Seth: Hey, everybody, how's it going? Welcome to the REtipster podcast. This is episode 227. And today I'm talking again with Vernon Henry.

So why are we talking again? Well, if you caught our conversation back in episode 218—you can find that at retipster.com/218—you might have noticed we touched really briefly on Vernon's past life when he used to work as a landman for an energy company, where he would go out and secure leases. He would have to do a lot of deep title research to secure the mineral rights so they could drill on certain properties. And his career went much further than that, too. He ran a mineral fund with a specific goal of going out and buying mineral rights. So he did the research. He did the valuation. He knows a ton about how this business works.

As we were talking last time, it kind of led to a deeper conversation, no pun intended, about how mineral rights work. And as we talked more, I realized how much I didn't actually know about this subject and how much I wanted to know more about it. And that's what we're doing here today. You're about to get a great education all about mineral rights.

And interestingly, the last time Vernon and I talked, in the following month or two after that, I got a bunch of random questions from people about this subject, about mineral rights. And I just kept thinking, I don't know. I got to talk to Vernon about it and learn this stuff. So if you're ever buying land and wondering if it comes with mineral rights, or if you're ever selling your land and your buyer wants to know if they're getting the mineral rights, and you know, how much do mineral rights even matter? Are they worth something? And is there anything consequential or not about owning the mineral rights? We're going to cover a ton of ground here.

And even beyond that, Vernon put together a lot of great information about this. I'm going to include all of that in the show notes for this episode, retipster.com/227. And Vernon was even thinking about creating like a custom GPT or something with all this knowledge built into it. Maybe he will at some point, but in the meantime, be sure to check out the show notes, again, retipster.com/227. You'll find a ton of explanation about all this stuff far beyond what we're going to be talking about here, along with some imagery to help you visually understand what's going on here.

So, Vernon, welcome back. How's it going?

Vernon: Hey, Seth. Thanks again for having me. And yeah, everything's going great. I enjoyed our last conversation and am really looking forward to this one. Hopefully, I can shed a little bit of light on what seems somewhat complicated, but I think if we look at it from a kind of high-level perspective, I think most land investors will understand it. But certainly gets into some nuance there that I learned over about 20 years of working with mineral rights that hopefully I can help distill it down to something that's manageable.

Seth: Beyond what I mentioned there in that intro about your background, is there anything else you want to mention about that? Anything that would be relevant or helpful to know? Or did I kind of nail it? What do you think?

Vernon: There is a whole world out there of oil and gas professions. And the landman role is very important in this business. It's very much a commercial role. The famous saying is "no lease, no grease."

So most of my history is in oil and gas, but this basically relates to any kind of mineral interest, any kind of extraction of minerals, whether it's coal or lignite or lithium, which is a big one that's growing right now, but essentially it all kind of works the same. And so the landman is a very integral piece to oil and gas companies and to these other companies because the title is a bit unique. It runs on its own chain of title. And so I have to kind of explain as best I can to folks. And anybody who wants to reach out to me after this, I'm an open book. So always happy to have that conversation.

Seth: Sure. To kind of kick this off, what are mineral rights and how are they different from surface rights? Like if I go out and buy a piece of land, they sign the deed over to me, and I can pretty safely assume, as long as that title is clear, what I'm getting are the surface rights to use the surface of that land. But the mineral rights... They may not necessarily be coming along with that, right? So when we say mineral rights, what are we even talking about?

Vernon: Sure. Yeah. Let's go back to where, you know, at one point, the state or the federal government conveyed all the rights. We call it fee simple rights to a parcel of land. 640 acres was generally the beginning size of those conveyances.

And there are some areas of the country where that happened and there are some areas of the country, like a lot of the western states where the state and federal government own both the surface and the minerals; they never conveyed those out. But most of the central U.S. and eastern U.S. is privately owned and that was conveyed from a government to an individual and with that came all of the rights to that parcel of land from the surface all the way down to the core of the earth.

And so what happened over time is people started slicing off, reserving, and conveying out different portions of those rights based on the value that they had at that time. And this continues to evolve even today. And so we look at it and we talk about it as, like, a bundle of sticks. It started as one bundle, but you can sort of take pieces out of that bundle and convey them or reserve them to the entity. I mean, mineral rights are a real property right, just the same as surface rights are. And they all started with one owner. And then over time, like I said, they get conveyed out.

Here's a brief example. We'll go into this a little bit later. But if in, you call it 1850, the Texas government conveyed to John Smith 100 acres, and then somebody came along and said to John, "Hey, John, I want to buy a portion of your mineral rights, and in exchange, I'll give you X amount of dollars." And John said, "Well, you know what, I need the cash right now, so I'll give you half of my mineral rights for $1,000 or whatever the trade was at that time."

So John keeps the surface. John keeps half of the minerals, but the other half of the minerals goes to this buyer. And so from there, that's where the chain of titles splits. And so everything that John conveys going forward is subject to half of the minerals that somebody else owns. And the other half goes with the surface. And so over time, these rights get split out and they're undivided. So if I have a hundred acres and I own 50% of the mineral rights under that 100 acres, I own 50 net mineral acres. So it's a fractional ownership under a specific portion of land.

Seth: And we're not talking about, like, okay, this guy owns those 50 acres and I own this. It's more like I own 50% of all the acres, right?

Vernon: Yeah, well, under a certain legal description. And it doesn't always follow the surface, right? So I could own 50% of under 100 acres, and then the surface of that 100 acres gets split up into five acres, 10 acres, you know, like we do in subdividing. But my minerals still cover 50% of all of the oil and gas or minerals underneath that legally described tract.

Seth: On that, I know we can go deeper to this and we probably will, but we're talking about 50% of the mineral rights going all the way down to the earth. But we can even get more specific than that. We can say, no, we're talking about certain minerals. So like the oil, but not whatever gold you find, you know, that kind of thing. Or you could say, we want to own from zero to a thousand feet deep, but not any deeper than that, right?

Vernon: Yep. There's vertical and horizontal severance. So there are the rights, like within these hundred acres down to the core of the earth. And then there are rights within that hundred acres between certain depths. So this came about when different oil and gas companies saw different prospects deeper or shallower. And let's just say they started producing in the shallow zone, but then they decided, hey, we think we can go deeper. And prospectors and people would go out there and say, "Well, hey, look, I'll buy your deep rights from you and you keep the production on the shallow rights, but I'll buy those deep rights and I'll pay you something now. And it's a risk. It may never produce or it may produce. And so I'll pay for that right now." And so that started getting sliced up.

If you look in the Midland Basin out near Midland and Odessa...

Seth: Is this Texas you're talking about?

Vernon: This is in Texas. Yeah, this is the largest oil and gas producing basin, one of the largest in the entire world, a major, major resource. And there are a ton of different horizontal strata that can be produced under a single piece of property, depending on where it is in the basin. And so those rights started getting sliced up horizontally to where somebody would hold, you know, one depth, somebody would convey another depth or keep a portion of that depth and convey out the rest of it.

And so all this is done through the deeds, through warranty deeds. So you can convey out your surface and reserve the minerals. So that's where you reserve a portion of what you own, or you can specifically convey out a portion of what you own or all of what you own. And it's all just done through the courthouse. You can create a specific mineral deed, which conveys the minerals. You can convey royalty rights. So I may keep the minerals but let you have a portion of the royalty that's produced.

Seth: When we say royalty, is this a lease payment? Or are we talking about the revenue that's made by the energy company when they take the minerals out and sell them, or is it both?

