A plain-English primer
Understanding minerals and royalties.
Start here
Royalties are more than
a monthly check.
When people hear the word royalties, they usually picture a monthly check from oil and gas production. That income is real, but it is only part of the picture. Mineral and royalty ownership actually spans three distinct asset classes, some already producing and some not yet drilled.
Knowing which is which matters, because each one is acquired differently, pays differently, and carries a different kind of upside. The rest of this page walks through all three in plain English, then points you to the right next step.
The three asset classes
Producing, and
not yet producing.
Mineral and royalty interests fall into three categories. One is non-producing. The other two are already paying.
Mineral Interest
Ownership of the hydrocarbons beneath a tract of land, along with the right to explore, lease, and produce them. Nothing is drilled yet, so the value sits in the right to negotiate leases, which can bring lease bonuses and delay rentals before a single barrel is produced.
Royalty Interest
A share of the revenue from production, paid to the owner free of the costs of drilling and operating the well. Once a mineral interest is leased and the well is producing, the royalty is the income that flows from it.
Overriding Royalty Interest (ORRI)
A royalty carved out of the operator's working interest rather than the mineral owner's share. It pays like a royalty, but only for as long as that specific lease stays in effect. Operators often sell ORRIs to raise capital, which is what makes them available to buy.
How it works
From acreage to
income.
A mineral interest does not pay anything on its own. Income shows up as the interest moves through a predictable sequence, from the lease that puts it to work to the production that pays it out. Here is how the money actually arrives.
On signing
Lease bonus
When a producer leases your minerals, you are typically paid an up-front bonus per acre to sign. This comes before any drilling and is yours to keep whether or not a well is ever completed.
While held
Delay rentals
If the producer holds the lease without drilling, the lease can require annual rental payments to keep it active. It is a way of being paid for the wait.
In production
Production royalties
Once a well is producing, you receive a set percentage of the revenue from what it sells, paid free of the drilling and operating costs the operator carries.
Over the life
Depletion and the decline curve
Wells produce hardest early and taper over time along a decline curve. As the reserve is produced, owners may be able to claim a depletion allowance against that income; how it applies depends on your situation, so confirm it with your tax advisor. Production, and the income with it, is finite, which is the central risk to understand.
Reference
The mineral & royalty
glossary.
67 plain-English definitions for the terms you will run into on a division order, a lease, or a royalty statement. A quick reference whether you are buying, selling, or just making sense of what you own.
- Royalty Interest
- An interest in an oil and gas lease giving the owner the right to receive a portion of the production from the leased acreage, or the proceeds of its sale, generally without paying any portion of the cost of drilling or operating the wells.
- Division Order
- A schedule of owners and their decimal ownership share in the revenues from a well's production.
- Held By Production (HBP)
- A mineral lease provision that extends the right to operate a lease for as long as the property produces a minimum quantity of oil and gas.
- Overriding Royalty Interest (ORRI)
- A royalty in excess of the royalty provided in the oil and gas lease, usually added during an intervening assignment. ORRIs are created out of the working interest and do not affect mineral owners. They are often reserved by or assigned to a geologist, landman, or brokerage.
Why owners hold them
What makes minerals
worth owning.
Income that tracks production
Royalties pay for as long as the well produces, which in strong fields can run for many years. The amount moves with production and commodity prices, so it is income tied to a real, depleting asset rather than a fixed schedule.
The depletion allowance
Because the underlying reserve is being used up, mineral and royalty owners may be able to deduct a portion of that income through a depletion allowance. How it applies depends on your circumstances, so confirm the treatment with your tax advisor.
Like-kind 1031 eligibility
Mineral and royalty interests are deeded real property, which can make them eligible as like-kind replacement property in a 1031 exchange. That gives real-estate sellers a way to defer capital gains, subject to IRS rules and your tax advisor’s guidance.
How a 1031 exchange worksExposure to development upside
Development is never guaranteed. When operators do drill more wells and prove up additional reserves on acreage you own, the value of the interest can rise, just as it can fall with prices and production.
Two ways forward
Looking to invest, or
looking to sell?
Invest in minerals & royalties
If you want producing royalty income as part of a portfolio, Heritage acquires and structures these positions for accredited investors and walks you through the details in the prospectus.
Explore investingSell your minerals & royalties
If you already own minerals or royalties and want to convert them to capital, Heritage is an active buyer and can evaluate your interest and make a direct offer.
Sell your interestInvestor voices
What investor partners say.
“I've worked with Don and his team at Heritage Land & Minerals on over five mineral properties. I've continued investing with them and have enjoyed how easy and straightforward they have made the process.”
Names abbreviated at investor request. Past performance is not indicative of future results.
Confidential Prospectus
Heritage Land & Minerals
Prospectus
Current offerings, tax considerations, and a mineral acquisition overview.
- Current mineral and royalty offerings
- 1031 exchange eligibility overview
- Tax considerations overview
- State-by-state field data
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Risk disclosure
Mineral and royalty investments involve substantial risk, including the loss of principal. Distributions depend on production volumes, commodity prices, operator performance, and other factors outside Heritage's control, and are not guaranteed. Mineral and royalty interests are illiquid; there is no public market for them, and resale, including its price and timing, is not guaranteed. Heritage Land & Minerals offerings are available only to accredited investors and only by means of a confidential prospectus that contains the complete risk disclosure. This website is not an offer to sell or a solicitation of an offer to buy any security.