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What You Need to Know About Selling Your Texas Oil & Gas Interests!

I tell all my Texas clients (and anyone else who will listen) never to sell their mineral interests. There are a number of reasons why:

1. About 99.9% of the companies who claim to buy mineral interests are scams. What often happens is that they send you a solicitation letter which makes an incredibly high monetary offer for your mineral interests. They ask you to sign a deed, which is either enclosed with the letter or that they send you if you contact them, and request that you send the signed deed back to them. Next they file the deed in the deed records. After the deed is filed in the county deed records, they contact you and say that they discovered certain ambiguous “problems” with your title to your minerals, or the market for mineral interests has changed, or some other nonsense. They then tell you they will pay you, not what they offered in the letter, but a tiny fraction of what they offered. If you don’t take it, you are stuck with the deed filed in the deed records that shows you sold your mineral interest to them. In many cases, I’ve had to sue the company on a client’s behalf to force the company to cancel the deed. Even if the company cannot be found or has gone out of business, you will still probably have to file a lawsuit to get a court order cancelling the filed deed. Given the expense of litigation, this can be a huge burden.

One way to tell if a company is a legitimate concern or not is to tell them that you might be interested in selling your minerals but your requirements are: 1) they need to send you a written contract of sale with a specific price and an earnest money deposit which, if acceptable to you, you will sign and take with the earnest money to a title company; 2) the deed will be prepared by your attorney; 3) the transaction will be closed in a title company; and 4) they will be required to deposit the balance of the purchase price in good funds with the title company before they receive the deed. Most of these companies will tell you that is an unnecessary expense, or “they don’t do it that way”. This is a huge red flag. However, in my experience, even some of the scam artists will agree to this, but once you have paid your attorney to draft the deed and it’s time for them to put the purchase price in escrow, they will disappear or pull out.

2. Companies who are legitimate purchasers of mineral interests generally do not send out mass mailings to potential purchasers. The fact that you received the letter in the first place is a sign that the company is a scam.

3. If a company is trying to buy your mineral interests, it may be because they’ve heard something about your mineral interests that will make them increase in value. For example, maybe the oil company who is producing your minerals may be getting ready to deepen or rework its wells or is preparing to drill new wells but has not announced their plans publicly. Either of these events would result in greater production and more royalties for you. The scam artists are trying to get you to sell them your minerals on the cheap with their bait and switch tactics, and before you have heard anything from the oil company, so that they can reap the benefits of increased royalties later on.

4. You will never get what your minerals are really worth if you sell to one of these scam artists and sometimes even if you sell to a legitimate buyer. The reason is that it is extremely difficult to value a mineral interest. I research and prepare valuations of mineral interests for clients, and I must tell you that it is often part skill and science and part crystal ball. Specifically, the value of a mineral interest depends on the stream of income in the form of royalties from a given well or wells. That stream of income, in turn, depends on many factors: what the price of oil and gas is in the future, whether the reservoir is becoming depleted or not, whether the equipment at the well breaks down and cannot be economically repaired, etc. It is truly impossible for anyone to predict some of these factors. However, even though valuations are very challenging, they can still be helpful and so I urge clients not to sell until and unless they have had someone do a proper valuation of their mineral interests.

5. If and when you sell your mineral interests, there must be special language in the deed that is required by Texas law in order to cut off your liability for the well and the operator’s behavior after the date of the sale. I have never, in the entire time I’ve been practicing oil and gas law, seen a deed from one of these companies that has the required language in it. From their point of view, it’s a good thing for you to continue to be liable. Obviously, that is not a good thing from a seller’s point of view.

6. Even with the proper “magic language” required by Texas law to cut off your liability, there are still situations in which you could be held liable even though you have no remaining interest in these minerals. Specifically, where an oil and gas operator has gone out of business or has no assets and whose operation has created contamination at the well site, the federal Environmental Protection Agency (“EPA”) is allowed by their regulations in some situations to sue everyone in the chain of title of the property and/or mineral interests for the cost to clean up and remediate the site. The  EPA has taken the position in some cases that anyone who once profited from this property is liable for the cost to clean it up, even though they have no current interest in the property. Incredible, but true. The moral is: know who you’re selling to. In other words, before you expose yourself to potential liability for environmental problems, do some due diligence research on the company. Have they been sued or fined by the Texas Railroad Commission or the EPA in the past? Are they on shaky financial ground so that it would be unlikely for them to be able to pay for the cost of an environmental remediation? The clients for whom I have performed due diligence research think of a due diligence investigation as insurance against a potential future catastrophe. In most cases, my fee for the investigation can be included in the purchase price and so it will cost you nothing.

If you receive an offer to purchase your mineral interests and despite what I have said, really do need or want to sell, give me a call and we can discuss the pros and cons in connection with the potential buyer, and also perhaps determine if a due diligence investigation is warranted.