Hold or Sell - Should you sell your minerals or royalties?
March 20, 2018
The offer letters are arriving in the mail. Is now the time to sell? Should you hold or sell your mineral rights?
Minerals owners often receive purchase offer letters in the mail. This is particularly common when oil prices are forecast to rise as they are now. The offer letters often present large sums of money to purchase the minerals in fee. Furthermore, the transaction can occur within a short period, in some cases in as little as two weeks or a month.
Clients regularly approach us to ask if they should sell their minerals. The questions that should be asked are:
1) Is it prudent to sell?
2) When does it make sense to sell? and
3) Is the offer appropriate and fair?
This is a two-part article. This article will cover the first two questions, “Is it prudent to sell?” and "When does it make sense to sell?". The next article will cover the third question and dissect an offer letter.
Is it prudent to sell your minerals?
Determining if it is prudent to sell your minerals is a personal decision. We at Turrett typically advise clients to hold their minerals. Minerals hold long-term value and continue to generate income even after they appear to be declining or are no longer economic to produce. New technology and higher oil prices can improve the economics of your minerals which could result in a renewed income stream for you. Minerals can be thought of as an inconsistent annuity that is dependent on technology and oil prices.
Technology in the oil field continues to allow the extraction of more hydrocarbon. The shale boom led by horizontal drilling and fracking is the easiest example to identify. These technologies have led to a major resurgence in value for minerals in old, depleted, marginally-economic fields drilled with vertical wells. If mineral owners were enticed to sell as production was declining from the 80s-era vertical wells, they would have missed out entirely on the shale boom.
There is no certainty in what new technology will revive the oil patch or when it will come. There is certainty, however, that there remains a significant amount of oil in reservoirs even after the field starts to decline. Recovery factors for oil fields, the amount of oil producible based on current technology, is in the range of 20 to 40 percent. That means that substantial amounts of the original oil in place is still available for extraction. Technology solves how to recover more of the oil.
The oil patch lives and dies by oil prices. High prices lead to leasing and drilling bonanzas. The commodities market is tough to forecast, but when prices come back to historic highs, there will certainly be another round of leasing and drilling leading to more royalty income. If you are not receiving much industry interest now, the next high-price swing will help you.
When does it make sense to sell?
This is a question that has different answers based on one’s personal circumstances. Three common reasons we have heard that make sense are:
Need the cash now. This can be for many reasons including financial upset, medical bills, college expenses for the kids, and many others.
The interest has been split among siblings and some siblings are not interested in the minerals. Sometimes it makes sense to sell to a sibling who is interested in the minerals so there is less dilution of the interest held by each individual.
The interest has become minimal through dilution by way of generational gifting. Keeping track of the royalty is more of a burden than the income justifies.
Each of these are valid reasons. Just be sure that you are selling your minerals for a fair price and that you are not “giving them away.”
The closing message is that if you have the ability to retain your minerals in your family, it is generally better to do so.
These materials have been prepared solely for educational purposes to contribute to the understanding of oil and gas appraisal. These materials reflect only general concepts in the industry based on Colorado and may not apply to all circumstances. It is understood that each case is fact ‐ specific, and that the appropriate solution in any case will vary. These materials may not be relevant or apply to any particular situation. While every attempt was made to ensure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.