Want to Have your Cake and Eat it Too? Consider a Partial Sale

April 6, 2020

Want to Have your Cake and Eat it Too?  Consider a Partial Sale

So you’re on the fence about selling your mineral rights. Is now the right time? What’s the long-term view on oil? Are the rigs going to return to your unit anytime soon? These questions can be impossible for even the experts to answer, given the nature of oil and gas markets. The answer also depends on one’s overall risk tolerance, time horizon, and goals. What you decide to do is up to you. Read on to learn more about how you can hedge your bets by becoming more diversified.  

In the early days of mineral buying, sellers had to commit to sell all or nothing. In recent years, however, companies like Revere have pioneered new and more flexible types of transactions, including the partial sale. Depending on where your assets are in terms of their lifetime value, you might benefit greatly from this kind of sale.  Let’s look at a few examples.  

PDP Asset – Proved Developed Producing (there is no more room for additional wells on the property). If your minerals fall into this category, consider yourself lucky. There are no locations left undrilled.  You are most likely receiving regular monthly checks.  The reasons for a partial sale can be many. Since long term capital gains taxes apply to mineral sales, many individuals see this as an effective way to pay lower taxes on their mineral rights, while keeping some skin in the game.  However, an even more common reason in this scenario is to lock in the value of your rights.  Since production from most wells declines sharply in the first 12-24 months, a partial sale can help protect you from smaller and smaller checks as months pass by.  

PUD Asset – Proved Undeveloped (only a few wells drilled, nothing currently permitted, and lots of open space for an operator to drill). Given the amount of time it takes for an operator to drill an entire unit, it may take many years for an operator return.  In some cases, they never return.  For example, fluctuations in oil prices may have rendered the acreage no longer economically feasible to drill.  Or, a newly discovered fault line in the acreage may cause engineering issues that make additional wells impractical. Many owners in this situation feel helpless. They worry that the day after they sell, the operator will decide to return. And every year that goes by without any indication from the operator feels like a lifetime. In these circumstances, a partial sale allows owners to cash in now on future production. It also allows them to retain some rights should the operator finally decide to return.    

Permitted/Current Drilling/ Awaiting Completion (DUC/WOC) – You may be shocked to learn that most sellers choose to cash in on their minerals after an operator has filed a permit to drill a new well. Why would they choose now of all times to sell? Don’t they understand that the operator has finally given notice that they will return?

A couple of factors are at play here. First, the best time to get the highest value for your rights is when there are permits on your property. Why?  We pay you for the potential of the wells being drilled and usually assume they will outperform older wells.  Also, given the amount of time it takes an operator to go from permitting, to drilling and completing the well, to taking the oil to market is much longer than most owners expect. Wells can sit drilled but uncompleted for many months until the operator has time to dispatch a completions crew to complete the unit.   Many sellers choose not to wait.  They’re tired of the uncertainty.

There’s one more reason to strongly consider a partial sale, and that is that Revere becomes an owner in the unit alongside you.  We share the risk, and in this way it becomes easier for you to manage your rights and keep an eye on future developments. In addition, should you ever decide to sell the remaining rights, we’re here for you.  

We hope this article aids you in understand the many benefits and ramifications of a partial sale of your mineral rights. Revere is always here to help you make the right decision for you and your family.

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