Cash money is a sure thing. There is no guarantee that any one tract of land will have a well drilled on it. Plus, oil and gas exploration is a very risky business. Some wells that are drilled are “dry holes,” meaning no oil or gas is found. And there are many instances of an operator fouling a well by its own completion operation techniques. Or, simply, things go wrong. If you sell, you have the sure thing, which is cash money. By selling, you are selling risk to the purchaser.
If one is up in age, acquiring a cash profit allows you to enjoy your asset while you are alive. You can’t take it with you.
You can pay of your debt, buy something you need, enjoy a much deserved vacation or provide for your child’s education.
You might have missed out on a big lease bonus that began paying big lease bonuses to fortunate mineral rights owners. You can now sell part or all of your mineral rights to finally get your part.
As mineral rights are passed from one generation to the next they are often divided into such small amounts that their economic value to each succeeding generation diminishes exponentially. Keeping track of the minerals at that point can become more of a headache than they are worth to the heirs. This is often referred to as the “fractionalization problem” and is one reason many owners end up selling their mineral rights while they are still alive rather than letting them be split into smaller and smaller pieces with each passing generation.
No matter how good a producing well is, it will eventually stop producing as the field it’s in becomes depleted. Once that happens, the mineral rights will be pretty much worthless. Since it’s hard to predict exactly when a well or field may become depleted, many people decide at some point to convert some or all of their mineral properties into other assets such as real estate, stocks, bonds and other investments that may hold their value longer, or may appreciate more than their declining oil and gas interests.
Some mineral owners in good areas are able to lease their mineral rights many times over the years without a well ever being drilled, and some receive quite a nice bonus every few years from doing so. Eventually, they too will see a decline in lease bonus rates due to declining opportunities for production in their area. New drilling technologies do occasionally bring an old area “back to life” but once the oil and gas is really gone, it’s gone.
Oil and gas prices are up and down. In 2008, the biggest crash in the history of the oil and gas business happened. Prices are also subject to politics. Trying to predict oil and gas prices is almost impossible. One thing is for sure, if natural gas price does not rise considerably soon, natural gas drilling will slow down.
Your property could turn out “bad” geologically. There may be a fault underlying it or the rock formation that contains oil and gas might change for the worse, meaning that your property is in an inadequate spot. It happens in every oil or gas play—there are “sweet spots” and “bad spots.” Taking cash money means the buyer takes on that very real risk!
Something can go wrong in the area of your mineral rights, such as oil wells or gas wells that first came in good, went bad. It happens all of the time.
The global economy is shaky. Some people are very worried about what could happen. A major terrorist attack, a major natural disaster, an economic meltdown... there are so many things that could happen that could shake up the world as we know it. It could put a damper on mineral rights sales. Prices should theoretically rise, but, chaos could ensue from a major global overhaul, making sales of mineral rights iffy.
Selling mineral rights or producing royalties can make sense. And, mineral rights also include royalty rights—whether you are receiving a regular oil or gas check or you own a non-participating royalty, you own royalty rights or gas royalty rights, which are part of your mineral rights position.
Even if a property is known to be productive for oil and gas, does this mean you should never sell? Answer it by looking at the oil industry, itself. Do companies ever sell off their producing leaseholds or do they always hold them? They usually sell. If a deal can be made such that the cash received allows you to do something with the lump-sum cash that you want to do, then, you might prefer to sell. It’s very common. Individuals have been selling mineral rights since the oil business began over 100 years ago.
Politics are a big risk. The Obama Administration has proposed changes to the tax laws on the oil and gas industry that some say are so bad, that the oil and gas industry will not exist if the laws pass. For example, if they take away the deduction for expenses (intangible drilling costs), that certainly would be a major blow. And if that happens, money being paid to mineral owners could decrease significantly.