Selling Mineral Rights And Selling Oil and Gas Royalty Rights
People often ask themselves “Should I sell my mineral rights?” The privilege to sell mineral rights is a luxury that U.S. citizens enjoy. In the USA and parts of Canada, individuals can own mineral rights and royalty rights underlying land. As opposed to other countries, where the sovereign government or king, queen, shah, or sheik owns them. So, those of us in North America are fortunate that we can even entertain the thought of selling mineral rights. (By the way, some people only own royalty rights but selling royalty rights is an option for them, too.)
Many people wonder whether they should sell their minerals. And, as is often the case, many people don’t even know they own them until a landman knocks on their door with an offer because Grandpa bought mineral rights or reserved them decades ago. And they’ve long since been forgotten as the generations go by.
It depends on your needs and your aversion to risk. If you don’t need anything and you think that your minerals are worth far more to you than what they’d bring in a sale, you could take the position that you should just hold on to them. On the other hand, some people have cash needs that necessitate a sale of some or all of their minerals. Selling mineral rights can be the solution to cash needs for some. And, as stated, there is always that important word, risk, lurking in the background. The risk of not taking a cash offer is real. This is why we find that corporations owning mineral rights always will consider a cash offer. They always evaluate it. If the cash offer makes that particular property dollar up for what their return on investment goals are, they sell. The same process should be done by an individual.
Some people take the position that they will just hold on to all mineral rights they own. If they have no cash needs, that can be a valid decision. On the other hand, if enough cash can be enjoyed from a sale, we could argue that it would be foolish not to sell, in view of the tremendous risks involved in the oil and gas industry and the speculative nature of many offers. Point being, only the mineral owner can determine whether they should sell. In areas of oil and gas production, many times, offers are made and mineral owners elect to hold on, and months or years later, they are sorry that they did not sell, as the reason the offer was made did not pan out. And they will likely never again enjoy a cash opportunity for those mineral rights. So, it can be a tough decision.
Why would anyone want to sell? Lots of reasons. Perhaps you have need for cash for a new car, a home, or a special vacation. Or maybe you need to provide for your children’s education, your retirement, or any number of things. Perhaps you’re just tired of struggling to make ends meet. A cash infusion can sure help. And, in some parts of the USA, the value of mineral rights can be significant. For some people, it’s a simple decision — if a sale of mineral rights can provide much needed cash that would be otherwise unavailable, it’s a no brainer. And, sometimes the buyer will allow you to sell less than your full interest.
Another reason many sell mineral and royalty rights is to reduce risk. A sale means cash money and cash is king. The oil and gas business is one of the world’s most volatile industries, fraught with risks, much uncertainty and subject to political changes in policy. If mineral rights have a certain value today, there is no guarantee that they will have the same value tomorrow. Things change rapidly in the oil and gas biz! There are many variables. For one… ever heard of a dry hole? That’s how your mineral rights can become close to worthless overnight. If any oil and gas company drills near your land and the well does not strike oil or gas in commercial quantities, it could make your mineral value plummet. So, taking a nice cash payment can make sense.
Some choose to sell mineral rights or producing royalty rights because they are just tired of dealing with it. Often, it’s a hassle of keeping up with the paperwork or a hassle of monitoring the oil or gas company drilling the wells. Managing mineral interests can be quite burdensome, best left to professionals. Believe it, companies make accounting mistakes and producing properties require monitoring and audits.
Also, sometimes family squabbles can cause some to want to sell and just get out of an uncomfortable situation. This is not unusual.
So, why would any company buy mineral rights? They buy because they are in the business of risk. They are able to tackle risk by spreading that risk over thousands of acres, even across several states. Thus, if any particular purchase they make becomes worthless, perhaps another purchase will turn out for the good, making up for the first loss. Individual mineral owners cannot enjoy such decreased risk if their property is in one locale. In the long run, over many decades, if a mineral buyer is good at it, they can make a profit. If they are bad, meaning they buy too many bad deals that don’t work out, or they pay too much, they will not make money. Assembling a large mineral rights portfolio is only for the wealthy, as it takes an enormous sum of money to fund and run such an operation.
Selling mineral rights and royalty rights means a cash settlement for those rights. If you have a producing property and are enjoying an oil check or gas check, it is somewhat equivalent to how people react when they win a lottery. Instead of accepting the future revenue stream, they elect to take the cash settlement. Nothing is as certain as a cash settlement, plus, you get to enjoy the money now, not as a series of checks that come in the future. Of course, the difference is that an oil property or gas property is a depleting asset, meaning that the oil production or gas production is declining every month. It’s pure science, the oil or gas in the ground is part of a reservoir, a pool of oil or gas, somewhat like an underground balloon. An oil or gas well taps into that balloon like a giant straw and “pricks” the balloon. Just as the balloon deflates, the oil and gas reservoir deflates, over many years. So, an oil check or gas checks, with constant prices, continues to go down over time.
Those who are not enjoying an oil check or gas check coming in might still be able to sell mineral rights. If so, the buyer is simply gambling that oil or gas production will occur sometime in the future. Sometimes, they win, sometimes, they lose. Over a period of time, by assembling a portfolio of thousands of acres to spread risk, they can achieve a profit if they are lucky enough to have more winners than losers.