Posted by Zoe Geoffrion , on Oct, 2015
How A Company Offering To Purchase Oil And Gas Royalties Can Help You Financially
When it comes to selling oil and gas rights or mineral rights to a property, there is a long-held belief that the landowner, or mineral rights owner, actually comes out in a better financial position with a lease.
While this may be true if you just look at the numbers as raw data, there are some very important considerations when looking at the option for a company to purchase oil and gas royalties over a lease. Considering the advantages and possible drawbacks or risks in both is a good exercise to do on your own before making any final decision.
The Lease Issues
Leasing typically includes a cash bonus at the time of signing as well as the opportunity to have a monthly check for oil and gas royalties throughout the time the oil or gas well or wells are producing on your property. The royalty amount is based on a pre-set percentage of the total amount of oil or gas revenue per month over the acreage leased and the total in the drilling unit, calculated before the company deducts operating costs.
The drawbacks to a lease are fairly obvious however, and they include:
- No requirement for the company to drill during the lease period, resulting in zero income.
- A poor performing well with very limited income.
- A good income per month that has to be reported for taxation purposes as income, often driving your taxation rate into the higher brackets and resulting in more in taxes paid per year over multiple years.
- The need to renegotiate the lease at the termination date, which may or may not be in an optimum market or when there is any additional competition for the mineral rights.
With a lease, which can be long or short in duration, the mineral owner is also at the mercy of the oil and gas prices, which can certainly go through long periods of below average pricing.
The Purchase Advantage
When a company offers to purchase oil and gas royalties, and you can negotiate an agreeable sale value, it becomes a one-time transaction. This means you are provided with the lump payment sum that is reported as capital gains, only taxed at the current capital gains taxation level, which is well below what most people will pay at the income level.
With the lump sum of money rather than the monthly allotment, you can use the money as you want, reducing your debt, eliminating mortgages or credit card debt, or even in making investments.
If a company offers to purchase oil and gas royalties, there really are important options to consider. Keep in mind you don’t have to sell all the mineral, oil and gas rights, you can sell for some of the property and retain the rest, it will be up to you to make that determination.