Vernon: Yeah, well, those are two different rights. So I can keep the right to sign a lease. I can keep the right to get a bonus, but I can convey a portion of the royalty. And the royalty is really just a portion of the revenue that's generated from the production that's sold out from under the property.

Seth: And what are executive rights?

Vernon: Executive rights are the rights to sign a lease and to allow somebody else to drill on your property.

Seth: Okay, so you could have that but not necessarily make any money from it?

Vernon: Yep.

Seth: Okay, I don't know why that would even be a thing, but—

Vernon: It's happened, definitely.

And why does that happen? It really just comes down to opportunities that people see and people that are speculators—they used to call them speculators—but oil and gas investors that would say, "Well, hey, look, just give me the royalty. But you can collect any of the bonuses from a lease." And typical leases include a bonus payment. So when you sign the lease, you get X dollars per acre as just a bonus payment. That's just for signing the lease. Usually it's a three-year term. So after you sign the lease, the operator has about three years to go drill a well.

If they don't drill a well, then the lease expires. If they do drill a well, then that lease is held by production as long as there's production from that well. So when that well starts producing, it generates oil, gas, sold, and it creates revenue. And so the portion of that lease that is called royalty is a royalty payment that's made to the owner of those minerals in exchange for allowing that company to drill.

If I own 100% of the minerals under my 640 acres, I can drill a well. But most people don't have 5 million, 10 million, or 15 million dollars to drill a well. So they allow a company like an oil and gas company to use their rights and assign their rights to them.

And in exchange, the payment is a bonus payment up front and then a portion of the production, which is usually about 12.5 percent of the old leases. Newer leases typically pay 20 to 25 percent royalty.

Seth: When I just hear the term mineral rights thrown around in generalities in terms of why it matters, is it usually because of oil and gas? Like, are there other minerals that people like, oh, I want to get those. Like, I want to get the copper or I want to get the gold or whatever else it is. Are we usually talking about the energy sector? Or are there other common reasons why mineral rights are super important in certain areas?

Vernon: Yeah. I mean, all of it's really geologically driven and technologically driven and economically driven, right? So if you look at the geologic map of the US, I mean, there's a lot of the US that just doesn't have really any marketable and valuable mineral rights. But I'd say the biggest industry is the oil and gas industry. And so we think about oil and gas. I mean, before that, it was coal. So the coal rights were very important. And, you know, over time, that's evolved. And, you know, there's less coal mining now. And in East Texas, there's a big lithium play that's going on right now. And so lithium wasn't needed or important 15 years ago, but now with all the battery technology and we need lithium for batteries, it's become more valuable. And now it's sort of worth thinking about, you know, companies spending money on extracting it. So where is it and is it worth trying to get it out of the ground? I think that's really what it comes down to.

Seth: Yeah. So going back to what we were talking about in terms of, like, 50% of the mineral rights or a certain depth of mineral rights or specific minerals underneath the ground. Is that what we're talking about when we say fractionalized? Where basically it's not everything anymore. It's just bits and pieces in one way or another.

Vernon: Yep. And we call it undivided, right? And so it covers a certain portion of a legal description, 100 acres, but is a fractional, undivided interest. So, like anywhere within that, you own a certain type of rights.

Seth: So if somebody says you own 20% of the minerals or 20% of my minerals, is there some difference between those two things?

Vernon: Yeah, absolutely. Well, the conveyance language is very, very important in a deed. So let's just say somebody owns 100% of the minerals; they give a warranty deed. Let's just say they own the surface and the minerals; they give a warranty deed. That is going to be all right title and interest in that property. And so if they own the minerals, it's going with it.

Now, where things start to get severed is through reservations and conveyances. So if I'm giving you this 100 acres, but I'm reserving my mineral rights, there has to be language in that deed that says "less and except all oil, gas, and other minerals are being reserved." And so that's like, I'm giving you everything, but I'm holding on to this right here.

And then there's the conveyance where I'm giving you a piece of what I own or all of what I own. For instance, here's an example: let's just say I own 20% of the minerals. If I give you 20% of the minerals under this property, I'm giving you everything that I own. I'm giving you 20%. I own 20%. I'm giving you 20%. It's almost the same as saying I'm giving you everything that I own, right? But if I say I'm giving you 20% of what I own of my minerals, then I'm giving you 20% of 20%, which is what, 4%?

There's tons of litigation that happens every single day on this stuff. The nuances, one word in a conveyance can mean a completely different thing and cause big economic differences further down the chain of title.

Seth: If I'm looking at a deed, and if I see the words undivided interest, I'm getting a warranty deed for the undivided interest in a property. Does that mean I can assume I'm getting the mineral rights because they haven't been divided yet? Or once mineral rights are held back, does that mean going forward now, nobody can ever say undivided anymore because it has been divided? Like, you can't say you're conveying all of it when you're not.

Vernon: Yeah. So the word undivided interest is not used as much in the conveyance language. And usually somebody owns the surface; they're going to reserve either all or a portion of what they own. And first of all, you can't convey anything that you don't own. So if all of the minerals have been reserved prior to my seller getting the minerals or getting the surface, even if his seller had given him everything that he had, and then he gives me everything he had. Well, maybe the minerals were reserved 100 years before, right? And so you can't convey what you don't own.

Seth: We're starting to get into, like, the title search area of this conversation, but that almost makes me think of a quitclaim deed where I'm basically saying, like, everything I own, if anything, I'm now conveying to you, no guarantees, but a warranty deed, isn't that a guarantee? So you're saying, like, yeah, I'm giving you all of it. It's all yours now. Is there certain wording in a typical warranty deed that says, except for mineral rights or something like this doesn't cover that part?

Vernon: There are permitted encumbrances to a deed. And so if there were minerals that were conveyed prior to that conveyance, or there were reservations in prior title, that's going to be carved out of a typical deed. But you're right. There is nuance between a quitclaim deed. I'm giving you anything that I own, whatever it is, I'm not warranting any of that. And then there's warranty language that you can add, and you can add that same warranty language into a mineral deed. You can say, I'm giving you X acres of minerals or a 50% interest in these hundred acres. And that's a warranty. You're right.

Seth: Because I remember seeing that in warranty deed templates, talking about, like, except for all encumbrances and that kind of thing. I guess what they're talking about there is like the mineral rights portion of it, if it's been held back. If it's been held back.

Vernon: If it's been held back. Okay, gotcha.

Seth: When you're doing a title search specifically to understand the mineral rights situation, I know a lot of times when I see title searches from title companies, they might go back like 40 years or something and they just stop at that point. I don't know why they just say, yeah, it's probably fine because that was a long time ago, but I don't know. But mineral rights searches, do they always have to go way back to the beginning of when the U.S. government conveyed everything to the private owners?

Vernon: Yeah. I mean, surface usually stays together. I mean, look, we deal with undivided surface estate a lot, but it usually comes back together because when people inherit a piece of property, let's just say they're four brothers, they inherit a piece of property. Well, typically, you can't really do a whole lot with that surface. If I spend $1,000 on that surface, it's for the benefit of all the other owners. And they're technically undivided owners. But that usually comes back together when one person decides to buy it because they don't want an undivided interest owner owning this portion and that portion.

And so oil and gas usually stay undivided because every owner has their own rights to access their minerals. And so it may not follow the surface. You know, there may have been 100% conveyance of the mineral rights in 1850 or 1890 when somebody was out there drilling in Spindletop or one of the early oil and gas exploration, where somebody came along and bought all the minerals from the surface owner. And, you know, the surface goes on and it gets split up and comes back together and so on and so forth. But the minerals stay severed.

