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Mineral Interests
Mineral Interests require no other capital contributions or assessments. Unlike a Working Interest, you never have expenses or completion calls. With mineral interests you own the original, virgin flush production. Mineral interests refer to ownership of all minerals that exist beneath a property, including oil and natural gas. The rights to these commodities can be sold or leased to others. In most cases, oil and gas rights are leased. You purchase direct ownership of the minerals; you receive a deed to the property, as if you were buying real estate. Mineral owners, like preferred-stock owners, get paid first, not last.
Working Interests
Working Interests are the red-headed step-child of oil and gas investments, full of expenses, delays, unforeseen issues, but therein lies the opportunity. Some operators just don’t know how to fully extract value from their working interest assets. Buying these interests is all about location, location, location, and expenses, expenses, expenses. If you are able to keep your expenses in check and re-work your oil and gas producers, you might have a formula that you can replicate field by field. There are some great arbitrage opportunities in working interest ownership if you can buy right. This is a part of the market where you want to be the operator and the owner of the working interests in order to have the full picture. Understanding what you own is key. Some oil and gas luminaries have made most of their money from the drill bit, but due diligence, and not just a tax write-off, is a must.
Non-operated Working Interests
A non-operated working interest (NOWI) is a type of working interest in an oil and gas lease that does not come with the right to operate the lease. In other words, a non-operated working interest owner does not have control over the exploration, development, or production activities on the lease. Making sure a reliable, deep-pocketed operator with great experience in the business is crucial to the success of any non-operated working interest. We stick with very well-known operators who have a lot of skin in the game and whose bread is buttered through the drill bit.
Operated Working Interests
Being an oil and gas operator requires more than just an operator’s license. Operators select wells, determine drilling and re-work schedules, and handle day to day operations. We only operate fields where we are working interest owners. Being an operator with a vested interest in the development of a field should be one of the first things you look for when acquiring working interests. Being an operator gives you control of the field and, if you pick the right field and stick to your modus operandi, you give yourself and other working interest owners the best chance of success.
1031 Exchange Allowance
Mineral interests are considered like-kind exchange properties. The tax code allows real estate sellers 45 days to identify a like-kind exchange property where they could defer taxes on the sale. Consult your CPA regarding the specifics involved in a 1031 exchange, but understand that this is another plus mineral ownership offers. Working interests don’t qualify for a 1031 exchange.
Self-Directed IRAs
As the retirement boom industry has evolved over time, options for using your retirement monies have also increased. Self-Directed retirement accounts now allow for check-writing ability, which allows investors to hand-pick investments they would like to hold in their retirement accounts, instead of being stuck with the same cookie-cutter five mutual funds offered. This segment of the market has ballooned, and you can take ownership of mineral and working interests inside these self-directed vehicles. Custodians will require a basic FMV (Fair Market Value) form filled out for every calendar year, which is standard and simple to fill out. Finding the right custodian is important, and nowadays there’s a healthy number of options for future investors to take advantage of when choosing the right one.