How to Earn Passive Royalties from Oil & Gas with Mineral Rights. Jace Graham w/ Rising Phoenix
If you’ve ever wondered how you can generate passive “mailbox money” from the energy sector, or if you’re looking for creative 1031 exchange opportunities, this episode is for you. Jace Graham, a fourth-generation oil & gas expert and CEO and Founder of Rising Phoenix Capital joins us to explain how mineral rights work and how his team acquires off-market mineral rights.
Top 3 takeaways:
Mineral Rights = Passive “Mailbox Money”
By owning mineral rights, investors can earn regular royalty payments from oil and gas production—without the risks or hassles of drilling themselves. It’s a truly passive income stream that’s less “hands-on” than many real estate or drilling deals.
Unique & Direct Acquisition Approach
Rising Phoenix Capital stands out by doing serious ground work—they source mineral rights directly from owners, avoiding auctions and middlemen. This potentially allows for better pricing and value for their investors.
Great 1031 Exchange Option
Since mineral rights are considered real estate, investors can use 1031 exchanges to defer taxes by transitioning from investment property into mineral rights. This opens the door for retiring landlords or anyone looking to reposition their portfolio while keeping more money compounding for them
Links:
Read more at www.risingphoenix.com
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Introduction to the Unconventional Investor Podcast
Welcome to the Unconventional Investor Podcast. I'm your host, Michelle Moses, certified financial planner, licensed realtor, and founder of ME Financial. If you're an accredited investor feeling overwhelmed by managing your portfolio and looking for alternative investment strategies that go beyond the traditional stock market, you're in the right place.
Let's head into today's episode so you can start taking control of your financial future. Hello everyone and welcome to the podcast. Thank you so much for tuning in today.
Exploring Oil and Gas Investments
We are going to be talking about another oil and gas investment, but it is going to be geared more towards mineral rights and royalties.
So if you've ever explored any oil and gas there are different ways to invest. You can invest in the actual drilling. There's many ways, but you can invest in the actual drilling. And then there's other things called mineral, right? And we will get into what those are. But if you are looking for things like mailbox money or a 10 31 exchange on something that you like, a investment property that you have owned, this might be a great opportunity for you to learn about what you can do with those funds.
To do a 10 31 exchange so that you do not have to pay the taxes. Or again, as I said, maybe you are going into retirement and you just want some monthly or quarterly mailbox money. So this might be a great investment for you.
Guest Introduction: Jace Graham
So today to talk about this, we have Jace Graham, and he is the CEO and founder of.
Phoenix Rising Capital, and he is a fourth generation oil and gas professional who has spent the last two decades identifying, acquiring and managing more than a hundred million in operated and mineral royalty assets. So thank you so much for joining us, Jace. Hey, thanks Michelle. Really excited to be here on the podcast.
I've listened to a few of the episodes and think you do a great job of really opening up some of the unique alternative investments that are out there for credit investors to look at investing in. So yeah, thank you. Thank you very much. I'm excited to have you on because we were just at a conference a couple weeks ago.
It's a specialty oil and gas conference and you really. Stood out to me because of what you do is very different. So we're going to get into why it's very different and why I agreed to have you on the podcast because you guys are, there's I can't even tell you how many hundreds of funds that are out there.
And you just, some of them, especially when it comes to like multifamily, they just run together. And there are a lot of oil and gas ones out there, but you really. Stand out with your mineral rights and what you do.
Understanding Mineral Rights
And so can you explain a little bit what mineral rights are and why they are attractive to investors?
Absolutely. So I think we take it back. The oil and gas mineral rights are part of the bundles of sticks that go along with the real estate. So in its essence, it is real estate. And when the first president patented deeded over that first track of land, back in say, 19 or 1840s or 1820s.
The owner of that land owned from the center of the earth basically to, they say the zenith in the sky, all rights, all title, everything. And over time, obviously, they started developing oil and gas minerals. Started actually up in the northeast in Pennsylvania, but down in the Permian Basin in West Texas.
And now, throughout the United States, minerals started trading. You could sell your real estate, your surface, and you could reserve the mineral estate, or you could reserve 50% of the mineral estate and convey 50% to the next owner of the surface. And so what happens over time is these minerals get fractionalized out.
The Acquisition Process
And what our firm does is we go after and we reach out directly to these mineral owners across the United States to try to have a conversation with them about. Entertaining an offer to sell their minerals. So a lot of our opportunities that we go after and we acquire are off market. These are not auctions, these are not marketed deals that are out there.