And it's interesting because that usually just follows family title. Somebody dies, they have three kids, each one of those kids inherits a third of those mineral rights, and then one person decides to sell half, and the other two have three kids, and that guy has five kids, and this guy has one kid, and that half goes over here, and so it's like a third of a half of a quarter, and you get these fractions that add up, and really to know the true picture of that, you have to go all the way back to where it was all one fee interest, because you may have missed a conveyance in 1890. And thought, oh, look, it looks like it all stayed together, when in fact, it went a completely different direction.

Seth: If somebody held the mineral rights back, I don't know, 100 years ago, and that person is long gone, if they didn't have some kind of a trust set up so that their heirs get it, like, I know another example I heard from Chris. Chris, if you're listening to this, this is your example. I believe he was trying to buy a property, but the mineral rights were owned by an LLC from, like, a number of years ago. And that LLC was now dissolved. Like it was defunct, didn't exist anymore. So, like, do they still own those mineral rights or how do you account for that?

Vernon: That's a really good question. I didn't really run into that a whole lot when I was running title, but I would think that basically the owners of that LLC would then own in a pro rata way or pro rata share their portion of the mineral. So if I owned 50% of that LLC and it dissolved, it would go to me. Now, how do you figure that out? I think there are probably ways to do that in court. It probably wouldn't follow the title very easily.

And what happens a lot in mineral title is that we get breaks in the chain of title where, you know, we can follow it up to here and then you can kind of pick it up later on down the line and you have to kind of like reconcile what happened between here and here. Do that through the courts. A lot of it is just heirship.

If a guy died and he didn't have a will, you figure out who his heirs were. It happens if you run into a messy title on the surface, right? Somebody two or three generations ago died without a will and their kids get it. And then those kids die and their kids get it. It's hard as a surface owner to piece all of that back together because you don't want outstanding interests that could encumber your ownership or have a claim to your ownership on that surface. You want to be able to do whatever you can on that surface.

But mineral rights are unique. An oil and gas company will go figure out who all those owners are and lease them individually, and pool all those interests together and use those and say, "Okay, now we have 100% of the rights covered and we have the right to drill that's been given to us by every single one of those owners that negotiated separate oil and gas leases." And then when they get paid, they're all going to get paid their individual pro rata share of the production.

Seth: Yeah.

Vernon: I don't know if that answered your question, but… yeah.

Seth: Yeah, I think it does. I have in my mind that, this image. I don't know if this is actually how it works or not, but let's say I own a one-acre desert square or something, or someplace in the Midland Basin in Texas, just a tiny little property. And there's this massive lake of oil beneath it that spans miles and miles and miles beneath it.

And if an oil company drills through my one acre and gets to that lake, which is actually beneath a lot of other people's properties too, but they can get access to all of it through mine, does that mean they only have to pay me for my mineral rights because they didn't need to touch anybody else's property or because that was beneath others as well, they get something too? And how would they even know exactly how far it expands beneath the surface?

Vernon: Yeah, that's a really good question. If we kind of back up just a little bit in time, a lot of the oil and gas was produced through geologic structures that were traps. They trapped oil and gas 5,000 to 10,000 feet underground, right? And there was a hard surface that time and pressure created this oiling or gas that's subsurface, and it was trapped up against something that was non-porous. It couldn't get through. And so originally, people still do, is they drove vertically down into that reservoir, and it's like a big sponge almost, and it all just gets sucked up into that reservoir. Or up the drill pipe, the production tubing.

Geologists would identify these areas through seismics. It was 2D seismic, and now more recently it's 3D seismic, where they shoot sonar under the ground, seismic waves, and the reflection of those waves gets interpreted back to creating a picture of what it looks like underground. And so there may be 100 acres or 500 acres of a reservoir that geologists have said, "Hey, we think that this reservoir is here underground." But if I own five acres above that, that's not going to be the whole thing.

There's been this sort of dual evolution over time. There's the sort of contractual world and there's the regulatory world. I'm sure you've seen those old pictures of the old oil fields where all the wells were stacked right next to each other. They're all just kind of right on each other. And what happened with that was those were overproduced and it didn't allow for the even production or extraction of oil over time, which is more efficient. And so what happened was we created this thing called spacing. So you've got to be a certain distance away from different wells. You don't want wells to get too close to each other.

Okay, so you've got to keep wells far enough apart so that they're not going to be interfering with each other. So if I've got one well here and one well here, and we're both pulling from the same reservoir, then we're competing against each other. And it's better to have those far enough apart to where I'm taking this resource, but I'm not pulling from this well over here.

And then also, if I drill a well on a five-acre parcel, well, somebody can come next door to me and drill the parcel next door as long as I'm far enough apart. So what ended up happening was this creation of this concept of pooling. So I may only have five acres, but the reservoir underneath me is 600 acres. Okay, well, I sign a lease on my five acres, but the company then goes out and gets the 50 acres next to me and the 20 acres and the five acres and creates what's called a pooled unit. And they unitize all of that land that's above and all the rights that are related to that production that they're going after, right?

And so what happens is nobody else can come and drill in that unit because that company has gathered all the rights to drill. When you pool that acreage, everybody gets their pro rata share of the production.

So if I own 10 or 5 acres out of that 100 acres, I'm getting 5 one-hundredths of the production. We can go into the calculation a little bit, but if I assign a lease for 20% and let's just say I own 50% of the minerals under those five acres. Well, I'm getting 50% of the five acres, so that's two and a half mineral acres out of the entire 100 acres, multiplied by my royalty interest, 20%. So that's what gives you a division of interest. And so when all the production that comes out of that well and is sold is paid to the owners on their division of interest. And so everybody is pro rata. They're getting their proportionate share of how much their acreage contributes to that entire unit. Does that make sense?

Seth: Yeah. I'm curious about that royalty percentage. What is a standard royalty amount? Like, is it 20%? Is that a normal expectation for the owner of mineral rights to have, like 50%? Or how much does the oil company get to keep and pay to the landowner?

Vernon: If you've negotiated a really good lease, it's going to be at a quarter royalty or 25%. Going much higher than that, companies aren't willing to do that. It really just eats into the economics.

Seth: Yeah. Does it ever happen where an energy company really needs this lease from this one landowner and they're just like, no, not going to do it? And they just kind of like dig their heels in or they demand some crazy high royalty and the company actually pays it? Is that common?

Vernon: Yes. And it really just depends on how much leverage you have. There are companies like Blackstone Minerals that own massive, massive portions of minerals. There are big ranchers in South Texas and other states where they own thousands and thousands of acres and they own the minerals, too. So they own the surface and the minerals. So the mineral estate cannot be encumbered by the surface. If I own the minerals and somebody else owns the surface, they can't keep me from even allowing somebody to come access my minerals. So the mineral estate is dominant over the surface estate.

But in some areas, large ranchers and property owners may own thousands of acres of surface and minerals. They never split the minerals. And they may say, "Well, look, oil and gas company, if you want to come drill here, you're going to go on our terms." And so sometimes those owners participate in the wells, big landowners; they'll participate in a portion of the wells, or they'll get an ownership in the well. They will negotiate a high royalty, typically 25%. It's hard for companies to give much more than 25%, but there are a lot of other negotiating points.

There are sort of drilling clauses that companies would have to drill a certain number of wells within a certain period of time. There are very specific rights that basically say, "Okay, if you stop drilling, then you have to release all of this other acreage so that I can go get somebody else to come in and drill the rest of it," right?

