Should You Invest in Oil and Gas Royalties?

Crude oil prices have fluctuated more than market could ever hope or want to in the past 24 months. Crude oil prices rose 77.94% across 2009. As amazing as that seems, gasoline futures rose 93.27%. Diesel fuels was up 49.16% for 2009 and the heating oil rose 46.92%. With great gains like this, high net worth baby boom investors are taking a serious look at a special class of income producing investments, oil, gas, coal and share royalties.

Should You Invest in Oil and Gas Royalties?

How do you get into the oil and gas royalty market?

Well, oil and gas royalty interest may be bought and sold like any other investment but they are intended for accredited investors. The Securities and Exchange Commission’s definition of an accredited investor includes individuals with a net worth of 1M or more or annual income of $200,000 or more or trusts or partnerships with assets of $5M or more.

How do many people enter this market?

Through a 1031 exchange. Commonly, a real estate investor will want to exchange out an unwanted property and find an alternative replacement property solution. Since oil and gas royalty interests represent ownership of a percentage of gross revenue from real property, exchanging into one of these royalty interests qualifies as a like kind exchange, provided the exchange is properly structured.

Royalty and over-riding royalty interest.

If you own a royalty interest or over-riding royalty interest in a property producing oil, natural gas, or coal, that means that you get some other resulting revenue without having to pay the drilling or operation expenses but the word royalty is often used loosely so let’s clarify how royalty interests and over-riding royalty interests differ. When you own a royalty interest, you own at least a portion of their minerals below the ground on that property. If you own an over-riding royalty interest, you don’t own any of those minerals. You own a portion of the revenues generated. When you own an over-ride, your ownership interest expires when the wells run dry or the mine plays out and the energy company stops leasing the mineral rights. There are actually royalty funds that buy and sell royalty interests. These are conceived as long range income producing investment programs.

Before you invest into oil and gas royalties, be sure to talk with an expert. This way, you can explore investment in oil and gas royalties with the right guidance.

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