INVESTING IN OIL & GAS ROYALTIES The Complete Guide to a Uniquely American Experience

Transcription

1 INVESTING IN OIL & GAS ROYALTIES The Complete Guide to a Uniquely American Experience

2 WELCOME TO YOUR ROYALTY REVENUE FUTURE Oil and gas royalties have been a uniquely American investment opportunity for over 100 years, but the playing field has changed dramatically over the past decade, with revolutionary advancements in exploration, drilling and production technology unlocking massive reserves of hydrocarbons buried tightly within shale formations. It s a simple formula: The more drilling there is, the more royalties there are to invest in. There has never been a more fortunate time to invest in American oil and gas royalties. Not only have we unlocked new reserves, but we are getting better at enhanced oil recovery (EOR) techniques, which extend the life of wells - and royalties - over time. Investing in the American oil and gas boom can be a daunting adventure for investors with no prior experience in the industry, however investing in royalties makes owning your piece of the boom easy by removing the risk of additional financial responsibility for drilling and producing. A solid royalties investment strategy can ensure preservation of wealth for generations. More and more Americans have begun to recognize royalties as a type of commodity-- something to hold, something to sell, something to pass down from generation to generation - making the market for them increasingly valuable. Patriot Royalties acquires high-quality portfolios of oil and gas royalties, then packages these deeded interests for accredited investors. In this complete guide to investing in royalties, our staff of landmen, geoscientists, geologists, geophysicists and petroleum engineers pool their knowledge to take you through the detailed advantages of investing in royalties, and help you avoid the potential pitfalls. Oil & Gas Royalty Benefits Cash payments from gross production vs. net No costs No liabilities Low-risk, high yields 15% tax advantage Current income Hard-asset diversification Wealth preservation for generations

3 OIL & GAS ROYALTIES Why Now? The American oil and gas boom, the shale technology revolution, and changing demographics promising increased future demand make this the best time in a century to invest in royalties. America is pumping the most oil in over 3 decades, adding more than 3 million barrels of daily supply since Since then, oil production in the U.S. has increased from 5 million barrels per day to over 9 million barrels per day in 2014,1 with early, conservative predictions that output could reach 9.6 million barrels per day by 2019, if not before, according to the Energy Information Administration (EIA). 2 Note: In November, 2014, U.S. total crude oil production reached 9.06 million barrels per day, a 3-decade milestone. The American Oil Boom In the immediate term, the North American oil boom, which has unlocked massive shale plays in the U.S. and the tar sands in Canada, is the most profound megatrend affecting all aspects of the oil and gas industry. There has not been a more consequential energy breakthrough than this in decades. Spawned by revolutionary advancements in drilling and extraction technology, the boom has silenced theories that Peak Oil was upon us and that it was game-over for the domestic energy production. Virtually overnight, horizontal drilling, combined with hydraulic fracturing to get oil and gas out of shale formations, changed global energy dynamics forever. Now it s all about improving on these revolutionary technologies to get even more oil and gas out of shale. Year after year, production continues to increase, as companies find new ways to improve performance and cut costs. Major new U.S. plays such as the Eagle Ford, Haynesville, Bakken, and Barnett are soaring, and should continue to do so. At the same time, new technology has revived the sleeping giant that is the Permian Basin in West Texas. Here, horizontal drilling is taking off to the point that it is now STABILITY LONGEVITY DIVERSIFICATION GROWTH YIELD EASE

