Urban dwellers, like those living in cities that sit atop the Barnett and Haynesville shale plays, probably never dreamed they would be contacted about the minerals lying beneath their backyard.

But it is happening over and over again in the Barnett Shale and in the Haynesville formation in northeast Texas and northwest Louisiana.

Leasing minerals can be a great opportunity to pick up extra cash without lifting a finger, but professionals in the business warn people to be wary of some unscrupulous folks looking to make money at the expense of mineral owners.

Adam P. Haynes, executive vice president of the Texas Independent Producers and Royalty Owners Association (TIPRO), warns mineral owners to be especially careful during downturns such as the industry is facing now.

“These times are full of folks trying to swoop in and pick up properties at fire sale prices,” Haynes said.

Unsuspecting mineral owners can lose out on potentially huge payoffs in the future if they jump at the first offer that comes along. Haynes said any legitimate offer should allow the owner at least a week to consider the offer, compare it with other offers, and consult a professional.

“Any offer to ‘buy now’ or ‘offer expires in 48 hours’ is very suspect and needs careful consideration,” Haynes said.

Offers may come in various forms, and each needs to be examined to determine if it is best for the owner. Sometimes a company will offer to lease the mineral rights, with the owner getting monthly royalty checks when the well starts producing.

In other cases, the company may offer to buy the rights, with the owner getting a one-time buyout with no future royalty checks.

With production slowed due to lower prices, most offers now are for purchasing mineral rights, not for leasing. Fort Worth oil and gas attorney Bob West said property owners in southeast Tarrant County are getting postcards and letters several times a week from companies wanting to buy their mineral rights.

“I’ve not seen any offers yet that I would want to accept,” he said.

That doesn’t mean the offers should be tossed in the trash, but West advises recipients to “be cautious.” If a producing well is on the property, a company typically will offer a multiple of a year’s royalty revenue to purchase the rights.

For example, if the well produces $10,000 a year in royalties, the company might offer two to three times that much to purchase the rights.

“I don’t think that’s a very good deal,” West advised.

In Texas, the county appraisal district office is a good place to check on the value of mineral interests, West said, because each county taxes those interests when a producing well is present. The district uses a methodology to determine the tax levy, and that information could be helpful in determining what price to ask for selling mineral rights.

In Louisiana, the mineral interest is not taxed at the parish level. So the parish assessor’s office would not have similar information, according to Bossier Parish Assessor Bobby Edmiston. However, in Louisiana, there is a state severance tax on minerals. And in Louisiana, unlike in many other states, mineral rights may revert to the surface owner ten years from the date of sale or reservation of minerals (establishment of a mineral servitude), or from the date of last production from or operations affecting the mineral servitude, according to Louisiana attorney Bill Fleming.

One word of advice West offers is to sell only if there is an immediate need for cash and no other assets are available.

Sometimes an owner may want to sell all or part of the royalties on a producing well. Tim Raetz, senior vice president/senior oil and gas manager for PlainsCapital Bank Wealth Management and Trust in Fort Worth, advises clients to retain ownership of mineral rights when considering selling current royalties. That way, if the well is opened again in the future after current production ceases, the mineral owner would once again start getting royalty checks. As new technologies emerge, old wells may be reopened, and the owner of the mineral rights would once again be the beneficiary.

“Who knows 20 years from now what kind of technology will be out there?” Raetz said.

Raetz also advises clients that they—with the help of an oil and gas attorney–can add clauses to their agreement to fit their needs. For example, the owner can sell only a portion of the rights or a portion of the royalties from a producing well.

“Try to retain something for the future,” he advises.

Determining what course to take ultimately comes down to the owner’s needs. An elderly person may be strapped for cash or want to simplify his estate and opt to sell.

“Every family and every estate has different needs,” Raetz said.

Experts agree that a professional should be consulted before any papers are signed. Too much is at stake not to. Haynes, TIPRO’s executive vice president, says owners need critical information before making a decision.

“Owners certainly need to have a reserve analysis and current decline curve for their minerals,” he said. “I do not think you should ever try and conduct serious business negotiations without some type of professional representation.”

That advice holds whether the owner initiates the sale or is contacted about the possibility of selling or leasing. Owners can be caught off guard by an unsolicited offer that shows up in the mailbox or on the front door. Those offers aren’t necessarily bad, but should be checked out by a professional, those in the business warn.

“Don’t ever just sign it,” Raetz, the senior oil and gas manager for PlainsCapital in Fort Worth, advised.

Those offers may turn out to be good ones. Reputable companies like Momentum Operating Co. in Albany, also mail out unsolicited letters to mineral owners. The key is to check out the company and the offer, experts advise.

Robert Willen, who grew up in Abilene and now lives in Albany, has been in the business long enough that people know him and Momentum Operating Co. by reputation. Momentum buys most of its minerals through Movest Capital, an affiliate company with the same ownership. The companies’ good record instills trust in potential sellers. When an owner contacts Momentum, Willen said, an evaluation is done and then a decision is made on whether to make an offer.

“Sometimes we buy them, sometimes we don’t,” he said.

Willen, too, advises mineral owners to consult with a professional before signing any papers. Reputable companies expect that, he said. Willen added that today more people are selling their mineral rights than they did in the past. Sometimes the owner is elderly and wants to liquidate his holdings. Or the owner may realize that oil and gas are depleting resources and may choose to take the money now, rather than gamble on future royalties.

Whether the owner initiates the sale or is contacted, he should check out the company and its reputation, Willen advised. Most reputable companies will be members of professional organizations like TIPRO and the Independent Petroleum Association of America.

The life of the company is another good indicator. If it has been in business for years, chances are it’s a good company to work with. Those guidelines have worked well for Momentum, Willen noted.

“The fact that we’ve been doing it for a long time speaks for itself,” he said.

Basin Oil & Gas, September 2009, Issue No. 21.
By Loretta Fulton, Special Contributor.