Podcast – How to determine mineral rights value

Ronnie Aroche 0:06
Good afternoon. My name is Ronnie Aroche, Business Development at Eckard enterprises. And I’m here with CeEO Troy Eckard. We’ve done a few videos to inform some of our investors on different moving parts of mineral ownership and why people shoulld be involved or at least on were involved.

One big question is is all around the value of the minerals that we’re looking at and our investors are looking at as well. Troy one question I have is what what determines the value for mineral purchases for us?

 

Troy W. Eckard 0:37
You know that’s that’s a $64 million question because the reality of it is is that it has a lot of depends. I hate answers like that. When I asked the question, you know what’s the answer and they go, it depends. So let me tell you what the depends means and mineral values and it’s a great question wanted to ask my even my professionals and that is:

The obvious is supply and demand. When minerals are sought after because oil companies want to drill in this particular place, the price is driven higher as less and less minerals are many releases are available. Supply and demand. But, from a company’s position like ours, where we represent wealthy clients the question is we can position ourselves anywhere we want. We’ve got basins all over the United States, we have minerals that can be bought millions of acres available in the United States. The real value determination for us is the perceived two categories:

What kind of oil and gas reserves do we have per acre that we buy? What’s the value in the ground? And what is that value going to be extracted? I mean, so the way I view minerals is as follows. If I have a lease, there’s an oil on it and its flowing oil and gas, I’m not just buying a mineral and paying for cash flow. I’m paying for an enterprise value. Some of these buyers and investors that represent these large high net worth family offices, or maybe they represent a private equity group, they’re willing to pay prices that are staggering by my standards because they only want to four-, five-, six-percent annualized yield; and they’re willing to sit on it for 20-30 years at a four-, five-, six-percent yield.

I don’t have that kind of depth of pocket the most of my clients don’t. They want a better return because they don’t have the depth to buy 100,000 acres. They’re gonna by 20, 30, 50, 100 acres. So the second part of that is, is that we want to find minerals that we believe, with a high level of certainty, are going to be successful in extracting oil and gas. We don’t want dry holes, and we don’t want wells or leases that are never drilled. So, the value is also determined based on location. Just like real estate, location, location, location.

So what we want to do is we want to look at an entire area, and I’ll just use this as an example, if you don’t mind. What we want to do is say, Okay, if this were one geological area, which it is, it’s in Kingfisher County, Oklahoma. We know that in this particular area, any minerals are going to be bought have far been out price by being just open acreage with no well on it. This is an income purchase, okay. When I get to this well over here, I got all these sections of land. By the way, each square, 640 acres, it’s one square mile in each direction. When I look at the square miles around this well, there’s no proof from the novices eyes that does anyone gas. And there’s not any income because if I don’t have a well in the ground, there’s no way to get my own gas to the surface. I don’t make any revenue. But when you look at buying the minerals around it, many of these mineral owners are not sophisticated. That’s not what they do for a living. And maybe they would like to sell their minerals outright versus just doing a lease because they are the landowners, and they are like the landlords. They can lease the minerals or they can sell them. Well, here’s a good example:

Let’s just say this section 29, right here, it’s owned by one large rancher. He owns all 640 acres and it has been in this family three generations. You call him on the phone, you contact him. You professionally introduce yourself and say we’re interested in buying mineral lease. He says, absolutely not for sale… zero. Why? It’s been in the family for three generations, and I’ll never sell. I’ll take whatever value I get, but they’re not for sale. Okay, that’s market value. Market Value is infinity.

Section 32 is owned by a less successful rancher and farmer. He had to sell off pieces of land to survive. And now listen section 32 has 75 landowners. Five acre track with a mobile home on it. A 10 acre track with the house and the horse barn. I go to this section I started making phone calls. And I find that these particular middle ours are willing to sell their minerals because they don’t know what they’re doing. They don’t have at least or maybe they want to sell so they can take enough cash and pay off their house, or their kids college. So in a dynamic market around a single well, the prices could vary from $2,000 an acre, not like, up to $15,000 or $20,000 an acre or more depending on how good this will is.