4 Figure MT-52. Total U.S. crude oil production in three cases, million bpd History Projections High Oil & Gas Resource Reference High Oil & Gas Resource overtaking conventional vertical drilling, and is positioning this basin to once again be America s biggest c rude oil producer. Formations of tight oil embedded in shale or dense sandstone are no longer out of our reach; instead, they are literally transforming the economy. 3 A combination of new horizontal drilling and hydraulic fracturing, or fracking, has now rendered the United States the world s biggest oil producer, overtaking Saudi Arabia and Russia. For 2014, daily U.S. production of crude oil and natural gas liquids has exceeded 11 million barrels. According to the EIA, U.S. crude oil production alone averaged approximately 9 million barrels per day in November 2014, representing the highest output since monitoring began in Production is projected to continue to meet global demand, which is expected to increase by more than one-third from 87 million barrels per day in 2010 to 119 million barrels per day by The next five years are expected to be the biggest portion of the boom, presuming new technologies don t unlock even more potential. The EIA s prediction that oil and condensate output will rise to almost 10 million barrels per day by 2019 Key Predictions Continued development of tight oil resources in the Bakken, Eagle Ford and Permian Basin shale formations will spur growth in onshore crude oil production in the lower 48 states through Tight oil production could increase to a peak of 4.8MMbbl/d from 2018 through 2021 and then decline to about 3.2MMbbl/d in From 2013 through 2040, cumulative crude oil production from CO2-EOR project alone could reach 5.2 billion barrels. As we near 2040 the EIA predicts that the pace of exploration and production activity could again quicken with large new development projects associated predominately with the production phase of deep-water and ultradeepwater discoveries in the Gulf of Mexico. means we re almost back to the highs of 1970 s. We re on track to achieving this level far faster than the government predictions originally forecast. 3

5 LETS GET TECHNICAL A typical property at Patriot Royalties is a $20-million offering divided into 100 units at $200,000 per unit. This $20-million offering would consist of a large number of wells that have significant mothly cash flows. Returns typically start at about 10%. As a royalties investor, you purchase a piece of that cash flow, of which each unit is a proportion. There will be a number of investors in that same $20-million offering, and Patriot Royalties aggregates a large number of producing wells and future drilling locations that are already being operated by large oil & gas companies. The cash flow is distributed to all of the investors, every month. These unit investments start out with an approximately 10% annualized yield when Patriot Royalties puts them into the marketplace. The key here is that the offerings have the potential to grow with the new wells, and in some cases have jumped from 10% to as high as 20% on new growth. ENHANCED OIL RECOVERY (EOR) Enhanced oil recovery (EOR) technology increases the amount of oil that can be extracted from a well after its initial stages of production have run their course. During the first phase of production, or primary recovery, only around 10% of a reservoir s original oil-in-place is extracted. During secondary recovery through the injection of water or gas into a well to flush more oil out, another 20-40% can be extracted. The tertiary phase can increase the prospects of extraction up to 60%. 4 There are three main commercially successful EOR techniques: Gas injection, which uses carbon dioxide (CO2), natural gas, or nitrogen to expand in the reservoir to push oil to the wellbore. This process accounts for around 60% of U.S. EOR production. Thermal recovery, which typically involves the injection of steam to improve flow. This process accounts for around 40% of U.S. EOR production. Chemical injection, which uses polymers to increase the effectiveness of waterfloods or to lower the surface tension that prevents oil from moving through the reservoir. This process accounts for around 1% of U.S. EOR production. HTC Energy s EOR Process 4

6 The EIA predicts that crude oil production using carbon dioxide-enhanced oil recovery (CO2-EOR) will increase after 2017 to 0.7 million barrels per day by 2040 due to rising oil prices and as output from more profitable tight oil deposits begins declining, while affordable anthropogenic sources of CO2 become available. From 2013 through 2040, cumulative crude oil production from CO2-EOR projects could total 5.2 billion barrels. 5 The global EOR market was valued at $38.1 billion in 2012 and is expected to soar to $516.7 billion by It is expected to show a CAGR of 26.7% from 2013 to Analysts at Wood Mackenzie predict that additional volumes from EOR slated to come on stream after 2020 could boost tight oil production in the U.S. by 25%, or up to an additional 3 million barrels per day by The bottom line here is that new technology continues to spur this boom, which is still only in its relative infancy. There are wells in the Permian Basin that have produced since the 1920 s and are still producing today because of secondary and tertiary recovery methods. Similarly, this type of production will happen in these new areas, such as the Bakken and the Eagle Ford shales. THE DEMOGRAPHICS OF DEMAND Demographics influence energy demand more than any other factor. Though it is the least-visible megatrend affecting the oil and gas industry, demographics shape the future of demand. Over the next decade and a half, the U.S. National Intelligence Council predicts that the demographic arc of instability will narrow, and 60% of the world s population will live in urbanized areas. Predictions are that the demand for energy is projected to increase by 50% due to the population increase and changing consumption patterns related to an expanding global middle class. global population will reach approximately 8.3 billion people by 2030 up from 7.1 billion in Demand for food, water and energy will increase exponentially in tandem with an increase in the global population. Along with this, the Billion-by-2023-Transparency-Market-Research.html 7

