It just occurred to me that most of us royalty owners are Baby Boomers and older and the speculators have realized we can’t take it with us. I’ve had several offers in the $20,000/nma range and it’s awfully tempting. At 71 years old can I expect to make more than that off royalties in my remaining years? It’s all a big gamble.
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Michael: Some might call it "a big gamble. I chose to call it “financial risk management.” In effect, we are all trying to make our assets bigger, like a snowball. Nobody has ever been called a fool that puts profit in their pocket. The $20,000/acre is a very large sum. Consider this: 1 acre in a 640 acre unit at 3/16ths royalty equals a net revenue interest of 0.00029297. At $20,000/acre and using $50.00 per barrel oil, a unit MUST make 1,365,334 barrels, before taxes of all kinds, to break even. You can do the math, but if the unit is making 1,000 BO/PD, it would take 1,365 days or 3.74 years to break even. This doesn’t include paying taxes and of course this example doesn’t take into account decline. The number of units that have done this or that will do this are few & far between. But is does happen. Taking that $20,000 (assuming 1 acre example), paying the tax owed, then investing the remaining in a conservative S&P 500 account or something similar, will help to preserve that “snowball”. If you have enough acres, you can lower your “risk” by selling only a portion and using the time value of money that so many people tend to overlook.
By no means is this anymore than an example and surely is not advice. Others may have different strategies and that is OK too, as everybody is different and there is more than one way to “skin a cat”.
Good Luck in whatever you decide.
Todd M. Baker
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Hutch: At age 88.6, I have faced the same problem. But…what would I do with the money? All my needs are met, the royalty income buys extras…and I hate the thought of generating capital gains this close to having the tax basis upgraded. You are still relatively young so my analysis might not work for you. Luck. Jim B
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Jim, always good to hear from you. Can you enlighten me on the tax basis upgrade you mentioned? I don’t have a clue how to determine basis on minerals inherited in the 1980s. At the time lease bonuses were pretty paltry compared to today and royalties were few and far between.
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Todd, thanks for your input, “financial risk management” has a nice ring to it. My acreage is not substantial but enough to provide a nice cushion when my “Trophy Wife” retires in a couple of years. Decline is a good point, our unit has been producing for 4 years and the days of 1000 bopd are over but the gas has held up pretty good, too bad prices suck. Hanging in there for now.
Hutch: At death all property is valued to determine estate tax liability (if any). That valuation stays with the property and is usually higher than originally determined. No help to the dearly departed, but valuable to the heirs. I know, that is a downer. Sorry to squelch the burgeoning rays of hope. Chuckle. In my case, I am happy to pass to my loved ones at least one more chance to beat the tax man. Hang in there, youngster. Jim B
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Did you have trouble getting paid from them? How did you prefer payment, wire, check?
Wire or cashier’s check are the safest. Personally, I don’t like handing over my bank account number to anyone, so I prefer a cashier’s check.
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It has been a while at these low prices but I am starting to get calls again about 14-2N-4W. Is there some new activity coming our way in this section?