Common Reasons to Sell Oil and Gas Minerals and Royalties
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In our last post, we talked about the Never Sell Mindset: why folks think this way, why we believe there is a better way to approach mineral ownership, and, finally, why you should never say never.
Here's a link to our last post if you want to check it out:
Also, we have a YouTube video on this topic. You can check it out here:
Part 1: Why Would Anyone Sell in the First Place?
We talk to countless mineral owners every year who fall into the "Never Sell" camp. Some fall into this camp for good reason, and we certainly respect their decision to hold their mineral rights, whether for themselves or for legacy. But, we also find that many folks become more open minded to the idea of selling as they learn more about the asset class, the market for oil and gas minerals, and how mineral rights are valued.
When folks realize how large the mineral market has become, and that they can obtain a market value, many of them realize that there are other opportunities available to them that are more meaningful than ownership of minerals.
In our last post, we talked about weighing the Opportunity Cost of holding versus selling your minerals. We encourage folks to look at other opportunities available to them, and to weigh those opportunities against continuing to own and hold minerals.
The decision to sell is not one that should be taken lightly, similar to the sale of a home or other substantial asset. After all, the decision to sell your minerals is an investment decision. It is also a personal decision and one for you and your family to think about and discuss. Your reason to sell may be different from others.
At the end of the day, the decision to sell comes down to Value Judgement. What is important to you? Where do you want to spend your time, your efforts and your money?
Like we mentioned above, many folks absolutely love mineral ownership, and there are many reasons to love it: whether its the idea of recurring monthly revenue, ownership of a real asset, or exposure to the oil and gas sector.
However, the mineral ownership knife cuts both ways: minerals deplete as they are produced and monthly revenue can slow to a trickle, mineral management is complex, and the oil and gas sector is extremely volatile (with high highs and low lows).
Many folks who elect to sell do so because they want to invest in something that they better understand and that is easier to manage.
So, in this post, we are going to talk about common reasons that we see frequently where folks make Value Judgment decisions and elect to sell. This list is not exhaustive, and your reason may be different, but we hope you will find it helpful nonetheless.
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Part 2: Common Reasons to Sell
1. Real Estate
Personal Home. Whether you want to purchase a new home, or renovate your existing home, many folks elect to sell mineral rights in order to reinvest back into their personal homes.
Real Estate Investment Assets. Whether you want to own single family rental, a vacation property (e.g. an airbnb) or a multi-family property (e.g. an apartment complex), another common reason to sell minerals is to redeploy that capital into a real estate investment asset.
One of the benefits of selling minerals in order to purchase a real estate investment asset is that these transactions can qualify as an exchange of "like kind" property under IRC Section 1031, commonly referred to as a 1031 Exchange.
Because minerals are legally classified as "real property," the IRS considers them "like kind" to other types of real property, such as real estate. There are specific rules about qualification under Section 1031, but if executed properly, a 1031 Exchange allows you to defer any capital gains taxes that you would otherwise owe upon the sale of your minerals.
2. Reinvesting Back Into a Core Business or More Familiar Business Sector
Oil and gas is extraordinarily complex. We see many folks elect to sell so that they can redeploy that capital back into another core business or more familiar business sector.
A great example that we use is for folks who farm or ranch for a living. Let's say that you've been eyeing a tract for sale that is down the road from your property. The tract would allow you to expand your farming or ranching operation, which is your core business. Selling all or even a portion of your mineral rights could provide you with the capital you need to go make that acquisition.
Obviously, our example of farming or ranching may not apply to you.
The point we are driving at is that many folks elect to sell in order to redeploy that capital back into a business that they know and understand.
3. Starting a Small Business
Many folks dream of starting a small business, investing in themselves, and controlling their own destiny. Believe me, we can relate! Selling all or a portion of your mineral rights could provide you with seed capital that you need to get started.
4. Life Events
A few great examples of life events are:
College. College is expensive! We see many parents electing to sell in order to provide their children with a college education and a head start in life.
Weddings. These are huge life events for parents, especially if you have daughters!
Retirement. We see folks electing to sell as they get closer to retirement age. Selling can not only provide you with the cushion you need to retire, but we also see retirement age folks with a greater need for certainty and stability as they move to a fixed income. Selling minerals can allow you to rebalance your portfolio by investing in lower risk assets.
Estate Planning. It is very common for folks to sell as they plan for the legacy they will leave their children, grandchildren and other heirs. In many cases, folks electing to sell for this reason do so because they would prefer to distribute cash, rather than having their heirs continue to manage oil and gas assets after their death.
5. Certainty in a Fixed Sum
One of the most common reasons for selling mineral rights is to lock in a fixed sum, rather than receive smaller payments on a monthly basis that fluctuate with the volume produced by your wells and the price of oil and natural gas.
When you elect to sell, you are effectively shifting two key risks to the buyer: (1) volume risk and (2) price risk.
Locking in a fixed sum makes sense to many folks we talk with, especially those who first hand experience with the ups and downs of the oil and gas industry.
Part 3: Do I Have to Sell All of My Minerals?
This is one of the most common questions we get from mineral and royalty owners. The answer is NO, you do not have to sell all. In fact, we see many folks electing to sell a portion of their mineral rights (e.g. 50%, 25%) in order to "take chips off the table," while retaining some exposure to the oil and gas sector.
Conclusion
Today, we've shared a number of common reasons that we've seen where folks make value judgment decisions and elect to sell their mineral rights. These are all great reasons, but remember that the reason for you is going to be personal to you.
The decision to sell is not one that should be taken lightly, and we encourage you to spend the time to consider the Opportunity Cost of holding versus selling. What is important to you? What are your needs? Where do you want to spend your time, your efforts and your money?
If we can do anything to help you, please don't hesitate to reach out.