7 UNDERSTANDING ROYALTIES Royalties are one of the oldest and simplest financial instruments around, and the American oil boom has ushered them back to center stage as private citizens seek to stake their claim on the shale revolution. In order to understand how royalties work, you must first understand what mineral rights are and how they may differ from state to state in a uniquely American tradition. Quite simply, if you own the subsurface rights to oil and gas you have the right to receive royalty payments based on the sale of oil and gas from the wells on the property in question. Mineral Rights In the United States, like nowhere else in the world, private individuals can own the minerals contained in the subsurface of their land and have the right to extract those resources. Some states allow for the separation of surface (land) and subsurface (minerals) ownership. Others do not. 10 Property owners who hold both surface rights and mineral rights have complete private ownership, which is known as a fee simple estate. The owner has the right to sell, lease, gift or bequest any of these rights to another party. Selling the subsurface minerals allows an owner to maintain control over the land while at the same time making money on oil and gas without footing the bill for drilling, development and extraction. In most cases, oil and gas producers will lease (rather than purchase) subsurface mineral rights, giving them the right to conduct testing and determine the potential for extraction and production, before committing longer-term. In this scenario, companies typically pay the property owner a fixed amount of money at the time of the lease signing, also referred to as a signing bonus. When the lease expires, the property reverts to the original owner. If production is undertaken on the leased property, the owner is entitled to a royalty payment, the amount of which is specified in the lease agreement. If you own the mineral rights underneath your land, those are called mineral interests. If a company comes and drills a well on your mineral interest, it turns that well into a royalty interest pdf 10

8 STATE VARIATIONS IN MINERAL RIGHTS Generally speaking states rich in oil & gas will have owenership rights split into surface rights and subsurface rights, with former subservient to the latter. This system is used in major shale states such as Texas, Oklahoma, New Mexico, Pennsyvania, Colorado, & Louisana. In these states, the rights to a single parcel or property can be owned by two separate parties. This can include a fractional ownership, in which the surface owner also owns a portion of the subsurface mineral rights. There are also case in which the federal government owns and manages subsurface oil & gas resources under privately owned land. Overall, the federal government owns approximately 31% of subsurface mineral resources in the USA, much of which is leased to private oil & gas companies, with the governement receiving royalties. This amounts to 57.2 million acres of land, 90% of which is in Montana, Wyoming, New Mexico, Colorado, Arizona, California, North Dakota & Idaho. WHAT ARE ROYALTIES? Royalties refer to ownership of a portion of oil and gas produced, without responsibility for the costs of development and production, which are the sole responsibility of the oil and gas operator. 11 Royalties are Cash Payments for the production of oil and natural gas, coal, and other minerals. Royalty owners hold the Real Property Interest to any mineral value produced from their property. Typically, royalties are paid to the individual mineral owners and generally range between 12% and 25%! Significantly, mineral owners are paid off the GROSS production, not the NET! While mineral rights, basic royalties, royalty interests and overriding royalty interests are all similar concepts, there are some subtle differences in terms of executive rights. Owning mineral rights gives you slightly more control in terms of the right to enter into lease agreements with oil2030 up from 7.1 billion in Demand for food, water and energy will BASIC ROYALTY: A basic royalty is a contractual arrangement providing a mineral interest that gives the owner a right to a fractional share of production or proceeds from the production of oil and gas. There are no obligations here to pay for exploration, developmental or operations costs, with the exception of production taxes. ROYALTY INTEREST: A royalty interest is an interest in an oil and gas property through a royalty contract. OVERRIDING ROYALTY INTEREST (ORRI): An ORRI is a royalty interest in addition to the basic royalty. It is created out of the working interest and is limited in duration to the life of the mineral lease. It provides a fractional, undivided interest or right of participation in the oil or gas. 11