And so the older leases were much more oil and gas company friendly. So the royalty rates were 12.5% and the oil and gas company could kind of hold all this acreage by drilling one well and hold it as long as that one well produced. And so as time has gone on, the royalty rates have gone up, kind of hitting a wall at 25%. And then the ability for the surface owner, obviously, depends on how much leverage you have to negotiate the terms of dictating what that oil and gas company can and can't do and how much acreage they can hold and how many wells they need to drill in order to keep the well active has evolved over time, just like any industry. And through litigation and the help of great oil and gas attorneys, it really helped to sort of give more power back to the mineral owner.

Seth: Let's talk about valuing mineral rights. How do you appraise mineral rights, especially if it's in any way a speculative move, like you don't actually know if you're going to get to anything down there? Or if you do know, like it's been established, yes, this resource is underground. Do you appraise it based on the amount of acreage? Or again, back to my one-acre desert square example, if there's a giant lake of oil beneath that one acre that spans a lot more than an acre underground, is it based on the surface acre or the amount that's underground? Like, how does that work?

Vernon: If we sort of back up a little bit, you know, the resource is only worth how much you can get out of the ground and how much it's worth in the marketplace, right? So there may be some resource at 50,000 feet that we don't know about yet that's down there and could be worth a quadrillion dollars. But if we can't get to it, then it's really not worth a thing.

Oil and gas rights are based on what we know now and what is reasonably known in the future. We've got a lot of these major geologic basins already identified. You can look at historical production to see, you know, has there been production in this area? Have oil and gas wells been drilled? And typically most of the known oil and gas producing reservoirs have already been discovered in the U.S. at this point. So really it's about how much is left and how much will be produced? Because we don't always produce 100%. It's usually a portion based on how much we can extract.

And then how much cash flow is that going to turn into? And that's a commodity question, right? And so the way that we look at it, mostly from a professional level, professional mineral buyers, is if you've heard of discounted cash flows, it's a very common financial term. And what we do is we discount the future cash flows of that resource.

And so there are different categories of resources. I'll kind of name them from a low risk level all the way to the highest risk level. And these are, we call them, “reserves.” So they're there. We think they're there. It's just about how risky it is.

So there's “proven developed producing.” So that's what we call PDP. That is, there's already a well on the ground. It's producing. All of it hasn't been produced yet. And so there's a decline curve to a well. A well starts at the highest point, the very beginning of the production, and then over time it goes down. Usually it makes a squiggly line, but it basically goes down over time. And so engineers, reservoir engineers, can determine, like based on the volume and pressure and production rates, how much is left in that reservoir that will be produced over the life of that well.

And so you can take that future production and say, "Okay, well, it's going to produce over this pathway, smooth it out if you want to, over the next 20 years, it's going to decline. And let's just put an oil and gas price on that. Let's say it's 50 bucks a barrel. And sometimes people bet on the oil price. They'll say, okay, well, I think the oil price is going to go up over time or go down over time, or you just hold it flat. And you can say, okay, well, over the life of that production, it's going to make me $50,000, $100,000, a million dollars, or whatever that is. But I don't get all that today. I'm going to get it over time, right?

And so if I discount that, I'm putting a risk factor on the trade-off between waiting and getting that production over time versus what is it worth today, right now? And so riskier things are discounted more heavily, and less risky things have a lower discount rate, just like a Fed treasury note. It's basically the lowest yield that you need from an investment because it's a sure thing. And so as you get into riskier and riskier things, you need a higher yield.

Seth: This makes me think back to the subject of shooting seismic to understand what exactly is underground. Can you see with much clarity how much of a resource is left by shooting seismic? Or is there some other way to know, okay, there are 10 years of oil left if we drill out this amount? I'm trying to figure out how speculative this is and how much of it is a sure thing when you know there's already that resource there.

Vernon: Yeah. So, I mean, seismic is generally the first step in determining the resource that's there, but it's not a sure thing. You may drill and it's some other rock or it's non-porous or non-producing in some way that may not be there. So there's risk. And so the surest thing is producing right now.

The next surest thing is “behind pipe.” If you've got a well on the ground and you've passed through another reservoir and you've finished producing out of this reservoir and you pull up the pipe and perf out into that other reservoir and you start producing, that's the next least risky.

Then you have “proven undeveloped.” You know the resources there. It's a known resource. There's a reservoir over here, and there's a reservoir over there, and they look exactly alike, and I've drilled out of this one, and I've got this one leased, and I know that I can go over here and drill it. I just haven't done it yet. That's proven undeveloped.

And then there's probable. Well, we think that there's there based on the seismic or analogous other wellbores that we've seen in this area that should sort of continue on into this area, then there's possible. Those are kind of like the moonshots.

And so the further and further you go into that, whether you identify it by seismic or by other wellbores that you've seen in the area and you've sort of mapped it and you think it's there.

From producing all the way down to, I don't know, this looks like something else and maybe we can get to it, carrying different discount rates. And then you value the total amount of resources within each one of those reserve categories and you discount them back. Sometimes something like a probable or a possible is not even given any value, or maybe it's discounted at 60% or 70% or something like that, just minimal value. And then you stack all of those values up and you add them up and you say, "Okay, well, this is the total amount of resource at a discounted rate that I'm willing to pay today." And that owner of the resource, if he's willing to sell it, can say, "Okay, well, I'm trading that future cash flow and the risk that comes with it for a single payment today." Does that make sense?

Seth: Yeah, it does. You mentioned in passing a bit ago that there could be a quadrillion dollars worth of something, but it's too deep to drill. I'm wondering, like, how deep is too deep to drill? And like, how far do these sonar waves go? Like, does it go to the center of the earth or does it just kind of stop after a certain distance? And you don't know what's beyond that?

Vernon: That's a good question. I think from a practical standpoint. The deepest I've seen these kinds of reservoirs get drilled are, call it, 20 to 25,000 feet. Much further than that, the heat and the pressure get so high that they just cook everything for oil and gas. Now, maybe there's some other rare resource that we haven't identified yet that comes about in the future that we've determined that we've got the technology to get to it. But for oil and gas, the real productive window, the shallow oil kind of produces around 2,000 to 3,000 feet. All that's basically been found by now and produced, all those old shallow fields. Most of the oil and gas production today is done at, call it 7,000 to 10,000 feet, 7,000 to 12,000 feet, sort of kind of that big productive range. And it's this sweet spot. The deeper you get, the more heat and pressure is building up on that reservoir. Actually, that turns into a more gassy reservoir. So the deeper reservoirs typically have a more gassy component and the shallower ones typically have a more oily component.

Seth: And when we're saying like 7,000 feet deep, is this 7,000 feet beneath the surface or 7,000 feet below sea level?

Vernon: Total vertical depth beneath the surface.

Seth: That's kind of what I assume. I just want to make sure.

Is there ever a case where, like, we know there's something down there, but we can't get through it because there's too much rock in the way? Or is it, no, we can bust through any rock no matter what?

Vernon: I think there are definitely challenges on the drilling side where bits get stuck, but as technology has improved, it's pretty amazing what we can do. An example actually is everybody now has probably heard of shale drilling, shale wells, and horizontal drilling.

It used to be what was considered the source rock. It held a lot of this organic life that eventually merged into the big well reservoirs that were underground. But if you drilled into it, a little bit would produce, but not enough to justify drilling a well. Then over time, people realized, "Well, you know, we've got this big source rock of like uniform thickness that goes over a large, large area rather than just being concentrated in little pools. But it's very tight so it's hard to get it out.”

What's happened is horizontal drilling has sort of unlocked that resource. The well goes down vertically and then makes a turn and goes through the reservoir all the way through and it has much longer exposure to that reservoir than a vertical well. It just goes through it and is only exposed to it this much.

