section in question lines up for long lateral wells especially the three section laterals that most Haynesville operators prefer. Then they will make offers. As always the first offer is a low ball in 99% of instances. The mineral owners in that situation need to do a little homework and understand what is going on with their minerals so they do not sell for less than a fair market price!!!
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Permalink Reply by Skip Peel - Mineral Consultant on
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For anyone considering a sale of mineral rights, it is critical to understand whether their section or sections are located in the portion of the fairway that has both Haynesville and Bossier shales or just the Haynesville. As the play has matured, the percentage of sections with only Haynesville Shale that are at or nearing full development is increasing significantly. Much of the north half of the play fairway will be fully developed in the next two to four years.
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Permalink Reply by michael f josephson on -
Is Lafayette county, section 10, township 18, range 25 west part of the Haynesville Shales?
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Permalink Reply by Skip Peel - Mineral Consultant on
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michael, there is no Haynesville Shale production within 30 miles of Arkansas. Along the state line in both AR and LA, there are Haynesville "Sand" wells. Long lived vertical wells mostly drilled fifty or so years ago when that play was live. As you go south into LA, the Haynesville sandstone grades into shale until you get to the lower half of the 19N townships just north of Shreveport and around Blanchard. The Haynesville formation is shale from there south through Caddo and DeSoto parishes and the play runs out in north Sabine parish.
Any lease offer these days in Lafayette County would be about Smackover brine which contains lithium. Some companies include oil and gas in the lease they offer but that is a diversion. The brine rights is what they are after. Lithium is the focus.
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Permalink Reply by Skip Peel - Mineral Consultant on
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A suggestion for Haynesville mineral lessors with low royalty income. You need to learn a simple search on the O&G database, SONRIS. As competition for mineral rights heats up I find a number of mineral companies making offers in units with low monthly production volumes even though that section has no Field Order for additional wells and no live permits to drill. If you have good rock but low royalty income, you could be a target. Mineral companies know how many future wells to count on even if those new wells are not in the very near future. They are betting on two things: the mineral owner thinks their royalties have about run their course and they don't know how many future wells that will be coming at some undetermined point in the future. If a mineral lessor has a notice letter that can help to determine that there are more wells that have a Field Order but have not yet been permitted. After the Field Order, you will get no notice and if you don't live on the property or know someone that does, you wouldn't even know that a new well pad had been constructed or even that a rig was in the process of drilling new wells. In the southern half of the Haynesville Shale fairway, approximately from the 12N townships south, you have economic Haynesville Shale and Bossier Shale. So approximately twice the total unit wells as units north of there.
Here is how to search: use the link below, click on it and save it to your "favorites or bookmarks". Leave the section box blank and enter the township and range, you can find that on your lease if you don't know it off the top of your head. I would hope by now that you do. Click Enter "Submit Query". Now you are looking at all the wells by section in your township. Scroll down to your section. A producing well is "Status 10". A well drilling or drilled and waiting for a frack is "Status 31". A live well permit that has not started drilling is a "Status 01".
https://sonlite.dnr.state.la.us/sundown/cart_prod/cart_con_sectwnrng1
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Permalink Reply by Skip Peel - Mineral Consultant on
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A recent experience assisting a mineral owner considering a sale brings back memories of a similar occurrence a few years ago. The ethics across the mineral buyer space varies quite a bit and competition for Haynesville minerals can cause some to employ less than up front honesty. Since the Louisiana legislature outlawed sending offer letters with checks and power of attorney forms I seldom see any acts that are outright illegal. I do see some that are efforts to mislead the unwary and uninformed mineral owner.
Some years back a client who I had acted as an expert witness for in a court case had new wells on the way and was receiving offer letters. One offer was considerably higher than the others and since he had an investment opportunity that the sale would largely cover, he took it. He didn't read the fine print which is exactly what was intended by the buyer. The dollar amount was in large font in a prominent place in the offer letter however at the bottom in fine print was the text "if you have a quarter royalty". The client missed that and it turned out he had forgotten that his lease a number of years previous was for one fifth not one quarter. He was sent a Purchase and Sale Agreement (PSA) that contained the statement that the buyer had the right to adjust the sale's price based on their title review. The first is a misleading act hoping for someone to jump at an offer without thinking it through or getting professional assistance. The second is standard boiler plate language that is included in all PSAs. When the potential buyer's threat to sue the mineral owner was rejected, the company went away and did not pursue a lawsuit. I found a better offer for the client. He sold and made the investment.
Now to the most recent instance that leads me to recall that situation. Ethical companies do not make offers on minerals where the full lease is filed in the public records of a parish without including the royalty fraction. Those companies all maintain online remote access accounts to the parishes in the Haynesville Shale. It takes all of ten minutes to sit at a computer and search for all the recorded documents in a seller's name or that of the individual they received their ownership from including the lease that covers the mineral interest. They know the royalty fraction, the percentage of the tract that the prospective seller owns and in most cases, exactly what the tract acreage is. To make a firm offer all those factors need to be included and the offer should state them in writing. There are many O&G leases covering Haynesville minerals that are not filed in the public record. In their place is a memorandum of lease with bare bone details that do not include the royalty fraction. In those cases a clear, unambiguous statement in the body of the offer letter should state that the offer amount is dependent on the royalty contained in the full lease. Every mineral lessors is given one and should make sure to keep a copy in a safe place as long as the lease is in force. Every co-owner in that tract should have a copy.
Whenever I am made aware of an offer that appears to be far above what I see regularly and consider to be a fair market offer based on the details of the mineral interest and the current prices being paid, it is a red flag. It could be what I describe and an attempt to take advantage of someone who needs money and might jump to take an offer without being careful and doing their own due diligence. In the recent instance the offer that was considerably higher was almost 70% higher. If that offer is in writing and includes the important information that I mention, it is a rare opportunity that can be taken if the seller has done their due diligence and isn't setting themselves up for a bate and switch deal.
Seller Beware!
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Permalink Reply by Skip Peel - Mineral Consultant
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I just got an email from a realtor soliciting a lease offer. The emphasis on beating the offer in hand was for a higher bonus. That's a mistake. The royalty offered is 22.5%. For the location and acreage total 25% would be the correct royalty. Mistake 1: Willingness to accept the 22.5% royalty chasing a higher bonus per acre. Mistake 2: Hiring a realtor to represent the mineral interest.
This is a sure fire approach to attract a flipper. One who will pay a somewhat higher bonus in order to get the difference between the 22.5% royalty and a 25% royalty. This section is undrilled currently and should get a number of wells in the future. The section in question should have economic Haynesville Shale and Bossier Shale.
Lessor Beware!
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