Background. A Texas banker owned land and minerals in an emerging oil area. His bank managed mineral assets for some of its customers and he was well acquainted with the oil and gas industry and the increased activity in his region.
Challenge. Knowing that the oil industry is cyclical by nature, he wished to take advantage of the rise in activity and sell a portion of his minerals to diversify his personal asset portfolio. However, he was concerned about “leaving too much on the table” and wanted to protect his upside if well activity proved successful.
Solution. Carrollton and the seller agreed on the market price of minerals in his area. Carrollton then structured an agreement whereby seller would (1) receive 75% of the market price at closing and (2) could earn performance payments based upon future well activity that could boost his effective sales price to 150% of market.
The Seller accepted the risk of future development to potentially increase his ultimate sales price, thus protecting more of the upside. Carrollton acquired minerals below market price with the obligation to pay more if and when the minerals proved to be productive.