And then you've got a horizontal well that goes all the way through that reservoir. What companies do is they “frack” that rock. So what that is, they push propant and pressure through the holes in that wellbore that they create into the reservoir and it splits that rock and it allows for that tight rock, which held that resource, to open up. And then the resource, the oil or gas or combination of both, is able to be unlocked and make its way into the wellbore and then up to be produced.

And so what was considered unproducible 50 years ago or 75 years ago, that's what we do all over the country is we've turned this resource that was not able to be produced into something that is the driver of our nation's energy. It's pretty amazing what the technology has done.

Seth: So is fracking and horizontal drilling; are those two separate things? When I hear fracking,else it sounds like you're breaking right

Vernon: Yeah, okay, they're two separate things technically but they're done in the same place so horizontal drilling is really just drilling a wellbore down and then going horizontal through the reservoir. That's horizontal drilling now. From there, the well is in the ground, and then a frack crew comes onto the site and actually does the fracking, where they push prop it down and they push pressure down into that reservoir through the wellbore and crack the rock open. And that's what allows the production to happen.

They are terms that are thrown around, but technically they're two different things. One is the drilling and the horizontal wellbore that's in the ground. The other one is the act of opening up the reservoir so that it produces.

Seth: So if I'm drilling down on my one-acre desert square and then we're going to the side, does that mean we need a lease from that neighbor, too, because it's technically beneath their land or we only need the one for my land? Because that's where we got it through.

Vernon: Well, oil and gas companies would come to me and they would say, "Hey, we want to lease your one acre." Right. And you say, "OK, fine. Here's at least one acre right there." But then they would definitely want to protect that position and they would want to create a pooled unit. If you're looking above, it passes through this 5,000-foot horizontal wellbore. They're going to want to create a pool of units around that wellbore that protects that wellbore from anybody else coming in and getting too close to that wellbore and stealing that resource, like we talked about earlier.

And so they will come to me and they'll come to my neighbor and they'll come to everybody to create that block of leases and create a pooled unit so that they can be protected. And then everybody within that unit receives their pro rata share of the production that comes out of that well.

Seth: What happens if I own the surface of a piece of land but not the minerals? Somebody else owns that. The example that came to mind a while back was like a gravel pit. There are a few big gravel pits near where I live. If I own that property and somebody else has the mineral rights to the gravel, can they just come destroy my property and everything on it to get to their gravel and get that out? Or what rights do I have or not have?

Vernon: That's tricky. So I think gravel rights are part of the mineral rights. I haven't done a whole lot with gravel rights. There's this sort of like what resides with the surface estate and what resides with the mineral estate question. And there's a lot of litigation around it on certain things. I know water rights typically go with the surface owner, but technically, yeah, I mean, in Texas, at least, and I think most states, it's pretty similar. The mineral estate is dominant over the surface estate. And so there's a fair use doctrine that says, "Hey, you can do what you need to do to go access that resource." And the surface owner can't keep you from accessing that resource. But you have to be fair about paying damages and giving fair compensation for the use of that property to the surface owner.

And usually what happens is the surface owner and the oil and gas company or whoever it is, the mining company, come up with a surface use agreement. And that surface use agreement is a compensation for the damages that are going to be incurred under that particular operation. And the surface owner can always sue the oil and gas company for nonpayment of damages. But at the end of the day, the mineral owner cannot be kept out of their acres, their property. They can't be withheld from exploring and accessing their resource that they own.

Seth: I mean, it actually kind of is a valid concern then if I own the surface rights but not the mineral rights. Not that it's likely it could happen, but it could happen. And if somebody else does have the mineral rights and they want to get to it, they could totally blow up my house and get to it. I mean, they would pay me for it, but it's not an inconsequential thing.

Vernon: Usually there's offsets and I can't remember if it's a regulatory thing, but most leases do include an offset to a house or a living structure. You can't go within 200 feet or whatever. And that's negotiable, but typically that's part of every lease.

The interesting thing actually now is out in West Texas, there are a lot of solar farms that are being put out on the surface. And so that's a surface, right? And a solar company may want to come in and put 640 acres or 1,000 acres of solar panels. Well, what if the mineral rights owner signs a lease and the oil and gas company says, "Hey, this is our drill site. We've got to get on here."

So that surface lease can't obstruct the mineral lease from actually coming and accessing their property. And so when you're a surface owner and you're in an area where there's a lot of oil and gas activity, there are a couple of things you can do. You can have a waiver of surface use. In other words, you could go to the other mineral owners or the oil and gas company and say, "Hey, will you sign this agreement that you will not allow surface operations on this surface? You can put your well anywhere else, but just not here."

And oil companies can do that. If they have the lease, they can negotiate that and say, "Okay, fine. Our drill site's somewhere else and we won't interfere with your surface." Or a lot of times, actually, a surface owner, like a solar company, before they put all that solar array on 600 acres, they go to the operator or the mineral owners and they get a waiver of non-surface use. They say, "We'll pay you to not allow anybody to use the surface for oil and gas activity," if that makes sense. So that's all negotiation.

Seth: Interesting. So I have an uncle who has a log cabin in the mountains in Prescott, Arizona, and there's a literal gold mine on his property. It was like a mine shaft that goes underground. It's all full of water now. Nobody uses it anymore. But at one point in time, they were mining gold. It's like probably 40 feet from his house. I don't know if he owns the middle rights to that or not. I'm kind of assuming not. But in that situation, if they decided to reopen that mine, they could totally do it. And they can make all the noise they want as long as they don't knock his house down.

Vernon: It all depends on what's written in the agreements and that kind of thing. But yeah, so you have to follow the chain of title to see if he inherited or he received those rights. Otherwise, if a gold company wanted to go back in there, they would run title and figure out who all the mineral owners were and go to them and sign a lease. And, you know, maybe he would have a portion of it. Maybe he wouldn't. And, you know, there's some protection that states give that says, "Hey, look, you can't just completely knock somebody's house down." But for the most part, yeah, if they wanted to go back and re-enter that same mine shaft that was there before it would seem pretty doable; in fact, that's probably the most efficient way of doing it—you've already got a hole in the ground; you might as well go back through it.

Seth: Do you know anything about the history of the first person who ever drilled for oil, like how did people even know, “Hey, if we drill down 3,000 feet, we're gonna find all this oil there?” Like, was it just an accident and then people started putting two and two together?

Vernon: I probably knew a lot more about it. I haven't really sort of studied the history recently, but I think the first well was drilled in Pennsylvania. And in the old days, it was really just oil seeps that were coming out of the ground. And so when they found oil that was coming out of the ground, they said, "Okay, well, we think there's oil here." And they use rudimentary tools to bust open the ground. I think they had a big wedge that they'd drive into the ground, lift it up and go over and over and over until they sort of cracked open that resource that was right there on the surface. And then what was the name of the first well, the Drake well, in some town in Pennsylvania? And then soon after that, it started growing and growing. And over time, you know, drilling technology has gotten better and better and they've been able to go deeper and deeper and, you know, extract more and more as they've gone along. So yeah.

Seth: When we're talking about mineral rights, which minerals are typically valuable? Like, what are the hot ones that most people are after?

Vernon: It's very much dependent on where you are. So, like Prescott, Arizona, the gold rights were very valuable. And in Texas, it's usually the oil and gas rights. It's the right to drill an oil and gas well. Lithium rights in East Texas are becoming more and more valuable now because lithium is a more and more valuable resource. It very much has to do with geology, where it is and how much it can be extracted.

Seth: Are there parts of the country where mineral rights just simply don't have much value at all? I don't even really know much about Michigan. I think they actually do drill for oil in some places in the northern parts, but I just don't hear about it much.

