Courtland Kilpatrick

This transcript has been edited for better readability: Henry Harrison Podcast — Entrepreneurs, Business & Finance Guest: Courtland Kilpatrick Henry Harrison I want to welcome Courtland Kilpatrick to the show today. This is Entrepreneurs, Business and Finance. Courtland is a good friend of mine and has become one over the last five years. We met through business about five years ago. Thank you for coming on the show. Courtland Kilpatrick Yeah, it’s crazy that it’s already been five years. That doesn’t seem possible. Henry Harrison I know. I think we’ve both aged a little in those five years. Courtland Kilpatrick No kidding. I think I had just had my first son when you and I met, so that really puts it in perspective. It’s definitely been five years or more. Henry Harrison It’s been a good five years. There are always challenges, but it’s been a good five years. We work together, and we first met through business. You’re an expert in many things related to oil and gas, but especially in mineral properties and mineral rights. I think that was a deliberate choice because you really like that space. Drilling has a lot of moving parts, a lot of contractors, and a lot of complexity. Royalties are not simple, but they don’t require quite as much of that operational infrastructure. So let me start with this: what first interested you in mineral properties? Courtland Kilpatrick A little background first: I didn’t start out in minerals. I started out in title, running title. What I saw in mineral properties was something very similar to what I like about real estate. It’s owning a tangible asset — something that someone is willing to pay you for simply because you own it. When I first started running title and taking leases, I was working for a company at the time — Chesapeake — and that’s really where my interest started. I would go to these individuals on behalf of Chesapeake, and I realized that simply because they owned the minerals under a particular piece of property, I could show up with what was basically a blank check in hand to negotiate just for the opportunity for Chesapeake to look for oil and gas under their land. I thought that was fascinating. These people didn’t have to do anything at all, and yet they could receive a $20,000, $30,000, or even $130,000 check with zero liability on their part. They were basically in a position where a Fortune 500 company had to come to them and say, “You own something that I need, and I have to pay you for it.” I found that really compelling. Henry Harrison You’ve always had a passion for it. My dad used to say, “Pick work that you enjoy,” and it’s obvious you do. It’s interesting every day. There’s never a dull moment. Let’s talk about the basic structure of how it works. Chesapeake is a major publicly traded company. When they want to drill wells, they have to lease property. But they lease it from someone who owns the property. That lease gives the company the right to drill, and the person who owns what we call the mineral rights or mineral properties — the underground ownership — gets paid a royalty if oil and gas are produced. It wouldn’t make sense for a big company to come drill on your property and not compensate you. Just like someone would pay to ranch on your property or farm your land, they pay to produce what’s underground. Can you explain a little about how mineral rights can be severed from surface ownership, and how that ownership is recorded? Courtland Kilpatrick Sure. For simplicity, there are basically two categories we can talk about: surface ownership and mineral ownership. If someone owns what we might call “full title” or “real property,” that generally means they own both the surface and the minerals below it, all the way to the center of the earth. Those two things can be separated in several different ways, but let’s simplify it. Let’s say Joe Blow’s grandfather bought a family farm 100 years ago. Joe now owns the farm, which includes both the surface and the minerals under it. Now Joe decides he needs cash. The farm is producing some income, but someone comes along and says, “I’ll pay you a certain amount per acre for the minerals under your land.” Joe agrees, signs the deal, and from that point forward Joe still owns the farm above the surface, but the buyer now owns the minerals below the surface. That buyer now has the right to negotiate with an oil and gas company for leases and royalties. So the surface ownership and the mineral ownership are now severed. That’s really the basic structure. One thing that makes this especially interesting is that, as best I understand it, the United States is essentially the only country where individuals can truly own the minerals beneath their land in this way. Henry Harrison That’s right. The history, as I understand it, is that Rockefeller may have had something to do with that becoming established, because once oil drilling started, it didn’t make sense to force people to sell the entire ranch or homeplace just because someone wanted what was underground. So people began selling or leasing the underground portion separately. And that leads to title, because title is not easy in this field. There aren’t title companies that can just tell you instantly who owns everything the way people might assume. That’s part of why you became such an expert — you were doing this work for a huge company. Now you’ve been doing it for years on your own. So how do you actually find out who owns the minerals? How are they recorded, and how do you know when someone really owns what they say they own? Courtland Kilpatrick That’s where things get complicated. Every state is different. Texas is different from Oklahoma, Oklahoma is different from West Virginia, and West Virginia is different from Louisiana. Each state has its own rules, systems, and level of recordkeeping. For simplicity, let’s focus on Oklahoma, since that’s one of the states we specialize in. Think of every piece of land in the United States as one giant jigsaw puzzle. At one point, all of it belonged to the federal government. Later, parcels were granted or transferred to individuals. In Oklahoma, a lot of those original grants involved Native American tribes. So if you go all the way back to what’s called the patent, you can often trace the property from when the federal government or the state granted it to a particular person. You might literally see a patent that says the United States or the State of Oklahoma