There is another type of working interest trust that I overlooked. In this situation, the working interest owner wants to cash out so they take perhaps 65% of the working interest (maybe 50% of the revenue interest) and put it in a "royalty trust" that is sold off to the public. The remaining 35% of the working interest goes to a group that actually operates the wells. The 50% paid to the "royalty trust" does not bear any part of the expenses. The group that operates the wells gets 35% of the gross and pays 100% of the costs. The revenue from the well breaks down this way: royalty owners - 20%; royalty trust - 50%, operating group - 30%. This looks like a real royalty trust because the trust pays none of the expenses.
But the problem remains of who has the incentive to drill new wells. The royalty owners can't. The royalty trust can't. So, the only party that can is the operating group. Picture this: they are going to pay 100% of the cost of a new well and get 30% of the revenue. Why would anyone in their right mind do this? The truth is that no one in their right mind will pay 100% of the costs for 30% of the grease. The result is that few, if any, new wells get drilled. The effect of no new wells is that reserves decline, production declines and revenue declines. When you buy a "royalty trust" of this type, you are indeed buying a wasting asset.
SBR is different because it owns landowners royalty. In a situation where SBR is one of the royalty owners, the revenue breakdown is like this: royalty owners (of which SBR is one) - 20-25%, working interest owners - 75-80%. Who has the incentive to drill new wells. The royalty owners can't but the working interest owners get 75-80% of the grease. Will people drill new wells for 75-80% of the gross revenue? Let me rephase that: how many new wells are drilled where the working interest owners get 75-80% of the gross? Answer: all of them. So, in SBR's situation, there will be new wells drilled so long as price incentives and tax policy makes it smart to do so.
I don't know how many operators there are on leases where SBR owns royalty interests but it is pretty large. On the other hand, I don't know what difference it makes. If it is economic to drill new wells or rework old ones, whoever is the operator will do it.
Remember that SBR has producing royalty interests in over 1,000,000 acres. I remember somewhere that SBR received 11,000 checks a month.
Thank you for the explanation of the difference in these structures for royalty and working interests. I have nothing to add except to say I recall a royalty run by the same folks as sbr, bru, did you know bru? BRU was listed on nyse.
I observed its price go from $20 per unit to $7 per unit over a five year period and then it was dissolved and the assets sold to another entity, perhaps sjt bought bru's interests. BRU did pay handsome distributions but basically it was a breakeven proposition at best for the long time unit holders. BRU may have been a case which you described as being without incentive under the set up to develop the resource field further. Now under SJT's management perhaps those limitations were lifted and the old field became newly productive. I could not understand why it drifted like it did, dissolve and then reform itself under the sjt banner except now for your explanation of incentive structures lacking for the entity. Thank you for the insights on topic.