What To Know About Selling Oil and Gas Royalties!
February 22, 2016
Those who own property containing oil and gas can sell their mineral royalties without actually selling their property. There are many reasons why someone might be interested in selling oil and gas royalties. Yet no matter what these reasons may be, royalty owners should know how to do this before beginning the sales process. There is much to learn about the sale of rights and royalties, and how royalties are assessed and valued, so understanding this process is essential.
Why Sell Oil and Gas Royalties?
Selling all, or a portion of, oil and gas royalties is a great way for royalty owners to generate capital, whether for personal needs or for other investments. Managing mineral royalties can sometimes be problematic, with many people deciding to sell their royalties to avoid complicated tax issues, higher tax rates, and even reduced SSI payments. Because of the amount of royalty the property may be producing. In the most basic sense, selling royalties provides a simpler stream of income than self-managing royalties without actually selling mineral rights.
What Happens When Royalties Are Sold?
In a sense, selling oil and gas royalties is a lease to another company for a certain period of time. In order to sell royalties, a property owner must also hold mineral rights, since selling royalties is a temporary contract and selling mineral rights is a permanent one. The benefit of selling oil and gas royalties is that mineral rights owners retain ownership of their minerals and only selling what their land will produce within a certain amount of time. This leaves mineral rights owners in control of things such as where the land is drilled and how much of their royalty is sold. What is being sold is only the product extracted from the ground during the contract period - nothing more.
Determining Oil and Gas Royalties Value
The process of actually selling mineral royalties can be a bit complex; however, this is to ensure that both the royalty owners and the companies buying the royalties each get a fair deal. First, the value of the royalty must be determined. This requires analyzing things such as the type of royalty and where it is located as well as the amount that it has been producing in the recent past. Normally, three to six months of payment receipts, along with a copy of the last oil or gas lease, must be evaluated to determine the yield that can be expected from a royalty in the future. This, along with calculated estimates of current price, life expectancy of the royalty, length of the contract, and a few other factors enables a royalty company to determine a fair rate to pay for that particular royalty. The agreed upon amount is then paid in a lump sum called a bonus to the seller.
Selling royalties is like giving someone else the ability to harvest oil and gas from a property for a certain length of time, in exchange for bonus money paid for that lease. Selling oil and gas royalties can be beneficial for a variety of reasons. It is a highly recommended way to earn money from mineral rights, as it leaves owners in control of both their property and their minerals!
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