Investments in Oil & Gas Mineral Rights // Family Office Club Podcast
If you would like to listen to the latest Family Office Club podcast and hear what Bellatorum Resources’ CEO Chris Bentley has to say on the current state of the mineral rights and oil royalties industry and what investment opportunities may lie within the space, go to this link: https://familyoffices.com/podcast/
The podcast is titled: “Investments in Oil & Gas Mineral Rights & Royalties Interview”. Alternatively, we’ve provided the full transcript of the interview below:
Richard C. Wilson: All right. This is Richard C. Wilson. Welcome to the Family Office Club podcast. We have with us here today Chris Bentley from Bellatorum Resources. Welcome to the podcast, Chris.
Chris Bentley: Thanks for having me, Richard.
Richard: Great. We’ve never had somebody on here before that invests in mineral rights. At least not that I can remember. We’ve done a few hundred episodes. I want to dive into what you do and then I want to make sure people understand at a base level what investing in mineral rights even means. Then we’ll go to maybe how you got into this in the first place. Can you address that first part?
Chris: Yes, Richard. It’s a great question. You’d be surprised about how many people I meet in the United States that don’t know what mineral rights are. It’s core to who we are as Americans actually. The property rights we enjoy in this country are way beyond anything in the rest of the world. There are very few places on earth where private citizens or residents enjoy the rights to natural resource production in the ground.
We use this term called a bundle of sticks. When you buy real property you have air rights, water rights, surface rights, and mineral rights. While oil and gas are not minerals, scientifically speaking, the rights are referred to mineral rights because back when these rights were granted people were looking for gold and silver and whatnot underneath the ground. In the United States, you can sell or sever those bundles of sticks.
You can sell your air rights, you can sell your water rights, you can sell your mineral rights, you can sell just the surface or an easement. Our firm acquires mineral rights in areas that have productive oil and gas, proven reserves in the ground with existing production and upside potential. It’s real property. You can 1031 exchange in and out of mineral rights. What a lot of people don’t know too is that you hear this term like-kind thrown around with 1031s.
It doesn’t mean that you have to exchange an apartment for an apartment. You can actually buy mineral rights with the 1031 exchange from a commercial property or whatever type of real estate as long as it’s real property for real property.
Richard: Okay. It’s interesting. I bet most people don’t know that. I think a lot of people would like diversity in real estate. Right now people don’t know is it going to take four to six months for people to realize that their real estate is worthless because no one’s selling it today for less than they thought it was worth two weeks ago. I think that’s a really good point for those listening here.
I want to make sure people don’t miss that as they’re working with a lot of their clients. I bet you people like some more diversity in the mineral rights whether you’re listening to this now or three years from now, versus if they’re really heavy in real estate. Maybe one out of their eight deals that they’re looking at this year might be better to be put into mineral rights perhaps.
Chris: Absolutely and what we like about this asset class– We understand that every sophisticated investor has buckets or tranches of capital that have different risk profiles. As we’re experiencing today, this is something I don’t think we’ve ever experienced in our history. Maybe this type of volatility we’ve experienced but the whole COVID-19 coronavirus outbreak along with distressed oil prices and geopolitics going on.
Being in real assets at a time like this, while the money may come out of the ground, we call it having our money in the ground and it’s coming out. If you look at this asset like rental property, your rental income will fluctuate but it won’t stop in the areas we’re buying. If you look at the oil and gas production, the commodity price goes lower so obviously our income goes lower. If you’re in a true rental property, apartment buildings or retail and your restaurant goes out of business you’re not getting any income off of that assets.
Some people still are okay with that because at least they own a real tangible asset that it’ll come back whereas in the stock market you can lose all your capital literally overnight if the vegas or the market have a negative influence on a particular asset that you’re in. What we like here is we’ve seen our cash flow go down obviously over the past couple of months, but it’s still free cash flow.
There’s no liability. There are no leaky faucets. There are no tenants that aren’t going to pay their rent and these major oil companies especially in the areas where we buy, like the Premium Basin, they can’t just stop producing just because oil prices are low. I guess they could but they would lose their rights. The terms of the lease say that you have to produce and pay in quantities.
