Why royalty and mineral interests could be a good fit for your portfolio

 In Insights

Oil and gas royalty and mineral investments are an attractive investment opportunity for investors seeking a steady stream of income, an inflation hedge, and a way to minimize stock market volatility.

How royalties work

A royalty is a monetary compensation paid to the owner of an asset (often a piece of property or pipeline that generates revenue from the production or transportation of crude oil or natural gas). The owner may lease the asset to be used by another party, and is paid a percentage of the net revenues of the asset based on the revenue it generates. Royalty interests can also allow investors to have a percentage ownership of future production or revenues.

Owning a natural gas or oil royalty interest is similar to having part-ownership of a natural gas or oil well without incurring the burden of operational costs such as staff, management and overhead. Most of the profits generated from the interests go to investors. The cash flow from the interests is tied to the commodity that is produced or transported. Because of this, the large oil reserves and other assets become quite valuable in an inflationary environment, providing a hedge for investors.

The private market collects the most revenues and the best way to invest

An estimated $80 billion in revenue flows to mineral interest owners alone on an annual basis. Today, private investors capture a meaningful portion of these flows. The U.S. market is valued at $590 billion with roughly 2 percent of this is in publicly traded companies.

Attesting to the strength and positive outlook of the market, the top six publicly traded companies in the mineral space have a market capitalization of $10 billion dollars and is estimated to grow to $15 Billion by 2020 by some industry sources.

What’s more, the mineral sector outpaced other areas of the market by a meaningful margin, including negative performance in the oil and gas industry when using the example of a four and half month window during 2018.

The case for royalty and mineral interests

Compared to stocks, royalties provide a stable, fairly low-risk alternative for investors. Instead of owning a share of the company stock that fluctuates daily, investors are guaranteed a monthly payment based on the company’s revenue. As we highlighted earlier, royalty and mineral interest owners do not have the burden of sharing the costs of ownership of the company with their investors. These benefits make royalties and mineral interest an attractive investment option.

Compared to stocks, these interests provide a stable, fairly low-risk alternative for income investors. Instead of owning a share of the company’s stock that fluctuates daily, investors are guaranteed a monthly payment based on the property’s revenue. This benefit, plus their hedging power, has led to a rise in the popularity like royalty and mineral interest owners.

The Strategic Pipeline Income Fund as an alternative investment

The Strategic Pipeline Income Fund invests in landowner royalties, in addition to other energy infrastructure areas, in the rapidly growing areas of the Bakken Shale, Permian Basin, and Eagle Ford Shale. The fund has purchase agreements with exclusive pipeline brokers who provide steady royalties from leading suppliers. You can read about some of our recent investments here.

If you’re an accredited investor, seeking an attractive tax-advantaged dividend yield along with a diversification play for your portfolio, then download our Investment Summary to learn about the fund.

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