Selling rights vs Keeping - Pros & Cons?

Summing up my longer, more rambling question below:

Is it possible that a high offer for mineral rights could be just as much, if not more, than what the mineral rights could actually be worth over time?

My father got a high offer last year, and I’m wondering if that offer was in fact higher than what the actual rights will be worth over time (considering rapid production decline, and economic instability)

…Or will mineral rights almost always be worth more over time than any given offer, regardless of decline and uncertainty?

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This is a theoretical question for now (considering the world economy - it probably isn’t a good idea to sell any rights at the moment). But due to the current economy, and recent things I’ve learned about oil production, I’ve been considering the pros and cons of selling.

Since I don’t fully understand the ramifications either way, I’d like to hear from more experienced people in the forum.

My brother and father are vehemently opposed to selling. In fact my brother basically said that if I sell my rights, he refuses to talk to me about it. He thinks it would be an abysmally bad idea, since whatever the offer is - it’s sure to be worth more over time if I keep it.

But considering a) the recent economic downfall that shows us we can never count on oil production or demand and b) the fact that wells decrease production rapidly over time - is it in fact such a bad idea to sell if you get a great offer?

My father got quite a large offer for his rights last year (when prices and production were high). I’m wondering if it would have been such a bad idea to take it?

Some people seem to think that ever selling is a terrible idea - but if wells always rapidly decrease over time, and the world economy is not a sure thing…is it really?

Not looking to start a debate, rather to hear opinions from people who know more than me. These are the questions I’m asking myself, but since I am brand new at this, I don’t have an answer for myself yet (just trying to figure it out).

I’d love to hear your opinions. Would it have been a good idea for somebody to have sold their interests this past November, say, for a large sum - considering the economy now?

Or is it still almost always a better idea not to sell (barring any dire immediate needs like medical operations, etc) - even with the uncertainty of global economy and rapid well declines? - If so, why?

It’s always possible the offer could be more than you will make over the long term, but these buyers are sophisticated, and are promising their investors a safe investment that returns 11-12% annually. How can they do that unless they are able to buy minerals at much less than they are really worth?

I have seen a few mineral buyers on this site gloating about people that turned down high dollar offers in the last few years, in light of the price crash. If you are trying to time the market, they may have reason to gloat for now. In a few years, they could look foolish.

So, in my view, it largely depends on your profile as an investor. Minerals cost little to own except investment of the time needed to manage them. If you are a long term investor, would you try to guess when a bubble in the market has occurred, in a market where buyers are looking for bargains? If you are a short term investor and like to try to time the tops of the market, then look to sell. If you are a long term investor, then why sell something that has a 100 year overall track record of increasing and spins off substantial income when it gets developed?

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My primary spiel on selling vs. retaining depends on more of a personal rather than business. On the business end, would it be better to get money and put it in the market, or a money market fund, so your returns are more stable, rather than up and down? Also, money now vs. sometime in the future is always preferable. Further, there are some counties where it was a very hot active area, and then due to poor drilling results, the fervor for the geographical area goes away. But, my viewpoint is the sale should be more personal. Judging by your picture, you are young(er). But, for many people, it is a choice because they know their kids don’t want to deal with them. Or, the interest will be fractionalized. Also, the ownership when done right, requires some investment of time. Many people don’t want to do it. Cash is easier to take care. Also, for many people, the money is necessary because of job loss, medical bills, college needs, etc. No one right answer.

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The answer to your basic question…[quote=“HGW, post:1, topic:58276”] will mineral rights almost always be worth more over time than any given offer, regardless of decline and uncertainty? [/quote]…has to be no (unless “almost always” doesn’t mean very low probability). But how can your question take “decline and uncertainty” out of a situation where the unknows will always out weigh the certainties? How you define “over time” also makes a big difference. Is that 5 years or the life span of your grandchildren?

You refer to your father getting a “high offer last year”, which I expect you realize is no longer available. But the question will always be, how do you know if something really is a “high offer”…because it’s a lot of money, or much more than you’ve previously been offered? Deciding whether to sell or hold is always a gamble. Some people are better suited than others to roll the dice. The people offering to buy your minerals are offering to “de-risk” you position. How much is that worth to you?

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I think it is important that mineral owners view the full risk profile and time-value of money of their potential royalty stream, but also know that mineral buyers are VERY well versed in those items as well. Any offers you receive includes overall risk and present value discount (converting future dollars to today-dollars) already included. So over the next 30 years you might receive $4,000,000 of royalties, but include 50% risk* of the unknown today (because the operator might hit a poor spot in the reservoir or Saudi Arabia and Russia could quarrel and bust commodity prices…) and 12% discount rate and your offer might only be $1,000,000.

