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When and Why to Sell, and What to Expect
A brief description of when to sell one's mineral rights/royalty and what to expect in valuation.
It really comes down to a simple question when deciding whether or not to sell your mineral rights or royalty interest: “If my mineral rights never produce any income for me, would that alter my life and hurt my financial security?” If your answer is YES, then you should really consider selling all or part of your mineral interests. Simply said, if you are relying, in any way on your mineral rights or royalty interest to provide income for your family or as a retirement plan, then selling your minerals would make a lot of sense. Recently, domestic natural gas production has increased, and the price of natural gas has plummeted with no hope of resurgence. Thus, there is no better time to sell. Natural gas prices are only predicted to continue to plummet, so every day you sit on your mineral rights your investment loses worth.
Completely selling your mineral rights is not your only investment option, selling your oil & gas royalty can also be a profitable, and less risky, option. An oil & gas royalty is a percentage of total oil/natural gas production paid to the mineral owner. The percentage is defined in the lease, and is typically 1/8, or 12.5%, of the net – although there is certainly room for negotiation of a higher royalty by the mineral owner. As a mineral owner, you have the right to sell your royalty without selling your mineral rights. Selling your royalty interest can make sense if you want to protect against uncertain payments while retaining some upside and ownership for the future. If you sell your royalty, you are selling any production or revenue resulting from the current lease and production of your mineral rights. If production ends, and the lease expires, then you have future upside from the lease bonus, should you sign a new lease. (http://gotexasmineralrights.com/
So you’ve decided to sell your mineral rights, now I’m sure you’re wondering how we value those rights. In truth, it really depends on your property. There are three primary basic property scenarios, with three very different valuation processes.
The first property scenario is a producing property. In this scenario your property is already producing, and you're receiving royalty checks from an operator, so it is relatively simple to value your mineral rights. In this case, our company does some simple research to figure out what stage of production your property is in. Depending on where your property is (formation and/or play), there is a standard decline rate which all wells experience. This means that your second check will be less than your first, and your third will be less than your second. Typically, wells experience a rapid decline rate within the first year. After the first year, the decline rate slowly levels off. Decline rates are unique to different plays (like the Haynesville or Eagle Ford Shales), but are similar within the plays, which means that your decline rate is going to be almost identical to your neighbor's. Once we find out where your property is on the decline curve, we will be able to come up with an offer based on a multiple of your current cash flow. This could be anywhere between 20 and 75 times your current months royalty check.
The second scenario is a leased, but NOT producing, property. Herein your mineral rights are leased, but not currently producing. This type of property is a bit more difficult to value, but still fairly straightforward. In this case, an Oil and Gas company has leased the rights to produce your mineral rights, but has yet to begin production. There are a variety of subset situations within this field (rig on location, drilling has begun, etc...), but the fact is that the property still has some unknown factors. At this point, we look at the known factors including the lessee (company leasing your minerals), neighboring production, and other factors. We will come up with a value based on how certain we are that the property will ultimately produce, and how much we could expect it to produce if it goes into production.
The final property scenario is a not leased property. Purchasing a property that is not yet leased can be a risky endeavor for our company, and the valuation is completely property specific. However, selling an un-leased property can still yield a hefty return, and make a great deal of sense financially. We are a well diversified investor, meaning we can take the occasional risk on un-leased properties. While an un-leased property may be risky for us, it is extraordinarily risky for the seller when you consider opportunity costs. If you have the option to sell your un-leased mineral rights, please consider taking it. This is the most uncertain of the three situations, so seize the opportunity to sell if it is presented to you.
Page Updated Last on: Sep 19, 2012