Owning Mineral Rights Is Like Owning Real Estate Without Bills
(please be advised. Video transcription may have spelling errors.)
Troy W. Eckard 0:05
Hi this is Troy Eckard, CEO and Manager of Eckard Land and Acquisition. With me is Ronnie Aroche, our business development manager, and we are constantly working with our high net worth clients that are qualified and financial looking for assets in the energy space. And what we have done is we’ve been working for and on mineral acquisitions in the state of Oklahoma. So we get a lot of questions for a lot of sophisticated investors. They could be bankers, lawyers. They could be in the business engineers, geologists, and a lot of the questions have to do with minerals, understanding how they work in the best possible way they can consider these types of investments for their own portfolio.
So Ronnie, you’ve had a bunch of questions from your clients. They’ve been asking you things like, you know how the metals work. One of the key topics is that we have a lot of investors that have a big real estate portfolio. So I’m here to answer some of those questions, see if I can explain them to your partners and some of our new partners out there and see maybe we can kinda shorten the information gap and make it easier to understand.
Ronnie Aroche 1:03
Yeah. I’m talking to different partners on a regular basis. They’re trying to understand, they’re getting the value in the minerals, but they’re trying to understand what the correlation is between owning minerals and how that’s so similar to owning real estate. And so just wanted to see if maybe you can kind of tell a lot of our partners how those things are similar how they can see owning minerals like real estate, and hopefully you can help us with these maps as well.
Troy W. Eckard 1:28
Good. Well, first off, thank you for the information. I know we work hard to try to get our feedback from our partners so that way we know what the differences between understanding and confusion and I’m going to put it in simple terms as I can.
For those of us that have been involved in real estate investments. I’m going to let you know minerals are effectively like being the landlord. Okay, when you buy a mineral interest, you own what is below the ground and oil companies want to come and develop or they want to extract the value of what’s below the ground where they believe there’s a lot of oil and gas or hydrocarbons. So when I buy minerals, the first thing I recognize is it’s a tangible asset, like buying a commercial lot, buying an office building, buying a self storage facility. It’s titled, it’s got due diligence. It has ownership checks, it has all the attributes of the piece of real estate. The only difference is what I own is below the surface, and I don’t know what’s above the surface. I don’t have the surface right.
With that being said, one of the key things for you and for our investor to understand Ronnie is that as the landlord, I essentially get to dictate who I lease to, the terms by which I lease, and the conditions by which I lease. So let’s use an example:
If I on an office building like the woman today, it’s a two story building, it’s probably 20,000 square feet. There are a number of tenants in these different offices that have all come up with a contract. They say, I want to leave this office for three years. So that office for five years and the right they pay the terms the number of parking places it’s all in the lease agreement. Same thing happens with minerals.
The other thing that’s an advantage, though, is that each owner real estate can decide if they want to offer certain types of mineral leases, such as do you want it to be a blanket least where the owner, the owner of the building pays the taxes and insurance and all the upkeep. Or, do they want to do a triple net lease where the owner of the building says, I’m going to lease you the space Ronnie, but I’m not paying for anything. You’re going to get your pro rata share, you’re going to pay your costs. And effectively I’m going to end up with a net check and pay zero cost. Well, that is exactly what minerals are. Minerals are like having a triple net lease, I’m going to least to you. Let’s say you’re Exxon, or British Petroleum. You come to me and say I want to drill a well under your minerals. Let’s assume this table we’re sitting at is a large block of land. I own the minerals out of the ground. I’m going to tell you I want $1,500 per acre of minerals that I own. I’ll give you a three year lease. That means you have three years in which to drill or have activity. And I want to retain 20% of the minerals, my royalty, I want to get 20% of whatever you find the ground free and clear you’re going to give me a check for 20% of revenue and I pay no expenses.
It’s a triple net because when you lease it for me as an oil company you’re going to effectively pay me the least bonus you’re going to do all the work you’re going to pay all the drilling cost operations you’re going to pay all the taxes. You’re going to pay virtually everything on this property. The only thing I’m going to have is my share production taxes for the revenue you give me. So, when you drill a big horizontal well it makes a million dollars a month in revenue, if I have a 20% royalty because I least you all my minerals to drill I’m gonna get a check for $200,000 minus my state tax to the state of Oklahoma for 3%, 4%, or 5% depending if it’s gas or oil.
I never get a bill. I never have to clean toilets. I never have to replace carpet. I don’t have a hot water heater. I don’t worry about property taxes. I don’t worry about abandonment. I don’t worry about escalations and value from the standpoint of being taxed higher. It is a net net gain asset owner. So that’s why minerals are very much likely real estate. What are the questions to your partners find themselves looking for?
Ronnie Aroche 4:59
So, I guess to reiterate, if I already own real estate, and that is my primary or my core investment, at least in my portfolio, why should I… why should I be minerals?
