Buyer beware - offer for "royalty lease" (as opposed to mineral lease)

General Mineral Rights Discussion
1

This seems deceptive to me.

Last week the Trust I work for received an offer stating "We are interested in leasing your interest located in Ward County, Texas to the following land....". Everything about the cover letter, and the included lease, were modeled to look like a standard mineral interest lease offer.

The section is already leased and has a producing well on it. It also has 6 permits that were filed in December of 2015.

My first thought was that the landman who sent the offer had screwed something up: wrong Section/Block, wrong owner... When I went back and read the letter and lease more closely I realized that the offer was for the royalty, not the mineral interest.

"On behalf of xxxx we would would like to offer you $2000/net royalty acre along with a 1/4 Royalty to lease your interest in the above described track of land." The bonus came out to about $3000. The lease itself was titled Oil and Gas Royalty Lease.

It took me a couple of minutes to wrap my brain around what the offer really was. If the 6 permitted wells are drilled, they could pay out the offered bonus in the first month. So, in exchange for potentially one months royalty amount up front, the trust would give up 75% of it's royalty as long as the wells are held by production.

I gave the landman a call to respectfully decline his offer. I also asked him if this was something new because I've never seen, or heard of, a royalty lease before. He said they are not new and then asked me if I represented anyone I would be willing to recommend the offer too. I told him as politely as I could that I found the presentation deceptive, and a horrible deal to boot, and that I would not be inclined to pass it along.

2

Christine, I've seen this a lot lately, and it is completely unethical. What they are effectively obtaining is a "term royalty deed" disguised as an oil and gas lease. It seems to be coming from a handful of individuals over and over again operating under different LLCs. I've also seen them solicit these "royalty lease" offers to NPRI owners, especially in the Eagle Ford. It would be a great service to mineral owners if you were to post the information of the group that made the offer so that when other mineral owners receive offers from that group and google the company name, this thread will appear in the search results.

3

I was not sure if it was within forum policy to name names. The companies name is Plains Natural Resources LLC. When I googled them nothing came up. When I asked the landman about this he said he is just doing contract work for the company but he believes it wasn't registered until Dec. 2015. It has a street address in San Antonio, but when you look up the address it comes up as a UPS store that advertised boxes with street addresses.

4

The one that I saw was absolutely a term royalty deed . However, three out of four of my clients choose to accept it and the other decline their offer.

I did not like the form, so I prepared a term royalty deed for its use.

5

According to the Texas Comptroller website, Plains Natural Resources LLC has an effective registration date of 1/4/2016. The name of their company is deceiving, and no doubt intentionally so, as "Plains" is a name used by a legitimate multi-billion dollar company in the oil and gas industry.

The offers I've seen from these groups is pennies on the dollar for what the revenue stream is actually worth. I calculated one a few months ago to be worth about 5% of what the well would likely do in 12 months, at $40 oil....not to mention the acreage will be HBP for potentially multiple generations...it is very sad. Using DrillingInfo it is easy to find the areas where a well has been spud and is in the process of being drilled, so these guys just pull a report of permit/drilling activity, send out "royalty lease" offers, and it is almost a 100% guarantee that they will be receiving royalties within 6 months as the well comes online.

In my opinion, nobody should sign a Term Royalty Deed unless the term is strictly limited to a calendar period, as opposed to a set period of time and for so long as oil and gas is produced. Otherwise, if a well is drilled, you have essentially sold 75% of your royalty stream for a low sum of money.

6

My vote goes to contacting the Attorney General's Office and asking them to look into the company. Deceptive trade practices make everyone in the industry look bad.

Charles Tooke

7

Good idea Charles.

Clint Liles

8

I don't like it when people trash my industry.

9

A kid can steal a candy bar and go to jail. How do you stop the big dollar theft?

10

Wow. I have heard of selling royalty or term royalty deeds, but never a royalty lease. I think there is a real possibility here of some owners thinking it is a top lease of some kind, or just jumping at the money. Of course, this is no worse than the companies that want to buy your minerals, and then provide a deed form which has a “Mother Hubbard” clause which sells everything you own in the county.

People who buy minerals, or this scheme, are taking a big risk in most cases, that the property gets drilled in some reasonable amount of time. The flip side is that they need to make a 200%+ return to make up for the ones that never get drilled. That gives you an idea of how much they are underpaying for the value of the minerals, long term.

11

The majority of the "royalty lease" offers that I've been asked to opine on cover tracts that have recently been spud for wells with mile+ long laterals, so a significant return awaits the purchaser in a few months. It would be nice if the operators would send out a notice letting mineral owners know when 1) a well has been permitted, and 2) drilling has begun. At the very least, a Lessee could have the courtesy of directing mineral owners to the RRC GIS viewer for updates.

My experience has also been that many mineral buyers have ties, whether current or former, to land brokers or operators and have first hand knowledge of mineral ownership within a block, leasing strategies, development timelines, geology, etc... Pairing this information with proven production results, and a few cash flow models, it is easy to raise capital to then use to inundate the mineral owners with purchase offers.

12

Hi Christine -

I've been thinking this over and if you will be kind enough to provide me with the name(s) of whoever contacted you and copies of any paperwork or letters they mailed or emailed you, I would like to submit them to the American Association of Professional Landmen to review.

If you would like to provide me with the information privately, accept the Invitation to become A Friend on The Forum that I just sent you and you can send me the information without posting it here on the General Forum Page.

Hell, I'm even thinking of calling this A-Hole's Mother.

Many thanks -

Charles Emery Tooke III

13

Charles - I wanted to know if the fellow whose name is on the cover letter is an AAPL member, so I already gave them a call and sent them the documents. No surprise that he is not a member.

