Landowners Selling Oil, Gas or Mineral Rights Must Market Their Rights to Multiple Parties to Maximize Compensation and Must Not Enter Into Terribly Lopsided Sales Agreements that are Loaded with Loopholes to Benefit the Mineral Acquisition Company
On this week’s version of All Things Marcellus, Doug discusses how energy companies and mineral acquisition companies overreach when presenting documents and contracts to landowners wherein they present extremely Company friendly terms with massive loopholes that benefit the company or Buyer of oil, gas and mineral rights and work against the landowner and natural gas right holder. Doug explains how brokers work as middleman to acquire oil and gas rights from the landowner and then market those rights to third parties at higher compensation rates. Any landowner interested in selling their oil and gas rights must be sure to aggressively market their rights to multiple potential Buyers to maximize the price per acre offered to the landowner.
If there is money to be made by selling oil, gas and mineral rights, that money should be made by the landowner and not a landman or broker acquiring natural gas rights from the landowner only to market them at a higher price to a third-party at a hefty profit. Doug explains the impact of taking the first offer or only offer from a single mineral acquisition company versus marketing the gas rights to multiple potential Buyers to obtain the highest possible per acre sale price.
For example, if the landowner receives an offer to buy the oil, gas, and possibly mineral rights for a per acre sale price of $2500, the landowner must actively explore other potential Buyers and attempt to market the natural gas rights to receive higher compensation. If a landowner or natural gas right owner simply takes the first offer, they could be missing out on tens of thousands or even hundreds of thousands of dollars in compensation. The broker or middleman is more than happy to make hundreds of thousands of dollars by simply marketing these natural gas rights the third parties.
To illustrate the point, Doug explains that if 100 acre landowner jumps on the first offer they received by way of a letter through the mail or knock on the door at a price of $2,500 per acre, they may be costing themselves hundreds of thousands of dollars. No landowner or gas right owner should simply take the first offer to sell their oil and natural gas rights without marketing the rights to other entities. You may receive an initial offer in the mail or in person for $2,500 per acre, but if you contact other companies and actively market your rights, you may receive significantly higher compensation. If you were able to find a company willing to pay $5,000 per acre for the same rights, you would have very easily increased your compensation by a quarter million dollars.
This might sound unlikely, but Doug walks All Things Marcellus listeners through a recent example where he communicated with several mineral acquisition companies and received a tremendous disparity in the per acre price offered by the different companies for the natural gas rights. One mineral acquisition company offered approximately 50% less than the highest bidding company. Under this example, if 100 acre land owner accepted the first offer they received of $2,500 per acre and did not market the rights to learn that another mineral acquisition company was willing to offer double, or $5000 per acre, the landowner would be missing out on the opportunity to double their compensation or in this example, lose $250,000. Again, the landowner may be able to make an additional quarter million dollars by exploring their options and marketing their gas rights to multiple entities.
Any landowner considering selling oil gas or mineral rights must actively market their rights to obtain the highest compensation and not simply jump on the first offer or second offer that they received. There may be considerably higher offers that other mineral acquisition companies are willing to make for the same Marcellus Shale gas rights and soliciting offers for gas rights is a very easy task.
Aside from maximizing compensation, the landowner or gas right owner interested in selling their oil, gas or mineral rights must also carefully study the Agreement for Sale or Agreement for Purchase that governs the sale of the gas rights. Most Agreements for Sale of oil, gas, or mineral rights provide that the potential Buyer takes over the royalty ownership interest on the date the Sales Agreement is signed. Once the sales transaction is concluded and the deed is recorded and filed, the Seller of the gas rights will owe the Buyer of the rights any and all royalty money that the Seller received from the time of the Sales Agreement signing to the date of closing. Typically this amount will be deducted by the Buyer from the total sales price for the gas rights. This is true, although most landowners believe that they maintain their royalty rights and interests until they receive the full payment from the Buyer for the purchase of their oil gas or mineral rights. Natural gas right owners must fully understand how these contracts to purchase rights operate and not simply focus on a promised lump sum payment.
Doug walks through another example where the Sales Agreement for the natural gas rights indicated that the Buyer takes ownership of the rights from the time the royalty payments commenced. In other words, if you are receiving royalties for five years and you entered into an agreement to sell your gas rights to a Buyer or mineral acquisition company, that Buyer would reduce the purchase price by the total amount of royalties that you have received over the last five years. So if you received one hundred thousand dollars in royalties over a five-year period, that one hundred thousand dollars will be deducted from the purchase price in your contract. These types of one-sided contracts for the purchase of oil, gas or mineral rights must be avoided.
Landowners must also review their mortgage paperwork to determine if they are even permitted to sell their oil, gas or mineral rights under the terms of their mortgage agreement. In most cases, the collateral for the mortgage includes the entire property including the oil and gas rights associated with the property. If you violate the terms of your mortgage agreement, the balance of your mortgage may come due immediately and/or other penalties and negative provisions may apply. Mineral acquisition company representatives and their landmen are most likely not going to advise you of these issues. You must seek your own independent assistance and experienced oil and gas legal counsel to advise you of your rights and how to protect yourself when engaging in these permanent transactions. When you sell your oil and natural gas rights, you are selling them forever and you do not get a second chance. Do not enter into these transactions lightly, but protect yourself and maximize financial compensation and enter into a fair and appropriate Sales Agreement for your oil and natural gas rights.
