Why Sell YourMineral Rights?
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Why Do People Sell Their Mineral Rights?
Sometimes life just happens, and people find themselves having to make tough financial decisions. Thankfully, mineral owners can sell their minerals for nearly immediate cash. There is a long history of selling mineral rights when hard times hit.
Sometimes having a lump sum of cash (imagine 10K - 100K) can drastically improve the quality of your life. This money could be used to buy a car, buy a house, remodel your kitchen, or give your daughter's wedding.
Oil and gas are finite resources, and all wells eventually run dry. Decline curves are steep (especially in shale plays), leaving mineral owners with less and less royalty income each month. Some mineral owners prefer to sell while the well or wells are still producing reasonable quantities of oil and gas.
As climate change becomes a more relevant and serious issue, many people feel guilty about receiving ongoing oil and gas royalties. A lot of people want to do their part to reduce their carbon footprint and lessen their contribution to climate change. That might be selling your minerals and buying solar panels.
Some people have no heirs, or more commonly, their heirs are not interested in owning mineral rights. Mineral owners who own a lot of minerals are also less likely to want to burden their heirs with the extensive time and energy required to properly manage the mineral rights.
Mineral owners with multiple interests are sometimes advised to sell part of their portfolio in order to diversify their assets (both as a whole and the type of minerals they own).
It can be burdensome and annoying to pay annual ad valorem (property) taxes and file state income taxes solely for the minimal royalties that you receive. This is especially true when you are not emotionally tied to the land your family once owned.
1. Need Money Now
During the great depression, many landowners sold their minerals in order to keep their land. While most Americans are no longer farmers, a great number of jobs have been displaced in the last decade.
The rise of automation, frequent natural disasters, and the growing gap between the "haves" and the "have nots" has made it especially difficult for many Americans to make ends meet.
Thankfully, mineral owners have the ability to sell their mineral rights for a lump sum, potentially saving themselves from financial ruin.
Some mineral buyers, such as Blue Mesa Minerals, can close a deal in as little as 10 days. Watch out for buyers who need 60 days to close a deal. Some complex title searches can take a while, but often, these companies are fishing for a bigger company in order to flip your minerals.
2. Improve Your Lifestyle
- Buy a car and have reliable transportation to work.
- Buy the luxury car you've always wanted.
- Buy a new house or a vacation/retirement home.
- Travel and explore the world.
- Remodel your kitchen or bathroom (or both).
- Buy land.
- Start a business.
- Give your daughter her dream wedding.
3. Declining Revenue
Almost all wells exhibit a steep decline curve, producing a majority of the oil and gas during the first couple of years.
A lot of mineral owners are surprised and disappointed to see their royalty payments decline by an average of 70% in the first year.
After their initial decline, vertical wells can produce low quantities for multiple decades, while horizontal fracked wells typically have shorter lives. As we get better at pulling hydrocarbons out of the ground in massive quantities, the decline curves get steeper, and the economic life of the well is shortened.
The value of mineral rights is related to the revenue, so mineral owners tend to want to sell while the revenue is still high.
Rule of Thumb:
- Vertical wells typically sell for 48 - 60 months revenue
- Horizontal wells typically sell for 36 months revenue
4. Don't Want to Support Fossil Fuels
More and more mineral owners, especially younger generations, feel uncomfortable receiving monthly royalty payments for one of the largest contributors to climate change.
To resolve this cognitive dissonance, some mineral owners choose to sell their mineral rights.
Some use the money to buy solar panels for their houses while others invest or spend the money in other ways.
5. No Heirs (Or Heirs Are Not Interested)
- Have no heirs.
- Heirs do not want to invest the time and energy into learning to property manage minerals.
- Heirs are not interested or do not want to benefit from fossil fuels financially.
- Don't want heirs to fight over the mineral ownership.
- Know their heirs would prefer cash.
- Knowledge and experience (new mineral owners often refer to inheriting minerals as "drinking from a firehose".
- Organization skills
- Monthly revenue check analysis
- Oil and gas lease negotiation (often requiring an attorney)
- State ad valorem (or property) tax payments
- State income tax filing
- Division order review and signing
- More complex federal income taxes
6. Diversify Mineral Portfolio
Sometimes the proceeds from the sale of mineral rights are used to buy another like-kind property (commercial building, land, etc), and other times the proceeds are used for other types of investments.
Mineral owners with extensive oil and gas assets frequently buy and sell to balance their mineral portfolio.
The following should be considered when diversifying your oil and gas portfolio.
- Geological diversification (various basins or shale plays)
- Different operators
- Producing vs. non-producing
- Conventional vs. unconventional
7. Tired of Paying Taxes on Small Royalties
Eventually, you end up with hundreds of mineral owners who each own a tiny fraction of interest. This interest becomes too small to make a significant difference in their finances. In fact, managing small minerals can be more of a hassle than it is worth.
Minerals that are too small are really hard to sell - the cost of transferring ownership may be more than the value of the minerals. It's better to sell before you get to this point - and not to put your heirs in this position.
Why Sell?
Why People Sell Their Minerals Rights:
With the price of oil declining and operators practically giving gas away, I decided to sell before the bottom falls out.
I am on a fixed income, and the sale of these minerals will help me secure stable housing. My children will be okay if even if they don't inherit these minerals.
My oil wells have been producing for decades and the reserves are almost depleted. Once the wells are plugged, the value will be significantly lower. I'd rather cash out now.
I inherited mineral rights, but don't want to be involved with fracking and fossil fuels. I would prefer to support renewable energy and do my part to reverse climate change.
Although everyone says, "Never sell your minerals", my daughter needs a series of costly life-saving medical treatments. There are exceptions to every rule.