The biggest risk with any mineral is in the uncertainty with how long the source will pay out. What if your oil well ran dry tomorrow? Your royalties would stop—forever.
Here are some disadvantages to having oil or gas royalties.
- Oil, gas and mineral prices will not always go up. Your royalties are based on the prevailing prices. While it’s nice to think that the prices will continue to go up forever, they won’t.
- Your property will eventually stop paying royalties. When it stops, it will be forever. When a well runs dry, the royalty property becomes worthless.
- Title transfer is an expensive and complicated burden for heirs. This is not the kind of thing you want to leave to your loved ones.
- Chore of record keeping and paperwork. If you don’t enjoy paperwork and tax forms, then this can prove to be a real headache.
- Keeping debt. If you have high-interest debt, that effectively nullifies the income you gain from an investment. You really should pay off all high-interest debt.
For anyone who depends on royalty payments, oil and gas remains a dangerous risk, unless they own geologically diverse property. Two or three isn’t good enough to ameliorate the risk. You have to own dozens of properties to bring the risk to tolerable levels. If you don’t have the funds to invest that broadly in the energy sector, then we recommend finding someone to buy oil and gas royalties from you so that you can invest in something safer, like a diversified fund stock portfolio.
Advantages of Selling Now
- Saving your heirs the hassle of title transfer.
- Eliminating the risk of losing on your investment because the well suddenly goes dry—and it will eventually.
- Eliminating the burden of paperwork.
- Reinvesting in safer investments.
- Paying off debts, lowering your monthly expenses.
- Cashing in on the lowest capital gains tax rate in nearly 80 years.
- Having extra cash for important family concerns, like home improvement, college or even a much-needed family vacation.
Summing it Up
All investments contain some risk. That’s part of life. Royalties from oil and gas properties will always run out sooner or later. Oil and gas investments work only if you own a great many, geologically diverse properties which reduce the overall risk in the short term. If you hold royalties only for a geographically limited set of properties, then your risk remains high that your income flow will be in jeopardy in the near term. Reinvest in something safer or spend the buy-out on important needs. You will rest easier knowing that your future is more secure.