“Royalty and Mineral Rights Ownership Gives Me Peace Of Mind That I Am Creating Generational Wealth For My Family While Providing Dependable Cash Flow For My Month To Month Needs Now.”
-Spear Minerals Client
The Spear Minerals Value Proposition
Spear Minerals provides compelling opportunities geared to the individual investor by marketing its real property interests in income-oriented oil and gas royalties. Spear’s acquisition and technical team have acquired and sold $1+ billion of minerals, royalties and leasehold in their collective experience. The team’s success has been anchored by a keen on the ground insider knowledge of oil and gas plays, land leasing trends, mineral owner relations, geology, and reservoir engineering.
Through Spear’s team’s extensive knowledge and constant review of US oil and gas operational areas, it always has a view of those which are strategic, and immediately seizes compelling acquisition opportunities when they arise. Prior to 2020, Spear’s team only marketed these opportunities, once acquired, in large packages to institutional investors. Unfortunately, these investors have exhibited a growing tendency for acquisition size over quality
– a sacrifice Spear is unwilling to make. Consequently, the Spear team made a strategic decision to shift its focus to the individual investor. The individual investor appreciates Spear’s ability to provide low risk cash flowing assets with future upside potential in smaller bite sizes.
These assets provide cash flow without the need for any asset level maintenance or further investment “Capital Call” that might be experienced in a commercial real estate property. The oil and gas royalty packages which Spear markets involve properties which are operated by many of the largest and most well respected operators in the business. The royalties are most often associated with projects possessing current cash flow concurrent with active development and drilling. Upside opportunity is delivered by the potential that operators will drill new wells on the acreage providing income in addition to that which exists at the time of the purchase from Spear.
Mineral/Royalty Ownership Benefits At A Glance...
Long considered a “mailbox investment,” royalties are paid, first from a well’s pre-expensed production revenue. Royalty owners typically receive 12 – 25% of cash flow after production taxes have been paid.
Royalty owners enjoy a depletion allowance which waives income taxes on the first 15% of royalty income each year.
Asset Value Appreciation Potential
Oil and gas commodity prices are historically cyclical. Currently, the market is in the midst of a protracted pricing downturn, resulting in reduced asset acquisition entry costs vs historical levels. For investors, this equals the potential to enjoy greater upside as asset pricing cycles back through to higher levels seen through the years. While pricing will continue to fluctuate, many experts agree that today’s lower commodities pricing represents an attractive opportunity to enter or expand one’s position in the energy industry.
Long-Term Passive Income
Royalty payments are made for as long as an asset produces, which can be upwards of forty years or more in some fields.
Capital Gains Tax Deferral
As ‘like-kind property,’ oil and gas royalties are eligible for IRC-1031 Exchanges, which provides capital gains tax relief for real estate and energy investors.
Royalty Owners Face No Liability And Are Not Responsible For Any Costs Associated With Drilling And Production
From drilling risks, to geological risks, to environmental risks, the oil and gas exploration and production (“E&P”) business carries with it a unique set of parameters which are not for the faint of heart. Fortunately for royalty owners, these risks, liabilities and expenses are borne solely by the working interest owners, i.e. the E&P companies and individuals putting up the money to drill and maintain oil and natural gas wells. In addition to being immune from up-front exploration and drilling costs, royalty owners are also not subject to ongoing capital calls or operator assessments. Other than potential administrative costs associated with managing the asset portfolio, royalty owners contribute nothing outside the initial investment.
When It Comes To Getting One’s Monthly Royalty Checks, Only Uncle Sam Gets His Share First
Royalty owners are paid first from pre-expensed revenue and typically receive 12% - 25% of cash flow after production taxes have been paid. Royalties are cash payments from the production of oil and natural gas and are paid off the GROSS production, not the NET.
Royalty payments are based on a percentage of the gross oil and gas produced on a property, the terms of which are clearly stipulated in the lease agreement. With the exception of taxes, royalty payments are free from all costs related to exploration and production.
Royalty payments are made by the oil and gas company that has leased the rights to the property and operates the wells.