These are off market where our team, our internal team is picking up the phone and having conversations with mineral owners throughout the United States. So I think that's, it's not easy. There's a, there, it's a heavy ground game component and something that we're, we do very well. That we're known for.
And so by doing so, we're able to buy further down without kind of the middlemen, if you will, at a reduced purchase price that then we're able to pass that back to our investors in returns. And you were talking at the conference about your, the process that you guys go through, you identify an area, right?
And then you target that area based upon the production, how old the production is and all that. Exactly. Yeah. Okay. I've got a in-house petroleum engineer. He's trained to look at these areas and look at recent activity and what operators are doing what and development.
And then we focus our acquisition team into those areas where there is recent development and production and all that stuff that's going on, permits that are happening. To, I talked to mineral owners specifically in those geographic regions. Okay. Yeah. And that's why I thought you guys were so different is you don't hear.
People say that they're actually going door to door and asking people to buy their mineral rights. And so you guys as just a brief ex, I know he's talking about to the sky and down below mineral rights, you basically own what is below from the ground. Down. Yeah. And when they're drilling oil or natural gas they go down so many feet and then they might leave and go somewhere else, and then it might become more feasible to come back and go deeper. So there might be tons of minerals underneath there that haven't been explored, that are just deeper than what the well is, or where they've drilled right now.
And so when you own the mineral rights. You actually, you own everything that's down below. But you don't have to drill, you don't need to do anything. You could just own it and not allow people to drill on it. But obviously this is what people wanna do. You want to own these rights so that you are allowing other people to drill on, quote unquote, your land, and then they pay you royalties.
So when we're saying royalties, that's what we're talking about is you own the land, they're drilling on it, and you are getting mailbox money. You're getting. Royalties. So a lot of times you're gonna hear us say mailbox money a lot in this podcast, and that's what we're talking about. You're just getting your money mailed to you from them drilling and selling the oil, and then it just comes to you because you happen to own the rights to that land to drill.
Am I missing anything, Jace? No, you did a great job of explaining.
Investment Strategies and Returns
I think just to step back, what happens like an operator like ExxonMobil will come in and lease your minerals? Okay, so they're, they've done a geological study. They say, Hey, we think there's oil or natural gas there, or a combination of the two.
And so they'll lease that mineral owner, and typically they'll do it for a three year, five year term where they've got three to five years to actually drill that first well, and then they'll pay a little bonus on the front end, say, a thousand bucks an acre. But really where the revenue comes in is the royalty income from the royalty rate.
Typically 20 to 25% of everything that comes outta the ground gets. I passed on to the royalty owner. Okay. And so that's what we focus on, is that royalty owner gets that passive income. And you're right, it's very quiet. I think that's why a lot of our investors like this asset, because it's not noisy.
You're right. It shows up every month. We get a check every month from the operator. We verify to make sure we're being paid properly, that the decimals of interest are correct to our ownership. That's important. And then we get a little monthly check and. Turn around and distribute that back out to our investors.
And I think it's really, I love it because it's not well known. Honestly, this was not really well known 10 years ago. This was not super popular. I don't it, it wasn't out there. It was just drilling. Yeah. And now there are different ways. I think just like the derivative market, now there's options and there's futures, it's the same way when it comes to oil, just because I also think it's because it costs so much. To drill. It costs so much to do all of these and to set everything up that you have to break it up and we're human. We're gonna figure out how to make money in all different ways. Exactly. Yeah. Yeah. So you really stood out to me basically, because you guys are doing the hard work. They, you guys are doing the grunt work of going door to mom and pop to families, that maybe have owned these things for a hundred years and, their kids don't even live in the state anymore.
So I think this is really important. And Chase, I wanna go back to your experience too because I think your experience is really important. And I, the, I have been studying this for about 10 years. And I haven't really felt like it came together until the last couple years of really understanding how all of this goes.
And what I have seen in the industry is the people that really understand and know what they're doing are people that grew up in it. And you grew up in it. Your dad did this. And you were probably being explained to this right, when you were four or five years old, how things were working.
Am I, is that how it was working? You're exactly right. I remember, going out to Big Lake, Texas in the Permian Basin and sitting on a rig with my father when I was four or five. And in fact, I just took my two boys. Jet and Bow that are nine and 11. We just drove back through Big Lake on our way up to our place in Colorado, and I was able to point out some things that, that my dad showed me when I was their age.
