The United States is one of the few countries where individuals can own royalty and mineral rights. Most other countries the government owns the royalty and mineral rights, leasing directly with the oil and gas companies.
In the U.S., individual owners have the right to negotiate and enter into leases themselves with companies. In return for granting access to their property, landowners receive financial compensation in the form of a set royalty based on production from wells.
At the end of each month the oil and gas company will mail the landowner a royalty check based on previous months’ production volumes and commodity prices. For this reason, royalty interests are often called “mailbox money.” Once the lease is executed the owner collects checks over the life of the well without the responsibility for the costs of development or maintenance of the producing wells.
All new technologies go through cycles from implementation to market adoption and finally maturation. The horizontal drilling and fracking techniques used to develop shale plays are no exception, and are responsible for the dramatic growth of production volumes over the last decade. The shale extraction techniques as we know them today can be traced back to the 1980’s when George Mitchell was perfecting the art in the Barnett Shale of Texas.
Increased technological efficiencies, combined with high commodity prices lead to rapid market development in the mid 2000’s starting with prolific natural gas plays such as the Barnett and Haynesville and later adapted to oil plays including the Permian and Bakken.
Over the last decade, since the technology implementation, the result has been an increase of domestic oil and gas production by over 100% and 40% respectively. We have become the largest gas producer in the world, and the second larges oil producer. We believe we are still in the early innings of the technological impact on the market, and that production and, therefore, royalty markets have the potential for further growth.
Currently, the decline in oil prices are causing weaker over-levered companies out of the market and forcing companies to become leaner and with stronger cost controls to earn profits in a lower-price environment. Investors who are financing the production will demand increased efficiencies and a leaner cost structure, which we believe will ultimately benefit the market in the long-run by increasing the applicability of the technologies.