Oil & Gas Technology
It is widely known that during the past 10 - 15 years, the United States has experienced an energy renaissance due to advances in technology. What you may not know is that the resulting resurgence in U.S. oil and natural gas production has created a whole new energy investment landscape. A new paradigm of investment products offering low risk opportunities designed to provide long-term and reliable passive income, tax advantages and appreciation potential has developed.
Portfolios of oil and gas mineral and royalty ownership deliver just this by offering one of the most unique and flexible investment opportunities available to high net worth investors today.
The U.S. Shale Revolution has changed everything
Shale plays are contiguous hydrocarbon-rich formations spanning hundreds, if not thousands, of square miles deep beneath the surface of the earth. Historically, there has never been any geologic question that Shale formations contain large reserves of oil and gas, the problem always was the ability to make these reservoirs flow oil and gas to the surface in an economic fashion. Improved extraction methods including horizontal drilling and hydraulic fracturing have made these long-known oil and gas plays extremely profitable while remaining incredibly consistent.
Because of the contiguous nature of the rock, shale plays exhibit consistent geology and pressure characteristics, which result in more predictable hydrocarbon production. It is rarely a question of whether oil or gas will be found in a shale play, but rather how much oil can be produced over the life of a well.
Key Takeaway: Predictable hydrocarbon production has greatly impacted the availability of royalties in premium, active locations in the market.
Thanks to shale plays, the U.S. Energy Information Administration (EIA) predicts that annual gas production will expand to more than 26 trillion cubic feet (tcf) by 2035 - with shale gas production expected to account for close to 50% of domestic output. Meanwhile, the EIA predicts oil extraction and production from onshore sources will total more than 7 million barrels a day by 2035.
On “pooled” acreage, one receives their share of revenue regardless of where a well is drilled
Oil and gas producing states utilize unitization or pooling methods to help prevent the drilling of unnecessary wells and to protect the rights of mineral owners. Pooling also helps maximize the recovery of natural resources. What pooling means for mineral and royalty owners is that they will receive their percentage share of income from any well producing within these predefined number of acre units, regardless of the physical location of the well.
Key to ensuring smart portfolio diversification in royalty ownership is acquiring small interest positions in as many pooled units as possible.
LOCATION, LOCATION, LOCATION
Where one’s mineral and royalty interests are situated is as key to success as location
in Commercial Real Estate Investing
In the oilfield, and particularly in large, contiguous shale basins, aggressive drilling on acreage is a key mechanism behind value creation. As mineral and royalty ownership is a passive investment with no control over drilling activity, it is critical to acquire ownership positions in proven acreage where large, well-capitalized operating companies are actively drilling.
Contact us today to learn more about how Spear Mineral's oil and gas royalties portfolios can benefit you.
Oil & Gas Royalties and the 1031 Exchange
As deeded real property, oil and gas mineral and royalty interests are considered “like-kind” replacement property for the purposes of a 1031 exchange. This means that investors have the option of investing all or a portion of the proceeds from a commercial real estate transaction into oil and gas minerals – all while deferring capital gains taxes.
Like Kind Replacement Property Easy Rule of Thumb: If the property sold is deeded and held for investment and/or business-purposes, the capital gains from the sale of that property can be used to purchase another piece of property that will be held for investment and/or business purposes.
Benefits of Exchanging into Oil & Gas Royalties
Royalties are essentially rental payments paid to royalty owners by oil & gas producers based on a fixed percentage of the gross production from the property. As a Royalty Owner, one receives a share of the gross production revenue without paying for any of the monthly expenses associated with future exploration and development on the property.
Capital gains tax deferral
A 1031 Exchange allows investors to diversify their portfolios while deferring capital gains taxes.
Exposure to non-market correlated cash flow potential
A 1031 Exchange into minerals/royalties provides exposure to non-market correlated cash flow potential. Unlike commercial real estate that is driven by rents, royalty cash flow is generated from a well’s monthly production sales. Additional cash flow may be added as new wells are drilled on the acreage.
Maximum capital available to invest
A 1031 Exchange maximizes the amount of capital available to invest, which helps not only maximize potential personal investment returns, but also helps promote the nation’s overall economic health.
