It is important to differentiate between selling one's minerals and selling one's royalty in LA.
Selling your minerals means not only the loss of royalties, but also the loss of executive right to the extent that you sell minerals. Selling the first one-eighth of your minerals may result in only a net 1/32 RI on a 1/4 RI lease, but the mineral purchaser also has the right to negotiate his own lease (on his 1/8 mineral interest), receive bonus consideration, shut-in rentals, lease extension payments, etc. Also, a sale of minerals creates a mineral servitude and covenant running with the land, which means that the minerals may be held for as long as there is not a lapse of greater than ten (10) years between any new good-faith attempt to produce minerals and the last attempt to do same.
Selling royalty involves the sale of your right to receive sales from production. Typically, royalty deeds are tied to a mineral lease or the life of a mineral lease, however, royalty deeds (with appropriate words of art) can also become covenants running with the land, thus creating a servitude. If the property from which royalty has been sold is unleased, the mineral owner is generally responsible for making up the royalty proceeds to the royalty purchaser; so, one should not plan on 'riding the well down' and going unleased if one cannot tolerate paying royalties out of one's own pocket until payout, and beyond, out of one's revenue.
If you sell royalty, royalty is usually paid 'off the top' of the royalty due the lessor. Most deeds are generally worded "the first (fraction) of production...". Generally, lessees / operators will honor the royalty deed directly upon the submittal of the recorded instrument (e.g., if the royalty purchaser buys the first one-eighth of production from one's land that is subject to a lease promising a 1/4 royalty, the lessee / operator will write two checks covering your lease: one check to cover the royalty purchaser's first one-eighth of production, and another check to the lessor for his remaining one-eighth (lessor's royalty less the deeded portion sold to the royalty purchaser). That means (you've guessed it) in many areas of the HS, signing a similarly worded royalty deed amounts to selling one-half (at least: not everyone signed at 1/4) of your potential royalty checks away for a while. Remember that when considering an offer to purchase your royalty.
However, royalty deeds are extinguished after ten years of non-production, so if no one produces in your unit for ten years, all rights return to the mineral owner. Also, royalty purchases are not subject to the price of the commodities which may be produced, "as is, where is". Selling royalty therefore can and have been utilized by lessors to hedge against the 'peaks and valleys' of the business. In essence, the mineral owner is selling rights upfront for a cash payment. Much like the 'upfront payment' option in the Powerball, one's payment for a royalty deed will never equate to the total theoretical recovery produced from the mineral owner's lands. However, the cash payment is there, lump sum, to do with what you wish, whether the well(s) go great guns or go dry.
To weigh the pros and cons of a royalty offer, one should consider the total EUR due lessor (or net revenue, if one wishes to remain unleased) from the minerals underlying the land and its possible inherent value, the value of the purchase offer, and one's ability to tolerate predicted risk. These are the same primary factors (greatly simplified) that most royalty buyers consider prior to tendering an offer to purchase royalty. The mineral owner must do the same.
Parker, I must respectfully disagree with your statement that those that purchase royalty must think it is a sure thing. Those that are serious in their trading and/or accumulation of royalty rights (in LA, particularly) realize that royalty deeds carry risk. These risks are similarly built into their models for trading royalty rights. The payoff can be big, but equally disappointing when a secured royalty deed runs out with no attributable derived income whatsoever. To be sure, some royalty buyers simply throw a low-ball price out there to the public to 'see what sticks', but armed with proper knowledge, and through the use of market forces (i.e., playing royalty buyers' offers against each other), a mineral owner may effect a decent trade on a portion of one's royalty to a net advantage.
Although I would add that many mineral royalties are now not tied to mineral leases and will (as you noted) operate very much like a mineral servitude (only difference is interrupted by only production and not good faith drilling as with a mineral servitude).
As Dion said, I don't always think it is a bad decisioin to sell a portion of your royalty if a good price is achieved. It is like hedging your bets, and depends on your situation. An elderly person might want to "cash out" and sell some royalty now, rather than wait to recoup that amount over years.
I once tried to buy royalty in an area and was unsuccessful. I was only trying to buy a small portion for a lot of $$$ (at that time), which basically amounted to half of the lessor's royalty. A well was all set to be drilled and every landowner told me how confident they were it was going to be a great well, they weren't born yesterday, yada yada. Well, as you might expect, the well was dry, it condemned the acreage in the area, and those people missed out on some big $$$.
The point is not to say you should sell your royalty, it is just to illustrate that there are times it could work out better for the landowner and that nothing is a "sure thing." Howver, HA wells are operating at a pretty high success rate, so there is not as much risk of getting nothing, and selling minerals or royalty are less attractive (thus all the offers).
The big question that you make mention of, is what is a fair price for HS royalty interest. We all get the low ball "mailers" all the time, but what range would be a reasonable offer to consider for HS minerals?
when evaluating whether to sell royalty interests, shouldn't one also evaluate the different tax treatment imposed on royalty income versus the sale of royalty interests? Or are they both taxed as ordinary income?
Sale of royalty interest can be considered a capital gain, and taxed accordingly. I was told capital gains tax is 15%, as opposed to royalty income being taxed at 40%.
I do not have first hand knowledge, this is what I was told by a client of mine earlier this year. I also 'hear' that Obama's admin. does not support the capital gains tax, so it may not be applicable in the near future.
There are requirements to consider; I think you have to own the property for at least 1 year to be eligible.
There are so many variables to consider when determining the value of a particular royalty interest. Especially in the Haynesville Shale.
Thanks for the information . It is very informative. Do you know of any mineral rights or royalties being sold in the south area of HS or what was the price offered? Sorry for so many questions. But am really curious about this.
The last lease that I know about was in T8N-11W and it was for $10,000 per acre and 1/4 royalty this was in the northern portion of the township, The lessor was told that his lease would be the last one taken for a while, this was several months ago.
As exciting as this is, we know that we have a responsibility to do this thing correctly. After all, we want the farm to remain a place where the family can gather for another 80 years and beyond. This site was born out of these desires. Before we started this site, googling "shale' brought up little information. Certainly nothing that was useful as we negotiated a lease. Read More