Should You Never Sell Your Mineral Rights?
Posted November 11, 2019
You may have heard people say, “You should never sell your mineral rights!”. The thinking goes that if someone wants to buy them, they must be valuable and therefore you should hold onto them. You pay minimal or no taxes on mineral rights, so there is not much risk or cost to you to keep them. And why would you want to sell something when the value could potentially increase in the future?
There’s also the argument that you don’t need to sell your mineral rights because you can lease them to an exploration and production (E&P) company. That way you can get lease bonus money for your minerals—including collecting any potential future royalties—without losing ownership of them forever.
In the right situation, these are all valid reasons not to sell your mineral rights. But is it good advice to say “You should never sell your mineral rights?”. And, if so, does this advice apply to every landowner?
When Is Selling Your Mineral Rights a Good Idea?
At Gateway Royalty, we buy mineral rights and royalties from landowners. While selling mineral rights isn’t right for everyone, we’ve worked with hundreds of Ohioans who are very happy with their mineral rights deals. These are people who did some research of their own and determined selling their minerals was a good option for them. Ultimately, it really all comes down to your specific situation.
Here are some situations where landowners might want to consider selling their mineral rights…
You want a quicker payout
It’s true that you may have the option of leasing your mineral rights for a signing bonus and the promise of royalties down the road. But you’ll likely get a larger sum of money now, more quickly by selling your mineral rights outright than you will by leasing them. With leasing it can take years to receive any royalties from drilling on your property (that’s if drilling ever actually occurs). Depending on your financial needs, you may not have that kind of time. Some individuals who are in difficult mortgage or health situations, for example, or plan on selling their homes in the next five years, may want to receive all the money upfront with no waiting.
You have an opportunity to get good value now
While it’s possible the value of your minerals could increase in time, like any asset it’s also possible that value could go down. Part of the reason value exists right now is because companies are actively exploring and developing your area. But that interest might not always be there. If those companies should stop developing around you or move out of your area (for whatever reason), the opportunity to sell your minerals could vanish. The value, interest and opportunity that are there right now might not be there later.
You’re looking to take advantage of tax benefits or investment opportunities
Selling your minerals can provide tax benefits for some individuals, helping you to shelter some money in ways that can be beneficial long term. There can also be benefits to selling your minerals from an investment perspective—enabling you to take the money from the sale and invest it in other land, a safe investment vehicle or the markets. This way your asset is growing and compounding at a specific rate, rather than sitting under the ground where it’s not liquid (financially speaking). By selling your minerals you gain liquidity and then you can take control of your future investments. When it’s under the ground, you don’t necessarily have control when the minerals will be developed.
You’re not interested in managing an Oil and Gas Lease
When you lease your mineral rights and receive royalties, there is some management involved in keeping track of what you’re earning and making sure you’re getting paid accurately. Operators do make mistakes, so it’s important to make sure they’re paying you correctly. You want to pay attention to the deductions on your royalty checks to make sure the deductions are appropriate based on the provisions in your Oil and Gas Lease. This can take some time and effort to manage—especially over the course of decades, in which a lease can end up being held by production. Some people just prefer the convenience of selling their mineral interest and not having to worry about it.
You don’t want to roll the dice with commodity prices and production
Royalty payouts rely on commodity prices and production. If you live on land that gets drilled and has great production with great commodity pricing for a long time, you’ll yield a nice royalty payout. If your land doesn’t get drilled for whatever reason or production isn’t very good, you’ll receive little or no royalties. That’s the way the game works. You never really know what the outcome will be until it happens. Selling your minerals is one way to avoid the commodity price risk and production risk by receiving a single lump sum upfront no matter what the outcome.
There’s also “business situations” that can happen with E&P companies, which can impact your production. A company can run into financial difficulties and decide to stop drilling in your area. The production of the wells surrounding your minerals are marginal in comparison to well production in another County or area. For example, Carroll County had many wells that were drilled in 2012 and these wells are marginal in comparison to the newer-technology wells that have been recently drilled in the county. Business situations or technology changes can affect your future royalty income, which is another reason why selling your minerals provides an option to sidestep some of these risks.
Never Say Never When It Comes to Selling Your Mineral Rights
Is it true you should never sell your mineral rights? No, it’s not true. While it doesn’t make sense for every landowner in every situation, there are times when it makes absolute sense for landowners to sell their mineral rights. If you have the time, patience and financial stability to hold on to your mineral rights or lease them out to and E&P company and see what happens with royalties, then you should do so. But if you’re in a different situation, where some of the reasons above might come into play, then selling your mineral rights is certainly an option worth exploring.
If you live in Ohio and have questions about selling your mineral rights, reach out to Gateway Royalty today. We’ll give you straightforward answers and help you explore your options.