Now let’s take you back over here Ronnie. [I keep looking at the camera but I should be looking at you and the fact matter is Ronnie, the answer your question is that…] If I were to go in this particular area, there’s no secrets anymore. Everybody in this area has already gotten a check. Everybody this area is already got a new pickup truck in the driveway, a newborn new house. And what they’re all saying is, our minerals aren’t for sale because they’ve been de-risked, and I’m going to have a check for the next 50 years. If you do want to buy my minerals you’re probably gonna pay me eight to 15 years cashflow. Now I’m back to the four-, five-, six-percent rate of return. So in this general area, you can have minerals that go for $3,000 an acre to $30,000 an acre in a matter of five miles. No different than real estate, Home Depot, Lowes, Chick Fil-A, Burger King… Walmart. Everything’s going to develop around Walmart, but right here is the main shopping center. Prices will be determined by perceived value. In this case, I believe minerals are always driven by perceived reserves in the ground, followed by a oil company willing to go drill a well to extract the oil and gas on the ground. So hopefully that answers your question.

 

Ronnie Aroche 6:00
So in like real estate, you know real estate you have Zillow, so you can see what the value is of any given property somebody wants to buy. In this case, it sounds like a lot of people are determining the value. Who specifically would you say determines the value? We would it be to the seller?

 

Troy W. Eckard 6:14
I’d like to say the seller, but seller is probably the smaller components. It’s gonna be the buyer. And the reason being is these are large, expensive acquisitions. And you brought up a good point. There is no Zillow. There is no online price comparison. This is pretty much an open auction, an open format that covers millions of acres across the country. I can guarantee you there might be 100 people chasing minerals around this world, and that same hundred may not be anywhere around these walls over here. It may be a different group of 100 people. So it’s competitive. The big advantage we have with Eckard Land and Acquisition, our company, is that we’ve been involved in over 300 to 400 horizontal wells, we’ve been involved in seven shale basins. In my career, we probably drilled well over 1000 miles vertical horizontal. We’ve been involved in seven states. The statistics are off the chart. We probably have been involved in five or 6 million foot of drilling.

Why is all that matter about minerals. If I put 100 mineral buyers here, and 100 mineral buyers here, we put it in one room, I’d be willing to bet 180 out of the 200 mineral buyers couldn’t tell you, which were drill bit turns. They couldn’t tell you geologically why this well is better than this well. They couldn’t tell you where that rig is going. Is it going north, south, east, west. They couldn’t tell you the macro view other than they can say it’s Oklahoma. It’s Kingfisher County. Everybody seems to be doing really well. We know the markets probably paying $15,000 to 20,000 per acre, and we know that this company, this oil company, and this oil company plan on drilling a bunch more leases so we better buy, and I have to offer a price because I have money to spend. I’ve been given $500 million by my pension fund. I’ve got to go spend the money. So most of, and I think probably close to 90% of the mineral buyers, have a pot full of cash, they overpay and they have no real sophisticated analysis what to do.

I have a different approach. I want to see what these oil companies are drilling. I want to hire geologists which I have. I want to hire engineers which I have. And I want to know why this well is better than that well. I want to know why this well is in a different zone then this well, and why that zone is also present here but they simply haven’t completed yet, or they haven’t even tested yet. And if I have this stack horizon, I have one zone, two zone, three zones, and I know that I can get a value three four or five times what the current market value is, it totally makes a decision where I’m going to buy and the price I’m going to pay.

So the market is mostly set by buyers but the sellers out here, the rich rancher says no way I’m never sell, I really don’t count him as a as a market buyer because he says I’m not in the market. The market is those who sell and those who buy. So it’s just like every other free economy.

 

Ronnie Aroche 8:51
You mentioned you know, various zones and different levels of production but what are some other industry standards that you think that determine the value?

 

Troy W. Eckard 8:57
Great point. It’s weird how patterns occur, right? It’s kind of like horses walking out of a pin. The first horse that walks out gets out the gate, he takes a right, he walks around an ant hill, and then here you are two years later you got a horse path it goes all the way to right, but the ant hill has been long gone. But the horse will never change paths. He walks around this old ant bed, and continues to walk.

