Lease or sell.

Sell or lease?

Which is the better option?

Well, like most things in life… it depends. And the answer is not always clear, even when you’ve factored in all of the reasons why.

Sometimes one option makes more sense than the other due to personal reasons.

Sometimes the economy influences that decision.

In this article, we are going to dive into the pros and cons of whether you should sell your oil and gas rights… or explore the reasons why or why not to lease your rights.

Cash up front! Let’s face it… cash in your pocket now is better than cash in your pocket later. If you are selling your property, you’ll usually get the full payment upon signing the contract… sometimes in as little as a few weeks time from reaching out to a company.

It’s like selling your house. Once it’s done, you don’t have any more responsibilities to maintain it. You don’t have to worry about whether the reserves are sufficient enough to sustain multiple royalty checks finding their way into your post box.

No waiting on the company. You don’t have to wait on oil companies to start drilling in order to get your money. Oil and gas companies plan their drilling projects years into the future. If you lease your oil and gas rights… this might delay seeing a lot of money in your account by a few years.

Less taxes in some cases. Depending on some factors, you might be able to pay less taxes if you are selling your home. Please note, these factors vary and are well outside the scope of this article. Please talk to an accountant for more details.

No worries about the future economy. You don’t have to worry about a slump in the economy or if oil and gas exploration will slow down in your region in the next few years. Big oil and gas companies are always trying to maximize their profit margin. Sometimes, this means buying properties right now… other times, it might mean shifting their focus to other regions.

You have more control. Once the sale is made, you have full control over the agreed upon amount of money for the sale. You’re not reliant on outside influence, such as oil and gas executives making drastic changes with a single stroke of a pen.

You are safe from market swings. Granted, this can be both good and bad. Sure, the market price might go up. But it can also go down. If you’re leasing, this can influence your royalty checks since they are most likely going to be centered around a percentage of the price of crude oil or natural gas dug up. If you sell when the market is strong, you can be confident that you made a great deal.

Neighbors can complicate things. Due to the nature of oil and gas, it’s able to stretch itself over vast areas of land underneath the soil. Sometimes, this means that these reserves cross into your neighbors lands. Many states have laws in place to prevent property owners from draining all of the reserves from neighboring lands. These laws require companies to share the spoils of drilling with all property owners.

You might want to move. If you sell your land but live on it… naturally, you might have to live with the fact that the company that bought your oil and gas rights… has the right to move heavy machinery over your land in order to poke some holes and find the oil and gas seams. 

You might lose out in the long run. If there are large pockets of oil and gas underneath you land… and the oil and gas companies spend the money and effort to dig it up, you could lose out in the long run. The royalties you’d receive might be higher than if you sold your rights up front. Of course, this is assuming things line up the right way.

The sound of industry! Once the oil and gas company starts their drilling operation, you can expect a lot of heavy duty vehicles driving around on your land… with a high level of noise that might even happen during the night. They have the right to do this whenever it pleases them… so long as they are leasing your land.

Lose from market shifts. On the flip side, if the market value of oil or gas drops… so does your royalty check. Also, if the market value drops too far down, it might become unprofitable for the oil and gas companies to drill at this time, depending on your location. You might be forced to wait a while before those royalty checks come back to your mailbox.

They thrive on future plans. Oil and gas companies plan their crews many years into the future. It might be a while before they decide to show up on your doorstep. Make sure you can afford to wait a few years before you see some real money coming your way.

Sometimes leasing is a low risk test. Sometimes, if an oil and gas company is unsure of whether there is sufficient reserves of oil and gas below your property, they try to lease it instead. This works out great for them… but you might not see much money yourself. Remember, these companies can afford to wait and gamble a bit here and there. Can you?

Might turn your property into a factory. You might have to stair at oil and gas extraction machinery and structures on your property. See and hear heavy trucks drive through… disturbing the peaceful surroundings.

Sharing is caring? You might have to share your royalties with your neighbors due to state laws. Oil and gas can make its way through sand and soft rock, stretching across multiple properties. The proposed sharing of royalties will be based upon what is known about the geometry of the oil or gas reservoir compared to the geometry of property ownership at the surface. This procedure is known as "unitization." Basically, it means you might have to share the money.

As you can see, there might be dozens of reasons why you should go with one option over the other.

A big one, based on my interactions with hundreds of property owners, is whether you live on your land or not.

Obviously, if your land is just an investment property, you won’t be bothered by the sound of trucks and drilling.

So, before you make a snap decision on whether to sell or lease your oil and gas rights… take the time to fully digest the pros and cons of each option.

I recommend making two columns on a piece of paper. One side has the pros, the other has the cons. Now you have a great overview to help you make the right decision!

Thank you for reading this article and I hope it will help you!

Co-founder, Relique Energy Management, Inc.

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