Vernon: There's a lot of shallow gas production and shallow oil production in Michigan. A lot of it happened in the 60s, 70s, 80s, and even into the 90s. But there are many states that people have tried to drill in and really just didn't have a lot of luck. There are a lot of large areas where there's really just no resource that's been found worth spending the time and money. And people have tried. You know, they get an idea, they drill a well, and they hit a dry hole. And they go, "Man, there's only so many of those you can do," right? It's like a million bucks in the ground that has no value. It's pretty tough to do that over and over again. But it certainly happened. I mean, I'm happy to provide a map of the sort of geologic resources that cover, you know, different areas of the United States. I mean, anybody can pretty much Google that, but I'm happy to provide one of those.

Seth: I have a little note here to try to find something like that. It would just be interesting to see. If I'm looking for this, go to this place. Honestly, I mean, we buy land all over the country and most of it doesn't have any sort of real valuable resource. But in the areas that I know are known for oil and gas or other kinds of resources, I go look and see, "Okay, well, have any wells been drilled around us? Is there any current active production? Are there any new wells getting drilled? Are there new leases getting filed? And how close are those to where my piece of property is?" And then I sort of say, "Oh, well, actually, maybe there's something here." And so then we go down the path of trying to get our hands around how much value there is. But as land investors, we're mostly reactive to this, right? We're not as much targeting certain areas because of those resources. Now, I mean, in our mineral business, we were buying in very specific oil and gas producing areas. We're targeting specific reservoirs. We're targeting specific depths, certain portions of a county that we would go after because we knew that resource was there.

Seth: Tell me about abandoned mineral rights. I guess, what is that? And is there a way to, like, reclaim abandoned mineral rights?

Vernon: An abandoned well is usually just a well that's been produced and drilled and sort of at the end of its life, and then it's plugged and abandoned. It's capped, right? Or cement down the hole, and then they cap it at the surface. It stays under the ground, but it's still there.

I don't really come across this concept of abandoned minerals very much because it's a right that runs with the land, right? In other words, if I die and I have three kids, well, those kids, through the laws of intestate heirship, every state has slightly different laws. But even if it doesn't go through a probate court, those rights get passed on to the heirs of that previous owner. And so over time, it's like roots or a branch of a tree. It starts with one and then it gets fractured and then it gets fractured again and fractured again and fractured again. If nothing else happens, each one of the heirs of that previous generation inherits the rights in some fashion, whether it's an adopted kid. Each state has its own rights, like just depending on how those rights are drawn in the state laws.

People inherit them. And then you may not know that you own them, but you may have them anyways. And that's the job of a landman: to go find those people. And each tract is 100% owned. The minerals are 100% owned by somebody. It's just about how many people and how much they own.

Seth: If I wanted to go out and buy mineral rights, or say if I have them and I want to sell these things, is there some marketplace where I can go out and shop for mineral rights to buy or list mine for sale? Or how does this stuff get found and bought and sold?

Vernon: Yeah, no, there's a whole industry around it. Most people don't really know about it. But yeah, there are marketplaces.

Seth: Is it like a Zillow or a Redfin for mineral rights?

Vernon: Yeah, kind of. Energy Domain is one of them. Energy Net is another one. U.S. Mineral Exchange is another one. I'll provide the links to these. And this is where people can post their minerals for sale. They can provide support for how valuable they think that it is and they can receive offers. There are people that are like brokers of mineral rights. They may go out and they find the people that want to sell and then they earn a fee by conveying those rights to an end buyer, just like we do in land. It's like a wholesaling business where people will go out and get leads and then they sell them and they capture a spread.

Then, yeah, I mean, if you want to go under a certain piece of property and you say, like, "I want to buy the minerals or whoever will sell under these hundred acres," you basically go back and you reconstruct a chain of title back to the patent or when the first owner owned that property. And you put together a list of all of the people that own the portion that they own. Like I said, it all has to add up to a hundred 100%. Maybe somebody owns 50%. This guy owns 20%. That guy owns 10, 5, and 5. It takes running title and airship and all that. But once you figure out who that list is, then you can go call them, just like we do with, you know, landowners, call them and make them an offer.

Seth: I don't know what kind of people or companies buy and sell mineral rights. If it's strictly like, yeah, energy companies do this and that's it. Or it's like, yeah, I can go into it right now. And that's a normal thing. A lot of guys like me do this. But have you ever heard stories of people just getting ridiculously wealthy by just buying mineral rights? Like, does that happen? Or is there a way to, like, reverse engineer that?

Vernon: Well, if it were easy, then everybody would do it. So first of all, it's simple in concept but hard in practice, like running down 15 chains of tidal is not always a really easy, very efficient way of doing things. Knowing that resource that's there, if you have some kind of special knowledge about it. "Hey, when a well is going to get drilled, or there's a reservoir over here that produced, and I'm in an oil and gas company, or I have some special knowledge that there's another reservoir that's going to get drilled in the next year. I'm going to go out and buy all those minerals before that well gets drilled." And if every one of those mineral owners understands that there's real value there, then they're going to sell those minerals for a lot more.

Seth: That sounds like insider trading. Is it like that?

Vernon: Yeah. No, I mean, it's very much about asymmetric information and what information you know about what's going to happen. It is kind of like insider trading, but there's no securities law around it. And so if I know something and other people don't know it, then that's how you create value. And I'd argue we do the same thing in the land business. I mean, we understand a market in a certain way. We understand the value of a piece of property. And we trade our knowledge and certainty for cash right now, right? And so it's a risk game, right? Like, how much risk am I taking in paying you for your rights? And how much risk are you taking in selling your rights right now?

Seth: If I'm buying a piece of land or whatever, any piece of property, and I want to understand what I'm getting in terms of mineral rights, you know, I understand I have to run a title search. Is this a completely separate title search from what the title company would normally be doing to verify the surface rights? It sounds like sometimes you can get this information just baked into the different deeds and conveyance documents. But other times, no, it's going to be a totally separate thing. And the title company might not even bring that up to you because they don't know that you care about the mineral rights. Or can you simply get it all from a simple title search from the title company? How do you figure this out?

Vernon: Yeah. Typically with a title policy, they're not going to ensure mineral rights and they will only go back, you know, 50 or 60 years typically to run surface title. And so, like we've talked about, you know, that may or may not include all the minerals. I mean, the minerals may have been reserved 150 years ago and it wouldn't have even touched any of the surface chain of title since then. And so sometimes they run together, though.

I mean, I bought a piece of property in Texas recently, and it was eight acres and we had 100% of the minerals and didn't know that until after we bought it. And I started doing some research and I've gotten to where, like, I can go into the county clerk's records. Usually in Texas, there are resources where you can go and look at the deed records. Some other states have them online and I'll just start running backwards. I'll say, "OK, well, I bought this property from this guy. Who did he buy it from? Okay, well, here's the deed that he bought. He bought this property from so-and-so and go back."

I found that the guy that sold us this property signed a lease 50 years ago, right after he bought it. He bought it and then signed a lease immediately. Well, I didn't run the full chain of title, but I know that this guy signed a lease on our property. Now, did he sign a lease on owning 100% of the rights, on 50% of the rights, on 20% or on 5%? I didn't know that.

But really what I did was I reached out to the oil and gas company that was drilling all around us. And I said, "Hey," and usually they have a landowner relations department or a land group, somebody in the land department. They won't run title for you, but if they're really active in an area and they know that you're leased or not leased, they'll help you out usually if you're really nice to them. And so I called this company and I said, "Hey, look, you know, I've got this parcel here. I saw it was leased in the 70s, but I know you guys are drilling all around us. What's the deal? Do you think that we have the minerals or not?" And he said, "Actually, this is an unleased interest. It's not pooled with any other unit. And we were planning on drilling a well in here in the next couple of years. And we'd love to lease your rights."