If you don’t then you lose your rights to the lease, so there’s still these valuable properties that if– Let’s say we have a smaller operator that goes out of business and they literally can’t afford. We’ve been through this before with properties we own. It was seamless where the new operator, a bigger player, went and bought out the smaller one. Not that Anadarko was small but you remember the Oxy buy out of Anadarko, a little while back.
We owned Anadarko assets, got Anadarko royalty checks in the mail and it was seamless. All of a sudden we started getting Oxy checks for the same property, we didn’t have to do anything.
Richard: Sure. One thing I was wondering is usually 1031 exchanges are done asset into asset but if somebody has a fund, how does that work? You’re getting part of many assets typically in a fund? Can it still be navigated?
Chris: Yes, if we were to divest, it just depends on the capital structure of the fund. There are several ways to invest in mineral rights. You can invest in the fund, which we operate a fund. We collect cash flow, we bundle up. The real return comes on the arbitrage when we divest to say an endowment or a pension fund who’s going to hold the assets in perpetuity. The other way is a lot of family offices are doing this, they’re actually just buying the assets directly and we’ve sold to some family offices.
We set them up with all the tools they need to manage the asset, it just depends on what their level of comfort is. There are some skill sets that help you to understand and manage the asset more efficiently and more correctly so to speak. You’ve got to keep in mind, we’re buying this from people who own them directly and they don’t necessarily know what they own. They inherit them throughout the years and so it’s not like every mineral rights owner understands oil and gas production.
These are properties that have been passed down over generations. It doesn’t take a landman that’s our career field which is short for land manager, it’s not a gender-specific term. It doesn’t take a landman to manage the asset class, it’s just better to understand the whole chain of title. How the oil and gas producers work, but by no means do you have to have a Bellatorum type organization to own the asset class.
We do several things at Bellatorum. We manage a fund. We also advise family offices that own these assets and help them manage their assets for a nominal fee. We also provide land management services.
Richard: How did you get into this in the first place? A lot of people who work for big oil and gas companies sometimes, get a petroleum engineering degree or their first job out of school is working in the finance department or the engineering department or the oil and gas firm. Many times we hear when we speak to people who invest in this space, so how did you get started in this space and when was that?
Chris: It’s actually a funny story, Richard. I joined the Marine Corps right after I got out of high school. July of ’99 I went off to Bootcamp and I thought I was going to be a lifer. When I was in the Marine Corps, I enlisted. I got accepted for an officer program so I was fortunate enough to go to college. I got a degree in political science with the focus on international relations, because again, I thought I was going to be a lifer in the corp and that’s a good undergraduate degree for an aspiring officer.
Well, during my time in I did six deployments, several to Iraq and several to Afghanistan. I had some injuries that were a pretty minor and end up having to get surgery. In 2012, there was a big downsizing in the military and budgets were being cut. Basically, if you had any injuries, the way they were able to trim the fat so to speak was anybody who had any existing injuries that had them on a light-duty status, they were giving medical discharges to.
That’s what happened to me. When I got out of the Marine Corps. I had a degree in political science and I was like, “What am I going to do?” I moved back to Texas where I’m from. At the time, Houston was the number one economy in the country, so we chose Houston. Oil and gas was booming and being from Texas I had a natural affinity to the industry. The only technical job you can get, at least the type of job I wanted to get with that type of undergraduate experience was an entry-level position as a landman.
Again, a petroleum land manager. Also, sometimes people use these interchangeable while they’re not the same thing. A right of wage. Right-of-way guys focus on the surface easements for pipelines and things like that. Luckily, I was able to get a job as a landman and a right of wage and I got exposed to a lot of work for two years for a company. Then when oil started crashing at the end of 2015, I got laid off a few days before Christmas of 2015.
I just thought, “Hey, I want to be my own boss so I never get laid off again.” We started Bellatorum in May of 2016. My wife told me that if I could do some deals and prove to her that this was a viable business plan that she’d quit her job. She was a management consultant at the time. I think at the time, she was working on a project for British Petroleum. I text her a screenshot of the bank account one day and said, “Hey, put in your notice. I need your help in the business,” and the rest is history.
Richard: That’s awesome. Great. Well, congrats. I ran into someone recently when I was in Colorado who was in real estate. They had an ex-military background, both the founder and the COO. They seem very sharp, hard-working, extra disciplined professionals compared to most other reels of professionals who are unprofessional, but the way they held themselves, the way they respected their own health, the way that they executed on things.
