Roger contacted me to discuss the numerous phone calls he was receiving for his mineral interests in Midland County that he has owned for almost four years. This wasn’t the first time he’s been contacted by a mineral buyer but it’s the first time in a long time he’s been contacted to buy his interests.

Unfortunately, new, or uneducated interest owners only look at the dollar sign being offered to them without taking into consideration two very important considerations when evaluating buyer offers. 

They should be asking themselves:

1. 1. 1. Why are they contacting me? What do they know that I don’t?
      2. Who is the buyer? Are they a broker or an end buyer?
      3. What are their terms?  Oftentimes, unreasonable contract language can make or break a deal and give you a clue as to how serious (and trustworthy) they are.

Roger called the buyers to try to get more information but they weren’t willing to disclose more details with him other than what was included on his offer letter. To me, this was a typical tell-tale sign that they didn’t want Roger to know what they knew. Why? Because the sale price would automatically go up! In their minds, the less sellers know, the better their chances of getting his interests for a discount.

With warning signs going off in his head, Roger did the right thing by not accepting any of these offers (or signing anything!) and called me.

After my initial conversation with him, it was time to dig in. He did great work by being organized and giving me all the necessary documents I needed to get to work. He provided me with deeds, property descriptions, past leases, wills, and past revenue statements. I also needed to see the offer letters he had received thus far. This was a great amount of information to help me get started quickly. If he had not, the process would have taken a lot more time and money because I would have had to spend time researching for this information and buy these documents.

With all the information at hand, I was able to find out answers to many of the following preliminary questions:

Background information:

• • Where are his minerals located?

• • What’s going on in the area?

• • How many wells have been, or are being drilled?

• • What kind of wells are they?

Mineral Status:

• • What kind of interests does he own? Are they Fee Minerals and Royalties, or ORRI?

• • How much interest does he own? How many Net Mineral Acres (NMA) or Net Royalty Acres (NRA) does he own? (See below what would happen if we didn’t know.)

• • Are the minerals producing? If so, how much?

• • Who is the Operator?

• • How long have they been in production?

With a thorough understanding of Roger’s asset positions, I turned my attention to the buyers’ and their offer letters.

Here’s what I needed to find out for each offer:

1. 1. 1. Who is the buyer? Are they an end buyer or broker?
      2. What are the buyer terms?
      3. Does the contract contain a lot of “outs” language for them? In other words, can they just walk away without any real repercussions?
      4. Is the offer based on the right numbers – Net Mineral Acres or Net Royalty Acres?
      5. Are they willing to put down a deposit (i.e., escrow)? If so, how much? 5%, 10%, or some other amount?
      6. When are they wanting to close? 30-60-90 days?
      7. Are there any other “subject to’s” in their offer?  (I needed to be wary of the following contract language: “Subject to board approval, financing, geologic or engineering due diligence.” The only acceptable “subject to” would be title examination, period.)

       

      By looking at all these details, I can now inform Roger:

      1. 1. If the offer is legit,
         2. If the buyer is legit (or is he a broker trying to flip the deal?),
         3. If he should move forward with any of these offers, or
         4. If he should wait

          

         My counsel to Roger was that it’s great to have two offers and even if they are legit, we should still reach out to a wider network of buyers to see what the market will bear. I advised him not to rush and if he is really serious about selling, then we need to do this right because once they are gone…they are gone. He hesitated a little when I said this, and so I also mentioned the option of not selling 100% of his mineral interests and to consider selling only 50% and holding onto his other half. He felt more comfortable with this idea and so we explored it further.

         In the end, he decided to hedge his bets, sell 50% of his interests, and keep the rest allowing him to continue to have some recurring revenue as well as to keep some exposure to oil and gas investments. I also want to point out, this was Roger’s decision based on his situation and future goals. My objective is to present all the facts and let you make the final decision. It is a policy that I share and heeds to with all my clients.

         After marketing his assets for 30 days, we were able to secure an offer for 3x the amount he was originally offered from a buyer in our network!

         But there was still more we could do to help Roger and it was with his taxes.

      2. Since he had owned his interest for longer than one year, the interest he sold would be taxed as long-term capital gains and his royalty income for the 50% he kept for himself would be taxed going forward as ordinary income, which could range anywhere between 15-37% depending on his tax bracket. I advised him to speak with his accountant and told him he would need a Retrospective appraisal to determine the cost basis of his interests at the time of inheritance to lessen his tax implications even further. Our Petroleum Engineer was able to provide him with this appraisal since we already had all the information at hand. It was a crucial step that Roger could not afford to miss!

         He now had:

         • • TRIPLE the amount of money
         • • A retrospective appraisal value so he could save on his taxes owed
         • • Maintained 50% of his interests

          

         All within around 45 days later. Roger’s intuition, organization, patience, and willingness to work with me truly paid off for him!

         What if Roger didn’t know exactly what he owned?

         

         What if Roger didn’t know how many Net Mineral Acres or Net Royalty Acres he owned? What if the offer letters he was receiving were only giving him a total dollar amount, not specifying how much per mineral/royalty acre he was selling?

         He needs to be VERY careful here.

         Buyers have been known to take advantage and flash sellers a large sum of money in their offers, hoping this windfall of cash will sway them to make a hasty and quick decision. These offers also try to warn sellers their offer will “expire” if they don’t respond within a short timeframe. They can also get pushy and try to intimidate you.

         Don’t let them and if they do try, this is a big sign you should not trust them and seek a trusted advisor. Trust me, you have time.

         The takeaway? You MUST know what you own before you consider selling!

         Venergy Momentum can help answer any questions, fill in any gaps, and do the legwork for you. You can help your situation by following these steps if you are just getting started:

         Stay organized! If you’re not organized, get organized! Convert paper documents to separate digital files. The documents that are most helpful are including, but are not limited to any documents with property descriptions and/or describing the type of interest you own, and how much:

         • • Buyer offer letter(s)
         • • Deeds
         • • Assignments
         • • Leases
         • • Wills
         • • Trusts
         • • County appraisal information
         • • Revenue statements
         • • Property inventory lists

          

         Contact us today for a complimentary consultation and we’ll help you get started in the right direction, educate you along the way, and feel comfortable throughout the entire process.