( * risk varies property to property. Illustrative % only)

The main difference I see it that they can shoulder that risk much easier than most mineral owners can. Your minerals might just be 1% of their portfolio, so when that well is never drilled or the reservoir ends up bad, it’s not a huge loss overall for them. For you though, that same bust might drop your net worth 75%. It’s a lot of eggs in one basket.

Excuse my analogy, but I’m an analogy person. It’s like the current pandemic. Overall, the chances of getting really really sick with COVID-19 is low, under 5% or so depending on the source. But since I only have my one life to chance, I’d prefer not to take the risk. This is similar to the chance of something going terribly wrong with a new drill or a part of a reservoir being disproved (it happens) and a set of acreage dropping to nearly nothing. Looking at the whole population of wells, MOST are successful and profitable and great investments. Oil and gas investors invest in drilling programs (lots of well) and fields (lots of wells) because overall, they’ll win.

But most mineral owners are not invested in lots of wells, and I would never recommend someone to mortgage their house to invest in just a few wells. I’d much rather see a mineral owner cash out SOME of their minerals, reduce their personal risk more (pay off debt, pay off their house, get a retirement cushion) and then leave the remainder to either grow or bust and maintain their family legacy. Play with “house money” to use a gambling term.

Thanks everybody. These points all make sense, and kind of clarify my own thoughts about it. My feeling is that there isn’t an obviously “bad” choice one way or another (like my brother tends to think, for example). It could potentially be more lucrative to sell while the market is hot…or potentially more lucrative to keep the rights for decades (or forever). Or maybe best to sell some, keep some. Everything is a juggling game of risk, current need, and long term goals. No one right answer.

Reasons to hold. (1) I believe you own in the Cimarex “Riverbend” development which is enviable quality. (2) You mention the depletion curve, but mineral owners hope their operator drills multiple horizontal wells, spaced strategically, so that new royalty streams follow in sequence.

(3) Oil companies, especially U.S. E&P companies, are continually improving technology. Before the 1990s, who could have imagined a well one mile deep and then two miles horizontal? The Permian Basin was a forgotten desert, but drilling technology tripled Permian output in five years. Perhaps companies will discover new ways to exploit new formations and tired oilfields.

(4) Oil and gas demand will continue rising, for years if not decades, despite electric cars and renewable energy. (5) yes, buyers usually know more than sellers in this business. The meek will inherit the earth, but not its mineral rights (Getty).

(6) If you cash out, what do you invest in? Perhaps a nice house or new car. Financial assets are especially risky these days, the stock market seems overvalued, especially the tech stocks, and Democrats intend to raise both corporate taxes and capital gains taxes. Invest in government bonds and earn almost zero (negative real rates considering inflation), and if rates rise your bond values plummet. Gold? $1,800 per ounce and no dividends.

(7) Oil and commodities rise & fall, boom & bust. Oil price rose 800% from 1998-2008, and oil exceeded $100 for four years 2011-15. I expect to see $100 oil again some day.

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Dear HGW, My Grandfather founded a small town in West Texas, WINK, that’s right blink and you have past through it. His hard work and land he accumulated in the Counties near Wink, have payed dividends through out my years, I was born in 72 and I’m 66 and still receiving income from his properties. Now granted a lump sum looks nice, but if you will be patient then the income will keep coming back. And after the land has been drilled out, it that ever happens, then perhaps someone one will come along and want to place a wind mill on your surface. I promise you will get more from the Ground you lease, then you will by selling your minerals. And on top of that, you can leave them to your Grand Children and then on down. What ever you decide to do, please contact a specialist attorney to help you get the most for your property. Just our Land now without the Minerals is selling for $26,000 an acre in near by counties. Continued success in all you do. Chris Wilson

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Years ago I sold a chunk of mineral rights to the producer. My brother didn’t sell his rights. It has probably cost me $500,000 over the years. I got $70,000.

The only way I would sell is if I was seriously in need of cash now.

Thanks for sharing your experience. Sometimes cash now is worth more than cash later, but it all depends of course. Appreciate the advice.

Thank you very much Roy! Those are all excellent points and I appreciate your perspective, as you know more than I do about these things.

Thanks Chris, I love hearing the personal stories, it gives so much more perspective.