10 Apr COVID-19 AND OIL AND GAS PRICE COLLAPSE
About every three years we find ourselves writing about an oil price collapse. Oil price collapses are usually tied to market conditions, where a slight over supply drives down prices dramatically. And those market conditions many times cause OPEC+ nations to start fighting about how they share the production cuts that will reverse the price collapse.
Enter Covid-19 and national economic disaster, and we have an unprecedented time in our country. Lower oil prices mean domestic drilling slows to a crawl, oil companies file bankruptcy, production declines all the while selling for half or less per barrel than just a month ago. And that’s where you come into the story. You are not only relegated to social distancing and shelter in place orders to help slow a pandemic, but also to a precipitous decline in your stock values and royalty payments that will likely be cut in half or more within a few months. All of our heads’ are spinning, right?
And even those of us with royalty in gas producing areas, who have suffered a long term drop in natural gas prices settling in the basement many years ago, guess what, those prices are going even lower than we’ve seen for several decades.
So, once again we revisit what this means for you, the mineral and royalty owner? Well, in case you are wondering, this would be a horrible time to sell, just to get that out there. But in times like these, some will have to choose something to sell, whether that be investments, real estate or minerals and royalty.
We have never counseled owners on whether they should sell or not sell their minerals. Why? Because everyone’s financial, health, and emotional situations are different. We believe the most dangerous counsel or ‘family tradition’ is that you should never sell your minerals. We have seen unnecessary family disharmony over this matter, particularly since minerals are most often owned as individual undivided portions (ie. heir’s portion) of the entire mineral estate of the subject land. In our view, there is unwarranted emotion tied to these decisions. While land can be a legacy asset that is full of memories and understandable emotions tied to multiple generations’ enjoyment of the land, minerals and royalty are an asset in the ground, a commodity asset at that, which is only valuable as long as hydrocarbons are needed, or until the Green Movement forces a virtual abandonment of hydrocarbons.
Having experienced numerous booms and busts in the oil and gas business, and having lived to tell it, we offer some insights that we hope you find helpful:
1. In the craziness of our world today, we encourage you to adopt Winston Churchill’s famous call to “STAY CALM AND CARRY ON” as Great Britain prepared for World War II.
2. If you are independently wealthy, and the mineral portion of your financial portfolio could drop significantly in value without undermining your financial security, there is little reason to sell unless:
a. You want to clean up your estate for your heirs. Future generations are showing little interest in learning about and managing minerals, and in many cases, they may philosophically disagree with our society using hydrocarbons. Also, minerals in states outside your locale sometimes require legal filings beyond filing a certified copy of your probated Will, which can be expensive and time consuming.
b. You manage your finances as a steward with the hope that future generations or your Creator will be pleased with your decisions. Future generations may be disappointed that their potential inheritance lost its value when that value could have been hedged if their parents or grandparents would have monetized a portion and put that money in the bank or safe investments.
3. Oil and natural gas are commodities, and commodities represent some of the highest risk investments in the financial world. Avoid betting the farm on the belief that oil and gas will always be as valued as it is today. Don’t forget the technological advancements we have seen in just the last twenty years, nor the likely future advancements that will have great impact on the delicate, inflexible supply/demand balance that determines the value of oil and gas.
4. Know yourself! If you are being offered a significant amount of money for your minerals, would you be miserable if you sold, and then the value of those minerals increased after you sold, OR would you be miserable if you turned down the money only to see the offers disappear as oil and gas prices declined further. You have to live with your decision, so do what brings you peace of mind.
5. If your mineral and royalty interests represent a disproportionately large portion of your financial portfolio, or if you have substantial debt or college expenses to bear, it is prudent to consider selling some portion of your mineral assets to secure your finances. Selling in a boom market is always the hardest, but best time to sell. If you wait until the market cycles down, you may not even have the option to sell because investors no longer prefer minerals in your area.
6. And if you need to sell, use an experienced advisor and marketing agent. Caple Royalty Services considers it a great privilege and responsibility to market and sell your mineral interests in order to secure you a true market price for your mineral interests. Check out the Testimonials of our past clients under About Us.
7. For those who don’t need or want to sell, but realize they lack the ability to wisely manage their mineral interests, Caple Royalty Services offers full mineral management services that will protect your mineral interests from unscrupulous mineral buyers or operators, and maximize your mineral interests’ value.
Contact us to learn more about your options. We look forward to serving you!