Troy W. Eckard 5:11
Okay, well, first off is a great question because it’s like owning a pizza parlor and somebody says, hey, do you want to go to a pizza buffet? You’re thinking, why would I do that? I already have a pizza restaurant that I own. But the fact is, is although the classification of minerals is very similar to what we call normal surface real estate, like buildings and and development, they’re very much polar opposite. And here’s why:
Oil is tied to the US dollar. Okay, oil is also inflation sensitive in that it’s a positive thing. When inflation goes up, it helps the price of oil because it’s tied to the dollar. Your surface real estate, though, when inflation goes up, actually goes down in value, because you borrowed money. Whoever is going to, at least for me, is going to pay more and rent, which means is going to be less profit is going to be less desirable… people can’t afford it. But more importantly is that whoever wants to buy your building is going to pay more than the cost terms of debt, or what the rate of return is going to be.
So when inflation kicks in surface, real estate generally goes down in value, whereas minerals go up in value. If I like the idea that it’s something, I can see touch kick or feel, I can touch a building, see a building, I go stand on my acreage, and I can go look at my 600 acres of minerals that I own. And I know there’s well as on top of it. It’s tangible to me, but they’re actually the opposite. What happens is, is that I’m going to take my real estate portfolio on the surface, and I’m going to make money all the time based on the market conditions. But I want to own some minimal so that no matter what happens in the economy every day, there’s an oil or gas well, making money pumping and flowing oil and gas and I get paid for it. And when inflation kicks in, it’s going to drag the price of commodities up it’s going to increase the value of what I have in the ground, which does two things. It increases my cash flow and increases the value my acreage. Why?
The higher the price of oil, the more reserves are in the ground because the oil companies can economically justify extracting it. So if you have a big real estate portfolio that’s great. You get the concept of long term hold, letting your assets become entitled, you want your assets to mature, you can look at long term cash flow with limited in this case, no cost, expose what you own minerals. But more importantly is you also have the ability to create an enterprise value from your minerals like you do with your business. If I went out and bought a piece of property, I built a building it’s worth the value of the building because it’s replacement cost. And I spent $2 million to build a building. Once I fill it full of tenants and I haven’t established cash flow, now somebody an investor or buyer is going to pay me based on the cap rate. They’re going to say, I would like to buy your building at a six cap rate. I want to make 6% of my money. So now you’re building a lot more valuable as a ongoing enterprise, a cash flowing assets, then it is just as a replacement cost piece of sticks and bricks. Minerals are the same way.
Today, if I own minerals and they are in the right area, they’re surrounded by production, and I know they’re going to be developed. They’ve been de-risked by an engineer. That’s great. And they’re worth let’s say, $6,750 per acre, like our BP Minerals. But, the minute we start seeing extraction oil and gas, and we get established cash flow, and the reserves are proved up, and the engineers like the appraisers come back and say, Hey, by the way, you paid $6,750 per acre. But now all of the sudden, it’s worth $15,000 or $20,000 per acre, because the reserves in the ground are so abundant that your value of future cash flow is worth so much more money; buyers are going to pay you based on that value in that cash flow. So there’s a huge correlation between real estate as far as surface real estate in minerals, but they are polar opposite in that they help each other when one’s down one is up. So a lot of our heavy real estate investors love to put portfolios of minerals together. They buy minerals every quarter, twice a year, every year, because it’s a nice balance.
Ronnie Aroche 8:43
And you know, there’s always by location like you mentioned. And then of course, what would you say the timing would be for, for when the value has increased and it makes sense to sell those minerals.
Troy W. Eckard 8:54
Well, let me give you an example. So this is a map of what they call the scoop of the stack in Oklahoma. Okay, and you’re familiar with the map down. Here’s the Texas border. This is the central part of Oklahoma. Each color represents a part of the SCOOP and STACK, meaning one area might be what they call a STACK core. This is the Cana Woodford. All this really means for the neophyte is that this is loaded with oil and gas. And if I did this is, let’s say a map comparable to Dallas, Fort Worth, these are office buildings, and these are apartment complexes, and these are Chick Fil A’s and Home Depot and Lowes. And what I know is that, if I tried to buy property right in the middle of this area, well, that’s like trying to buy a open commercial lot next to Chick Fil A. It’s not $10,000 an acre, it’s $50 a square foot, okay.
If I come all the way down here where I know the drilling is moving and I’ve got a couple of rigs located but it’s kind of wide open space. I’m still probably talking $10,000 an acre in my comparison to what you pay per square foot so what we look at is we look at this as a balance. The balances is that I don’t want to necessarily want to be over here where I see nothing. I don’t necessarily want to be in the middle.
