Riding the Oil and Gas Rollercoaster

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Just like all commodities, oil and gas has its shares of ups and downs, but this most recent descent was fast and hard. I thought an article giving some tips of how to hold on tight during tumultuous oil and gas markets might be timely.

Between the OPEC war with Saudi Arabia and Russia and the negative financial impacts of the Coronavirus on world economies, your oil and gas royalty checks have taken a big hit lately. That monthly royalty check has likely been slashed in half or even worse stopped coming all together. Many oil companies are curtailing production on their wells because pumping out oil at $24 per barrel is just bad business. So, what is a royalty owner to do during these lean times? Well, I’ve been working in this industry for almost 20 years now, and we’ve seen the highest highs, some pretty low lows. I can guarantee you, the clients that have come out the other side most successful are the ones that kept cool heads and planned.

Lesson One:

Look ahead. It’s easy to get caught up in the moment, when oil and gas is trucking along at $65 plus a barrel. It’s prudent to always assume that those prices could go away tomorrow as they did with this downturn. Overnight we fell from $58.00 per barrel to $21.00 per barrel. At a bare minimum, make sure you are setting aside enough money to cover your income taxes. I can’t tell you how many clients take future revenue to pay current taxes. In an up economy, that works fine. However, when that revenue stream gets cut in half, you don’t want to be left scrambling to pay the government when oil prices are falling. That’s just bare minimum. Furthermore, saving some of your oil and gas revenue for the proverbial rainy day can make all the difference.

Lesson Two:

Hold on tight!

In times like this, there may be an inclination to divest of your mineral, oil and gas assets. If at all possible, resist that urge. Don’t sell your miner rights when the market is at its lowest. You’ll be selling at pennies on the dollar. Mineral buying companies are actively on the hunt right now, looking for people who get desperate in their efforts to make ends meet. If your finances will allow, hold on to your mineral rights through these downturns.

You’ll be leaving so much on the table if you let go of your mineral rights and sell at moments like this, thousands of dollars most likely. If you find yourself in a situation where you have to sell out of necessity do two things.

  1. Contact someone that can broker your minerals and walk you through the process. A good mineral broker should pay for themselves by the increased value they get for you. They will expose you to markets and buyers that would be almost impossible to gain access to on your own. The buyers they bring you will be vetted, reputable buyers. You’d be surprised about how unscrupulous some mineral buyers can get, looking to get at your mineral rights for bottom barrel prices. Your mineral broker will help protect you from those kinds of pitfalls.
  2. If your finances will allow it (they should if the mineral broker can bring you increased value) don’t sell 100% of your mineral rights. The increase you get form working with a broker can hopefully allow you to keep a portion of your mineral rights to enjoy during more prosperous times. Even if you want to divest of all your minerals, sell only what’s necessary during the lean times and save the rest to sell when prices rebound.

If you find yourself facing a difficult decision like this right now, or at any time, please reach out to me. We can look at your portfolio and strategize. We can create a plan that is custom to your situation. You don’t have to navigate these difficult times alone; I am here to be your advocate.

A Guide to Selling Oil, Gas and Mineral Rights

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You’ve decided it’s time to sell your mineral rights. So, what’s next? First, get organized! Gather up as much documentation as you can regarding your oil, gas and mineral rights. You can never arm yourself with too much information regarding your property.

Herco recommends the following documents will ensure a smoother, faster process to sell your mineral rights:

  • Mineral Deed or Royalty Assignment
    • Identifies you as the owner
  • Probate Document
    • Detailing oil, gas and mineral interest and you as the heir.
  • Oil and Gas Lease
    • If your property is currently leased, you’ll want to know the terms of that contract, including the royalty and year term of the lease. A potential buyer is going to ask.
  • Division Orders
    • You should receive this document from the oil company when a new well is drilled on your property. This is going to tell you the name of the well(s) on your property, the location and the amount of interest you own in that well.
  • Royalty Check Stubs.
    • A potential buyer is going to ask how much you are currently receiving on a monthly basis. This will be something a potential buyer with require before making an offer.

So now you have your ducks in a row, what’s next? There are not as many resources for selling mineral rights as there are for selling surface real estate. When you’re selling your house, you call up a real estate agent and get your property listed on the MLS and interested parties can come look at your home. It’s not so simple when it comes to selling your oil, gas and mineral rights. You have options, certainly but most are skewed in favor of the buyer.

The following scenarios occur far too often when people are trying to sell their oil, gas and mineral rights.

  1. You’ve received an unsolicited form letter offering to purchase your mineral rights. Typically, these types of letters are very vague and may offer high prices in order to entice you to sign. Occasionally, they come with sight drafts that look like checks. Do not sign these letters or cash those drafts! If you do, you’ll likely become contractually obligated in a deal that won’t give you fair market value for your minerals.
  2. You have decided to list your mineral right with an online oil and gas auction site. This does offer you great exposure to the market, however, you are awash in a sea of other sellers. You will likely pay a fee regardless of whether you sell or not. There is no guarantee that your mineral rights will be seen by top buyers.
  3. You’ve engaged with a “brokerage firm” that has offered to appraise your minerals and buy them from you. Seems a bit of a conflict, right? Telling you what they are worth and then buying them for the price they quoted. Those types of brokerage firms are rarely the end buyer, so they are giving you a low purchase price and reselling your minerals for a profit.

In order to get the most out of your mineral rights, contact a mineral rights broker that is working for you in every aspect. They are not the end buyer, and they are incentivized to get you the best price for your interest. This type of broker is going to use their expertise to make sure you and your oil, gas and mineral rights are protected throughout the sale process. Showcasing it to top buyers that are specifically buying in the area you own and getting competitive bidding from multiple buyers.

You don’t need to go at this process alone. When you sell your house, you want someone that knows the market, understands what buyers are looking for and can get you the best possible price. Why should your mineral rights be any different? Please feel free to reach out to us at Herco to discuss your options.