Oh, wow. Some rigs and stuff. So we're. We're trading the fifth generation in the Graham family on what oil and gas is all about. But yeah, I grew up in and around it, I learned on the shoulder of a giant. My father was a tremendous operator, did things ethically in the right way and raised capital privately from investors.
And so I got to see everything from actual, the drilling of wells to the leasing of the land before you drill to mineral funds that we started putting together. And so when I formed Rising Phoenix Capital. Mineral funds is the mineral asset class is what I really gravitated towards.
And so that's kinda what we built our portfolios around. Yeah, and I did too. I remember when I first got into it, I was, when they said mineral rights, I was like that right there, that is the easy, 'cause when you're drilling you don't know. Now I think the technology, they know if there's oil there, they didn't always know if there was a lot of oil there and if it was successful.
This, yeah. The minerals, the drilling deals. There's benefits to investing in those. You get, big tax write-offs from the intangible drilling costs they call the IDCs and that's great. There's also that dry hole risk. It's out there. It's inherent.
And then on the other end of the spectrum where we play. In the minerals is that it's, it's very passive from an operating standpoint. We're not drilling wells, we're just buying that asset one time from the mineral owner. And what we like to look at, you talked about the different le la layers, right?
Like a layer cake, if you will. Like the Permian Basin has many different zones in depth that you can go in and develop horizontally into, but it'd be like buying a one story apartment. That you paid for and then an operator drills another well, and another well, and you're adding a second story and a third story, and you're getting the rent from the second and third story, but you didn't have to pay for it.
And so that's what we really like about owning minerals. Long term too is just that serendipity, that upside when operators do come in and they start to figure out how to develop some of these additional zones that may not, they may not be economical today, but they might be tomorrow. Much improves.
Yeah. Yeah. Then they develop those and that's what we, that's when it just really gets fun. Yeah. And that's what's happened, right?
The Future of Oil and Gas
I mean, I think we've become more efficient, not only with our cars, if you look at how much barrel, how much use we get for a barrel of oil in the United States, but also it has become more efficient in the way that people are drilling.
And the way that they can get to the oil. I essentially, yeah, the United States is energy independent. We are now an exporter of oil and now natural gas. Yeah, natural gas is qu look natural gas as well. So usually was constrained by pipeline. We're now exporting LNG, liquified natural gas overseas.
Oil and gas is not going anywhere, anytime. No, and I think that's what we've realized. I think if you saw my history, you'd be really surprised that I have you on the podcast because I started the green Chamber of Commerce here in Phoenix, all about, being nice to the environment, and I was all about, solar and everything. But it, I just realized over the years, it's just, it's gotta be a mix of everything. There's just you, I think, I agree, know it's totally agree with you. Just, I don't think we're helping the earth, but at the same time we have. Ways that we wanna live and that we are living and we need to support that in some way.
Absolutely it just is what it is. Okay, so can we go into a little bit, and I know we're gonna go over time on this one and I'm okay with that 'cause I really want people to understand this is so when you are buying these mineral rights, you're targeting it and you already know that there is a driller that wants to drill or they're already drilling there.
Is that the, what's going on? Absolutely. Yeah. That's one of the main fundamentals that we're looking at in our funds is there existing production, is the area well-defined? Meaning there's production all over and you can point to what you think production will do in the future. And so that's the main criteria that we look at.
Okay. So we're not buying what they call white space. Ahead of the bit. Ahead of the bit. These are producing already. Yeah, producing 'cause our investor base, and myself included, we want yield day one. And so that's what we, that's what we look for. And then once we find that area and we find the operators that we like, that's when we deploy our sales team into those areas to start having conversations with the hundreds of mineral owners that may fit in that area.
And so do you find, are you, because I know when you drill it, you know the oil is coming out fast, right? But then let's say it's a year or two in, are you looking for the new ones or are you looking for the ones that. I'm not, I, not I, you guys all have terminology for this. You're looking for the ones, great question.
No, you're right. 'Cause the production on an oil, it's a declining asset, right? There's a decline curve. So a lot of it comes out, what we call flush production in the beginning, and then it tapers out and then levels out and goes flat a. What we try to do with our portfolio, and this is what Adam Lapu, our petroleum engineer is just really good at, is finding this blend so that we can have kind of a flat yield to where we're buying some stable cash flow.
