Energy Institute’s Advice for Mineral Owners

Growing up in Midland, Clayton Hooper knew the cautionary tales of boomtowns. Families pinned dreams on the Permian Basin, 300 miles of ancient bedrock that made West Texas a world player in crude oil. Eager for a windfall, some ranchers struck deals for their parched lands – and the oil and gas minerals underfoot.

“I’ve grown up on these stories where people would have been some of the wealthiest families in America,” Hooper says. “But they lost their wealth by signing bad leases and getting taken advantage of by unscrupulous landmen. They basically gave away almost all of their minerals.”

This course not only gives me a slingshot, it gives me an army behind the slingshot.
Clayton Hooper

Today’s generation may not share the same regrets. Hundreds of private landowners who hold mineral rights – some passed down through five generations – are learning how to protect their family legacies. They’re gaining legal savvy and practical skills to manage precious oil and gas reserves as participants in TCU Energy Institute’s Royalty Owner Program, a three-day course offered several times a year.

“Our parents and our grandparents didn’t have access to this type of information unless they worked for an oil company,” says Hooper, a third-generation rancher and professional risk manager. “This course has given me that information without having to go to college to become a landman.”

The program levels the playing field for mineral owners – the “landlords” of America’s oil and gas industry. Participants learn effective interaction with energy players, such as landmen who secure oil and gas leases from private owners for energy companies. Program participants learn how to negotiate a favorable mineral lease and to get operators to honor the terms.

“One of the things you learn in the class is that you have more power than you think you do,” says Nell Mitchel, who manages hundreds of her family’s mineral interests in six states.

The takeaway, royalty owners say, is that an oil and gas lease is more like a deed than a contract. A bad one can haunt the family for generations to come. “I can’t tell you the millions of dollars that landowners have lost – maybe billions – in negotiations because they didn’t know what they had,” says Abilene resident Glen Webb, attorney, rancher and mineral rights owner. He also is one of six instructors for the Royalty Owner Program.

Fueled With Knowledge

Hundreds of natural gas wells dot the Texas ranch in Crockett County once owned by pioneer cattleman J.W. Henderson. For five generations, Henderson, a local legend, and his descendants have managed the homestead. “There’s no way we would ever let go of this land because it has been in the family so long,” says Pat Perry Eason, Henderson’s great-great granddaughter.

Eason, along with her parents and siblings, collaborates with the five oil and gas companies drilling on land since the1970s. “Every single generation – including my Dad, who is working it now – has just put so much blood, sweat and tears into it.”

But Eason found talking to landmen daunting, even though she is a certified public accountant in oil and gas taxation. The emeritus associate professor of accounting at the University of Texas at El Paso holds a doctorate in business.

“Even with some background in oil and gas taxation, I didn’t know enough about how all the moving pieces fit together,” says Eason. “Talking to landmen in the past, I just depended on what I was told – not always the smart thing to do.”

After completing the Royalty Owner Program, Eason is more at ease. Most of her exchanges with landmen have been “great, as long as I have my information properly organized and in front of me.”

Our parents and our grandparents didn’t have access to this type of information unless they worked for an oil company.
Clayton Hooper

Within a week of taking the mineral-rights course, Eason saved more than $15,000. “In my gut, I knew the revenue was off, and I had been trying to get it corrected for over a year,” she says. “The workshop helped me organize my records and understand how to communicate in such a way that I was able to resolve the matter within a few weeks.”

Mitch Strickling can relate to royalty owners operating in the dark. The Midland, Texas native is well versed in the production side of the business; he worked for his father’s oil and gas company after earning an MBA in international energy. But a few years ago, the family firm acquired 5,000 net mineral acres in Reeves County, and Strickling needed a master-level class in royalty ownership.

“You think that just because you know what a pump jack is, you understand the industry,” says Strickling. “It’s a lot of different businesses and sectors, it’s so hairy.” The protocols and perspectives change for each of the key players – royalty owners, working-interest owners and private-equity investors.

“Our family understands that to have somebody want to drill on your minerals is the opportunity of a lifetime,” says Strickling. “You have to be educated, specifically with regards to being a royalty owner, and the TCU program is a perfect set up for this.”

