There’s never been a more active time for mineral buying and selling. The industry is flush with private equity and investment capital looking to gamble on future production, and that competition has driven per-acre prices to historic levels. It’s certainly a “seller’s market”.
Your mailbox is likely a good gauge of this activity as snail mail letters are still the preferred method of marketing for mineral buyers. Whether you intend to sell in the near future or not, it’s always good to have your finger on the pulse of the fair market value (FMV) of your assets. After all, you may not be planning to sell your house in the near future but you probably have a ballpark idea of what it’s worth right? You shouldn’t treat your minerals any differently. With all that said, there’s no harm in filing those offer letters away in a drawer. The decision to sell mineral rights is oftentimes situational and sometimes unforeseen, and you’ll find that those past offers will be helpful points of reference when the time comes.
But let’s say that time is now and you’ve made the decision to start seriously considering purchase offers. That’s exciting! However the process of entertaining, evaluating, and negotiating offers can seem daunting - but it doesn’t have to be. Like anything else, if you’re prepared for the process, understand what to expect, and know what questions to ask, you’ll be setting yourself up for a successful sale. Here are a few tips and tricks:
Weed out the amateurs and bad actors: First things first, eliminate the “fly by night” operations from your buyer list. Believe it or not, there are very unscrupulous one-man shops out there who start an LLC, do a few bad deals with uninformed and unsuspecting mineral owners, close up shop when they start to get a bad reputation, then start a fresh new LLC and repeat. There aren’t a ton of these bad actors out there, but they do exist. Beware of a prospective buyer who doesn’t have a company website, uses a personal email address (such as @yahoo.com, @gmail.com, etc), or is difficult to get ahold of.
Check out reviews: You probably read reviews before you buy something on Amazon, dine at a new restaurant, or hire a realtor to sell your house, so why not read reviews for the buying groups you’re considering? Unfortunately there’s no central online platform for mineral buyer reviews, but many buyers’ websites have a “Testimonials” section with quotes from mineral owners they’ve worked with previously, detailing their experience with the buyer. If this isn’t clearly listed on the buyer’s website, there’s no harm in asking them if they can send you over some testimonials to review. If you’re still on the fence about a buyer after reading their reviews, go one step further and ask if you can speak with a mineral owner who they’ve worked with in the past. A legitimate, experienced, professional buyer will have no problem providing you with a “reference” who you can call and ask about their experience with the buyer.
Ask the buyer how they’re capitalized: One of the most common horror stories in selling minerals is that a buying group backs out of a deal after a 30, 45, or even 60 day due diligence period because they don’t have the money to close. This frustrating situation isn’t the end of the world by any means (as you’ll still own your minerals and can just take them out to market again), but it does result in a lot of wasted time and effort on your part, along with an healthy dose of undue stress. To mitigate this risk, try to only work with groups who have plenty of funding behind them. Most of the highest paying mineral buyers are backed by a private equity firm which has given them at least a $50MM (MM = million) capital commitment. Other buyers may be associated with family offices who have tens or hundreds of millions at their disposal. At any rate, it’s perfectly reasonable to ask a prospective buyer how much they have in their bank account to ensure they’ll be able to pay you in full at closing.
Have an asking price in mind: As we’ve discussed in previous blog posts, mineral rights are not all that different from surface real estate - in fact, you could just think of minerals as “subsurface” real estate. In real estate transactions, unless it’s a foreclosure auction, you rarely see a residential or commercial property hit the market as “Make Offer”. Typically the seller has researched the market conditions and comps, and determined an asking price based on that information. They will likely set their ask price a bit higher than what they’re willing to accept in order to give themselves room to negotiate. This is an effective strategy for selling minerals as well. Buyers are understandably wary of an owner who says “make me an offer” as this person could just be a tire kicker. Evaluating mineral interests with seismic data and petroleum engineering is very capital intensive, and the last thing a buyer wants to do is to run a full evaluation without any idea of what price an owner would sell for. For all they know, you yourself don’t know what price you would sell for, and then everyone is ultimately wasting their time. Like we’ve said before - the more prepared, transparent, and respectful you are as a seller, and the more confident and deliberate you are with your requirements, the more likely you are to complete a successful sale.
Request an abbreviated PSA: Once you’ve selected a buyer and negotiated the purchase price, the next step is for both parties to sign a Purchase Sale Agreement (PSA) outlining the terms of the agreement. You can save yourself a lot of time and money by asking the buyer to send you a shortened version of their PSA, ideally two to four pages in length. If you don’t ask, many buyers will send you a lengthy 10+ page contract, oftentimes with a lot of protections for themselves buried within all the legal language. While this isn’t malicious (they need to protect their interests of course), it does require you to spend more time and money (legal fees!) reviewing and editing the agreement to make it more fair for both sides. Save yourself some heartache - when you verbally accept an offer, tell them you’d like to cut to the chase and sign something short and sweet.