And so I'm negotiating an oil and gas lease on an interest in a very well-known oil and gas field right now.

Seth: How much do you think you're going to make from that if it goes through?

Vernon: I've done a little bit of calculation. I mean, I think our bonus payment would probably be $500 to $1,000 an acre. I think we own eight acres.

Seth: Is that per year?

Vernon: No, that's a one-time lease bonus payment for a three-year lease. And then within the next three years, they would have the right to go drill. And then once it's produced, then I would get 100% of that eight acres multiplied by the royalty rate, 20%, 25%, whatever I can negotiate. divided by the total number of acres. And that's my pro rata share of the production that comes out of the ground. It could be 50,000 or 60,000 bucks; I don't know.

So the way that I think about this is I'm gonna buy the property and then I'm gonna sell the property eventually. And whenever I'm conveying that property, when I'm a seller, I'm thinking about, "Okay, well, I know that there's a resource there. I know that there's a well that's going to get drilled. I've done work to unlock that value just by doing the research. Now, you can hire a landman to do it, or you can hire an abstractor to go do it, but I just did it on my own." And I determined, "Okay, well, actually we have eight acres, eight net mineral acres under this piece of property and it's going to get drilled."

So I've reduced the risk of those minerals and I've recognized the value that, "Hey, you know, one well or two wells or three wells can get drilled in this." So if I sell that land and somebody wants to buy my minerals, I say, "Okay, well, like the surface is worth X dollars per acre, but the minerals are also worth why dollars per acre to 3,000, 4,000, 5,000, whatever that number is." And that number is really just based on how much resource is going to get produced and what's my share of that production over a period of time discounted to today's dollars.

So I'm either willing to trade that production in the future for dollars today or hold on to that mineral right so that I can receive the production in the future. And so it's just a discounted value. It's like, I recognize that there's this future production value. I can quantify it. And then I can say, if I'm going to sell this to you, this is my price. And if you're not willing to pay for it, then I'm just going to keep it. And then I can go find another buyer who would recognize that value because they're very active in oil and gas and they understand the real value. Or I can take it to a marketplace like U.S. Mineral Exchange or EnergyNet and post it up and people can bid on it.

Seth: Yeah, it's fascinating. I never knew about this U.S. Mineral Exchange and EnergyNet and all these websites. It's really cool.

Back to this title search question, since a title company is not even really going to be thinking about this and they're not going to insure over it or anything like that, it sounds like I either have to know how to do this kind of title search myself, which I kind of don't. I mean, I can take a stab at it, but I'm sure I'd probably miss something. Or you could talk to the land department at an energy company or is there like some kind of pro-Title USA equivalent that just does title searches for mineral rights or is there somebody on Fiverr I could say, "Hey, tell me the situation here. Give me the full rundown. Tell me if it's clear or not." Like, is there such a thing anywhere? How would I do that?

Vernon: I mean, that's what landmen do. So you hire a local landman to go run title and create a mineral ownership report. In fact, this happened to me in Ohio. Bought a property in Ohio, looked around and saw, "Hey, look, there's a well on our property or the property next door." And I noticed there were new wells getting drilled kind of several miles on either side of us.

And so we asked our realtor, "Do you have any connections with any landmen?" He said, "Oh, yeah, yeah, I know a local landman and he'll charge you." I think he charged a thousand bucks to run the title and create a mineral ownership report. And so we got that mineral ownership report and that told us how much we own. So then when we were negotiating with the new buyer for that property, we said, "Okay, well, just like what I said earlier, this is the price for the surface. This is the price for the minerals. So you got the whole thing. You have to pay this much. If you just want the surface, then I'll keep the minerals, and that's the price."

And so what I was going to say also is that a landman's mineral ownership report is usually pretty spot on, but it's preliminary. And so what people do in the oil and gas business is to get more certainty, like we do with a title commitment or title insurance. In the oil and gas business, we go to a title attorney and we get what's called a title opinion. And that title opinion is based off of all the work that the landman did. And the attorney reads all the documents. And like we've talked about these slight nuances and conveyance language, "20% of my minerals versus 20% of minerals."

And they look through all the documents in that chain of title over time. And then they give an opinion on who has the total ownership of that mineral interest, if that makes sense.

Seth: In terms of finding this landman, I guess my previous assumption was that a landman is one who is employed by an energy company, but that's not necessarily the case. I'm just looking at ChatGPT here; it says there's something called AAPL, American Association of Professional Landmen? Is that where I look?

Vernon: Absolutely. I'm a member of AAPL. And then there are also local organizations that are sort of sub-organizations of AAPL. So the one here in Houston is HAPL, Houston Association of Professional Landmen. Shout out to those guys. In fact, I was president of HAPL just a couple of years ago. So great organizations. And so you can reach out to these local organizations just depending on where they are. Or you can go to AAPL and figure out, "Hey, who's a landman that works in this area?"

And you can find a number of people that work. They're usually near kind of heavily producing oil and gas areas where they work. Day to day, they're typically hired by oil and gas companies. There's a sort of contract landman that takes a contract on running title in a certain area for an oil and gas company. And then when that project's done, they move on to another contract with another oil and gas company. And so you can contract out a landman for a certain day rate. And say, "Hey, look, I just want you to run title on this piece of property." And they'll say, "Okay, well, it'll be X amount, depending on how complex they can see the title." And then they'll go run that and they'll hand over a mineral ownership report, which gives you a lot of information.

And AAPL is a fantastic resource. And then, yeah, I'd say just look in the more regional area also, and you can reach out to somebody in the local organizations that will help you find somebody.

Seth: That's landman.org, the AAPL website. I'll put that in the show notes. Again, and retipster.com/227. You also mentioned Landgate. What is Landgate?

Vernon: Landgate's another software that deals with oil and gas rights, but they also deal with surface rights, surface resources, and really just energy-related resources related to land. So I think you can post your minerals for sale. You can post your surface rights for sale for wind leases and solar leases. There are just a lot of different rights that you can sort of post. It's kind of another marketplace.

Seth: And we're getting close to the end. Vernon, thanks for your time. It's been awesome. Thanks to all the listeners out there, if you're still with us. So a few final questions here regarding the 1031 exchange. I actually had a separate conversation all about 1031 exchanges. If you're not familiar with those, I'll include a link to that conversation in the show notes if you want to check it out. But a 1031 exchange basically allows you to sell a property. And if you can buy a new property in a certain timeframe, a like-kind exchange, you cannot pay taxes on the capital gains of the first property and mineral rights. I mean, that is a type of real property, right? So can you do a 1031 exchange with mineral rights, whether you're buying or selling them?

Vernon: Absolutely. Nice. You can buy another piece of minerals with it. I don't know if you can go from minerals to surface and from surface back to minerals. You'd probably have to ask a tax professional. I think I knew that at one point, but I don't know. It's been a while since I've looked at it. But yeah, no, I mean, it's real property rights. So you should be able to buy and sell those through a 1031 exchange.

Seth: And wind and solar rights—I didn't even know that was a thing. What is that? And are those similar to mineral rights?

Vernon: Those go with the surface. So the surface owners are the ones that have the right to lease those to a wind company or a solar company. But again, remember, as long as it's not interfering with the right of the mineral owner to access their minerals.

Seth: So to wrap up, Vernon, I know we're going to have a lot more information beyond what we talked about here again in the show notes, retipster.com/227. We'll try to find some images, maybe some videos if we can find any helpful ones. Maybe someday, if we ever come up with a chatbotthat knows all about this, people could talk with it there. Any last conclusions we should walk away from this?