Oil and Gas Production Reaches New Heights

Advances such as horizontal drilling and hydraulic fracturing have stoked a production boom in recent years. As these technologies unlock more oil and gas from shale deposits, royalty owners are in a sweepstakes period.

“I get wind of what’s hot because I get letters every week – two or three – wanting to buy my mineral interests,” says Mitchel, her family’s mineral-rights manager, who fields pitches from pipeline operators and visits from landmen. “If the county is hot, I can probably get as many as 10 offers.”

Faith Pinkerton scribbles “void ” on mock six-figure checks deposited in her mailbox. Like her fellow mineral owners, Pinkerton keeps a paper trail of who wants what – which boosts her leasing leverage with oil producers.

“I’ve received offers for a lot of money,” says Pinkerton, a mother of six children and the owner of a horse ranch in Oklahoma. “But when you figure it up over a lifetime, it would be utterly stupid to sell your minerals – even if they’re not producing, whether you have a well or not.”

Despite a painful slump in oil prices, Texas crude production is nearing all-time highs. The state is predicted to pump 1.28 billion barrels of oil in 2015, which would top the record of 1.26 billion barrels during the glory days of 1972, according to the Texas Alliance of Energy Producers.

Royalty Owner Program participants carry mineral rights in the most prolific oil plays in Texas: the Permian Basin in the West, the Eagle Ford Shale to the South and the Barnett Shale in the North – among other regions in Texas and elsewhere. “The world runs on crude, and we’ve got a hell of a lot of crude in Texas,” said Webb, a program instructor.

Handsome Returns

Landowners can reap sizable economic gains by leasing their property for oil and gas exploration. A typical deal includes an up-front signing bonus, ranging from several hundred dollars to several thousand dollars per acre – depending on the county’s energy potential.

“In my legal practice, I have seen bonuses as high as $10,000 per net mineral acre in the Barnett Shale several years ago,” says Webb.

Our family understands that to have somebody want to drill on your minerals is the opportunity of a lifetime.
Mitch Strickling

Big financial returns, however, are not in lease bonuses but in royalty fees – paid monthly, often for many years or even decades – when oil and gas is extracted from the land. Royalty fees are a percentage of the gross or net production from the drilling operation, which Webb notes typically range from 19 to 25 percent for Texas mineral owners.

“We learn not to sign 12 percent royalties anymore,” says Webb, adding that one program participant roped a 33 percent royalty, but the high end lately is about 25 percent.

“Royalty owners have so much power because oil and gas companies have to have you under lease to make their operation efficient,” says Webb. “I’ve had landmen call me and say, ‘You’re not going to get a better deal.’ And, I say ‘hit the road.’ They always come back.”

Webb is optimistic even in the midst of volatile global oil markets. “We’re going to wake up someday and figure out there’s more crude in the state of Texas than we need as a country,” he says. “We are so close to energy independence, and nobody realizes it.”

Navigating the Fine Print

Mineral ownership often means a litany of questions when energy producers come calling. Should I talk to my neighbors about the offers I’m getting? Do we need to band together to bargain for our minerals? How will oil and gas royalties affect my income taxes?

Landowners want to know the impact of the oil truck traffic on their rangeland. If they refuse to host an oilrig, they worry about being “force pooled” and having the land drilled anyway.

The royalty owner course de-mystifies oil and gas legalese – probing such common lease terms as the “Mother Hubbard” clause, which allows operators to drill on any adjacent property (Webb says “Mother Hubbard clauses are terrible and should be deleted from the lease right off the bat.) Program participants examine how a contract defines the time period of a lease (“habendum clause”) or revives a lease when production stops or a well has never been drilled (“force majeure”).

Royalty owners have so much power because oil and gas companies have to have you under lease to make their operation efficient.
Program instructor Glen Webb

“I think that if mineral owners were more educated with regard to managing these assets that they’ve been blessed with, there wouldn’t be such an adversarial relationship between them and the operator,” says Strickling, who has dual perspectives as both an energy operator and a royalty owner.