Even their marketing materials, they talked about that. I want to bring that up here about what difference you think it’s made either at that being in your background or maybe you’ve hired a few people that are veterans as well as part of your strategy?
Chris: No, absolutely. It’s a great question. I’m glad you brought it up Richard because there were two reasons for wanting to hire veterans. One, there’s a social component to it. It is extremely difficult for veterans who get out of the military to find work. Especially if you’re a veteran without a technical degree such as engineering or doctors obviously are in a different category. Especially when it’s senior enlisted guys get out, finding meaningful employment is very difficult.
I had always hoped to have an organization where I could hire somebody for fit and then train them. Hire them for cultural fit and train them and offer these newly transitioning veterans meaningful employment. I think we’ve achieved that. We hire primarily veterans but it also helps with the discipline, the execution and the culture, the work ethic. Everything that I guess we might be stereotyped for in a positive way in the military, we have those in Bellatorum.
I like to give the analogy, Richard. I think a lot of people really don’t understand the impact of this but if you think about the US Military and probably any military around the world actually. We take people from all walks of life, all over the country. Myself included… I’m from East Texas from a town that nobody’s probably ever heard of and take these 18-year-old kids and teach them how to do amazing things.
Like fixing fighter jets and nuclear aircraft carriers, the engines and submarines and all these things that our military does are primarily executed by people with no formal education. Their formal education comes from the military.
The way we’re able to achieve that and I think not to oversimplify it, but it’s because we have very strict standard operating procedures and checklists train and you don’t deviate from those. What we’ve done at Bellatorum, is we’ve created a very militaristic style of SOPs and checklist and so it makes our training process easier, but it also makes our quality control mechanisms pretty sound. I’m not saying we’re perfect, but I would argue that our speed to execution and our accuracy of execution are far beyond any of our competitors.
Richard: Right, that makes sense. I know as a CEO that it’s definitely helped us a lot having more consistency and processes and checklists, but it can be a frustrating thing as a team leader if you give someone instructions, whether it’s 3 parts or 12 parts to it and then you go and you look at the execution and like yesterday we’re sending an offer to buy a company through one of the companies I’m on the board of. I told them they should go and try to buy this company that’s a broken deal from three years ago.
I told them exactly what to say in the e-mail. They sent the e-mail out and they got two out of the five points I told them to mention. I said, “Well, the next time let me draft the e-mail, send it to you and you just sent what I said,” because I respect this group, they have a lot going on just like every human being does but it’s so key in business to be paying attention to the details when serving investors or negotiating deals or following up with a client while being able to move fast, while there are 20 other things going on.
You still have to execute with excellence and not deviate like what you said from what the said plan was or what the best practice is. I think that’s something so critical to the investment world.
Richard: I feel like that topic right there almost never gets talked about in our space for some reason. I’m sure you talk about it every day because that’s your life, but it doesn’t come up too often. With my other investors, it hasn’t come up before at any of the 140 events that we’ve hosted here at the Family Office Club, so I appreciate you bringing that up. I know we have just a couple of minutes left here, so I want to respect your time.
If somebody is trying to get their arms around investing in mineral rights, trying to understand what you do in comparison to investing in maybe non-operating working interest or oil and gas royalties they might hear about or other oil drilling investments, can you help compartmentalize a little bit the scope of what do versus other types of oil and gas investments just so somebody who’s a bit new to the space can make sense of it mentally so when going forward they can make sure they’re comparing apples to apples when they see other investment options in the industry?
Chris: Absolutely. You mentioned oil and gas royalties, which, that’s what we do. We use those terms interchangeably. Mineral rights or oil and gas royalties. What’s great about these versus non-op working interests is that working interest have a lot of liability with them. As a working interest owner, you are a partner with the driller. You’ve agreed to take on some of the risks associated with that in liability so if some extra costs come up in that process of drilling the well and maintaining it.
If there’s maintenance that comes up unexpectedly or a blowout or anything like that, you have to pony up your pro-rata share of the investment. What’s great about being in mineral rights or oil and gas royalties is that it’s free cash flow, you get paid every barrel of oil that comes out of the ground and you are the property rights owner and so you have a lot of the negotiating power.
