Investments in the volatile stock market today are becoming increasingly challenging, given daily dominance by high frequency traders and algorithmic computer driven transactions. These high volume trades also influence the technical side of the stock market and investment decision making. The total synthesis between economics & politics has accentuated the volatility. There is another investment vehicle outside of the increasingly volatile stock market with potential for enviable increasing income and capital appreciation.
Ownership of oil & gas Royalty and Mineral interests in burgeoning shale related areas provides an interesting set of parameters that allow for possible above average returns. These returns cover the short and long term plus provide robust margins…..with minimal downside risk.
In an Increasingly volatile stock market, it’s very tough even for the best money managers on the planet to pick winners and losers. When owning stocks, the volatility exposure is endless, and usually includes Tweets related to President Trump, China trade negotiations, to tensions with North Korea, etc. When owning minerals rights, the only volatility is oil and gas pricing, which in downturns, mineral rights within the right over-pressured areas actually go up in value due to the scarcity of shale plays in the country that can make profits at sub $50 dollar oil.
When owning mineral rights, the owner has several legal documents that protect the interest and exposure. 1.) The owner has a recorded deed which establishes the rightful owner from now until the owner decides to bequeath or sell the minerals rights. 2.) When an Oil and Gas company drills wells on the property, the owner will have a legally binding lease agreement stating the royalty to be received with no operational liability exposure. 3.) Mineral rights take precedent to surface rights. It has been well established in Oklahoma law that mineral rights are always superior to surface rights and extraction of those oil and gas minerals can never be held up or interrupted.
When the owner has an income from a stock in the form of a dividend, there is the vulnerability of the dividend being reduced or taken away due to the company restructuring profits. Opposed to dividends, mineral owners receive almost a 20% royalty of everything produced related to their properties paid every month. Once a well is established and flush production is over, a royalty owner can get a good estimate of what they will receive every month. This allows mineral owners to properly configure their finances to be setup with an influx of available capital that was previously not available to them. Wells in the STACK play are very predictable, usually declining 65% in year one and 5% every year there after. The STACK has the lowest year one decline in production compared to every other major oil and gas horizontal play, with higher “flush production” figures that can be as high as 7,400 BOE per day.
Buiying Amidst a Price Recovery
Everyone has heard that one buys real estate when there is “blood in the streets.” Well, so is the same in the oil and gas business. When lower tier shale plays are exposed for having high break-even costs, the plays that have very low break-even costs, go up in value exponentially. When one buys the best oil and gas assets during a price recovery, you get great discounted assets with associated underlying reserves. When one owns reserves in the ground (mineral rights) the assets ascend in value with the rise of oil and gas prices. Having the foresight to buy valuable assets in an industry rebounding in price enables mineral purchasers to have rapid asset appreciation.