In my strategy for our partners is, we want to be in an area where there’s ongoing development, it has been de-risk, there’s lots of oil and gas. But we want to be in an area that tells me that we can buy right, we have a lot of future value, long term cash flow, major will come is going to develop it. And so from a real estate perspective, it is like real estate from the standpoint of the three phases of real estate. There’s raw land development, there’s the entitlement of that raw land, and you go in and get it fixed up for being annexed into the city. You get water. You get sued, and you get all the entitlements with it. So it goes from $30,000 per acre to $8 a square foot, and then you sell that hard corner, right by the highway in one of your main corridors to Home Depot for $11 a square foot, and then Lowes goes across the street, and all of a sudden you’ve created not $30,000 an acre $8 a square foot, you know have $21 to $50 per square foot in Texas terms. And, that simply means that everybody else who has property values continue to increase. Minerals are the same thing.
If I’m over here buying minerals on this little part of McClain County, where we’re at, I know I have this massive amount of oil and gas and drilling activity coming toward me, I know if I can buy my minerals right next to the Home Depot and the Lowes and it has been proven because there’s a Chick Fil A and McDonald’s and maybe there’s a Burger King down the street, I know that there is going to be infill and I know there’s going to be development. I know that if I can buy it below market, the markets going to increase the value once we start seeing cash flow. And that’s what all these little lines represent is every time you see a line, it’s an oil well creating cash flow. So we go from a raw land value to an enterprise value.
So from my from my view, my vantage point, this is an enormous geological play. It gives us 10 years worth of running room. My expertise, after 34 years of looking at all the gas and being involved in the thousands of wells, tells me I know how to navigate and figure out the best value. And what my job is to not be in the middle of here, unless I’m the seller. I want to be a buyer here and the seller here I want to buy when it’s pre development I want to sell it’s maximum development, and want to keep rotating our capital the same way real estate doesn’t. So there’s some big advantage because the cash flow there’s also some big advantages in knowing where to be and how to be.
This is something you don’t do is a one time investment is something you’re going to say I want to put $100,000 a year in our half million dollars a year in for the next five or 10 years and create this huge mutual fund of minerals. And that’s what most of our wealthy clients are doing. That’s what I do with my own money.
Ronnie Aroche 12:22
Well, I think that’s going to give a better understanding as to how minerals related to real estate. I’m sure we’ll have other questions and we’ll provide our investors with more further information on how that is, and I appreciate your time today.
Troy W. Eckard 12:35
No problem. I’ll close with this: Eckard Land and Acquisition is very simply a 10 person office. We do not have a lot of overhead. We don’t have any pressure. We buy minerals we put them in our account, we invite our wealthy partner to participate by buying some of the metals with us. We’ll retain the bulk or most the minerals in our own account. We’re like a specialist. We’re like a neurosurgeon. Our clients come to us because they know we’re experts of what we do, and what they want us to do is provide them the opportunity to participate with us in mineral acquisitions. So, what we want to do with you is we want you to take your experience and invest in stocks, bonds, real estate, whatever you’ve done and we want to make this a very simple decision. So I’m going to give you three final thoughts on minerals that makes sense.
First off, it is tangible, it is real, it’s entitled in the courthouse. It is in perpetuity, and you own it forever; until you decide to sell it.
Two: there’s no capital exposure. You write your check for $100,000 and you own the minerals. There’s no cash calls, there’s no property tax, there’s no expenses, there’s no exposure, there’s no liability from environmental. You encounter none of it.
And third last, and most important to me: You’re on top of the food chain. When there is a million dollar check written a month for oil and gas sold off these horizontal wells in Oklahoma, the first thing that happens is: that oil company sends his check in for the oil and gas well. The operator, the company of drilled the well that manages the money, looks at it says, we got in $1 million this month. The top 20%, 18%, 25%. Whatever that royalty interest that is owned by me, the landlord, whatever that percentage is, they cut my check first. And there is no deductions at the bottom of that check. Other than the severance tax I pay to the state of Oklahoma.
That means I’m a net check provided. The worst thing that’s going to happen to me, is I’m going to get carpal tunnel from taking my stamp and stamping the back of my revenue checks for minerals that I’m going to own for the next 30 to 40 years.
I do have one final closing statement that’s very important. I used to have this picture on the wall of Superman. That was my superhero when I was a kid, and I’ve taken that down and I’ll put up a guy in Oklahoma has been buying those for 30 years who’s worth probably $300-$400 million. And, he owns interest in minerals in 100,000 mineral acres in Oklahoma and 24 other States. And the reason he’s my hero is that when I sit down and look at his investment strategy, he said very clearly: Troy I love real estate. I love minerals 10 times as much. And I said, Why is that? He goes because I never have to change carpet, toilets, I don’t have evict anybody. I get paid no matter what’s going on in the world. If there’s a war, if there’s a crash in the market, every day all over 24 States I get paid revenue every day 24/7. That is my new hero that goes up on my wall. I’m Troy Eckard with Eckard Land and Acquisition. Thank you very much for your time.[/vc_column_text][/vc_column][/vc_row]