Well, here’s how it works generally in minerals, and mineral leasing. If this mineral property over here, if they leased it, not sold it, but if they leased it for let’s say $2,000 an acre, generally speaking in shale plays they’ll pay three and a half to five times a lease bonus in the cost of minerals. So this is $2,000, they’ll pay somewhere between $6,500 up to $10,000 or $12,000 per acre to actually own the mineral. Why? Because if I lease it, I’m going to get a royalty but if I own the minerals, I get it in perpetuity. It’s not tied to just how long the well last. I own it forever. It’s actually owning it not being a tenant in the building.

Now I will tell you this… when you get to an area like this area where you have so many well as drill, and has been proven zone by zone, you kind of change tactics because now it’s not just three times least bonus. Now it’s cash flow driven. It’s how much reserves are being extracted and what kind of time frame. So I think, Ronnie the honest truth from my view, is that it is a value that’s driven by well density, number of reservoirs, how fast you get the reserves ground, how much density you’re going to get. But at the end of the day really is about just understanding what kind of oil and gas we think is contained how much willing to pay for it?

 

Ronnie Aroche 10:39
There’s a lot of variables that change.

 

Troy W. Eckard 10:42
Yes. But, the lease bonus is one of the big key factors. The second thing is all the public documentation where XTO, which is an Exxon company, comes out says: Hey, in this area we’re finding a million barrels per well. And British Petroleum goes out and says: we’re finding a million barrels per well, but we found in two zones. We are getting 2 million barrels per well. So that’s also a big variable. It’s just the market anticipation of value is created by public documents. So that also plays a difference too.

 

Ronnie Aroche 11:06
I think it definitely laid out the value on minerals and your analogies and and the map definitely helps. Anything else that you’d like to throw in there for investors?

 

Troy W. Eckard 11:17
Well, I think two things happen: One is that, when you and I, and our team here at Eckard Land and Acquisition, when we work there’s so much that goes on behind the scenes that determine where we’re going to buy. I mean, we’re turning down dozens and dozens of mineral opportunities with variable prices all over the board. We have a market study that tells us what minerals are going for, and why. We say no, probably 99 times out of every yes, and our main objective is that we are buying minerals that we will not lose their money on, our target rate of return is better than 20% per year. And, what we want is minerals that last 30 to 40 years. We believe they are a legacy asset. If I had to build myself a platform of value my my portfolio, minerals is one of those cornerstones. And so I call it a legacy asset in that every time I buy minerals, it’s money that’s well positioned, I can transfer it to my kids, I can transfer it in my estate, it doesn’t have taxes, it’s not complicated. If I need to go sell it, I can put it on 50 auction sites tomorrow. So as a legacy asset, I like the fact that if I can buy and continue to buy and build that portfolio, I’m just adding more money into my piggy bank every single year, cash flow every single month, and I don’t have any expenses that are exposed to it.

So I really enjoy the fact that this is a true value proposition. And I will tell you, there’s two values that you need to think about. There’s the value of the check coming every month, and there’s the value when and if you decide to sell some, part, or all your minerals. Maybe in three years, and oil prices are $85 a barrel, you say: I’d like to cash in on this really strong market for oil. Well, let’s don’t sell all your minerals. Let’s go sell 25% of your ownership. Let’s get 10 years cash flow. We still have the minerals, and we put a pocket of money in our bank. And guess what… it’s long term capital gains, and we go out and buy a bunch more minerals.

This is a 10 to 20 year play. We have lots of room. So if I’m an investor, well then why should I get involved today? Well, you shouldn’t. This is not a there’s not like a train and I tried to hop on or off. This is an investment decision based on very practical fundamentals and minerals are the top of the food chain. You get paid first. You have no exposure liability. You have no capital calls. It’s just a matter of depositing checks. It’s just a great way to invest money.

 

Ronnie Aroche 13:27
A lot of good information in a few minutes. Thank you for taking the time and answering those and we hope you guys enjoyed it as well.

 

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