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Money For Nothing - Competition Heats Up for Margin-Boosting Oil and Gas Mineral Rights

On average, the landowners and other entities that own mineral and royalty interests in producing oil and gas wells receive about 20% of the gross revenues generated by those wells — and do so without any responsibility for the significant costs and complications associated with well development and production. Mineral and royalty interests have traditionally been a highly fragmented market, with most held and passed down through generations by landowners or purchased by individual investors. However, competition for these interests has become more heated in recent years with the creation of large publicly owned and private-equity-funded consolidators and a new emphasis by E&P companies on adding these higher-margin slices of revenue from leases they own and operate. In today’s RBN blog, we explain mineral and royalty interests and analyze the developments in this massive $700 billion market.

As the oil and gas industry has evolved from a growth-at-any-cost strategy to a laser focus on generating free cash flow, it’s not surprising to learn that there has also been an increase in competition for the highest-margin portions of the revenue produced by every well — the average 20% paid to holders of mineral and royalty interests by producers of lease acreage. Because E&Ps agree to fund 100% of development and production costs, the mineral and royalty interest holders receive a much higher percentage of the gross revenues of each well while remaining free of development/production costs and shielded from the impact of inflation. That has helped to make mineral and royalty interests hot commodities pursued by a variety of entities looking to boost returns on oil and gas investments.

Before we dive deeper on this, let’s quickly define a few key terms and explain the financial side of well development and who gets what money-wise from a producing well.

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