5 Reasons You Should Sell Your Oil & Gas Royalties
There are many reasons that make selling your oil and gas royalties now a great idea. While retaining ownership of your royalties could be more beneficial in the long-run if production is steady and prices are high, there are a number of reasons you might want to consider cashing in
Oil and gas royalties are depleting assets, meaning that over time, production wells will eventually run dry and have zero value. Though initial exploration may reveal rich oil reserves and project large streams of future income, sometimes oil and gas wells run dry faster than initially anticipated. Over time, the royalty checks you receive from a leasing company will shrink to nothing, and it’s difficult for anyone today to predict exactly when that will happen. If you sell your royalties to a 3rd party today, you generally receive a sizable lump-sum payment, and all risk related to production transfers to the buyer.
Relieving Your Relatives
If a person owning mineral rights dies, the administration of divvying up mineral rights among heirs can prove messy. As successive generations receive their piece of the rights, ownership gets divided up into smaller and smaller pieces, making the rights almost impractical to manage. For example, if you had 2 kids, you might leave each with 50% of your rights, then they might each have 2 kids, who stand to inherit 25% of the original estate. Assuming each family continues to have 2 children, by the 5th and 6th generations, each heir owns a miniscule percentage of the original rights. Any income they would receive in the form of royalty payments almost wouldn’t be worth the cost of administration (think taxes, attorneys, etc.). If you’re contemplating leaving royalties to your heirs, you might be doing them a favor by selling your rights now and leaving the cash as part of your estate. Cash is more easily distributed and will give your direct heirs liquid assets to use as needed.
Need for immediate cash flow
Depending on the agreement, oil and gas royalties are structured as a lease of the mineral estate over a set period of time. In this agreement, the oil company may explore and drill for a small monthly installment. If they go on to produce oil, then you receive additional royalties as a percentage of production revenue. If they strike it big and oil prices are high, this could result in substantial royalty payouts for you. However, if the company chooses not to drill (which is their prerogative) or drills but the oil prices are low, royalties may be much lower than anticipated. With an oil lease, it could take a long time, if ever to see any cash. However, if you sell your rights today, you can get a nice chunk of change in your bank account within a matter of weeks. This could be used to alleviate debts, pay for a child’s wedding or college tuition, or simply invested for more certain appreciation in real estate or the stock market.
The tax implications of oil and gas royalties can be burdensome in terms of both the paperwork of compliance and the cost of hiring a CPA or attorney to help you navigate tricky issues. Selling now eliminates the need for future tax reporting, and could be beneficial in terms of utilizing capital gains or losses on your current return. Always consult your accountant or legal counsel before making a big decision like selling your oil and gas royalties to ensure it will be beneficial for you.
Eliminate future uncertainty
The oil industry is known for its volatility. Recently, plummeting prices have halted production in many areas of the country, with more than 2/3 of rigs getting decommissioned and exploratory drilling grinding to a stop. This major bust comes on the heels of a huge boom in 2013 and 2014, when barrel prices topped well over $100. The sudden and unexpected bust left many mineral rights owners without the royalty checks they were counting on. If you sell your royalties, the future of the oil market doesn’t matter. Most corporate buyers will still pay top dollar for these royalties, assuming the risk that their investment will pay off in the long run.
**Caddo Minerals does not offer advise about financial decisions. This following article is for educational purposes only.