09 Jul Common Sense Royalty Management For Today
Grandpa may have said to never sell the farm or the minerals, but we live in a very different world today. Faltering world economies and new technology have demonstrated just how fast we can move from too little to too much natural gas. So, have you awakened to this new world? Have you ever considered the underlying philosophy that guides your royalty management decisions? Essentially, your philosophy about the commodities marketplace will determine whether you manage your royalty like lottery tickets or real investments.
Your choice will either lead you to 1) ignore risk, accepting the traditional view that minerals will always be worth more, or 2) evaluate your mineral holdings like part of your overall investment portfolio. One philosophy believes that our minerals will generally be worth more in the distant future, and that the commodities market can be trusted. Upholding this belief leads us to cling tightly to our minerals, regardless of their disproportion to our overall wealth, and to ignore the seemingly outrageously high offers that speculators make for our royalty during boom times.
Not only will you ignore serious offers to purchase your minerals, you will never consider that if your minerals represent most of your total assets, you are at risk of losing a tremendous portion of your financial worth. You are literally one news announcement away from an unnecessary cratering of your financial statement. If you think I am exaggerating, review natural gas prices at www.eia.gov in 2008 when they dropped in HALF over a four month period and to a THIRD of their peak by early 2009.
But, the other philosophy believes that nobody knows what minerals will be worth in just a few years. Just a few years ago, we feared not having enough gas, but now we are told there may be enough for a hundred or more years given ‘current’ technology. At one time we were told that OPEC controlled the oil market, but now some say they are losing that control… control they supposedly had just a few years ago. Ten years ago, shale gas was barely a blip on the energy radar screen. Now, we are being told it is the fuel of the future. My, how times change!
If I am totally honest, I sit somewhere in the middle, having lived long enough to know just how long prices can stay depressed (look at the 80’s and 90’s!), yet clinging to my minerals like lottery tickets, hoping they will eventually bring home the mother lode. It is apparent to me now in hindsight, that I could have sold a portion of my minerals in 2008 for more than all of them are worth today, and maybe more than they will ever be worth. Notice that I said ‘portion of my minerals’, because I would never recommend anyone sell all their minerals.
So, I ask why royalty owners did not recognize how crazy the oil and gas market had become in 2008, and take some cash off the table? In short, because there are always those experts that say how high energy may go. When gas was $13 on the spot market, they were saying that it could go to $20! When oil was at $140, they were saying it might go to $200! They are always there! And, unfortunately, we listened, and let our greed guide our mineral management.
As I write this article, the July issue of Oil and Gas Investor magazine hit the stands. On page 11 you can read about renowned energy forecaster, Henry Groppe, forecasting natural gas prices doubling over the next 12-18 months! On page 31, you can read where Raymond James & Associates’ analysts are hinting at natural gas dropping into the $3 range. Both highly respected forecasters, studying all the data, and coming up with starkly different forecasts! So, how do you manage your mineral wealth wisely when you can never fully anticipate the wild price swings seen in the energy sector?
For those of us whose mineral interests are a small portion of our total assets, we can live with what may prove to be foolish decisions. But I want to warn those who have come into new found royalty wealth, wealth that represents a majority of your asset base. If your asset base is mostly determined by the price of a commodity that may go up or down without warning, you are at great risk. What would your financial advisor tell you if you only had one stock and it had shot up in value? Wouldn’t they say that you should take some money off the table by selling a portion, and then diversifying your investments?
Some will say, ‘I didn’t have it before, so if it goes away, I can live without it.’ That is easy to say before things go south, but a whole lot harder to live with when your family is wondering how you went from being a multi-millionaire to a family taking on debt to replace the lost cash flow when the well declined or energy prices tanked. You don’t have to be subject to the whims of the commodity markets. You can monetize a portion now while you know what it is worth.
In summary, recognize the risk associated with the production of commodities. Evaluate the present proportion these commodities represent of your asset base. And if they represent too much risk, consider selling a portion of them for reinvestment in diversified, less risky assets. The portion that you keep will still benefit you from upward swings in the market, and should oil and gas go the other way, you can rest easy because you managed wisely instead of playing the lottery. You win either way!
These concerns inspired the founding of Caple Royalty Services. We aren’t just about helping you manage your minerals. We sincerely want to help you successfully navigate the challenges and opportunities that come with new wealth through not only evaluating your royalty for market value, but also for risk as it relates to your overall financial and personal well-being. And if the sale of a portion of your royalty would be a wise move, we market your interest to a number of high capacity buyers to secure multiple offers, assuring you of getting a true market price.