Cash is King.
Cash is a sure thing, and by selling, you receive a sure thing and transfer the risk of ownership to the buyer. Since they are in the “risk business” this works well for both parties. Energy prices are volatile and unpredictable, and many people who own mineral rights would rather not deal with the risks associated with ownership. Selling allows you to shed the risk of ownership and use the money to pay off mortgages, high-interest credit card balances, medical bills and other expenses, or simply invest the money in less risky assets such as real estate or stocks and bonds. You might also want to sell so you can travel, take that family vacation, or help the kids out etc.
“Don’t put all your eggs in one basket” is a saying you have probably heard. If a substantial portion of your current income is derived from mineral rights you are much more vulnerable to the price swings inherent with oil and gas that could drastically affect your income. Selling some or all of your interest would reduce that risk and allow you to put the money from the sale to work in other, more stable investments.
Some owners, especially those with smaller interests, decide that their mineral rights just don’t justify the time and effort involved with ownership any longer. They would rather spend their time doing something other than managing mineral rights that may not be making them much money. Eliminating the paperwork associated with mineral ownership can also significantly simplify your tax returns each year.
When you sell oil and gas assets that you’ve owned for more than a year, any long-term capital gain proceeds you receive will be taxed at rates of only 15% in many cases, whereas bonus and royalty income is always taxed at regular income tax rates, which can be as high as 39% if you’re in a high tax bracket. Please check with your tax or investment professional for questions related to tax or investment advice.
Oil and Gas Interests are “Depleting Assets”
Ownership can be more profitable over the long run than selling, but only if everything goes well. It’s very difficult if not impossible to predict how profitable (or not) a property might be in the future, and no matter how good a producing well is, it will eventually stop producing as the field it’s producing from becomes depleted. Once that happens the mineral rights will be virtually worthless. New drilling technologies do occasionally bring old areas “back to life”, but once the oil and gas is really gone, so is the value of your mineral rights. This is why mineral rights are classified as “depleting assets.” 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 that are more predictable and less risky.
It is usually easier to liquidate mineral holdings while you are living and let you heirs inherit cash rather than mineral rights. If you die, and own mineral rights in more than one state, your estate would have to be probated in each of them in order for title to pass to your heirs in most cases. In addition, if you reside in one state at the time of your death, but your mineral rights are in another, your estate would perhaps need to be probated in both states in order for title to pass to your heirs. This can result in a lot of expense and headache for an estate, and thus your heirs.
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.
Owning mineral rights is somewhat of a gamble most of the time
Some mineral rights owners for various and sometimes merely sentimental reasons decide not to sell their mineral rights under any circumstances; and it is certainly possible that keeping them will produce more income over the long run than selling them would; however it is somewhat of a gamble to count on that, and it happens only if a lot of things go exactly right over the years.
Buyers, on the other hand, can generally afford to take more risks on whether a property will be profitable or not because they are able spread their risk among MANY properties, rather than just a few. This is something most mineral owners with limited inventory cannot do.
Whether to sell or not is a personal as well as business decision, but don’t let sentimentality alone keep you from selling.