For example, we’ve talked about what happens if that company goes out of business, and those wells shrug in. Well, we still own the property and there’s still proven reserves in the ground and more than likely a major is going to come buy out that smaller operator that didn’t have the financial wherewithal to keep operating in a distressed environment.
We love it.
It’s definitely the free cash flow component of the asset class with no liability is the attractive thing and that’s why pension funds and endowments love to own these assets in perpetuity because while the yield may be volatile, it’s definitely long term.
Once they put wells on they’ll produce 50 to 70 years sometimes even and potentially even longer. The recovery of the reserves in the ground is never 100% so until the world either moves away from hydrocarbons or the producers figure out how to get every hydrocarbon out of the ground, that asset will have value and perpetuity.
Richard: I know you said earlier the words non-op working interests and for people that aren’t deep in the space, it’s non-operating working interest. I have to tell you the first time I heard that maybe 7 to 10 years ago, I thought, non-operating working interest so these are broken wells that are not operating. I think that there’s confusion sometimes around terms thrown around just like in the family office industry, people hear a multi-family office and they think it’s real estate related but it’s really a type of a wealth management solution.
Can you just define exactly, I know you said that you basically are a partner in the operation and that way you have more liability with non-operating working interests. Can you just define, why do they use that label if you are a partner in it but it’s called non-operating? It doesn’t literally mean the thing is not operating, it just means your role in it is that you are a partner but you’re not mechanically moving the machinery around all the dirt.
Chris: Exactly. You covered it. Non-op meaning you’re a non-operating partner. We refer to the Exxons and Chevrons of the world as operators. They’re out operating the well and the drilling operations and everything. They’re the operator. It’s like the company, you have an operator and you have a financial partner and you’re just a financial partner. When I say you have the liabilities, as a non-op guy you won’t be sued for somebody having a safety mishap and be drag out in front of congress when an offshore well blows up and pollutes the Gulf of Mexico but you will lose all your money.
That’s where we talk about the liability, you have a lot of financial liability associated with being a non-op working interest owner. However, that doesn’t mean that you can’t make money. Obviously, you participate on the larger share of the revenue. If everything goes well, you can make a lot of money in working interest.
Richard: I guess I have one more question I’m just curious about. You mentioned maybe six weeks ago when we had a call about how some real estate investors like this because of the hard asset nature of it but what about the income of it? A lot of people in real estate look at cap rates and what’s the cash flow going to be and the cash dividends. Is this the type of investment where you hold it, it gets improved, you sell it for more because of either market momentum or market timing or improvements to the project?
Or is this a type of investment typically that is producing a 7% cash flow and then you sell it to the next group and maybe if you’ve timed it right or you’ve arbitrage some sort of pocket with inefficient deals the value goes up but you’ve also cashflow?
Chris: Absolutely. The cash flow is somewhat unpredictable and volatile because it’s based on commodity price and it’s also based on volume. We only, Bellatorum, I’m not saying other mineral rights and oil and gas royalty companies, but Bellatorum only buys producing assets and we only buy in Texas. That’s because there are specific property rights in Texas that are way better than other states in the United States in our opinion. The mineral rights owner in Texas is superior.
The reason that’s important to understand when you talk about cash flow, the way that’s related to your cash flow question is if we buy ahead of the drill bit, so to speak, we’ll never buy completely ahead of the drill bit so what we would refer to as a raw piece of land or acreage. Let’s say it has one well on it and we know they can fit twelve more wells on that acreage position so that the yield is going to be low but there’s about five potential and that’s what you talked about the yield.
Again, our business model is not to brag about the cashflow on the royalty income, it’s about the arbitrage on bundling and selling to the longer-term institutions. Those guys won’t do the on the ground deals as you can imagine. When a pension fund wants to buy a portfolio of mineral rights, they’re not going to do these $50,000, $100,000 deals as we do. We are referred to as an aggregator.
The types of assets we’re bundling up, the yield’s not going to be that great. Last year, we had an 11% yield which was respectable. Again, it’s not our model. When we divest the portfolio, that’s where the real return’s going to come to our investors. The pension fund, for them, because they’re paying us obviously a margin, their yield might be on average 4% to 6% over 50 years, but there could be years where it’s up 30% depending on commodity price, how many new wells get drilled, you follow what I’m saying?
