How to Protect Your Future if You Own Oil or Gas Royalties

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.

Disadvantages

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.

 

High Risk

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.

Should You Buy Mineral Interests?

If you want to buy mineral interests, it is important to be aware that the procedure is more complicated than buying a car. In buying a vehicle, for example, you just need to pay for it and the dealer will handle the title transfer. Then, you can simply drive the car home. When it comes to mineral rights, gratification is not always instant. There are a variety of companies that buy mineral rights and sell them to interested investors.

Buying the Property

It is important to have a goal before you decide to buy mineral interests. For example, there are a number of mineral rights owners who have no intention of producing minerals themselves; they simply purchase the property as a form of investment. Their objective is to sell their interests to a mining company who can extract valuable rocks, oil and gas, or coal from the property. If you are this type of buyer, then it may be a good idea to look for undervalued investment properties that may yield long-term gains.

This type of speculation often leads to the use of “options”. In essence, the buyer offers a small amount of money to the seller today to get the option to buy mineral interests property at a future date at a specified price. This type of transaction often sees the speculator looking for another buyer who is willing to pay a higher price for the property.

Getting Royalties

There are cases when mining companies don’t want to buy a property at its entirety. It is simply too risky in many cases because they are unsure about the minerals that may exist on the land. In these types of situations, they often lease the property for the purpose of exploration. The lease gives the company the right to enter the conduct tests to find out if mineral or oil and gas exists beneath the surface.

If valuable rocks or oil does exist after you buy mineral interests, you’ll receive royalties for every stone that is mined and from the oil that is drilled to the surface. That means that there is a lot of money making potential in this type of venture. In some cases, people who invest and buy mineral interests can receive thousands of dollars, even millions, on a yearly basis. The continual stream of income allows a person to live a comfortable lifestyle over the long term.

Making Money from Mineral Rights

In many countries around the world, mineral rights belong to the state. Basically, every valuable rock, oil and gas, and minerals found on your land automatically reverts to the government once it is discovered. It is important to note that you cannot legally extract these resources and sell these on the market without the explicit recognition of the authorities. This is not the case in the United States.

Americans are fortunate in the sense that they can own mineral rights and mineral interests without undue interference from the state. It is possible for both individuals and organizations to have both “mineral rights” and “surface rights”. In essence, complete private ownership can be granted by the government in a concept known as the “fee simple estate”.

This type of ownership is the most basic type of ownership. In essence, the owner controls everything from the air above the property to the subsurface of the property. They are free to lease, sell, and bequeath their rights either to individuals or to organizations. The concept also includes partial ownership. Those with mineral interests can sell this asset to others.

There are laws that govern the transfer of mineral rights from one party to another. In addition, there are also laws that cover drilling and mining activities. Regulations may vary from one state to another; so for individuals who are interested in buying or selling mineral rights, it is critical to know these laws intimately to get the most out of your investment.

How to Buy Mineral Rights

The fee simple structure may have allowed owners to have complete control over their property but this doesn’t mean that they are able to extract the minerals or oil and gas themselves. This is where energy companies come into the picture. Partnering with a company that specializes in mineral extraction can bring a lot of benefits.

Basically, the owner will retail possession and control of the surface. The coal company, which wants to buy the coal, can share the property by acquiring the rights to the coal. This set-up is a win-win situation for both. The property owner would retain ownership and receive a stable source of income while the mineral extraction company does not have to buy the land or the building. The transaction can involve both known and unknown minerals that may exist beneath the surface. On the other hand, there are also agreements that cover the specific type of identified mineral written on the contract.

Selling Mineral Rights – Why Should I Sell My Mineral Rights?

If you own the rights to minerals, you probably often think about selling them. Although it might be nice to receive the royalties that come from owning the rights to minerals, sometimes dealing with all the responsibilities as well as the uncertainty that come with owning mineral rights just doesn’t seem worth it.

There are quite a lot of risks when it comes to owning the rights to minerals. You never know when something may change or go wrong that can undermine their value. This includes things such as the possibility for your property to turn into a ‘bad spot’, or political changes to the current tax laws, or higher tax rates (which is inevitable due to the current extremely low tax rate of 15%), and even the fact that there is a constant rise and fall to the overall worth of mineral rights, which is dependent on a wide variety of factors.

Why Sell Mineral Rights?

There are many things to take into consideration when thinking about selling the rights to the minerals you currently own. Below are some things to bear in mind if you’re currently thinking about selling.

  • Mineral prices are not a constant, and instead fluctuate often making it so that you are never able to predict their prices.
  • Alternative energy is becoming more popular, making the security of owning minerals much more unstable.
  • Wells that start off good, can go bad at any time. How much of a risk are you willing to take?
  • The federal tax rate is currently at 15%, which is one of the lowest since the Great Depression.
  • How beneficial would a lump of cash be to you right now? Do you have a lot of debts that need to be paid?

Should I Sell My Mineral Rights?

Selling your mineral rights is a decision that only you can make. One great idea is to make a list of all the pros and cons. Once you’re done, simply go over the list very carefully in order to determine whether or not selling your mineral rights is the best decision for you.

Selling mineral rights doesn’t have to be complicated. There are many companies who make it their business to buy mineral rights, making them quite knowledgeable when it comes to knowing all that is involved in buying mineral rights. If you have specific questions about your mineral rights, don’t hesitate to contact someone who can give you the detailed answers you’re looking for.