Mineral Rights Due Diligence

As with any investment, you must practice due diligence when investing in mineral rights. There are a number of due diligence criteria to keep in mind to ensure that the mineral rights you acquire are worth investing in.

Area of Interest

If you are considering investing in minerals, the most obvious question is where the mineral acres should be located. You want to acquire minerals that are proven to be rich in oil and gas through historical data gathered over the past 100 years of US exploration. You will want to look at areas that have “stacked pay,” meaning that there are multiple hydrocarbon-rich zones stacked on top of one another. This means that there are multiple opportunities for extraction, as multiple horizontal wells can be drilled through the various layers. These additional “pay targets” ensure long-term value and cash flow. You will want to investigate areas where modern technology is being used to exploit reservoirs to their fullest potential. It is also crucial to target areas where the state government is friendly to oil and gas ventures. This helps avoid anti-fossil fuel regulations that would otherwise hinder the development of oil and gas resources.

Regulatory

It is important to utilize regulatory filings to aid in the determination of areas that are ripe for potential future activity. Analyze documents to determine information about the area such as developmental plans, number of wells, and target formations of new wells.

Operator

Another essential due diligence item to consider is the operator themselves. Since the operator is the actor that will actually extract and produce the resources under the mineral acres we acquire, it is crucial to select areas being developed by top-notch operators. Look back at the operator’s current and recent drilling and well completion activity in a given area. The importance of confirming that an area is under operators that have proven results cannot be understated, as the quality of results is ultimately driven by the operators and their efficiency. Another important aspect is ensuring that an operator is financially sound. You want minerals that are developed by best-in-class operators as part of our due diligence process.

Geological Factors

Geology is an essential aspect of proper mineral rights acquisition, and a critical element to consider when performing due diligence. A comprehensive geological review is recommended to ensure that there are no geological risks and that you have a complete understanding of the reserve base. A few of the elements of risk to consider are the geological features of the reservoir and the presence of fault lines. Fault lines occur where there has been significant movement of subsurface rock, which can divide geological formations. This can make drilling difficult or impossible, and the operator will typically exit the targeted area at the fault line.

Engineering and Production

Examining engineering and production data allows the ability to forecast future production potential. Look at production data from existing wells in the area to predict which areas will have the best production in the future. Analyze production curves for all formations in the area in order to create multiple profiles. Evaluate the well spacing to determine how many wells an operator could potentially drill per formation, per drilling unit. Through a combination of all of these factors, one can estimate the potential for additional future wells to be drilled.

General Due Diligence Questions

The following list of questions are important to ask before making any investment, mineral rights investing included.

The Who:

  • Who is the authority for the sponsor’s company?
  • Who is the sponsor’s broker dealer, financial advisor number, or the exemption they claim to sell securities?
  • Will the sponsor disclose their management and ownership, and will they do so with the full details of their backgrounds?
  • Can the sponsor provide their securities filings?
  • Can the sponsor provide all projects or investments they have managed, offered, or funded in the last five years, in writing?
  • Can the sponsor provide the names of the entitles under which they funded prior investments for the last five years?
  • Does the sponsor have any lawsuits pending, or threats of lawsuits pending, now or in the foreseeable future?

The When:

  • Do you have any desire to be in this alternative asset space?
  • Do you know anything about this asset class?
  • Are there certain advantages associated with this asset class that are desirable and appealing to you?
  • Are there open sources of information available outside the selling source to verify the information they provide?
  • Are there other parties or selling sources in the space that you can access or request data from to allow for a comparison?

The Why:

  • Why is the sponsor contacting you?
  • Why does the sponsor need you and your capital?
  • Why does the sponsor think there is value in what they are selling?
  • Why is the sponsor targeting this geographical location & asset class choice?
  • Why is the sponsor utilizing debt, or not utilizing debt?

The How:

  • How does the sponsor make money & get paid? (Including all sources of fees and equity!)
  • How did the sponsor buy the assets they are offering you, or are they brokering the deal?
  • Does the sponsor currently own the assets they are offering?
  • How will the sponsor verify that they own those assets?
  • How do you get the names and contact information of your fellow Partners?
  • What is the purpose? Have the sponsor walk you through the process and show the use of proceeds for every dollar being invested and capital being spent.
  • What will the sponsor invest and spend of their own money?
  • Does the sponsor pay commissions, brokers fees, or outside 3rd party compensations?
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