FORT WORTH, Texas—Legendary oil man J. Paul Getty had it right when he observed that “The meek shall inherit the earth, but not its mineral rights.” Getty surely would note that minerals have growing importance in the oil and gas development chain, according to George Soulis, vice president and business development manager for Oil & Gas Clearinghouse.

The business has turned and mineral holdings have become even more valuable thanks to the nature of unconventional plays, Soulis said May 21 in the opening keynote for a pre-conference minerals workshop, part of Hart Energy’s DUG Permian Basin conference and exhibition.

“Minerals have changed as the industry has moved from formation exploration to prospect exploitation,” he explained. Predictable “exploration plans are available through permit documents” so nowadays “the type curve is more important than a structure or trap. Today, location is paramount.”

That trend makes the yield vehicles more predictable—and more valuable to investors, Soulis added.

But mineral interest firms have to do their homework to confirm the value of what they offer, he cautioned. Minerals also offer “an alternate investment in a low rate-of-return environment” that has lingered for several years, while allowing potential securitization.

Good rock, reservoir characteristics and basin specifics make minerals very attractive to investors, he said. “Each basin has specific metrics” that determine the ultimate value of the holdings and it’s important for minerals firms to do their homework on areas where they seek to buy interests from property owners.

C.H. “Scott” Rees III, chairman and CEO of the consulting firm Netherland, Sewell & Associates Inc., also emphasized the importance of research in his presentation to the workshop.

“The industry typically values properties based on discounted-risked cash-flow analysis,” Rees said. “As such, the primary indices are internal rate of return (IRR), payout, and multiples of cash flow.” It’s important to study the detailed check stub sent out by producers for detailed information on well-by-well production trends—and to catch errors, he advised. Then, matching check stubs to public production numbers is important “but time consuming” work that can spot “huge differences” that can mean thousands of dollars in misplaced payments.

Evaluating undeveloped—or under developed—acreage can be tricky, but Rees suggested “following the capital” to spot drilling trends. “And don’t forget about the infrastructure. What midstream investments are there to take production out?” he added.

Wells with great test results may have to wait for months to go on production if gathering and processing assets aren’t readily available in the area.

A roundtable discussion that included James Elder, co-CEO at Momentum Minerals LP; Nick Varel, president and CEO of Wing Resources LLC; and Will Cullen, vice president of LongPoint Minerals LLC; ranged widely over the experiences, observations and challenges of minerals buyers.

“DUCs [drilled but uncompleted wells] are a real issue in the Permian,” cautioned Varel. Official estimates project 3,000 DUCs in the basin “but it may be 4,000,” he added, due to a shortage of fracking crews. That lack of drilling and production information can skew important data important to minerals holders.

When asked how small-time mineral investors can compete with large firms that have in-house staffs of geologists and engineers, Cullen advised “it’s going to be hard to move in.” Varel suggest small players “should not put too much money in one place.” Diversity of investments could prove important if positions in one play don’t work out.

Elder noted the red-hot Permian “still needs some delineation” and smaller players should be aware of that. He also noted “landowners have become more savvy” and will drive harder bargains after employing consultants to get a better picture of what their mineral rights might be worth.

But there can be special situations where a property owner might ready to deal, Elder added.

“Maybe there are personal circumstances, maybe there are debts, maybe there’s a kid getting ready for college” that make a property owner more flexible on terms, he said.

The workshop’s final presentation featured a roundtable discussion on financial structures that can make a proposed minerals deal work for the best. John Greer, a partner with Latham & Watkins LLP; Henry May III, vice president with Post Oak Energy Capital LP; and Mike Allen, president and founder of Providence Energy Corp., discussed such nuances of dealmaking as the use of Internal Revenue Service (IRS) Section 1031 exchanges, which can postpone tax payments, and how best to hold minerals—in a corporation, a limited liability company or a trust.

Actually, there are few 1031 exchanges in the minerals space, said May. Greer agreed, noting the tight time frame the IRS allows is difficult to meet in a complex transaction that includes selling one property and then buying comparable assets. But whatever strategy investors employ, “it’s important to buy ahead of the drillbit” to obtain the greatest value from minerals May added.

Allen noted the rule-of-thumb metrics for pricing minerals deals “are more complex now” than in the past. In this century’s first decade, a standard benchmark was to price an offer to a royalty owner based on six years’ cash flow, or three years’ cash flow for non-operated properties.

As to the best ownership method, Greer said “a lot of it depends on the management team.” A trust can avoid going public, he noted. May added that minerals typically are held for a long time since the investment is assumed to have value in perpetuity. However, investors still must consider an ownership structure that will allow for a potential exit at a future date.

Paul Hart can be reached at pdhart@hartenergy.com.