Most of us have seen re-runs of that old show “The Beverly Hillbillies” where poor ol’ Jed Clampett and his family are transported to instant riches because of what lay beneath their property- oil. And while that show was funny and amusing, the real world of mineral rights and resources lying beneath the soil is much more complex and serious.
For landowners and potential investors, mineral rights is a topic of great importance and considerable complexity.
We took a look at the basic groundwork of mineral rights and what landowners and investors need to know about, and we have a very quick and simple look.
What are Mineral Rights?
Jason Fernando in a May 2023 online article says that mineral rights are the ownership rights to underground resources such as fossil fuels (oil, natural gas, coal, etc.), metals and ores, and mineable rocks such as limestone and salt. In the United States, mineral rights are legally distinct from surface rights. Surface rights give the owner the right to use the surface of the land for residential, agricultural, commercial and other purposes. Mineral rights entitle the owner to own and exploit any natural resources found beneath the land.
Should You Never Sell Mineral Rights?
Before selling mineral rights you should take a step back and consider your options. For some wealthy individuals, it can make sense to hold onto mineral rights. In many cases it makes sense to sell mineral rights. Below are some of the most common reasons why selling mineral rights is the best financial decision:
- Taxes: The #1 reason for selling mineral rights is taxes. If you inherited mineral rights and then sold them for $100,000, you could pay only $5,250 in taxes and keep $94,750. If you collect royalty income of $100,000, you could pay $30,000+ in taxes and only keep $70,000 and it would takes years to collect. Your basis in mineral rights can affect how much tax you owe when selling mineral rights vs collecting royalties. If you inherited mineral rights, it nearly always makes sense to sell.
- Diversification: In our opinion, another key reason to sell mineral rights is diversification. We talk to a lot of mineral owners who have a substantial amount of their net worth tied to their mineral rights. If your mineral rights make up more than 5% of your net worth you should consider selling. After selling mineral rights, you can invest in a total stock market ETFthat will give you diversification AND give you a dividend payment every quarter.
- Control: When you own a stock, real estate, or other asset, you decide what happens with that asset. When you own mineral rights you do not decide when (or if) any drilling will take place. As a mineral owner, you would prefer that an oil and gas operator drills immediately. However, you have no control over this and many mineral owners wait decades and nothing happens.
- Oil & Gas Prices: In addition to not controlling when or if any drilling occurs, you also have no control over the price of oil and gas extracted from the ground. Oil and Natural Gas prices have been historically volatile. This industry is known as a boom and bust type of industry. The amount you get from your royalty income is driven by current oil and gas prices.
- Short Term Financial Need: Many mineral owners are facing a short term financial need. If you recently lost your job, need to make a down payment on a home, want to start a business, or help your child through college, selling mineral rights can make sense.
- Medicaid Eligibility: While the rules vary by state, if you receive oil and gas royalty income you may not be eligible for Medicaid. The rules are complicated but we have a guide to help you better understand the value for Medicaid eligibility
How Much are Mineral Rights Worth?
The fact that mineral rights can be privately owned in the United States means that homeowners with rights to valuable resources on their property can sell those mineral rights to private corporations, sometimes generating substantial up-front or ongoing royalty payments by doing so. A common example of such transactions involves properties located on subterranean oil reserves, which can attract purchase offers from oil extraction companies.
In the United States, the ability to privately own mineral rights allows homeowners with valuable resources on their property to sell those rights to private corporations.
Generally, the attractiveness of these mineral rights—and, therefore, the royalties that private landowners can obtain for them—is heavily dependent on the price of oil. When oil prices are high, unconventional methods of oil extraction become more economical, raising the value of mineral rights.
Do I Own the Mineral Rights to My Property?
Fernando makes the following points in his May 2021 article.
- Mineral rights are ownership claims against the natural resources located beneath a plot of land.
- In the United States, mineral rights are separate from surface rights.
- Mineral rights are often “severed” from surface rights in states such as Texas, Oklahoma, Pennsylvania, Louisiana, Colorado, and New Mexico.
How Do I Value Mineral Rights?
US Mineral Exchange, a private company which works with buyers and sellers in the mineral rights field says, “Understanding the market value of mineral rights is a lot more complex than it may seem. Many mineral owners are looking for “comps,” or “comparable sales” to tell them what their mineral rights might be worth. The problem is that comps don’t exist with mineral rights. Every property is unique. The value of your mineral rights could be worth 10x more than your neighbors. Your mineral rights might also be worth 10x less than your neighbors. If you are looking for a website that will tell you the market value for mineral rights you won’t find it!”
What does “Mineral Rights Do Not Convey” Mean?
Ranger Land and Minerals, a Dallas-based company says,” In the United States, mineral rights can be extremely valuable in earning oil or gas royalties. However, when it comes to selling your property, the documentation may cite “conveying” mineral rights to the new owner as a part of the agreement.
Mineral rights refer to the ownership of underground resources, including fossil fuels like oil, natural gas, and coal, as well as metals, ores, and extractable rocks such as limestone and salt.
In legal terms, “conveying” is a term used to describe the sale or transfer of a property. In a split estate, landowners can choose to convey or retain their rights separately from a property’s surface rights. Essentially, when working with them, there are three basic ways in which property can be conveyed. They are as follows:
- Conveying surface rights, while retaining mineral rights.
- Conveying mineral rights, while retaining surface rights.
- Or, conveying both mineral rights and surface rights to one or separate entities.
If you choose to sell your mineral rights, then that may earn you a nice paycheck. Plus, if you sell these rights on a parcel of land that is producing oil or gas (or will be in the future), then you may be able to earn a royalty interest on the future sale of resources.
In a fee simple estate, the sale, or conveying, of mineral rights is tied in with the surface rights. Therefore, it is commonplace that the sale of the property also involves the sale of the property’s subsurface. However, in a split estate, it is possible to convey your mineral rights while retaining your surface rights.
Because they are valuable, obviously, there are also benefits in retaining them (rather than conveying them) when selling your property. In the case of a split estate, surface rights can be sold for a large profit, while these rights are retained for future earnings. If you still own your mineral rights, then you can explore an oil and gas lease as a great way to earn royalty interests from the resources produced.”
In Conclusion
The entire field of mineral rights and the buying and selling of such rights is a very complex and involved situation. Anyone, either buyer or seller, involved with a potential sale of mineral rights should have good advice from an educated source and should enter into any deal with a good bit of research and information beforehand.
There is real possibility of potential gain lost when a landowner makes a mineral rights deal from a position of ignorance. Using the services of a reliable and trustworthy mineral rights lawyer or investment firm is a very good idea for most landowners.