Why should I sell my Mineral Rights?

By: Vernon Henry - November 7, 2019

I inherited some minerals owned by my grandfather, and I remember, as a child, he told me to “Never sell your mineral interests”. I held this belief for some time, and for many years, it rang through to me. Not only did I have a sentimental tie to my grandfather, but I also didn’t know what the minerals were worth, so any sale could be leaving value on the table.

 My grandfather, however, grew up in a different time than we live today. Mineral interests are commonly purchased, sold and traded now more than ever. Due to the emergence of the unconventional drilling/production, the paradigm has shifted. The reason my grandfather told me not to sell is because very little was known about the geology under the mineral rights, and some major discovery might take place in the future, which could drastically alter the value of your minerals.

Now, much more is known about geology, and with unconventional (shale) development, the risk of owning minerals has changed dramatically. Whereas before, much of the “value” risk was associated with Geology, and now much of the “value” risk is much more associated with timing of development. In other words, the risk of whether oil could be found was reflected in the price of minerals, so often prices for minerals were very low until oil was discovered (usually very locally), and the price changed to reflect the new information. In recent years, due to the large geographical areas covered by unconventional shale, the question of “if” the existence of hydrocarbons is not as large of a driver of value, but more so “when” the minerals will be developed.

 As any professor will teach on the first day of Finance 101, $1 today is worth more than $1 tomorrow. This theme is true on almost any investment. If you collect $1,000 per year over a 10-year period, you should be willing to trade that future cashflow stream for less than $10,000 today, in order to get all of it at one time, and eliminate the risk of not receiving those cashflows.

Mineral and royalty interests hold the same truths. Although the geology and productive reserves in a property might be known, the risk lies in 1) how long it will take the operator to develop (mineral holders usually don’t drill their own properties), 2) the commodity prices, and 3) how much each well is expected to recover. Usually this process occurs over the 20-40 years it takes to produce an entire well, so there is variability in that risk, and the owner of the minerals holds that risk, whether they know it or not.

 Ultimately, the decision to sell or keep mineral interests are personal, but one must keep in mind the risks and benefits each interests uniquely holds, and assess the value with those aspects in mind.