Asset appreciation potential
Mineral/royalty ownership in unconventional shale plays provides exposure to upside potential. As continued development “proves up” additional reserves, the market value of royalty interests has the potential to increase, resulting in a better overall ROI.
Five Key Things To Know About
Executing a 1031 Exchange
Net Selling Price
(NSP = Selling Price - Closing Costs)
In order to defer all of the capital gains on the property being sold, one must purchase a replacement property, or group of properties, using an amount equal to one’s NSP. If one purchases replacement property for less than one’s NSP, capital gains tax on the difference will be owed.
Qualifying Properties / Qualifying Replacement Properties
To qualify for a 1031 Exchange, the property one is selling MUST be deeded and held for investment and/or business-purposes. Proceeds from the sale of the property can then be used to purchase deeded Replacement Property, which must be held for investment and/or business purposes.
Current tax regulations require the use of a Qualified Intermediary (“QI”) to facilitate an exchange. The QI will prepare the Exchange Agreement, escrow the proceeds, and coordinate the exchange with the closing agents.
From the date of the sale of one’s original property, one has 45 days to identify three (3) replacement properties.
One has 180 days from the date of sale of one’s original property to close on any and all identified replacement properties.
Minerals & Royalties are considered
With ownership conveyed by deed, subsurface minerals and royalties are considered real property and share many positive characteristics with traditional Real Estate:
Hard asset ownership
Royalty interests can be a great hedge against inflation, as they are not tied to markets.
cash flow potential
Instead of rent from tenants, cash flow is generated from a well’s (or package of wells’) monthly hydrocarbon production sales.
Underlying Market Value
Using existing and future commodities pricing markers, the market value of royalty interests can be determined by calculating the estimated value of reserves in place. Much like a Real Estate development project, value is increased with new development; new wells contribute additional cash flow potential while also increasing the overall asset value of the portfolio.
Royalties and Retirement
For individuals already enjoying retirement, royalty ownership is often considered “mailbox money” designed to help augment their monthly income potential.
For those planning for retirement, income-generating royalties can help significantly amplify retirement savings when used inside an Individual Retirement Account (IRA) or other tax deferred savings vehicle. Delivering a monthly cash infusion
of royalty payments into one’s IRA provides the means to strategically invest in new opportunities or to take advantage of dollar cost averaging in existing investments all are considered tax deferred under one’s retirement plan.
1031 Like Kind Qualifications
To qualify for a 1031-Exchange, you DO NOT have to exchange into the exact same type of property you are selling. For example, you could sell an apartment building then roll any capital gains, tax-deferred, into a Triple Net Lease opportunity. Or, you could use your gains to purchase a rental property plus oil and gas assets if you are looking to diversify your portfolio.
Like Kind Replacement Property Options Include:
• Rental Properties
• Owner-Occupied Business Properties
• Multi-Family Properties
• Commercial Properties or Triple Net Leases
• Tenancy in Common (TIC) Properties
• Condos and/or Hotels
• Oil and Gas Properties
• Raw Land
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These materials are for discussion and information purposes only. They should not be construed as an offeror a solicitation with an offer with respect to purchase or sale any security to enter into any particular transaction and not be relied on in evaluating merits of investing in any security or entering into any transaction. Such an offer to sell, or a solicitation of any offer to buy, may only be made by means of the Private Placement Memorandum and the Purchase and Sales Agreement.
Neither Spear Minerals nor any of its affiliates shall be liable for any losses, cost, expenses or damages (incidental, special, consequential, compensatory, punitive or otherwise) arising out of any use of reliance on the information contained herein.
The information contained herein may contain general, summary discussions of certain tax, regulatory, accounting and/or legal issues, relevant to the proposed transaction. Neither Spear Minerals nor any of its affiliates is offering, or purports to offer, tax, regulatory, accounting or legal advice and this information should not and cannot be relied upon as such. With respect to investments in oil and gas royalties, Spear Minerals is acting solely in the capacity of information provider and not in the capacity of a financial advisor. The information contained herein is believed to be reliable, but no representation is made as to it accuracy or completeness. You should consult your own advisors to evaluate the economic risks and merits and any tax, regulatory, accounting or legal consequences of an investment in oil and gas royalties.