Last Updated on It is safe to affirm that mineral resources represent the most important source of energy for mankind. These resources are found in abundance in different locations. Having a property right over a piece of land does not imply that you have the right to touch the mineral resources beneath that land. What you need are mineral rights.
Mineral rights represent the ownership rights to exploit an area for the underground resources it harbours. This includes any oil and gas minerals that might be present.
The owner of the mineral rights can explore and exploit the mineral resources present on the property. This mineral ownership can be bought and sold.
There are several reasons why mineral interest owners might sell their mineral rights. This guide will provide an insight into the reasons behind their decisions, where these rights can be sold, and more. Keep on reading!
What are the main reasons people choose to sell their mineral rights?
The reasons mineral owners choose to sell their oil and gas mineral rights can be personal or strategic. Some of these are discussed below:
Volatility and Risk Reduction
We are no stranger to the wild swing in the price of oil and gas over the past few years. There have been significant fluctuations, including a fall from $164 per barrel in June 2018 to $36 per barrel in January 2016. It eventually rose back up to $70 per barrel in 2021.
Similarly, natural gas dropped in price from $7 per MCF in 2009 to $1.75 per MCF in 2016. It is not uncommon to see counties increase leasing and drilling activity and then abandon it when there is a better option somewhere else.
Indeed, no one can predict the daily or yearly gas and oil prices anymore, owing to their high volatility, among other factors at play. You might consider selling your mineral rights to convert them into cash if you feel uncomfortable with the level of volatility and risks of oil price movement.
Estate Planning
Much like the potential legal expenses, it takes so much paperwork and time to divide into split estates or transfer mineral interests. For this reason, some mineral owners might choose to sell their mineral interests rather than burden their heirs with inherited mineral rights. An heir who does not understand how the oil and gas business works may find it hard to make the right decisions concerning mineral interests.
Unless there is a professional mineral manager, who can ensure the proper management of assets with objectiveness and honesty, sometimes the best choice is to sell mineral rights.
Taxation Advantages
Are you aware that you can sell your mineral rights and pay no tax? A 1031 exchange can be used to help mitigate any capital gains tax. Also, the federal tax code permits anyone to sell their mineral rights and pay no taxes as long as they buy a like-kind property with all or some of the money.
Many mineral owners subject to being taxed find the value of their assets not worthy of their money or time because of excessive taxation. Besides the annual income tax due on royalty revenues, mineral owners could also incur an Ad Valorem tax and Severance tax.
For exploiting nonrenewable resources, production activity is often subject to a Severance tax in many oil and gas producing states, depending on the volume and value of the minerals extracted.
An Ad Valorem tax is imposed at the county level and is a form of property tax. When owners put mineral rights up for sale, they simplify their finances by avoiding expensive taxes.
Is it a good idea to sell mineral rights?
Should I sell my mineral rights? It’s a common question many landowners ask. As mentioned above, there are different reasons why people sell their mineral rights. Indeed, selling mineral rights might turn out to be a good idea. How? Below are the advantages of selling mineral rights:
Diversification
It is not uncommon for people with mineral assets to buy and sell some assets to restructure and diversify their asset portfolio. Most mineral owners wish to optimize their high-yield assets and dispose of lower-yield assets of a similar nature.
The importance of asset diversification cannot be ignored. There is always a risk when a large part of your net worth is concentrated in a single asset class.
For this reason, consider having a careful look at the kind of result your mineral assets have delivered and the potential returns you will get over the next few years.
Furthermore, you might find it advantageous to divest a part of your mineral assets for a fair value. This helps you diversify your assets even though you retain your investment in the mineral property.
You can receive a quick, lump sum cash payment for your mineral assets rather than monthly royalty payments
One of the risks of being a mineral owner is the lack of a guarantee for your future royalty payments. For instance, if the prices for oil or gas drop, then the oil and gas company that is drilling on the land might decide not to continue with the well and allow it to stay dormant. This means dormant mineral acreage that will generate no royalty income.
Instead, it might be wiser to convert non-producing mineral assets that generate no royalty income into a lump sum payment.
The cash you obtain from the mineral rights value could be extremely helpful for various purposes. You might finance a college education for children, pay off debt, invest, or use it for other needs. After a long period, depleted oil and gas interests might attract no fair market value.
For this reason, you can consider the benefits you can realize from the present value of your oil and gas royalties. You can use the proceeds from mineral rights sales to invest in other assets with a higher potential for appreciation.
Should you sell your mineral rights if they are producing?
Yes, it can be beneficial to sell your mineral rights for a fair price, even producing rights. First, sellers must be aware of the different stages of the production process. They must also know the value their minerals and royalties command in every development stage.
