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Law.
Law.
Millions of individuals own mineral and royalty interests in Texas, and these rights can be inactive for decades before suddenly becoming a significant source of wealth. Mineral rights entitle owners to a share of the proceeds of production of oil, gas, and other minerals. The value of these interests can increase dramatically when the interests are targeted for development. Owners of these interests come from all walks of life, often having no background in energy. In fact, many are unaware of what they may or may not own until they are contacted by a landman or oil company.
Patrick Flueckiger
Even with some basic information, they may lack the records or legal knowledge to fully understand what they own, especially when descriptions are buried in industry jargon and governed by complex legal principles. Given the potential value at stake, it is important that owners seek professional guidance and make well-informed strategic decisions to protect the value of their interests.
Simply put, owners of oil, gas, and other minerals should not sign anything related to their interests without first understanding the implications. Since these assets are complex and valuations can shift quickly, the industry often benefits when unsuspecting owners make hasty decisions. A mineral owner should not rely solely on the advice or representations of a third party interested in leasing or purchasing their rights, because those third parties naturally prioritize their own business incentives. That is the reality of owning complex assets in a competitive industry.
Owners should protect their interests and level the playing field in their dealings with the industry through guidance from professionals such as attorneys who have fiduciary duties to their clients in the management of mineral and royalty interests.
A major decision that owners face is whether to hold or sell their interests. Although the conventional wisdom is to hold mineral rights, there are reasons why a sale might be reasonable, or even essential. A sale can offer a de-risked lump sum payment in exchange for giving up an uncertain and unstable future cashflow. This tradeoff might be reasonable when faced with near-term cash needs, such as retirement funding, estate tax liabilities, or a desire to diversify into other investments.
When an owner does decide to sell, they should do so through professional and systematic marketing of their interests, engaging with a range of buyers to assess the true market value of what they own. Offers can vary widely, and without comparing them, owners may leave significant value on the table.
For owners who decide to hold their mineral interests, effective stewardship is key to preserving and maximizing value. This entails careful leasing decisions, reviewing payment details for accuracy, leveraging appropriate income tax strategies such as depletion deductions, and educating heirs about the value of these interests and about the importance of strategic and cautious decision-making. These efforts could include developing connections with professionals, including tax advisors and attorneys, to provide support whenever the need for management decisions arise. The expense of professional advice is often modest compared to the value added. Unfortunately, many seek help only after an irreversible mistake, when the opportunity to preserve value has already passed.
Patrick J. Flueckiger represents owners of land, mineral and royalty interests in Texas. He is Of Counsel with the law firm Decker Jones, P.C., the second oldest law firm in Fort Worth.