Oil & Gas Royalty Companies

Oil & Gas Royalty Companies

Oil & Gas Royalty Companies

Your great grandfather passed down mineral rights through the generations and now you receive a monthly check from the oil or gas company; a portion of everything they pull from the ground before expenses. This is known as a royalty and this is how the majority of oil and gas royalties are owned; privately and generationally.

The good news is, as an investor, you do have access to certain niche companies that focus on obtaining these royalties or mineral rights which can be very lucrative. Before we get ahead of ourselves though, let’s take a look at what oil and gas royalty companies are and what they do.

What are Oil & Gas Royalty Companies

The short answer is, oil and gas royalty companies focus their time and energy on purchasing the most profitable, or what they perceive as potentially profitable, mineral rights on particular pieces of land. Many times, these companies will focus on land that already has produced natural gas or oil but still has royalties for purchase or adjacent pieces of land that are untapped but have a high likelihood of producing oil or gas in the near future. There aren’t many publicly traded companies that actively acquire these royalties (much like gold royalties), which makes this a very niche industry. There are also entities that are called oil and gas royalty trusts, however they hold the royalties for a certain period of time and allow them to wind down without actively acquiring new royalties.

Why Invest in Oil & Gas Royalty Companies

If you have ever looked at your heating bill in the winter time or finished pumping your tank full of gas at the gas station and thought to yourself, I would love to get a portion of that price back, then oil and gas royalties might be a good fit for you. All kidding aside, you are essentially investing in a company that receives a royalty check for all oil or gas produced, without the operational costs that the massive oil and gas companies undertake. The profit margins can be quite large, especially when these commodities rise in price.

Oil & Gas Royalty Companies vs Oil Price Index

An additional benefit to owning oil and gas royalty companies is the fact that they are typically less volatile than the underlying commodity prices. While past performance is no guarantee of future performance, you can see in the past when the price of oil dipped down, the royalty companies followed but not as sharply. On the flip side, when oil was up these royalty companies were actually up even higher in some cases (2021 YTD is a good example).

Oil & Gas Royalty Companies vs Oil Price Index Annual Returns

How to Invest in Oil & Gas Royalties

If you have an in with a large land owner in a gas or oil producing area you can literally buy the mineral rights directly from the land owner. If you don’t have the option to start there, you have the ability to invest in companies that are actively participating in this market. The only caveat is, there are currently no mutual funds or exchange traded funds (ETFs) that focus on this particular industry, as it is so niche. Your best place to start, is to work with an advisor that has an understanding of this industry as well as strategies that align with your goals while limiting your overall risk exposure. Reach out today if you would like to learn more about oil and gas royalty companies!

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