Vernon: It can be challenging, obviously, to understand this. And I think the murkiest side is really just the information. People don't keep track of title the way they do with the surface because you don't owe taxes on anything that's not being produced. And so it's not really tracked until it's produced. So it makes it hard to know without going through the whole chain of title. But at the end of the day, it's real property, right? And it's worth whatever somebody is willing to pay for it. And it's worth how much revenue it can produce over time. And I think if you sort of look at it that way, you can dive a lot deeper. But at the end of the day, you just have to think it's like 3D, right? I'm taking this piece and this much within this piece under this portion of the ground. And it's worth this much because there's this much resource there and it can be extracted over time and produce this much revenue. And the mechanics of doing those calculations are essentially just a financial calculation of how much revenue I'm going to get over time.

Seth: Are there ever property taxes on mineral rights?

Vernon: Yeah. Well, there are severance taxes. There are production taxes. So for every, you know, in Texas, it's like four and a half percent for gas and seven and a half percent for oil. And that's paid every month. And the operator usually withholds that amount and pays the taxes on behalf of all the mineral owners.

Seth: And this is Texas specifically you're talking about?

Vernon: This is Texas, but every state has its own tax law and it's usually production taxes. Yeah.

Seth: And I think as I wrap this up, one of the big things I wanted to understand was when buying or selling land, when questions come up about mineral rights, say if I'm trying to sell it to somebody and they're asking me if mineral rights come with it and they're all concerned about it for some reason. My hunch is that 99.5% of the time, they don't even really understand why it matters. I think maybe there's this fear in the back of their mind that, like, somebody's going to come drill on their property or something.

I think what I'm hearing, and correct me if I'm wrong, is that mineral rights and whether you get them when you buy a property are only an issue to the extent that either you are planning to drill or you have a plan in mind to, like, extend a lease to somebody and make money in royalties when they are drilling. But like, if you're not concerned about either one of those things, it's probably not an issue, right? Because if somebody was going to disturb the surface, they probably would have done it already, or you would have a really good idea of that?

Vernon: Well, no. I mean, okay, so let's look at it this way. You know, surface operations, like a surface pad for drilling, may only be four or five acres, right? And so out of a 640-acre unit, four to five acres of that is really where the operations happen. The rest of it happens underground, right? Like the well goes down and then it goes out underneath the ground, but it's all just sort of contained in a four- or five-acre pad.

And so a lot of that's part of the negotiation with the oil and gas company. "Hey, look, I'll lease this property to you, but I don't want to give you the right to drill on my surface." And they'll say, "Okay, fine. We have another well pad that we're going to drill. We've already negotiated with another surface owner. So we don't even need your surface." So then you're just going to receive revenue from the production of that pooled unit.

And remember, I mean, like, you got a big pooled unit. If you're right here and the well pad's right here, and they drill a well all the way through there, well, the well board is just underneath you a mile or two miles underground. You never see it, but your portion is contributing to that unit.

And so I think the way to think about that is it's also a negotiation. Like if the surface owner says, "I'm not buying this land unless I can control the minerals, because I don't want you to be able to decide whether an oil and gas company can or can't put a well pad on my property," then that's just part of the negotiation. And if the property is big enough, if it's a thousand acres, that's one thing. If it's one acre in a 640-acre unit, you can say, "Well, look, that's not big enough for a single pad, or they've got another pad over here." Or you can say, "Look, I'll keep half, you keep the other half." And then when you lease that property, you can do a no-surface-use agreement with that operator. And then they won't drill on your mineral, your surface tract, because you've already negotiated that.

Seth: I think the scenario I have in my mind is the one I've usually dealt with, which is like, I never had the mineral rights. So, like, I have nothing to give you. It's just the surface. That's all I ever got. So it's a question of whoever owns it back in time, what, if anything, they're going to do. And in that case, it's, yeah, I'm sorry. I just can't give it to you. So you're either going to have to live with that or...

Vernon: Don't buy the property. Other people own it, right? You've got to go do your own title search and figure out who those people are, pick up the phone and make them offers, negotiate purchase agreements and do your due diligence and all that. So it's a separate deal. And at the end of the day, if the oil company says, "Hey, this is our best spot to drill and I own 50 acres right there and it's right in the middle of that 50 acres," then it's a negotiation between the surface owner and the oil company to say, "Okay, well, let's put the pad over here and you're going to pay me X dollars per acre for, you know, using this property. And, you know, these are the things that you can and can't do to come on and off. You have to keep the gate closed and so on and so forth."

And that's a negotiation. There's always compensation associated with it. So then it's just about what kind of deal you can get for that portion of your property that's going to get disturbed by the oil and gas company. And then after they're finished with it, what do they have to do? They have to clean it up. They have to scrape all of it off and they have to plant the grass and you can kind of go into any level of depth that you want to.

Seth: I'm curious to see whatever map you're able to find about the different hotspots or just dead spots where, like, mineral rights aren't really even a thing. Like nobody cares about it. I don't really know the answer to this, but I feel like a lot of times when I get that question, it's like I'm in an area where, like, nobody cares about mineral rights. Like you're just getting concerned about something that's a non-issue. I just want to be able to point to something and be like, you're not going to get them in our rights. And this is why it still doesn't matter because nobody wants them anyway or something.

Vernon: I'll put this out there. This is a resource that I've used that I think even has a free trial or a free version that you can get some information from. But the way that we think about a lot of our land information, we get from either the county or a paid service that aggregates all of the county information. And the same thing is very similar to oil and gas.

And one resource that I've used that's pretty cheap, you can get a lot of information that aggregates all the state's production data. You can go state by state. Texas has the Texas Railroad Commission. They have GIS mapping. You can go on and zoom down and see what's around your property.

This other company is called welldatabase.com. They have a free version. They have some paid versions. You get more information with the paid version and not affiliated with them in any way. It's just I've used them before. And if you want to know what's going on around you, you need to have a resource where you can go check and see what's happened around you and educate yourself.

And Well Database is a pretty good one. You can do it for pretty cheap or free and just zoom into your property wherever it is on a map and see what wells have been producing around you. Is there anything producing next door, up north, south, east, or west of you? How close? And are there new wells getting drilled? And really new wells getting drilled that haven't been drilled yet, that's where a lot of the value is because the highest production is in the first few months of production and it goes, you know, declines over time. And if a new well gets drilled, that's a big spike in revenue for that mineral owner.

And so understanding kind of the activity that's happening around your tract is really important in determining, "Am I going to put a bunch of value on this that's not there, or is there real value there? And should I dig more?" I could go on forever.

Seth: Yeah, I know.

Vernon, again, thanks so much for walking me and us through this. I've learned a ton. Again, I've mentioned this several times, but check out the show notes for real this time. There's going to be a ton of information there. It's not like your typical show notes where there are just a few bullet points. There's, like, a ton of stuff there, retipster.com/227.

Vernon, if people want to connect with you for any reason, you don't have to share anything, but if you want to, is there anything they should do to get ahold of you?

Vernon: We're land investors primarily. We fund a lot of joint venture deals. And so we have a company, acreequityfunding.com, which, you know, you can submit your deal and reach out to us through there.

You can also reach out to me by email. It’s vhenry@upliftland.com. So upliftland.com, we've got a few different brands but that's the easiest way to get to me.

Seth: Awesome, thanks again. Vernon appreciate it and we'll talk to y'all next time

Vernon: All right, thanks, Seth.

Seth: Yeah, you bet.