Understanding Royalties: Sell Oil and Gas Royalty Interests for Cash

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What are Oil and Gas Royalties?

A royalty is a right to a payment for the use of an asset by another party. For oil and gas, royalties are rights to a portion of the sales of oil or natural gas from a property. The total royalty interest on a property is typically defined in the leases signed by you and the operator who drilled and/or maintains the wells on the property. This is often a small interest, usually less than 20%, of the total revenue interest tied to the minerals. An individual royalty will be a portion of this total royalty interest.

What are the benefits of owning royalties?

Royalty interests have the benefit of receiving a portion of the total revenue from the sale of oil and gas but without being responsible for paying expenses. Working interest owners are responsible for the operating expenses tied to the well. If you own a royalty interest in a producing unit or lease, you should be receiving regular payments from the operator for your portion of the revenue brought in by oil and gas sales.

What are the risks of owning royalties?

Most royalty owners do not realize that the production from their property will continue to decline every year, though their check will fluctuate mainly based on oil and gas prices. Eventually, the well will deplete and the royalty checks will decline to $0. Furthermore, if the well that pays the royalty gets damaged and is shut in for repairs, or if the well simply becomes uneconomical to operate, the royalty payments will stop. Because of this risk, many royalty owners choose to sell oil royalty or gas royalty, trading their declining monthly cash flows into a lump-sum pool of cash they can convert to a non-depleting asset.

Should I sell gas royalty or oil royalty?

In general, royalty ownership in an oil and gas field should be looked at individually and decisions should be made on a case-by-case basis. This is why it is important for owners to understand how royalties and other oil and gas interests work. Before they sell oil royalty or sell gas royalty, many owners consider the amount of recent royalty payments, how old the lease on the property is, how reliable the operator is and how long the royalty payments might last. Another thing to consider is the current prices of oil and gas that may be affecting the size of the recent royalty checks.

 

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