9 increase exponentially in tandem with an increase in the global population. Along with this, the and gas companies. Owning royalties, which is more common, is easier and less complex and gives you a fixed royalty rate, but offers no control over an oil and gas lease. Both are considered real assets from the perspective of the Internal Revenue Service (IRS). ORRIs, or Overriding Royalty Interests differ from both in that they are tied to the existence of a lease, which essentially means that you may receive oil and gas royalties as long as the lease remains in effect. This is potentially risky, but can be equally rewarding. If you buy an ORRI on a highly prospective property that is not producing yet, and the lease happens to expire before production is achieved, then you lose your investment. 12 The key to successful ORRI investment is diversification across a wider geographical area that is prospective for future oil and gas production. ORRIs - or overrides, as they are most commonly referred to in the industry - are typically assigned to entities who have reserved an interest in the properties in question and are often sold as a means of raising capital for drilling and development. OIL & GAS ON THE MOVE Royalties sharing for Cross-boundary Flows Because oil and gas can move through porous sandstone space or opening from fractures, oil & gas from neighboring lands could end up in your well, or vice versa. For this reason some states have created regulations to govern the fair share of oil & gas royalties. In such states, oil companies are typically required to specify the method for sharing oil & gas royalties among adjacent properties at the same time of filling for a drilling permit. The process is called unitization and regulations vary from state to state and from shale play to shale play. HOW ARE ROYALTIES CALCULATED? Royalties are based on a percentage of the gross oil and gas production from the property and are free from all costs related to exploration and production, with the exception of taxes. Royalties are generally approximately 1/8 of production, or on average, 12.5% of production, depending on the specific terms of agreement. Some state laws stipulate that owners be paid a minimum royalty often 1/8th. For high-value properties, royalty rates can be negotiated upwards. When production commences, royalty owners will typically find that their payments are significantly higher than what they received as a signing bonus. YIELD = Gross Production x Price x Interest Yield: gross profits paid to you as a royalty owner Production: amount of oil & gas produced from the well head Price: market price received for oil & gas produced Interest: your undivided interest 12

10 Royalty payments are made by the oil and gas company that is operating the wells and leasing the rights. A royalty clause in the lease specifies the amount to be paid and can include other terms and conditions. In rarer cases, royalties can be paid in kind, with owners receiving oil or gas, and then marketing it themselves. This requires a very solid understanding of the market, and most royalty owners choose to receive payment in cash. 13 The royalty clause is generally established at the well. This means that the costs of exploration, production and marketing are all assumed by the oil and gas company operating the lease, but other expenses that may be incurred after production can be carried either by the company, the royalty owner, or a combination of both. All of this is clearly defined in the royalty clause, and for royalty investors this is the crucial part of any deal. A royalty clause may state that the royalty is fixed in the pipeline, at the point of sale, or at some alternative delivery point - all of which will affect the calculation of royalty payments and additional expenses deducted. These are costs that will be deducted after oil and gas has been extracted at the well. In other words, review your royalty clause closely: You may be subject to the cost of moving oil or gas from the well to the refinery and storage tanks. TAXES ON ROYALTIES Royalty payments are considered ordinary income in terms of federal and state taxes. This income is reported on Schedule E of Form 1040, while the oil company reports royalty payments to royalty owners on Form 1099 MISC. Royalties are subject to the new 2013 Net Investment Income Tax (NIIT) of 3.8%, which is levied on individuals with unearned income and adjusted gross income of more than $200,000, or $250,000 for joint filers. The advantage here is that royalty income can be offset by allowable depletion and other expenses, which could include legal fees. 14 While the IRS allows royalty investors to deduct any expenses incurred, the most significant deduction is for depletion. Oil and gas wells do not produce forever, and production tapers off after its initial peak. Risk here is lowered substantially by the depletion deduction, which allows royalty owners to recover losses by writing off a portion of their income each year. There are two ways to calculate this depletion. It can be calculated accurately based on well reserves versus production, or the IRS allows you to claim a 15% depletion deduction straight off the gross income. In addition, if your royalty clause contains postproduction expenses, such as transportation fees, these costs can also be deducted, along with accounting and legal expenses

