Coronavirus Impact on Mineral Rights

With the recent news about Coronavirus, many mineral owners are concerned about the impact of Coronavirus on mineral rights.   If you are a mineral owner who is concerned about the impact of Coronavirus on mineral rights, this article will help.   We’ll guide you through what this means for mineral owners, your royalty checks, and what to expect in the future.   In addition, we are going to cover the impact of Russia and Saudi Arabia choosing to flood the market with oil.

The biggest near term impact on that Coronavirus has on mineral rights is in the demand for oil and gas.  As a mineral owner, the amount that you get each month from oil and gas royalties is tied to the current price of oil and gas.  While natural gas prices have remained generally stable, the price of oil has plummeted by over 54% year to date.

We would like to repeat that again because it is important, oil prices have dropped 54% year to date as of this writing.

Coronavirus has had a devastating effect on oil and gas demand.   As the Coronavirus has spread around the world, many countries are restricting travel and requiring everyone to stay inside.   Many companies are choosing, or being forced, to allow their employees to work from home.  Large industries like the cruise lines have effectively stopped operating.   A very large amount of oil demand comes from global travel for both business and leisure.  Another very large part of oil demand comes from commuting to and from work and school.   As those activities get shut down the demand for oil drops accordingly.

Mineral rights owners will be negatively effected due to decreasing worldwide demand for oil.   You will see the direct impact of Coronavirus on your royalty income.   As oil prices decline the amount you receive in royalty checks will go down accordingly.

The question now becomes when will Coronavirus stop impacting mineral owners.  Until world wide demand goes back up as people get back to work you can expect a negative impact for mineral owners.   Once travel restrictions are lifted and people start going back to work we will see oil demand increase.  This should help support oil prices going forward.

In addition to the impact of Coronavirus on oil and gas demand, we are also seeing issues on the supply side.  In recent meetings between Russia and Saudi Arabia, they could not come to an agreement to keep oil supply low.  Without getting into the politics of the situation, this means that Russia and Saudi Arabia have now decided to pump as much oil as possible.  Each are doing so to protect their market share of global oil supply.  By pumping as much oil as possible, we are increasing supply of oil around the world at exactly the same time that we have decreasing demand for oil.

This is very bad for oil prices.

For a long period of time OPEC has effectively controlled the supply of oil in the world market.  As that relationship breaks down, the market will continue to be flooded with oil until the issue is resolved.  It is currently unknown when Russia or Saudi Arabia might pull back on supply.   Until they do, we will see lower oil prices due to excess supply.

The Coronavirus impact on mineral rights owners could be severe.  If you are a mineral owner who gets oil and gas royalty income, you will soon start to see the impact of Coronavirus on oil and gas royalty checks.   Oil and gas operators pay you royalty income on a lag.  For example, when you get a check in March of 2020 the income is related to oil that was sold in either January or February of 2020.   What this means is that today (March 2020), you will not have seen any impact from Coronavirus on your royalty checks.   However, in April or May you will start to see significant impacts to the value you receive each month.   As we mentioned above, oil prices have declined 54% year to date so some mineral owners will see a large decrease in royalty income due to Coronavirus.

While Coronavirus will impact royalty checks for most mineral owners, you may see a decreased effect if your operator passes along the hedged price of oil to you directly.  Many oil and gas operators hedge the oil they sell.  What this means is that they will “lock in” a price of oil for the next year.  They do this so that they have a guaranteed price allowing them to plan their capital spend accordingly.  Your operator may have hedged 80% of oil produced in 2020 at $50/barrel and still be getting paid $50/barrel even as prices are $30/barrel.   Some operators will pass this along to you and you will be paid at the hedged rate.

If you are interested in selling mineral rights it is important to understand how Corona virus impacts the sale.  We are still seeing strong demand from mineral buyers to buy mineral rights.   However, the market has dramatically shifted in just a couple of weeks based on the factors listed above.

Generally speaking, mineral buyers take a long term view when buying mineral rights.  Mineral buyers understand that the underlying price of oil will fluctuate.  However, the value of oil and gas mineral rights is directly related to the price of oil.  If the price of oil materially declines like it has in the last week, this means that mineral buyers must take a more conservative approach to valuing mineral rights.

Mineral buyers cannot forecast oil prices at $50/barrel when it is currently trading at $30/barrel or even $40/barrel.   Imagine you are in the market to purchase a rental property.   You find a property you like which is currently renting out for $1,000/month.   However, after talking to the seller they inform you that “I used to rent this for $1,700/month and I’m sure it will go back to that soon.”     Would you pay for the property assuming it was renting at $1,700/month when it’s only currently renting for $1,000/month?  Of course not!

Mineral owners every day make this same argument when trying to sell mineral rights.  They want to sell mineral rights based on what oil might be in the future or what it was in the past.  What matters is the current price of oil today.   Mineral buyers pay based on what your mineral rights are worth today.

There is no question that Coronavirus is impacting mineral rights.   If you want to sell mineral rights, finding the best market price available is even more important than ever.  Every mineral buyer has a different view of what mineral rights are worth.   As a mineral owner, your goal is to find the mineral buyer who is willing to pay you the highest price.  That is exactly what we do at US Mineral Exchange.

We quickly connect you to thousands of qualified mineral buyers.  We work to secure the best market price available from a legitimate end buyer.  In addition, we walk you through the process from start to finish to ensure everything goes smoothly.

In these uncertain times, you need a trusted partner who will ensure that you maximize the value when you sell mineral rights.  If you are considering selling mineral rights now or in the future, please fill out the contact form below.  We will get in touch with you and take the time to learn more about your situation and discuss the best way to maximize value on the sale of mineral rights.