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In our first Series, we take up the "Never Sell Mindset" and a phrase that we hear from mineral and royalty owners all the time:
My Grandpa [my aunt, my neighbor] told me that I should never sell!
In today's post, we are going to talk about (a) why folks think this way to begin with, (b) why we believe there is a better way to approach mineral ownership and (c) why you should never say never!
If you would rather watch our video via YouTube, check out the link below:
Part 1: Reasons for the Never Sell Mindset
So, why do folks think this way in the first place? In my experience, there are two primary reasons for the Never Sell Mindset:
First, it doesn't cost you anything to hold your minerals.
Whether for 1 year, 5 years or 50 years, your oil and gas mineral and royalty interests can stay on your Personal Balance Sheet forever and it won't cost you anything. This is because what you own represents a cost-free interest in any oil and gas that is produced from your lands.
These interests may differ in size and character, but the common denominator for mineral interests, royalty interests and non-participating royalty interests (NPRI's) that are subject to valid oil and gas leases is that they do not bear the costs and expenses of exploration and production (they participate "cost free").
Second is the idea that your minerals could be worth more at some point in the future than are today.
Perhaps through the drilling of additional wells, or a big upswing in commodity prices, many folks hold on to the hope that their minerals could appreciate if they hold them long enough.
Both of these points are well taken, but we encourage the mineral owners we talk to to think about a couple of things before saying never:
First, there is an Opportunity Cost to every choice we make in life,
whether you are talking about selling a home or buying a home, taking a job or not taking a job. And this concept of Opportunity Cost applies equally to the decision to hold your mineral rights.
Second, for most people the biggest contributing factor to the Never Sell Mindset is a lack of understanding of how mineral rights are valued.
Many folks who would consider selling end up paralyzed by the decision because they would rather not make a decision, than make a poor decision, and sell for something less than fair value.
To us, this makes sense. After all, when you don't know what to do, making no decision can be the best decision. However, in our experience, the more folks educate themselves about mineral and royalties, the market and valuation, the more comfortable they become with the idea of selling in order to pursue an opportunity that is more meaningful to them.
Part 2: Minerals as an Asset on Your Personal Balance Sheet
An important concept that we often convey to mineral owners is that:
Your minerals and royalties are an Asset on your Personal Balance Sheet and they should be treated just like any other Asset you own.
So, what is a balance sheet? A balance sheet is a tool used by businesses and individuals to understand net worth (for businesses, we call it "shareholder's equity"). The equation is very simple. If you stack up all of your Assets (your home, vehicles, stocks and bonds, etc.) and subtract all of your Liabilities (mortgages, loans, credit cards, etc.), you will come up with your net worth.
One of the great things about your minerals and royalties is that they are an Asset on your Personal Balance Sheet,
meaning that they positively contribute to your net worth, just like equity you may own a home, or stocks and bonds you may own in a retirement account or a brokerage account.
Now, the difference between minerals on the one hand, and homes and stocks bonds on the other, is that folks have a general understanding of how homes are valued (by comp analysis). Folks likewise have a general understanding of how stocks and bonds are valued (based on company and market performance).
How many times have you been to Zillow, Redfin (or any other real estate website) to check on the value of your home within the past few months? How many times have you logged into your Fidelity or Vanguard account to check on the value of your 401k?
This is where the difficulty arises. When it comes to minerals and royalties, there is no one-stop-shop or other easy place that you can turn to to understand value. There is no Zestimate for your minerals!
Generally speaking, there are few resources available to owners of oil and gas minerals and royalties to help them understand value. Unless you are an oil and gas professional yourself (or have someone in the family that works in the oil and gas business), then you are largely left in the dark.
So, what happens? This lack of resources and understanding of mineral rights leads folks to the Never Sell Mindset. And it also leads to folks treating their mineral and royalty interests differently than other Assets on their Personal Balance Sheets.
Whereas folks are comfortable selling homes because they understand value, they are not comfortable selling minerals and royalties because they don't understand value.
In summary, we don't think the mantra should be "never sell your minerals." But, rather, we think it should be:
Never sell your minerals and royalties without understanding value.
Said in a different way, you should never sell anything without understanding value! And finally, you should make smart, informed decisions.
What we've seen is that when folks get educated about the asset class and they have a general understanding of how minerals and royalties are valued, it gives them the comfort to treat that Asset just like any other Asset they own on their Personal Balance Sheet. It gives them the freedom to pursue other opportunities that are more meaningful to them than ownership of minerals.
You say: "This is all fine and good Steven, but how do I get educated about minerals and royalties?" I'm glad you asked! This is exactly why we've created the Minerals Guy.
Our goal is educate and empower mineral and royalty owners to understand more about minerals and royalties as an asset class, and their potential value.
We hope you will join us for the journey!
We are always here if you need us...
Our heartbeat is to serve mineral owners and we driven by core values of transparency and fairness. Everyday, we help mineral owners to retire, send kids to college, start a business, get out of debt, take risk off the table, and pursue the things in life that mean the most to them!
If we can be of service to you or someone you know, click the link below to schedule a consultation.
Part 3: Understanding the Opportunity Cost of Holding Versus Selling
So, let's dive into the concept of opportunity cost and how it applies to selling mineral and royalty interests. First, what do we mean by Opportunity Cost? To us:
Opportunity Cost is the idea that an opportunity taken is an opportunity foregone.
It's the concept that if we choose Path A, we can't also choose Path B. And this is true for many things in life. A great example is the decision to buy a new home: an opportunity taken (a house bought) is an opportunity foregone (a house sold). Your decisions is going to take you down a different path, hopefully for the better.
So, what do we mean about Opportunity Cost and minerals? Your minerals and royalties can stay on your Personal Balance Sheet forever--that is certainly your prerogative. But, alternatively, you could trade them for a different Asset. The question is pretty simply:
If you could sell and realize fair market value for your minerals, what would you do with the cash?
When we are talking about judging Opportunity Cost and minerals, you have to look at it both ways: (a) what is the opportunity cost of continuing to hold my minerals? And, (b) what is the opportunity cost of selling my minerals?
To a large degree, the decision to sell or hold comes down to Value Judgment. This is a personal question for you and your family to think about and discuss.
Here is the question at its core: Is there an Asset that I would rather own than oil and gas minerals and royalties?
Some folks may answer that and say, "no" for one reason or another. But many folks look at what is important to them and they make a Value Judgment decision and elect to sell.
Summing It Up
We talk to mineral owners all the time who fall into the Never Sell camp. Many folks choose to hold minerals for good reason and we respect their decision to do so. But don't let yourself fall into this mindset because you don't understand the asset class and are fearful of making a poor decision.
Continue to educate yourself about mineral rights and the pro's and con's of selling versus holding. Evaluate the Opportunity Cost of continuing to hold by thinking about other opportunities that you could pursue.
If we can do anything for you please don't hesitate to reach out to us. We would absolutely love to hear from you!
Until next time!
Steven Hatcher