WHATALANDOWNERNEEDSTOKNOWABOUTSALESOFMINERALRIGHTS?

Sandusky,MISanilacCounty

13014

CurtisTalleyJr.FarmManagementEducatorMSUExtension,Hart,MI

2318732129talleycu@anr.msu.edu

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DefinitionofMineralProperty Mineralpropertyisrealproperty canbeseveredfromsurface

Mineralnouniversaldefinition Generallyincludes:Fossilfuels oil,naturalgas,andcoal;Metalsandmetalbearingoressuchasgold,copper,andiron;Nonmetallicmineralsandmineablerockproductssuchaslimestone,gypsum,buildingstonesandsalt;Mayalsoincludesandandgravel,peat,marl,etc.

Canalsoincludepotassium,gasessuchashelium"mineral"canvaryfromstatetostateandevenchangeovertime

CharacteristicsofMineralSale Saleisgenerallyforever Ownersgoalsveryimportant

Cashnowvs.potentialfuturecashfromleasebonusorroyalty

Financialneedmaybeafactor Youngvs.Older;goalsmaydiffer Oldermaywanttolivebetternow

Cansellalloraportion Example50%dividedinterest(tenantincommon)ofthehydrocarbons

Donebymineraldeed

CharacteristicsofMineralSaleContinued

Ifnoroyalties,difficulttoestablishvalue Whatarenonproducingmineralsworth? Consultoilandgasappraiser

Sellerlosescontrolandleveragewitheventualmineraldeveloper

Ifcashflowsexistseveralvaluationmethods OneRuleofthumb:Salesprice=4yearsofroyalties

Example:Ifroyaltiesthepast4yearsaveraged$5,000peryear;salevalue=$20,000

CharacteristicsofMineralSaleContinued

AnalysisofpreviouscashflowstoprojectfuturecashflowsandNetPresentValue Allocatesverylittleornovaluetononproducingminerals

Doesnotconsiderfutureimprovementsinnewtechnologyimpactoncashflows

CharacteristicsofMineralSaleContinued

Currentcashflowscansellbymineralauction Ifthereiscompetitioncansignificantlyincreaseincome

Surfaceownerlosescontrolofreducingimpactstosurface

Newmineralownernoincentivetoprotectsurface

Getreferencesonpotentialbuyer Understandsalescontract!qualifiedlegaladvice

MagnitudeoftheRoyalty

Situation:40acres,oneoilwell@25barrels/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

CharacteristicsofMineralSaleContinued

KnowwhatPartneringTogethermeansinthesalescontract

Example:Sell50%undividedinterestfor$250/acregrantsbuyer50%offuturemineralincometo100%ofpropertyseeMagnitudeofRoyalty

Buyermayflipthelandjustascanbedonewiththesaleofanoilandgaslease

MineralRetentionConsiderations Oilandgascompaniesprefersameownerofsurfaceandminerals Lesspeopletoplease(1vs.2) Surfaceownermorecloutwithcompanywhenmineralownerandsurfaceownerthesame

Leasebonuscanbeimmediatecash Bonuses$15/acreupto$3,500/acreinMI2010

Leasehaslongtermroyaltypotential Shortprimarytermmaymeanopportunitytoleaseagain=bonusagain

MineralRetentionConsiderationsContinued

Technologyconstantlychanging Hydraulicfracturingandhorizontaldrillingexamples

Newtechnologyincreasesproductionfromoldwells

Potentialtonegotiatefavorablelease

SalesofMineralRightsReducingRisk?

Willseveringmineralsaffectfuturesaleofsurface? Mineralproductionpresentbutnoroyaltytosurfaceownermayreducepotentialbuyers

Intactmineralswithroyaltyincomeattractivetocertainbuyers salenowcouldincreaserisklater

SellMineralRightsandReclaimin20Years?

UnderMichigan'sDormantMineralsAct,severedoilorgasrightsreverttothesurfaceowneraftertwentyyears,unless:

Theseveredinterestissold,leased,mortgaged,ortransferredbyrecordedinstrument.Adrillingpermitisissued.

Oilorgasisactuallyproducedorwithdrawnfromtheseveredholdings.Theinterestisutilizedforundergroundgasstorageoperations

SellMineralRightsandGetThemBackin20Years?

BuyermustfilerecordclaimofinterestwiththecountyRegisterofDeeds(affidavittoretain)duringthe20years.

Clockstartstickingdaydeedfiled TheDormantMineralsActappliesonlytooilorgasrights,andnotothermineralrights.

IWishYouTaxProblems!

DONOTLETINCOMETAXDICTATEADECISION Sale:2013MFJiftaxableincome$72,500Cap.gainrate15%;earnedincomerate25%+SEtax

IWishYouTaxProblems!

Oil&Gasleasebonusnotearnedincome:tax@ordinaryrate;noSEtax

Oil&gasroyaltiesnotearnedincome;tax@ordinaryrate;noSEtax

CropdamagesordinaryincomesubjecttoSEtax

SurfacedamagesordinaryincomenotsubjecttoSEtax

Resources MSUExtensionhastheOilandGaswebpageathttp://msue.anr.msu.edu/program/info/oil_and_gas

Oilandgasleasingvideoonwebpage Leaseaddendumonwebpage QuarterlyOilandGasNewslettercontacttalleycu@anr.msu.edu

http://news.msue.msu.edu MSUExtensionnewsarticles

YourcountyMSUextensionoffice

THANKYOU

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