granted 160 acres to someone. From that point on, there is a chain of ownership. Over time, that chain gets more and more complicated. The original 160 acres may have been owned by one person, but by 2024 that same mineral estate might be owned by 350 different people. Why? Because every time there is a marriage, a divorce, a death, a will, a transfer, a deed, a lease, or an affidavit of heirship, that affects title. To figure out ownership, you have to go to the county courthouse — or in some cases a title company that houses the records — and you have to hire a landman to run the title from patent forward. That landman creates what’s called a runsheet, which is basically a list of every document that has affected that property from the original patent to the present day. Then from that runsheet, someone creates a mineral ownership report, which tells you who owns what interest today. So you may end up with a report that says Joe Blow owns 22.3 net mineral acres at a 1/8 royalty, and at that point you know what you’re dealing with. That’s title in a nutshell. Henry Harrison And when you say “run title,” that sounds simple, but it really isn’t. It takes a lot of expertise to know how to build that runsheet, interpret those documents, and be sure the ownership is correct. Sometimes people think they own something and don’t. Sometimes they do own it and don’t even know they own it. There’s a lot of confusion out there. Courtland Kilpatrick There really is. There are all kinds of clauses and legal rules that can affect ownership. There are mother hubbard clauses, favored nations clauses, and rules like the Duhig rule, where someone can’t legally sell more than they own. So yes, the basic concept of a title report is simple, but actually producing it and interpreting it is extremely difficult. Henry Harrison And while more records are online now, I don’t know of any state where you can just sit at your computer and go all the way back to the beginning without ever needing courthouse work. Ultimately, at least in places like Oklahoma and Texas, someone still has to go into the county records and verify things the hard way. And there are some interesting stories around that, especially when land rushes happen and people are literally waiting in line to get access to records first. Courtland Kilpatrick Absolutely. The worst I ever saw was in West Virginia. I waited in line for three days, and the company had to put me up in a hotel just to keep my place. There were only three microfilm machines in the courthouse, and if there were 50 people waiting, you just had to wait your turn until the people ahead of you were done. So yes, those stories are very real. Henry Harrison There’s never a dull moment in the business. And of course, there’s opportunity there for people who own minerals and may be ready to sell — maybe because of divorce, death, estate planning, or just because they want to cash in on some of the royalties they own. The royalty itself is a wonderful thing because, at least in Oklahoma, you don’t even pay property taxes on the minerals in the same way surface owners do. You simply receive a percentage of revenue. Before we wrap up, though, I want to touch on something else I really respect about you. When you were in college at Texas Christian University in Fort Worth, you were inspired to enlist in the military. You served in Iraq, in a real war, with real danger. You came back home, finished college, and then started your more traditional business career. You’ve shared that while you were fortunate in many ways, you did suffer hearing loss from an explosion. Would you talk a little about that experience and how you got there? Courtland Kilpatrick Sure. I probably wouldn’t have joined without a couple of patriots that I knew and really admired. Here’s the short version. I had originally planned to go to TCU, but I ended up getting a full-ride scholarship to school in Tulsa. My parents said, “Look, college is expensive. Why don’t you take the scholarship for two years, and then we’ll help you finish wherever you want to go.” So I did that, spent time in Oklahoma, and then transferred to TCU. My first semester at TCU was when 9/11 happened, and obviously that affected everything in the country. My family had military background. My father was in the Navy, my half-brother was a Marine, and I had a nephew who was a Marine. I always respected the military, but I didn’t necessarily think it was my path. Then my senior year rolled around, and I saw what tuition was going to cost. I wasn’t sure what I wanted to do, so I took a semester off and spent some time driving around with my girlfriend at the time. Eventually I wound up back at the family ranch, working out there. One day I came in a little earlier than normal and happened to see a general on television talking about how every generation has its challenges, and how my generation wasn’t stepping up. He was saying there weren’t enough people joining. That really got to me. I laid in bed that night thinking, “I’m able-bodied. I’m not in school right now. I don’t have a family depending on me.” So I decided to go talk to a recruiter the next day. When I got there, there was an older World War II veteran in the office. He talked to me about his life, what the military had given him, and the positive things that came from service. He was honest about the negatives too. Long story short, I joined. I went home and told my parents, and they looked at me like I had a horn growing out of my forehead. I eventually deployed to Iraq. We rolled into Baghdad on Christmas Eve of 2005, stayed there for a year, and came back just before Christmas of 2006. We lost some people in our company, including our captain, Captain James Funkhouser, and our interpreter. As for me personally, I got hit by a Soviet-style mortar explosion that detonated about 20 feet to my left. That took out about 40 to 45 percent of the hearing in my left ear. Beyond that, though, I was fortunate compared to a lot of others. There were terrible things, because war always involves terrible things, but overall it was a positive experience for me in terms of discipline, maturity, and things I probably lacked before. So that’s the 10,000-foot military story. Henry Harrison That is a fantastic 10,000-foot story, and I think it’s a very inspiring note to end on. Thank you very much for taking time out of your business day to come on the show. Courtland Kilpatrick Absolutely. I appreciate it.