Today we're buying some with some additional kind of upside, some meat on the bone, if you will. That's what our buyers like. And then we got some that may just be a little bit of that, that initial flush production. And so what we're trying to do is build a portfolio that has these blended assets that kind of have a average, a flat, and we're pushing 15 to 20% cash on cash based on a historical That's wonderful.
Okay. That sounds great. And I'm, it's a smart way to do it. Obviously yes. Blending it would be the, a smart way to do it so that you yeah.
Investment Opportunities with Phoenix Rising Capital
Or you're not taking too much risk and so I, so let's talk about your funds and the way, 'cause you've got we have two tiers of way you can do it, the reason that you can do the 10 31 alluding back to where I started in the podcast, you guys is. That you're owning land, so you would be selling an investment property, something that you own for business, and you could 10 31 it into mineral rights and and because you're actually owning the land, so it's real estate for real estate.
And then you, so you have that prong, right? Jace, of that you can 10 31 into some mineral rights. And then what is the other prong that you guys have? The other option, the other thing we do and again, really what our bread and butter is our high yield mineral funds. And with the 10 31 exchange, you're.
Directly investing into maybe, a handful of assets or wells, in a fund and in a portfolio. You're in, hundreds of wells diversified across multiple basins. And that's where we've really found a niche for. 'cause like you said I mean there's really not a lot of this type of product out there.
Just Google invest in oil and gas minerals and you're just not gonna see a lot of opportunities to do that from, accredited investors. That's what we look at we're looking for good cash flow, or the return profile that we're targeting. We want to have a 15 to 20% kind of cash on cash yield during the hold of the fund, and then look to divest the fund in a, call it a three to five year window for one and a half to two to one moic or multiple on invested capital.
So you invest a hundred grand. We wanna get you 150 to 200 grand back and our current track record is on par to show that. And it's been underwritten by Mick who was at the conference we were at not too long ago. And how do you exit? What's your, how do you sell it to other producers or. You there's various ways.
And so right now, we're taking our port portfolio and we're actually finding best buyers based on asset class and where they're buying. So you got big private equity funds that are in the market now that have come in within the last, call it 10 years or so that just they want to buy as much as they can and they're not gonna do this ground game.
They gotta put, a hundred million, 500 million to work and no, they want people like you doing that work. Exactly. So we're happy to sell to 'em. Uhhuh part, another way to do it, there's some public auctions that you can go onto, like energy net or oil and gas clearing house, where we can list these at a strike price that works for us.
But also our, we just the industry's, it's a small pond and so we know probably best buyers for each asset class or asset that we own. And so we reach out and it's, again, it's very personable, just like we are with our sellers, with our buyers of being in the business and knowing what they're looking for and being able to deliver that to 'em.
Okay. I think that sounds wonderful. And so then if they did a 10 31 and just did mineral rights, the idea is that you would own that for the long term until you wanted. Exactly. Exactly. So what we have, we've got clients that do 10 30 ones with us as well. So you can't 10 31 into a fund, you have to have that direct title like you mentioned.
And so we hold their hands, show them what we have in inventory that could work for a 10 31 exchange. And if they say, Hey, that works, let's do this, then we can help facilitate that whole transaction. And then we hope to earn your business on the mineral management side in that world because there is some kind of uniqueness with, division orders that get issued from an operator.
When a new well comes online, you want someone to verify some of that. Stuff. And then the check stubs come in and they're sometimes complicated to understand from a layman's per perspective. Oh yes. Very. And so we do all that and send out, monthly reports and just manage and just make it super simple.
And so that's something we also do as well. Okay. And as the mineral rights, to me, this is something that I own and I'm just going to hopefully own it forever and give it to my kids. That's the way I think of it. Great strategy is that great IRA is can about this, right? Yeah. Yeah.
To own, long term minerals. It, it never hurts again, that serendipity, that upside that maybe we can't point to right now, but we know it's out there. We know that we're seeing operators develop d different zones maybe. Five miles away is gonna happen. And timing shows us that it works.
So I love we own minerals, obviously long term. We also have some that we're gonna be turning shorter term, so we play on both. Both, yeah. So you probably analyze yours a lot closer than mine is more I guess I would get to the point. I'm just more of, I'm just gonna buy some every year.
