The mining industry is nearly at a standstill due to plummeting crude oil and natural gas prices. This means mineral rights owners are also feeling a lack of cash flow as dwindling royalty checks arrive in the mail. For some, it’s time to consider listing their producing oil properties for sale. But, how do you do this? Who will buy it? And how will it affect your taxes?
Promoting Oil Properties for Sale
Thanks to modern technology and online commerce, listing your oil and gas property for sale is very similar to selling a house or parcel of surface rights land. You can place an advertisement in a local publication (print or online), work with a broker, deal with investment bankers directly or go the for-sale-by-owner route.
In addition to a text write up, production statistics and photos, sellers are now adding video clips to their advertisements. This helps potential investors see the current setup of the producing oil property.
When it’s time to promote your producing oil properties for sale, the information you present should both educate and entice a buyer. Oil and gas investors are interested in learning more about the production rates and quality of the minerals on your land.
Have all documentation detailing the geological finds and output from the well available. Be sure to include:
⦁ offset production analysis
⦁ decline curve analysis
⦁ estimated ultimate recovery
⦁ geological surveys
⦁ verification of production
This information can be woven into the text description of the property for sale, discussed during a short video tour of the rig or printed in a quick bullet-point fact sheet to make an impact on investors.
Who Should You Target?
Once you’ve created a fact-filled advertisement and feel comfortable promoting your property, you’ll need to get it in front of the right people. Think of it like commercial real estate. Although you could find an individual (maybe a neighbor or a relative) who wants to buy, it’s more likely that a business or land investor will be purchasing from you.
Since buying into the oil industry can seem complicated, it’s common for landowners to sell their oil producing properties to an oil and gas investment company, like BWAB. Then, the investment company will turn around and sell the property to an oil and gas company for commercial exploration and production. This approach offers minimal risk and a swift, legal sale for the seller.
Keep this in mind: The longer you own a producing well, and can show a track record of output, the more enticing your offer is to potential buyers. When considering a price, do a little research on the going rates based not only on production numbers but also on the age and reliability of the well.
The company acquiring the land will likely base their offer on:
⦁ the current royalty percentage on the lease
⦁ term of lease or sales terms
⦁ current operator
⦁ proximity to successful wells and existing pipelines
⦁ estimated ultimate recovery (EUR) the well
Once an agreement is made, a Purchase and Sale Agreement (PSA) contract will be presented for a lump sum based on the per net mineral acre being sold. At the property closing, the seller will sign an Oil & Gas Mineral Deed before receiving a check or receipt for an automatic bank deposit from the buyer. This is a one-time payment, and you will no longer receive royalty checks on the oil production.
Making the Sale and Taxes
As you work on promoting and preparing for a sale, be aware of the tax implications.
As a mineral rights owner, you can take a deduction for the depletion of the natural resources in the land, according to the United States Internal Revenue Service (IRS). According to the government, “The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction.”
After the sale, when you are no longer an independent producer or a royalty owner, these deductions will no longer apply and may have a significant impact on your annual earnings and expenses.
However, when you sell your mineral rights, there are a few tax perks. You can take advantage of the long-term capital gains tax if you’ve owned the land for at least a year before selling or you may be eligible for 10-31 Like-Kind Exchanges, which means the property is deemed a real estate transaction and no taxes are owed.
It’s best to talk with a tax professional about how selling producing oil properties will affect your annual tax preparation and filing as soon as you consider making a sale.
If you have producing oil properties for sale, BWAB can help. Contact us today to learn how we buy and sell producing oil properties.
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