The volume and the commodity price could go up and you could have a fantastic year, and then it could level out and commodity prices could go low, you can have a horrible year where it’s 2% to 3%. Over time, we’ve seen that the oil and gas royalties streams at least provide over the course of decades a pretty steady average return of 4% to 6%.
Richard: Sure. On the income side, I see. 11% actually sounds pretty great. A lot of real estate investments before the virus crisis really came up, where the cashflow it maybe to 7% or 8%, et cetera. Investors who come from that world might be used to seeing less than that, but I get that that’s not what drives your purchases. You’re really looking for that upside on the volume or upside on aggregating that package together.
It’s interesting in the private equity space people oftentimes buy companies with, say, half a million EBITDA or one million EBITDA, they bundle those together, and then they make it into a nice package at 10 million EBITDA and they sell it to the private equity shops because they won’t bother with the small stuff. The deals need to be aggregated so that the total profits per year aren’t meaningful enough for the big guys to care about it existing. Is that not light years away from one way that you create value?
Chris: No, it’s very similar. It’s already the way– You nailed it. The bigger institutions don’t want to do what we do. That’s where we add value in the value chain to both parties. We actually pride ourselves on the way we interact with the small mineral owners, the mom and pops that own one net royalty acre or even 50 net royalty acres because the big guys are not going to waste their time, money and effort on doing these small deals.
We’re a liquidity option in a very illiquid asset class, and when a mineral owner needs to sell their mineral rights, they don’t have a lot of options, you know what I mean, at the smaller levels. We’re a liquidity option for them and then we add value up the food chain, so to speak by bundling and delivering a nice, organized package of real property cash flowing assets with marketable title which is important to understand as well because when you buy surface real estate, you have a title company, they give you a title policy and all that.
There’s Zillow, and there are all these things in real estate agents world. There’s not that in this asset class, even though it’s real property. We have to run the title in house, make sure it’s called marketable or defensible title where we’re giving a good chain of title to the buyer and being able to warrant that we actually own these assets and that we’re comfortable with the chain of title and the ownership. That’s extremely valuable to the buyers up the food chain.
Richard: Interesting. Next time we chat, maybe here on the podcast, or otherwise, we should just go through and just define all these terms in the industry. I feel like you could spend 30 minutes just going through that because sometimes investors look at a deck or an opportunity, and if they don’t understand it, they just move on and they won’t even ask someone like your questions or if they don’t understand it, it’s really hard to trust it or get a high conviction on it.
It’s kind of a disservice to themselves, not to at least be able to navigate to select the best in class provider. If they’re trying to get exposure in this area, it’s going to take them a very long time, or they’re going to choose the wrong provider who just has the slick talk versus really understanding. That also, it might be interesting in the future to explore due diligence on firms like yourself. What are the smartest questions that investors should be asking you and they’re never asking because they don’t live and breathe what you do, or what are the best questions you have been asked, et cetera?
Maybe we can follow up some other time and dig into that because I just feel like our space talks about private equity and buying companies all the time. We talk about real estate investing all the time, both at events and on podcasts and books, et cetera and not as much on royalties and mineral rights. I look forward to following up with you some time to add some more content to our community in those areas.
Chris: No, absolutely. I would love to come back on it if you’ll have me back on, I appreciate that. One thing I’d like to say in response to that before we wrap up is, inefficient markets and niche asset classes or niche industries are where you make a lot of money, the same riches and niches. To your point, I hope that not understanding the asset class would not dissuade a sophisticated investor from digging into our company and our opportunities further because that is exactly why we’re able to deliver such great returns and have a good track record it is because it’s so niche.
It’s not going last forever. All markets eventually become efficient and somebody is going to invent real estate agencies in the Zillows and things of that nature for this asset class and you got to take advantage while there’s still a bunch of information asymmetry and inefficiency in this particular asset class.
Richard: Right, I totally agree. What’s the best place for someone to get ahold of you if they want to learn more?
Chris: We have a ‘contact’ page on our website bellatorum.com. People can call me directly at our offices 832-559-8217. Chris@Bellatorum.com is my e-mail. I’d be happy to fill in any questions and inquiries.
Richard: All right, great. If anyone has trouble getting ahold of him, just let us know. He’s a member inside the Family Office Club so happy to help make the connection. Thanks for your time, Chris and advice, insights and we look forward to having you back on sometime soon.
Chris: Thanks a bunch, Richard. I really enjoyed it.