As sellers acknowledge that oil and gas sources will not last forever, they know that when production starts, the value of mineral interests goes up; the extent of this rise depends on the number of newly completed wells. But ultimately, as oil/gas production continues, mineral acres become a declining asset.
It should be noted that selling mineral rights while they are producing might be a good idea. But you may not get what you feel is a fair valuation from potential buyers. What a buyer might be willing to pay might not be the true value nor the best price based on the current market.
Besides this, as the production from the well declines, so does your mineral interest value as the property owner.
Vertical wells usually decline at a much slower rate than horizontal wells. The former produces a steeper decline curve as its production keeps declining. This is another consideration that most mineral buyers are aware of before they make offers to buy minerals.
When is it wiser to keep your mineral rights?
As mentioned earlier, the most important thing for an owner of mineral rights is to carry out proper due diligence. They should also understand the stages of oil and gas development and exploitation. There are opportunities during each production stage.
However, there are times when you might need to hold on to your mineral rights until some activities start taking place.
During the undeveloped/unleased stage, there is no development and no production on the land. Landowners need to be patient unless drilling and leasing activities are promising.
You should not sell minerals at a stage when they are worth nothing. Since they are not being developed, there are no taxes on them.
Unlike those interested in selling minerals or mineral rights, this is the best time for any mineral buyer who is a long-term investor to buy undeveloped rights.
But, it would be the least opportune time for landowners to put their mineral rights up for sale.
In addition, the value of your asset may increase if you opt for leasing mineral rights to an operator in the gas or oil business. During this period, thoughts of selling might have crossed your mind.
However, it should be noted that the terms of the lease and its duration are key factors at this stage. There is a significant difference between negotiating 6-month lease agreements and 3/7-year leases. Usually, a shorter lease implies more imminent development by gas and oil companies.
The asset value starts declining as the expiration date of the lease approaches if no development has occurred. In such cases, it might be a better idea to keep your mineral rights since it is not the most opportune time to sell them.
How to decide if selling your mineral rights is the right choice?
As stated earlier, the decision to sell mineral rights should be considered carefully. There are situations in which you should keep your mineral rights, but others when selling oil and gas interests makes sense. How do you decide if selling your mineral rights is the best choice? This section will discuss this thoroughly.
Again, the production and development stages of the oil and gas should determine if it is the best choice to sell your mineral rights.
For instance, when the drilling starts in one or multiple wells, it might affect the value of your interests, typically increasing exponentially. Even though only one well can be drilled at a time, operators can drill multiple wells one at a time.
Your mineral interests and any proportionate share of royalty interests increase in value as the number of wells that an operator drills increases. This is because of the flush production that a prospective buyer will likely realize from the wells.
Sometimes, operators might just drill one or two wells on the property and then analyze the production results from their drilling methods used.
Mineral rights buyers throw out different values that range significantly. This is because there are often concerns about the results from newly-drilled wells.
If you wish to sell at this stage, it is best to put up a percentage of your interests for sale. You should do this at the highest possible price. This will ensure that you can earn some cash while avoiding a considerable level of risk.
Where can you sell your mineral rights?
Mineral owners who put their rights up for sale on their own may find the whole process can be stressful. If you do, several questions may keep crossing your mind: What is the guarantee that I am receiving as much money as my mineral rights are worth? What sale documentation is needed? Do I need the service of a broker?
Anyone that wishes to sell their mineral rights should seek the knowledge and assistance of a mineral rights broker.
For this, you can employ the services of Pheasant Energy. Indeed, it is wise to access several buyers if you wish to get the best offer from those in the industry.
Without the service of a professional broker, committed buyers may not hold the required documents to purchase your rights. Besides this, a reputable broker, like Pheasant Energy, will help you minimize the financial risks – while explaining the potential benefits – associated with any mineral rights sale.
With the assistance of a good mineral rights broker, the selling process becomes easier. You can put your rights up for auction, and several buyers will be able to view them. A good broker knows that creating competition among quality buyers will increase the price of your rights. Doing so can generate more money for you and secure your financial future.
It might be tedious and overwhelming to sell your mineral rights. But with Pheasant Energy, the research and paperwork are properly handled to ensure that the correct legal procedures are followed.
Pheasant Energy is an expert in mineral rights management, including sales and leases. With Pheasant Energy’s in-depth knowledge, any seller or buyer can make a more strategic investment.
Conclusion
Your mineral rights grant you access to any oil and gas minerals beneath the land in question. Even though selling any mineral interest rights might be for personal reasons, carefully considering the right time to sell will provide you with the best investment result.
Besides this, you should contact a top mineral rights broker in order to make informed decisions whenever you decide to sell your mineral rights.
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