Seller Beware!!! How Mineral Companies Work Together.
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.
Views: 1626
Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on
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I should add to the above the fact that the company that a mineral owner chooses to lease to is much less important than the terms in their lease. The lease controls the primary aspects of the lessor's revenue and legal rights. It doesn't matter what company ends up owning the lease, they must abide by the terms. Under Louisiana law, even if the owner of the lease (the lessee) is not the operator of the wells, the lessor gets paid.
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Permalink Reply by Skip Peel - Mineral Consultant on
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I recently reviewed an offer letter that included a mineral deed. It's been a while since we discussed this shady tactic. The reason is that through lobbying by myself and attorneys I work with, the legislature passed a law to outlaw it. The letter in question was sent to a Texas mineral owner where the tactic remains legal. I would never do business with any mineral company that sends a deed or a check or both with an offer letter. This is from a 2008 site discussion. The "power of attorney" part of the scheme is beyond the pale.
HAYNESVILLE SHALE LEASE SCAM STOPPED
by Jeff Ferrell
SHREVEPORT, LA (KSLA) - Louisiana Attorney General Buddy Caldwell said it's 'mission accomplished' in stopping a scheme to rob people of their mineral rights. Caldwell said state efforts to publicize the scam appear to have scared off several 'fly-by-night' companies.
The offers from those companies typically came in the mail, containing a check and asking the recipients to sign a contract. And the 'devil' really was in the details. It's just another aspect of the Haynesville Shale experience.
During a visit to Shreveport on Friday, (11/14), Caldwell told Shreveport's Optimist Club good news about his office's work around the state. We caught up with Caldwell just before speaking at that gathering.
In fact, Caldwell's visit comes two months since his warning to KSLA News 12, among others, about mineral lease scams mailed to property owners. "Since we've started our public service ads we have almost helped obliterate that problem."
Caldwell's office received more than 200-complaints about several companies inserting clauses in those mineral lease deals that even included 'power of attorney.' "They could put you in a nursing home, handle all your financial business, take care of your money and change your property description," added Caldwell.
In the case of changing your property description at the courthouse, they could claim you own just a portion of your actual acreage. Then, they could pocket any and all royalties from the rest of the land.
Caldwell described their public message, which solved the problem, as simple. "People going to their lawyers; we haven't had any more complaints about it."
People began falling for such schemes just as the bubble burst on the Haynesville Shale, or at least the huge prices for lease signing bonuses. But Shreveport Optimist Club President Stephen Glassell told us that the public should not worry, predicting that signing bonuses will rise again. "Absolutely! I didn't think we'd do it after the 80's crash. I think so!"
We also asked Caldwell about recent complaints since several gas companies began withdrawing some of their offers. He concluded, it would take a large number of cases before they might investigate.
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Permalink Reply by Skip Peel - Mineral Consultant on
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This is the tip of an iceberg. There are seventeen years of discussions and replies archived here on the website. At the very upper right of each web page is a search box labeled "Search GoHaynesvilleShale". Click on the search blank and enter a key word. In this case, I entered "Cobra" which was the name of one of the two companies that used this underhanded approach to buy mineral rights from unsuspecting owners.
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Permalink Reply by Skip Peel - Mineral Consultant on
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I'd like to keep this discussion near the top of the main page for a little longer. I want as many members and visitors to see it as possible. At a time when offers have been the best since the play began, I still see horrible, low ball offers and hope that no one is selling for those below fair market prices.
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Permalink Reply by Skip Peel - Mineral Consultant
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I'm hearing from mineral owners who are surprised that offer amounts for their mineral rights have increased. That is a function of competition. More mineral companies have entered the market for Haynesville minerals. Some buyers are unfamiliar with the fact that many, if not most, of owners have been receiving multiple offers over the years. Those newbie wanna be buyers tend make non-competitive offers or use old traditional approaches such as offering to pay 36 or 60 times the most recent monthly revenue payment. I've seen them make mistakes that are either sloppy due diligence on what someone owns or, even more disturbing, a deliberate attempt to state that someone owns more than they do. They want an executed Purchase and Sale Agreement (PSA) that gives them to right to bind the mineral owner to the sale even if the buyer decides they own less than is the acreage in the purchase offer. That makes the sales price less than what was stated and the seller can do nothing about it short of a threat to sue and even that doesn't dissuade some. Ethics in the sale of minerals is iffy at best. Seller Beware!
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Permalink Reply by Quattro
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I appreciate you continuing to bump this up Skip.
It does seem there are decent offers being put forth.
I know this is an open forum but it would be nice to somehow have a listing of the buyers that are reasonable and honest. It is really hard to do due diligence.
Selling can make sense with the right tax situation (step up basis) and the fact that you can earn an actual interest rate now. If someone is paying you a decent amount now for future production at an unknown future price, I dunno - it seems worth considering.
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Permalink Reply by Skip Peel - Mineral Consultant
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You're welcome, Qattro. I've found that listing a company can be a problem. I've had good experiences with a particular individual at a company and not so good experience with a different individual at the same company. One never knows what higher ups are telling an employee or what pressure they are putting on an employee to do things that may go against that person's ethics. And one never knows what the investors are telling the higher ups to do. It's a mine field but it helps to get professional assistance. Knowing a company name is no guarantee that a mineral owner is getting a fair deal.
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Permalink Reply by Skip Peel - Mineral Consultant
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I don't know how many representatives the average mineral company has researching mineral ownership, making offers and processing deals. I know they have several teams. The guys that secure a Purchase and Sale Agreement (PSA) move the potential transaction to a title team than researches the ownership through public record documents, builds a file of conveyance instruments, approves the title and creates the mineral deed which goes to the seller, the seller is paid and the deed is recorded in the public record. Title is an important step and is not cheap. In a conversation with one company lead recently he told me that at that time there were 30 titles being run on acquisitions from 5 different basins.
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Permalink Reply by Cowart -
Mr Peel,
I just watched your interview with Uni of Minnesota and was impressed with your background and knowledge.
I'm a mineral rights owner with land in East Texas, currently under contract with a Energy Co in that area.
As you mentioned in your interview I don't know if it's fair market value. Wondering if you would be able to discuss some of my concerns?
I'm free any time let me know and we can talk over the phone or email.
Thanks Robert Cowart
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Permalink Reply by Skip Peel - Mineral Consultant
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You're welcome, Robert. I prefer email but take phone calls when I'm not swamped. Emails help me keep the details of a mineral interest where I can refer to them because the details are important and I can not remember the details for all the people I try to help. East Texas can be a difficult piece of research. As you probably saw, I'm not a big fan of the Texas Railroad Commission's website. It appears made difficult to use on purpose. Louisiana's database is much, much easier for most mineral owners to use.
It is against website rules to post an email address in a main page discussion but you can click on my name in blue and it will take you to my personal page which has my phone and business email. If you have difficulty accessing it, send me a "friend request". I've had my page set to private since I joined GHS.com.
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