Oil and Gas Lawyer Blog
The post below is from my partner Nicholas Miller. Nicholas has developed a specialty helping mineral owners evaluate offers to purchase their minerals and advising them through the sale process.
John and I often receive questions from clients and interested parties about selling mineral assets. John previously wrote about our work in marketing and selling minerals here.
A few years ago when fielding these questions, I would pass along the family mantra I so commonly heard growing up in a mineral and land-owning family; don’t ever sell your minerals. You never know if and when the low-producing or non-producing asset will suddenly become exponentially more valuable. This unknown still rings true today, but I believe to a lesser degree.
In the mid-2000s, when shale formations became accessible through technological advancements including horizontal laterals and fracing, the ability to produce new, previously untapped horizons was at an all-time high. The possibilities seemed endless. The Barnett was followed by the Haynesville, the Eagle Ford and now the Spraberry and Wolfcamp, just to name a few of the big-name plays over the last 15-20 years. Exploration is now focused mostly in the Permian area with the Wolfcamp, but new wells do come online across Texas operated by what seems to be an ever-changing field of oil and gas companies both large and small. What is different about today’s exploration versus where we were 10 or even 5 years ago is the predictability of what given acreage may produce. With today’s technology and web applications like Drillinginfo or even the Railroad Commission website, it is relatively easy to see trends in locations and operator activity. It follows that it is easier to gauge whether particular mineral acreage will be productive or not, and to what degree.
This gives the mineral owner a better ability to negotiate sales prices and evaluate offers. While the fear of missing out on the next big play is still real, it is diminished with more information. Decision-making is facilitated by applying newly available data to a given scenario or mineral tract. As a result, mineral owners are now considering a sale where they would not have previously.
Reasons for selling your minerals used to be limited mostly to fixing a problem. Need to pay taxes or medical bills. Need to put kids through school or pay for a wedding. Want to add to a retirement account or take that dream vacation. There has been a shift in the decision-making process whereby more mineral owners are selling based on a rational business decision as opposed to an unrelated need or want. Owning minerals is really just an investment of capital betting on the future production of those minerals. Some of our clients feel more comfortable with an asset that has more stability and so would rather put their funds into rental properties or a Delaware Statutory Trust as a more secure investment. Oftentimes clients will choose to only sell some portion of their minerals to diversify and spread the exposure to risk. If that big payday does come, they can still participate, but they are also protected against the downside by investing in properties that are more likely to produce a steady income stream.
This is especially true with the utilization of a 1031 exchange. Minerals are real property, so a a like-kind exchange under section 1031 of the Internal Revenue Code is an option just as if you were selling an ordinary investment property. If a 1031 is utilized during a mineral sale, taxes are deferred so long as you identify a replacement investment property within 45 days of your sale and follow the correct steps.
Sales of minerals are still largely private transactions, although minerals may also be sold at auction. It pays to know the buyers in the area and what types of assets they’re looking for. And, as always, the seller should have legal counsel, just as in any real estate transaction.