11 ENERGY EXCHANGE LIKE KIND OPPORTUNITIES For 1031 Exchange Investors, a substitute for Ownership of Real Estate is fractional interest in Oil and Gas Production, which qualifies as like kind under Section 1031 of the IRS Code. Ownership is structured through a fractional interest similar to tenant-in-common ownership in real estate Interestingly, 1031 Exchange Investors are turning to Energy Exchange Properties, which are already-producing oil and gas assets, as an alternative to more traditional Exchanging into oil and gas producing properties by purchasing Mineral Interests, Royalty Interests or Overriding Royalty Interests allows an investor to defer capital gains taxes while providing the opportunity for portfolio diversification through exposure to the booming energy sector. Based on years of relationships and oil and gas industry contacts, Patriot Royalties is a consistent source for quality, energy-based replacement property for real estate investors seeking to complete a 1031 Exchange. real estate options. ACCREDITED INVESTORS ONLY Only accredited investors may purchase royalties. Regulation D, Rule 501 of the Securities Act of 1933 defines an accredited investor as: a) Individual net worth over $1 million (or joint if married), excluding value of primary residence; OR b) Individual income over $200,000 in each of the previous two years ($300,000 if married), and a reasonable expectation of the same income level in the current year. Businesses and organizations have different restrictions. An accredited investor can also be: a) A charitable organization, corporation, or partnership with over $5 million in assets, OR b) A business in which all equity owners are accredited investors, OR c) A bank, insurance company, registered investment company, small business investment company, or business development company, OR d) A trust with assets over $5 million, not formed to acquire the securities offered.

12 BUYING ROYALTIES The shale revolution has created a much more dynamic arena for the buying and selling of oil and gas royalties. Private individuals can buy royalties and mineral rights directly from individual landowners and from companies specializing in the creation and sale of diversified royalty packages. Buying Royalties from Private Owners While buying royalties from private owners can be slightly more complicated in terms of finding the right opportunities and attempting to put together a diversified portfolio, the return on investment can still be impressive. Specialized Royalties Companies The growing trend is for specialized royalty companies to acquire royalties and mineral rights and re-package them for investors who are seeking a more diversified portfolio, less complexity, and longer-term potential. Patriot Royalties carefully assembles properties for investors, combining wells that are already producing with undeveloped acreage that has high production potential and proven enhanced oil recovery (EOR) potential for future increases in production. These packages also focus heavily on areas where operators are actively putting money into new drilling. These investments are for the lifetime of a well, while any new wells drilled on that same property in the future could result in additional royalty income. Typical returns on investment start at around 10%, but in some cases can reach an amazing 50%. EVALUATING PROSPECTS: The Big Picture There is no magical formula for investing in royalties. This is a highly dynamic environment that requires constant re-evaluation. The best companies in the business recognize this and are always evaluating current and prospective investments and making adjustments as market dynamics change and as commodity prices fluctuate. There is one rule of thumb here that is cliché for the simple reason that it has been both the bane and saving grace of investors for centuries: If it looks too good to be true, it probably is. For royalty investing - which can sometimes offer up to a 50% return in only a couple of years - it is perhaps more difficult to determine whether it s too good to be true. There is the potential here for two extreme scenarios unbelievably astronomical returns or oil and gas wells that end up dry - and everything in between. The most important thing is for investors to enter the royalties game with realistic expectations.