I, can't go wrong here. Keep and just keep going with it. I think on the, where we bring value on the mineral management side is we also can see indicators on activity that's gonna be happening in and around your portfolio. Or the asset that you acquired. And we will reach out and say, Hey, they just filed six permits just to the north of where.
Your asset is, and oh by the way, there's a rig there. All of a sudden the value goes up on it. Maybe a good time to maybe reach out and see what the market would be willing to pay if you're interested in, in, in selling or divesting. Oh, so it'd be a good time to sell and then maybe buy somewhere else.
Exactly. Yeah. Or do something else if with your money, if you want to, sometimes it's just time. So why are people actually selling their mineral rights? Is it just run the gamut of a thousand different reasons? It's, it seems to me they would just own it forever, but sometimes maybe they just need money.
Yeah. Yeah. It varies. There, there's various life events that occur. There's the good and the bad, right? There's, people need money, they want to cash out. We see a lot of times when people get a little bit older, they just they want to consolidate and make it easier on their spouse or their heirs.
And just. Cash out and take that money and do something else with it. We work with, companies that may be selling down. They need cash to go drill. We worked with a family that had 10, hes, and there was a elderly gentleman and he basically got 'em all together and just said, now's a good time to consolidate all this.
And for various reasons. What we really try to do is understand the why and help with the why and try to provide as much value to our sellers as we can. Whether that's providing an engineering report on how we value the minerals to, so they understand, again, pop in the hood to say, here's how we value, here's what we're seeing, here's how we're underwriting.
And providing that back to our sellers as a value add. Something that we just, we try to, leave everybody with a little bit of value. Yeah, absolutely. My whole philosophy is we can all win. We can all make money together. We don't need to be ripping people off to No. Be doing anything.
Yeah. Yeah, and that was another thing I liked about the conference. You just seemed real honest and just, I'm not looking for everybody. I'm just looking for my people. I know. I just say that. Yeah. I'm just looking for my people. Yeah. And I think that's a great attitude, especially when it's a relationship business like this.
And a lot of it is relationship business. Yeah, you really stood out in that. And then also you, I don't know if you've listened to all these, I have litmus tests for funds and Phoenix Rising has skin in the game. They put their own money into every single fund that they do so that they're interests are aligned with the investors.
Absolute. And as you guys know, that is my number one litmus test for any alternative investment. And they do this. And then Jason says. Tons of experience. He is been doing this his whole life. Again, that's why I agreed to have you on the podcast. So listen, I really appreciate it's an honor to be here and no we're, it's hard work that what we do.
We're not trying to be the biggest fund out there. We know what we do. We know how much we can deploy in a year, and we stay very focused on that so that we can turn around and deliver the best returns back to our investor base. And I think that's how you get the best returns because when you get into these.
Super large, anything it was, you're talking about oil and gas, you're talking about multifamily. When they get really large, the returns tend to go down. There's just more hands in the pot. There's more people working it, it is, there's just more fees. So I tend to be just with my style of investing and for my clients is medium to small.
Just because I don't always. Like the tried and true huge, it's safe, but you also just don't earn as much. So I tend to lean towards the medium, which is where you fall. Okay. Am I missing anything of the highlights of Phoenix Rising or anything?
Yeah. Rising Phoenix. No, I think you, I think. I think you I think you, you did a great job. You nailed just about everything. Sorry. I always say Phoenix. 'Cause I live in Phoenix, so I Yeah. No, that, that's the name of the soccer team, right? Yeah. Yeah. And so you guys, if you want to go to their website that, and check out the fund, it is La Plata Peak Fund, LA.
Pl A TA peak fund.com. And I, and Rising Phoenix does have a website. It's Rising phoenix.com if you wanted to check that out too. But if you just wanna do the fund, it's la plata peak fund.com. And Jace, thank you so much for being on. I really enjoyed our conversation. And I, I hope that something good comes of this, and listeners, I hope that you found some, found this very interesting and maybe it'll fit in your portfolio.
I appreciate the time. Michelle. Thank you for having, yeah, thank you, Jace. Have a good day, everybody. I hope you got something out of this.
Conclusion and Contact Information
Thank you for listening to the Unconventional Investor Podcast. I hope you feel more confident in how you can grow your wealth using the strategies I shared in this episode.
If you're ready to take the next step in diversifying your portfolio outside the stock market with alternative investments, head to me financial.net/contact us to book a 15 minute consult call with me. Let's discuss how we can work together to achieve your financial goals. Until then, I'll see you on the next episode.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.