While borrowing against oil and gas royalties isn’t widely discussed among mineral owners, it represents an important financing option for those who receive regular royalty payments. This practice, known as Reserve Based Lending (RBL), has been common in the oil and gas industry for decades but is now becoming more accessible to large royalty owners. Understanding how these loans work, their requirements, and their risks can help mineral owners make informed decisions about leveraging their royalty income without having to sell their valuable mineral interests. We also discuss other options for borrowing against modest royalty income, but that may come with counterparty risk to consider.
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Why Borrow Against Royalties?
For many mineral and royalty owners, their regular income from oil and gas production represents a valuable asset – but what happens when they need access to capital? While selling mineral rights is one option, there’s another possibility that many owners might not know about: borrowing against their royalty income.
Known as Reserve Based Lending (RBL) in the industry, this financing method allows mineral owners to access capital while retaining ownership of their interests. However, not all royalty owners will qualify, and the requirements can be substantial.
The Big Picture: How These Loans Work
Major banks and some regional institutions will consider lending against royalty income, but they typically require significant monthly revenues – usually $10,000 or more per month to qualify for even a modest loan of $250,000. These lenders will typically offer between 25 to 36 times the monthly cash flow, using conservative price estimates to ensure the loan remains viable even if energy prices decline.
For larger mineral owners, traditional banks offer several advantages. The loans are relatively straightforward, offer flexible repayment terms, and allow owners to retain control of their interests. However, these loans come with regular reassessments and may require personal guarantees.
Options for Smaller Royalty Owners
For those receiving less than $10,000 monthly in royalties, some specialized lenders offer smaller loans, though these come with additional requirements and risks. These lenders typically require royalty payments to be directed to a trustee during the loan period, who then handles repayment and eventually returns control to the owner. While these loans may be easier to qualify for, they often carry higher interest rates and require careful consideration of the lender’s reputation and track record.
Understanding the Risks
The main risks of royalty-based lending revolve around production and price fluctuations. Oil and gas prices can be volatile, and unexpected production issues could impact an owner’s ability to repay. Banks protect themselves by using conservative price estimates and requiring diversification – preferring to lend against interests in multiple wells rather than a single source of production. Tip: did you know that the bank price decks are available for you to use in understanding what the market things about future commodity prices – see links below for more information.
Making the Right Choice
Before pursuing a royalty-based loan, owners should carefully consider their options. For those receiving substantial monthly income, working with established banks – particularly regional institutions familiar with energy lending – often provides the best terms. These banks understand the industry and can offer more favorable rates, though they’ll require thorough documentation and credit checks.
For smaller royalty owners facing urgent needs, specialized lenders might provide a solution, but careful due diligence is essential. Investigating the lender’s history, checking references, and understanding all terms and requirements can help avoid potential issues down the road.
Ultimately, royalty-based lending provides an alternative to selling mineral interests outright, allowing owners to access capital while maintaining their long-term asset ownership. However, like any financial decision, it requires careful consideration of the risks, requirements, and alternatives before moving forward.
Whether exploring traditional bank loans or specialized lending options, mineral owners should consult with financial and legal advisors to ensure they understand all implications and choose the option that best fits their specific situation and needs.
Conclusion
The key takeaway? While royalty-based lending isn’t for everyone, understanding these options helps mineral owners make informed decisions about managing their valuable assets while maintaining long-term ownership for future generations.
Note: This information should not be considered legal or financial advice. Consult with appropriate professionals regarding your specific situation.
Resources Mentioned in this Episode
- BOK Financial Price Deck Information
- BOK Financial Energy Price Deck March 2024
- Haynes Boone Energy Bank Price Deck Survey
- Reserve-Based Lending & Insurance
- MRP 5: What to Know About Selling Minerals (and 5 Red Flags to Watch For)
- MRP 70: 5 Tips if You Are Thinking About Selling Mineral Rights
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