13 Where is the Oil & Gas? Today s market focuses on liquids-rich basin over natural gas or low-liquids basins and plays. That said, if you can find royalties in a natural gas-prone are at the right price, it can still be financially rewarding. How much and for how long have the wells been producing? If the wells in question are not yet producing, time is of the essence, but in this scenario royalty payments can only be estimated and not assured. How many years of reserves are left in the ground? To determine the longevity of your investment, the simplest way is to divide total reserves by annual roduction. This will provide a conservative estimate that does not take into consideratoin any potential declines in production. (Proven reserves are the amount of oil & gas that can be economically extracted). The safest investment in oil and gas is through royalties with operations that are already active and producing. These investments can offer you a stream of monthly revenue for decades. Patriot Royalties has royalty interests that are already producing wells that you are purchasing. We also have large blocks of undeveloped acreage that large, publicly traded companies will pursue, turning them into royalty interests for an even bigger payback. The big picture here is impressive: With the Eagle Ford, Bakken, Barnett, Fayetteville, Marcellus, Horn River, and revived Permian Basin shale plays, the U.S. is in the midst of an oil and gas boom that could still be resounding generations from now, thanks in large part to new technologies that have helped the drill bit reach previously inaccessible reserves. And as more wells are explored with new techniques, expect even more innovations and improvements to lead to even greater accessibility of formerly off-limits reserves. The Keys to Success Becoming a successful stakeholder in the American oil boom requires asking three key questions: Where, when, and for how long? Know Your Basin Today s market has shifted more towards liquids-rich production over natural gas. Patriot Royalties follows all markets, acquiring and retaining interest in the basins that offer the higher liquids-rich potential developments. More specifically, Patriot Royalties focuses on diversification, targeting oil in areas with associated natural gas as a byproduct or added-value component of developing oil plays. Evaluating the basins behind the American boom is essential, and, from a royalties perspective over the longterm, it is hard to beat the Bakken, Eagle Ford and Niobrara shale plays in terms of opportunity and value. While Texas Permian Basin is an astonishing giant that is being revived, it is also one of the more challenging places to compete in terms of royalties because it has been around for 100 years and today s assets are generally overvalued.

14 The Bakken: This shale play is located in Eastern Montana and Western North Dakota, reaching into parts of Saskatchewan and Manitoba, and represents one of the biggest U.S. oil developments in four decades. Wells here can run around 10,000 feet deep. Eagle Ford: This shale play runs 400 miles from Southwest Texas to East Texas and is a fracking haven that has as much gas as it does oil. The Permian: The Permian Basin is a massive Texasbased shale play that includes a host of other plays within its confines, including the Cline, Avalon, Wolfcamp, Bone Spring, Spraberry, and the Yeso formations. The Anadarko- Woodford Play: This is a crude and liquids play in West- Central Oklahoma, running through the Anadarko Basin. Depths range from around 11,500 feet to 14,500 feet. Granite Wash: This is a multiple-play shale in the Texas- Oklahoma Panhandle, with stacked formations reaching 15,000 feet. The Niobrara: This shale play is located in the Rocky Mountains, overlapping Colorado, Wyoming, Kansas, and Nebraska. Wells run slightly over 6,000 feet. The Bakken, Eagle Ford and the Permian are each producing more than 1 million barrels of oil per day, with the Permian leading the pack at 1.8 million barrels a day, according to the EIA. While the Bakken has quadrupled North Dakota s oil and gas production, Texas remains the biggest producer of oil in the United States, with some 11.5 billion barrel crude oil deposits that can be developed, or fully one-third of all known U.S. reserves, with up to 75-billion barrels of total potential according to the EIA. Today, Texas oil accounts for nearly 36% of all U.S. oil production. In 2013 alone, the impact of the Eagle Ford shale on the south Texas economy was more than $87 billion. This includes direct economic impact of oil and gas exploration, indirect economic activity (created from suppliers building warehouses in the area, for example), workers spending their paychecks within the local economy, vast support personnel, and much more. The economic impact of the Eagle Ford on this area was $61 billion in 2012, and by 2023 the projection is a staggering $137 billion. LEVELS OF RISK: Wildcat, Developmental & Producing Wells For the savvier investor, royalties can be acquired for wildcat wells, and the purchase prices will be lower due to the fact that there is not yet a revenue stream and the risk is higher. At the other end of the spectrum are royalties for wells that are already in development with a high probability of production, or wells that are already producing. The purchase prices here will be higher, reflecting the substantially lower risk. Always keep in mind that royalties are depleting assets. It is important to understand that the initial years of production will be the most lucrative, while later years will see a declining yield. Along with this comes diminished returns.

