Have you been given the common advice to never sell mineral rights? The decision to sell mineral rights is a personal decision that only you can make.
The advice to never sell mineral rights comes from a good place. Family members have passed this advice along over the years because it’s good to own assets. However, mineral rights are unique asset. For many, holding onto the mineral rights does not make sense.
The reason is that mineral rights are different than most traditional assets. Mineral rights have major draw backs:
No Control: When you own mineral rights, you have zero control over the asset. The decision to drill a new well is not yours. The decision to shut in a well is not yours. You have no control over the investment. If you own a rental property, you get to manage that property and decide how to operate it.
No Diversification: Most mineral owners have a small amount of ownership concentrated in a small area. This means you are not diversified. If the wells in your area don’t perform well, the value could decline dramatically. If you invest in a stock market ETF, you get diversification among thousands of companies which spreads out your risk.
Volatility: Would you put a significant amount of your net worth in cryptocurrency like Bitcoin? Of course not! The reason is because the price swings wildly. Yet mineral owners continue to hold mineral rights that are extremely volatile. The price of oil and gas is extremely volatile. The value of your mineral rights is directly tied to the price of oil and gas. This means that the value of your mineral rights is very volatile.
Depletion: With most assets like a stock or a rental property, the value will go up over the long term. Mineral rights are a depleting asset. As that oil and/or gas comes out of the ground, it is gone forever. If they drill 6 new horizontal wells on your acreage and they produce for 20+ years, that oil and gas is gone. It won’t be worth more in the future, the value has been extracted and it will be worth less. Assets should increase in value over time, not decrease.
For a select few, holding your mineral rights can make sense. If you have significant assets and your mineral rights are a tiny fraction of your net worth, holding onto the mineral rights could make sense. For 99% of mineral owners, selling mineral rights makes more sense.
Above, we described why holding mineral rights is risky. How do you know when to sell? The decision to sell is a personal one.
Many of our clients decide to sell for the following reasons: