WHATALANDOWNERNEEDSTOKNOW

ABOUTSALESOFMINERALRIGHTS?
Sandusky,MI
SanilacCounty
13014
CurtisTalleyJr.
FarmManagementEducator
MSUExtension,Hart,MI
2318732129
talleycu@anr.msu.edu
,

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DefinitionofMineralProperty
Mineralpropertyisrealproperty canbesevered
fromsurface
Mineralnouniversaldefinition
Generallyincludes:Fossilfuels oil,naturalgas,and
coal;Metalsandmetalbearingoressuchasgold,
copper,andiron;Nonmetallicmineralsand
mineablerockproductssuchaslimestone,gypsum,
buildingstonesandsalt;Mayalsoincludesandand
gravel,peat,marl,etc.
Canalsoincludepotassium,gasessuchashelium
"mineral"canvaryfromstatetostateandeven
changeovertime
CharacteristicsofMineralSale
Saleisgenerallyforever
Ownersgoalsveryimportant
Cashnowvs.potentialfuturecashfromleasebonusor
royalty
Financialneedmaybeafactor
Youngvs.Older;goalsmaydiffer
Oldermaywanttolivebetternow
Cansellalloraportion
Example50%dividedinterest(tenantincommon)ofthe
hydrocarbons
Donebymineraldeed
CharacteristicsofMineralSale
Continued
Ifnoroyalties,difficulttoestablishvalue
Whatarenonproducingmineralsworth?
Consultoilandgasappraiser
Sellerlosescontrolandleveragewitheventual
mineraldeveloper
Ifcashflowsexistseveralvaluationmethods
OneRuleofthumb:Salesprice=4yearsof
royalties
Example:Ifroyaltiesthepast4yearsaveraged
$5,000peryear;salevalue=$20,000
CharacteristicsofMineralSale
Continued
Analysisofpreviouscashflowstoproject
futurecashflowsandNetPresentValue
Allocatesverylittleornovaluetononproducing
minerals
Doesnotconsiderfutureimprovementsinnew
technologyimpactoncashflows
CharacteristicsofMineralSale
Continued
Currentcashflowscansellbymineralauction
Ifthereiscompetitioncansignificantlyincrease
income
Surfaceownerlosescontrolofreducing
impactstosurface
Newmineralownernoincentivetoprotect
surface
Getreferencesonpotentialbuyer
Understandsalescontract!qualifiedlegal
advice
MagnitudeoftheRoyalty
Situation:40acres,oneoilwell@25
barrels/dayfor200days@$90/barrel
25x200x$90=$450,000/year
1/8royalty=$56,250/yr=$1,406/acre/yr
1/6royalty=$75,150/yr=$1,878/acre/yr
3/16royalty=$84,375/yr=$2,109/acre/yr
.20royalty=$90,000/yr=$2,250/acre/yr
CharacteristicsofMineralSale
Continued
KnowwhatPartneringTogethermeansin
thesalescontract
Example:Sell50%undividedinterestfor
$250/acregrantsbuyer50%offuturemineral
incometo100%ofpropertyseeMagnitude
ofRoyalty
Buyermayflipthelandjustascanbedone
withthesaleofanoilandgaslease
MineralRetentionConsiderations
Oilandgascompaniesprefersameownerof
surfaceandminerals
Lesspeopletoplease(1vs.2)
Surfaceownermorecloutwithcompanywhen
mineralownerandsurfaceownerthesame
Leasebonuscanbeimmediatecash
Bonuses$15/acreupto$3,500/acreinMI2010
Leasehaslongtermroyaltypotential
Shortprimarytermmaymeanopportunityto
leaseagain=bonusagain
MineralRetentionConsiderations
Continued
Technologyconstantlychanging
Hydraulicfracturingandhorizontaldrilling
examples
Newtechnologyincreasesproductionfromold
wells
Potentialtonegotiatefavorablelease
SalesofMineralRightsReducing
Risk?
Willseveringmineralsaffectfuturesaleof
surface?
Mineralproductionpresentbutnoroyaltyto
surfaceownermayreducepotentialbuyers
Intactmineralswithroyaltyincomeattractive
tocertainbuyers salenowcouldincrease
risklater
SellMineralRightsandReclaimin
20Years?
UnderMichigan'sDormantMineralsAct,severedoil
orgasrightsreverttothesurfaceowneraftertwenty
years,unless:
Theseveredinterestissold,leased,mortgaged,or
transferredbyrecordedinstrument.
Adrillingpermitisissued.
Oilorgasisactuallyproducedorwithdrawnfromthe
severedholdings.
Theinterestisutilizedforundergroundgasstorage
operations
SellMineralRightsandGetThem
Backin20Years?
Buyermustfilerecordclaimofinterestwiththe
countyRegisterofDeeds(affidavittoretain)during
the20years.
Clockstartstickingdaydeedfiled
TheDormantMineralsActappliesonlytooilorgas
rights,andnotothermineralrights.
IWishYouTaxProblems!
DONOTLETINCOMETAXDICTATEADECISION
Sale:2013MFJiftaxableincome<$72,500
Cap.gainrate0%;earnedincomerate=15%
+SEtax
Sale:2013MFJtaxableincome>$72,500Cap.
gainrate15%;earnedincomerate25%+SE
tax
IWishYouTaxProblems!
Oil&Gasleasebonusnotearnedincome:tax
@ordinaryrate;noSEtax
Oil&gasroyaltiesnotearnedincome;tax@
ordinaryrate;noSEtax
CropdamagesordinaryincomesubjecttoSE
tax
Surfacedamagesordinaryincomenotsubject
toSEtax
Resources
MSUExtensionhastheOilandGaswebpageat
http://msue.anr.msu.edu/program/info/oil_and_gas
Oilandgasleasingvideoonwebpage
Leaseaddendumonwebpage
QuarterlyOilandGasNewslettercontact
talleycu@anr.msu.edu
http://news.msue.msu.edu MSUExtensionnews
articles
YourcountyMSUextensionoffice
THANKYOU
QUESTIONS?