15 As always, the higher the risk, the higher the potential reward. The best way to mitigate some of the risk while maximizing potential reward is to diversify your royalties portfolio with a mixture of producing wells, exploratory wells in proven areas, and wildcat wells. The value of royalty investments more than any other energy investment is based on commodity prices. For Patriot Royalties, the ideal is a diversified royalties package that includes: A good well count for wells that are already producing. Undeveloped, high-potential wells in the same area. An operator that is actively putting money into drilling new wells and has the necessary permits to continue development. Areas that are good for secondary and enhanced oil recovery (EOR), which would promise increased future production at no expense to royalty owners. Key Questions Every Royalties Investor Should Ask How can the title and assurance of ownership be verified? Are the royalties or minerals subject to property and/or state taxation? What are the advantages of the location of the royalties or mineral rights? Are the wells already producing, and what is the expected shelf-life? Are developmental wells in a highly prospective area with a good production track record? Are the wells being operated by a reputable company?

16 DUE DILIGENCE IS ESSENTIAL Investing in royalties requires you to continually do your homework, and to invest with a company that continually does its homework as well. Patriot Royalties offers some critical tips for making the most of your investment dollars: Investigate the operator s success rate: Compare the number of wells the operator has drilled to the number of wells that are actually producing; then compare these figures to county and state averages. Examine the operator s track record: Have earlier projects been successful? Choose royalties where operators are innovative: Follow advanced technology for the best investments. Avoiding Scams The changing nature of royalty investing against the exciting backdrop of the shale revolution has raised the specter of scams, which are growing both in number and sophistication. While most oil and gas investment opportunities are legitimate in their marketing, and are responsible in their operations, there will always be unscrupulous promoters attempting to take advantage of investors with fraudulent opportunities in this complex sector. Before entering into any royalty investment scenario, the Better Business Bureau urges you to ask for the company s security statement of exemption. Case Study In 2014, investors lost an estimated $4 million on royalties for wells on a farm in Kentucky that hadn t produced oil in decades. The company that sold the royalties was based in Nashville and guaranteed the wells would yield at least 75 barrels per day, along with fraudulently claiming they were already producing barrels per day. The scam was a comprehensive one involving fake names and shell companies, along with professional videos and marketing material. It was enough to keep investors from doing real due diligence. 16 The bottom line: There is no Holy Grail there are great opportunities for investing in the American oil boom through royalties, but only for those who do their due diligence. Patriot Royalties builds portfolios of oil and gas royalties for accredited investors, institutional investors, foundations and endowments, family offices and asset managers. We provide value through transparency and ongoing, active management. Transparency is achieved by utilizing independent, thirdparty engineering, administration and treasury management as well as independent annual audits. The management team actively monitors the portfolios and will make opportunistic adjustments based on the royalty marketplace and/or the energy investment landscape. 16

17 CONTACT US TODAY Your Royalty Revenue Future Awaits 1910 Pacific Ave, 12th Floor, Suite Dallas, Texas (469) royalties.patriotenergy.com