I would be interested in how many owners use professional management services and whether it's worth it. My company owns gas and oil interests in Crockett and Val Verde counties in Texas and receive between $500K and 1.5M net revenues annually. Just this past year we began using the services of big name bank (asset management arm) to do this and they charge a service fee of 5% of net revenues. Initally there was a promise of us receiving a large backpayment due to the discovery of production fees disallowed by our lease (and, thus, the big appeal of signing on with this company). Turns out there was an original lease that allowed the expenses and now, receiving only general oversight services, we've not seen a real value for the money being paid. My question is whether a service like this is really worth it. Do mistakes happen often enough (we have two large operators, Approach Resources and Oxy USA) that we should continue to retain them? Or have other owners used other methods or self-manage with sufficient results. We were sold on the advantages of having the clout of a big bank name when it came to resolving any issues, but I'm not sure it's worth paying $25K - $60K annually to have it. Should we consider it like having insurance; if anything big comes up, we'll be glad we had it (division orders or new leases?) Any suggestions for self-managing software or ways to review maybe once annually? Any insight is very much appreciated! I would love to learn as much as I can in order to keep this in house. Thanks in advance for any assistance!
The only advantages I see to having a big bank manage the assets are when it comes to taxes, or, in the event there are a significant number of unleased properties, they can handle the lease negotiations.
Your bank should be performing the necessary withholdings to make it easier for you to manage your own personal taxes, so that's a plus. Probably not worth $25k+ a year though. That said, I've seen a number of mineral owners get into trouble at tax time because they didn't have a good tax strategy in place the year prior.
With the large banks, unless you're making $5mm/yr, it seems they focus more on trying to get new clients vs continuously auditing your production payments and looking at your leases with a microscope. The management fee is easy money for them.
My personal recommendation would be to hire the best CPA around that is familiar with strategies to efficiently manage royalty payments, and then utilize a "mineral manager" on an as-needed basis. A mineral manager that is an experienced field landman or an attorney would probably be the best use of your money as they could look at your chain of title/leases and determine whether everything with the oil companies is as it should be. If you own surface interests, the field landman likely could make site visits as well to inspect for damages/surface use violations.
Long story short, with $500k+ annual revenue, I think finding the best oil/gas CPA in the business, paired with a more "boutique" as-needed mineral management firm, would be a significantly better option than the trust department of a large bank. The CPA would probably pay for itself with their tax strategies. You may want to consider reaching out to one of the forum sponsors that does mineral management to see what value they offer relative to the large institutions.
Best of luck!
I won't comment on mineral managers, but in my experience bank trust departments have high fees, and there are many that do a poor job negotiating leases and other deals. Banks do a good job on reporting, keeping records straight, and on tax reporting, however, as a broad brush statement. There are a few exceptions, but with income in that range and only a few operators, I think you are better off with a combination of: 1) a good CPA to keep financials and do taxes; 2) a good attorney (or mineral manager) to negotiate leases, easements, and agreements; 3) training yourself on how to review and sign division orders, and keep up your index of minerals producing wells. Most CPA's can produce trend reports showing income by well, so you can track starts and stops in income to look for problems, questions, or issues.
Personally, I put banks, especially big name ones, in the same category as used car salesmen ... just another big sticker price.
The advice you get from the Forum is of the "gold standard," in my opinion. Now, you have learned your lesson for the day, and it didn't take a penny.
After 40 decades of experiencing all sides of this issue and making some assumptions about your company based on my experiences and your comments, I think you should follow your instincts to "keep this in house". At the rates of income you described, your company will never be completely satisfied otherwise. However, the oil and gas business is rapidly changing; especially in Texas so the setup and maintenance of minerals management capability within your company should be made to accommodate monitoring of the old business and foreseeing your place in the new oil business as it emerges. Here are some comments for consideration:
- Bank Trust departments are best used for short term protection of shareholders or beneficiaries after the unexpected death of the sole or primary principle involved in the management of the mineral assets. Bank controlled Trusts are easy to get into but very cumbersome and expensive to retract from. Bank management is extremely risk averse and asset values are rarely grown by risk averse management. Use Banks as a limited tool that provides temporary stability.
- Appoint and educate a company manager in mineral economics to be responsible for the assets. Be consistent and continuous with the manager. Demand a business plan for the minerals including their isolation from other company assets for liability purposes. Use of mineral income needs should be a big part of the business plan.
- Since you seem already "set up" administratively, assign and educate a bookkeeper to account for revenue by parcel and by well within each parcel then report to the appropriate company officer on a monthly basis looking for anomalous trends in revenue streams.
- Spend some money on an annual retainer for an experienced mineral lawyer familiar with Texas oil and gas regulations and matters. The company manager should call on the mineral lawyer as needed.
- Arrange for and keep a geologist/engineer on a retainer to advise both the lawyer and manager on any company matters. It is best if the the technical person or lawyer can recommend the other or have at least worked together in the past. As time goes on, the engineering aspects will become more important than the geologic aspects but there are many older people well experienced in both disciplines. Inexperience may be less costly but usually more expensive in the long run.
- Use the management group to both look backward at what has happened and to coordinate in making the best management decisions moving forward. Don't guess on new deals presented because many millions of dollars will be at stake for the company depending on research and judgement.
In short, if you are gong to put all your eggs in one basket, make it strong and WATCH THAT BASKET. Nobody is better at watching a strong basket that the one who owns and has built that basket.
If you were starting from scratch, my advise would be somewhat different. In the minerals business, based on ever growing high risk capital investment requirements and long term production, set up in all phases is paramount to long term success. Seems like your company has done that but the free lunch offered by the big Bank, may turn out to be a stale appetizer.
Is management worth it? That depends on the owner expectations. A passive owner that is risk averse and satisfied with saving money and the status quo will get that result. An aggressive owner looking to the future knows that experienced and well educated management, whether hired or home grown will add value to assets (see Eggs in basket analogy above) in minerals management at the rate of 2.5X - 10X at at incremental costs a fraction of the growth. Knowledge of how to get mnerals out of the ground at a benefit to mankind is acquired not automatic to the mineral owner.
Thank you all! This has all been very helpful. I'm going to post an additional question about this, but within this post, do any of you have a recommendation for good software that I can use to verify income and expenses? What else should I be doing on a monthly basis in terms of good due diligence? Thanks!