14

Atta Girl - Good thinking!

I'd still like to explain to his Mother what he's up to...

15

Christine, your common sense served you well. Accepting this offer from a company whose existence can be measured in weeks would be a fool's errand. I have heard of royalty leases before, there were a slew of them in the 1950's in the Barnett Shale and in the 1970's in some other parts of Texas, but I have seen only a handful of them in title since then. A good friend of mine's elderly mother got an offer similar to yours for a small tract of land in East Fort Worth, and my friend asked me if she should sign it. Normally, I would read an offer like that, explain the pros and cons, and let the mineral or royalty owner make his or her own decision. But after reading his mother's offer, the whole thing, word for word, I was so outraged at what they were trying to do that I told him, "Your mother will NOT sign this document. I REFUSE to allow her to do so. Agreed?" He said, "That's all I need to know, thanks." The way that they worded the document, she would not only be leasing royalties but ALSO conveying ALL surface AND mineral interests that she owned ANYWHERE in the County to the Lessee! Theoretically, she would have conveyed ownership of her HOUSE to the Lessee and been homeless anytime that they chose. Unbelievably, I found about 100 such documents that had been executed and filed in the Deed Records! So I contacted the Attorney General's office, and nothing happened. And I contacted AAPL to file a complaint because almost all the principals of this company were AAPL members. I don't remember the exact excuse, but they basically said that there was nothing they could do either, even though I cited to them two different parts of their Code of Ethics that had been violated. Anyway, good job on your part.

16

Hey, Pete!

Interesting story. And right here in my backyard.

I'd love to see what information you have on those guys. Can you send it to my personal email?

Thanks -

Charles

17

Charles, I sent the information to the personal E-mail that I have on file for you. If you did not receive it, send me a personal message with your current E-mail address and I will re-send.

For the rest of the audience here, I do have to clarify that, after locating and re-reading the information I have on this situation with my friend's elderly mother, from two years ago, I realize that the paperwork sent with the offer made to her would not have resulted in her actually conveying her Mineral and Surface Estates to Lessor. HOWEVER, and I forgot to mention this, the Royalty Deed DID have a Power of Attorney (POA) included in it that would have allowed the Lessor, meaning the new royalty owner, to do EXACTLY that, steal her minerals and her surface at any time of their choosing. Would they have done that? No, not likely, and she might have had some rights under homestead law, I don't know.

BUT they might have used that POA to steal a pipeline easement from her or a pad site from her, her tract of land was not very big but it was big enough for her house, a setback, and a pad site. ALSO, the Royalty Deed contained a clause that would allow them to "clawback" any royalties that she might have already received under an existing Oil and Gas Lease. So they could have demanded from her all the income she had received, potentially over many years, from her oil-and-gas royalties, money that she already had paid income taxes on.

18

Hey guys I saw one of these for the first time last year. It came to me from a friend of a friend who was asking for his Aunt. It took me a few moments to figure out what was going on. This is a horrible deal for people as they nearly always think it is for an Oil and Gas lease and the consideration is the Bonus money instead of the sell price. Anyway for what its worth I attached a couple redacted forms that were sent to me.

P.S. Buzz don't sign one of these, lol

19

Correction: "Grantee" instead of "Lessor" in the comment above.

20

Great topic Christine. I wanted to point out that even though the instrument you received is a term royalty deed, one of the reasons they call it an "Oil and Gas Royalty Lease" may be their attempt to avoid the application of Texas Property Code Section 5.151 below which exempts oil, gas and mineral leases, and which I have copied here:

SUBCHAPTER F. REQUIREMENTS FOR CONVEYANCES OF MINERAL OR ROYALTY INTERESTS

Sec. 5.151. DISCLOSURE IN OFFER TO PURCHASE MINERAL INTEREST. (a) A person who mails to the owner of a mineral or royalty interest an offer to purchase only the mineral or royalty interest, it being understood that for the purpose of this section the taking of an oil, gas, or mineral lease shall not be deemed a purchase of a mineral or royalty interest, and encloses an instrument of conveyance of only the mineral or royalty interest and a draft or other instrument, as defined in Section 3.104, Business & Commerce Code, providing for payment for that interest shall include in the offer a conspicuous statement printed in a type style that is approximately the same size as 14-point type style or larger and is in substantially the following form:

BY EXECUTING AND DELIVERING THIS INSTRUMENT YOU ARE SELLING ALL OR A PORTION OF YOUR MINERAL OR ROYALTY INTEREST IN (DESCRIPTION OF PROPERTY BEING CONVEYED).

(b) A person who conveys a mineral or royalty interest as provided by Subsection (a) may bring suit against the purchaser of the interest if:

(1) the purchaser did not give the notice required by Subsection (a); and

(2) the person has given 30 days' written notice to the purchaser that a suit will be filed unless the matter is otherwise resolved.

(c) A plaintiff who prevails in a suit under Subsection (b) may recover from the initial purchaser of the mineral or royalty interest the greater of:

(1) $100; or

(2) an amount up to the difference between the amount paid by the purchaser for the mineral or royalty interest and the fair market value of the mineral or royalty interest at the time of the sale.

(d) The prevailing party in a suit under Subsection (b) may recover:

(1) court costs; and

(2) reasonable attorney's fees.

(e) A person must bring a suit under Subsection (b) not later than the second anniversary of the date the person executed the conveyance.

(f) The remedy provided under this section shall be in addition to any other remedies existing under law, excluding rescission or other remedies that would make the conveyance of the mineral or royalty interest void or of no force and effect.