Mineral rights are rare commodities. Webb says less than one percent of the world’s population privately owns oil and gas minerals or royalties, and there are no consumer protection laws for mineral leases, as, for example, a citizen would have for leasing an apartment. “One of the first things we teach is that royalties should be free from all costs – such as processing, gathering, transportation and marketing,” the instructor added.

After taking the royalty-owner course, several landowners discovered these “post-production” costs in their mineral leases. “I found that I am being charged post-production costs and getting paid at the point of sale, versus being paid at the mouth of the well,” says Pinkerton. “When I sign leases in the future, if they’re planning to deduct post-production costs, I will not accept that.”

Hooper, the rancher in Midland, says his lease did not include post-production costs, but they popped up later in the division order – the “mini” contract prepared before production begins on a well that’s been drilled. “What I learned in this course is that an oil company can actually change an agreement that you have made in an oil and gas lease through the division order,” he says. “I went back and found they were withholding some post-production charges where they should not have been.”

With knowledge in hand, Hooper exercised his right to send a new division order to the energy players involved. “One of the oil companies quickly accepted it and one fought me on it,” recalls Hooper. “They said they couldn’t change the division order. What I learned is, I just sent them a second letter that actually had a copy of the law. And once I sent that, they changed it and stopped holding out post-production charges.”

With thousands of dollars at stake, Hooper says his tuition in the Royalty Owner Program more than paid for itself. “I went up against Goliath and I didn’t even have a slingshot,” he says. “This course not only gives me a slingshot, it gives me an army behind the slingshot.”

Tracy Rector has high praise for her program course instructor, George Wilson. He “has such a way of making the technical jargon more understandable,” she says. “A lot of the terminology in the oil and gas industry is by acronym so there’s this learning curve.”

“Taking this course helps me tremendously,” says Tracy Rector, who with her brother manages working mineral interests in 14 Texas counties (They’re active investors, sharing in the revenue with the title mineral owner).

Friends with oil and gas leases now ask Rector for advice, and she leans on one of her favorite aspects of the program – its big take-home primer on mineral rights. “You come back with this binder that is extremely well-organized. It’s very helpful for referring to when you have an issue come up, or you have a lease that you need to renegotiate,” says Rector. “It also has examples of contracts – what your lease should look like or what an undesirable lease would look like.”

Mitchel says the course helped her with the contentious the practice of “forced pooling” in Oklahoma. The doctrine allows drillers to aggregate or “pool” a large area of land together to extract minerals. Landowners are then compelled to join leases, even if they object. (While “forced pooling” is illegal in Texas, exceptions to the law have been invoked in recent years by the Texas Railroad Commission, which regulates the oil and gas industry.)

“You don’t get to negotiate, it’s called a pooling order,” says Mitchel. “They try to avoid you to save time. The oil companies claim they don’t have your address.” She hopes to avoid forced pooling in the future. “I found there was a loophole that I could negotiate and had 20 days to do that,” she says. “That was very helpful to me.”

Stewardship and The Ancestral Home

Another part of the Royalty Owner Program that participants especially appreciate is the legal coaching about surface damage clauses. Landowners cherish their historic family homes and want oil and gas partners to clean up after themselves. Owners work to protect the land that will pass to the next generation, since the estate and its minerals – the “family jewels” as Hooper calls them – are not for sale.

A powerful connection to the land is evident for Eason and her siblings in Crockett County. The family’s heritage is due, in part, to historic land certificates granted by the state of Texas more than a century ago. The certificates were given Eason’s great-great-great grandfather for his military service as a Texas Ranger. That ancestor fought in battle alongside Sam Houston – whose legendary victory at San Jacinto gave Texas its independence.

“It’s a connection to the generations and to history that not many people have. Anything the family does first and foremost reflects a concern for the effect on the land,” says Eason, noting that her parents have won conservation awards for their management of the property.

Eason’s father still works the range where Angora goats co-exist with natural gas wells. Eason is working to pass this heritage to the sixth generation – supporting her daughter’s attendance at the Royalty Owner Program. To Eason, the family’s ancestral home has value beyond measure. “Not many people can take their children to a place where their great-grandparents had been living and working,” she says, “and every generation since.”