There are any number of reasons why an individual, family, family trust, company, or institution might want/need to divest some or even all their mineral and royalty assets. Here are a few of our own that you can consider:
1. Diversification and Portfolio Restructuring
Owners of mineral and royalties or other oil or natural gas assets, may wish to divest their lower-yielding assets to fund other higher-yielding (or potentially higher) assets of similar or like-kind nature.
If you are not similarly diversified, it may be time to consider the risks of having a large part of your net worth concentrated in a single area or asset class. We encourage people to take a long, hard look at what their mineral and royalty assets have brought, are bringing currently, and will potentially continue to bring to the dinner table over the next 1-5 years.
If it appears to make sound financial sense to divest a portion of your mineral and royalty assets, then we encourage you to do so in order to diversify your asset holdings, while still remaining invested in the properties.
2. 1031 Exchange Opportunities
A 1031 Exchange allows the owner to sell a property and purchase another “like-kind” property using the proceeds from the initial sale without paying taxes immediately.
These taxes are deferred until the sale of the replacement property. There are strict guidelines regarding the requirements for an exchange.
Oil and gas interests may qualify for a Section 1031 Exchange opportunity if properly managed by a qualified intermediary.
3. Lump Sum Payment
Owning producing minerals and royalties is like having a winning lottery ticket nowadays and like the actual lottery, most lottery winners choose the lump sum payout because they do not know what will happen in the future.
There is a chance in your lifetime that you will never receive as much royalty income as you might be able to receive by selling a portion of your mineral and royalty assets for a lump sum.
A lump sum payout can help eliminate debt, purchase a new home, or cover college expenses.
In most cases, the tax implications are better by taking a lump sum payment than to continue to pay ordinary income tax rates on your monthly royalty income.
4. Reduce Risk and Volatility
Over the last decade, we’ve borne witness to wild fluctuations in oil from $164 per barrel in June 2008 to $36 per barrel in January 2016, plummet to -$37 per barrel in 2020 and back up to $70 per barrel one year later.
We’ve seen natural gas from $7 per MCF in December 2009 to $1.75 per MCF in February 2016 and everywhere in between and up since then.
Time and time again we’ve seen entire counties go through months of increased leasing and drilling activity only to get quickly abandoned by operators upon the discovery of a new play somewhere else.
Nobody can predict where prices will go from day to day, month to month, or even year to year anymore due to so many factors at play, or better yet, which operators will stick around for the long term and which ones will go belly up.
If you’re not comfortable with this level of risk and volatility, you may want to consider converting some of your minerals into cash.
5. Estate Planning
Therefore, many mineral and royalty owners haven chosen to sell some, or even all, of their interests to simplify their estate and avoid the active management of their interests.
This isn’t always the case, but if your heirs do not understand the oil and gas business as well as you do, they may make poor decisions with the mineral and royalty assets in your absence. Consider the points in this article.
We’ve found, in most cases, it is easiest to leave cash to your heirs unless you have someone, like a professional Mineral Manager, who can help properly manage those assets honestly, objectively, and unemotionally, as every asset should be.
6. Tax Advantages
Taking long-term capital gains from the sale of your mineral and royalty assets may be more efficient than being taxed at levels of ordinary income year after year.
To find out what would work best for your situation, we advise that you consult with your tax advisor.
7. Other Obligations
Remember, you don’t have to sell ALL of your mineral and royalty interests!
You can sell partial interests anywhere from 25-30-50-75%, or anywhere in between.
It really boils down to what are you doing with your royalty income: is it play money, used for daily bills and/or expenses, or do you invest it on a regular basis?
It just depends on what your situation is and what your plans are for the future. It’s always worth a conversation and it’s never a wrong time to take funds received from a depreciating asset and move them to a new (and appreciating!) investment vehicle.
If any these reasons sound like something you would like to explore further, you can also schedule an appointment right away or fill out the form below and we will be in touch shortly.