Aspen Grove Royalty Comapny, LLC

Trade the Risk for Cash:

Some mineral and royalty owners would rather obtain a lump sum cash payment now through a simple transaction rather than risk future non-development of their interest, a depleting reservoir, a higher tax rate, a lower commodity price, or any number of other risks. For the extreme risk avoider trading potential risk for guaranteed income is in of itself enough of a reason to sell all of their oil and gas interest. On the other hand an extreme risk seeker might never consider selling. We believe a wiser approach might be to settle somewhere in the middle of the two extremes.

Selling a portion of an interest guarantees some cash now while reduces the level of risk the interest is exposed to going forward. Although the portion of the interest that wasn't sold is subject to risk it is also subject to an unknown but potential future reward. Subsequent to identifying your unique reasons for a possible divestiture give careful consideration to selling only a percentage of your interest rather than all of it. Whether one feels they are currently adequately rewarded for the amount of investment risk exposure their ownership interest carries can be an important step in the decision making process.

Satisfy Immediate Cash flow Needs:

Selling your interest may satisfy your current capital needs without the need for taking on debt. Sometimes selling just a portion of one good mineral or royalty interest is enough to forego a bank loan, allowing you to fund whatever your current or future business or personal needs are yourself. Receiving cash in exchange for all or a portion of an unpredictable, irregular, and depleting asset for the purpose of either getting out of debt, or keeping from getting into debt, may solve your current cash flow or working capital needs.

Used Proceeds to Help You and Your Family:

A divestment could allow you to pay down outstanding debt, start a college fund or possibly pay for college entirely, start a business, build an emergency fund for your family, or even invest it in something potentially more lucrative.

Use Proceeds for Your Business:

Forego visiting a banker for that next business loan and consider funding your needs internally. Whether you're starting your own business or growing your current one identifying a source for obtaining easy cash that doesn't dilute your business ownership interest, or require the use of debt, could be a wise decision not to mention a potential advantage over your competitor. Alternatively you could use the proceeds to pay off current business loans, purchase equipment, hire more employees, or possibly expand into other markets.

Use Proceeds to Purchase Something More Enjoyable:

Save for either the cash flow generated from owning a producing mineral interest or the feeling of anticipation experienced from the possibility that a non-producing mineral interest may generate cash flow at some later date, there is no real enjoyment factor to owning mineral rights. Depending on your investment strategy, and personality, you may discover other investments in real property that do come with tangible enjoyment traits. Using the proceeds from the sale of your mineral interest to invest in a vacation home, a ranch, a farm, or other real property may satisfy your investment strategy while providing yourself, and potentially generations to come, a high level of enjoyment and lasting memories to boot. Alternatively you could forget the investment approach entirely and use the cash from the sale for anything you find more enjoyable than owning minerals and royalty…..like a new car, boat, home remodel, or trip around the world.

Use Proceeds to Help Someone Else:

Make one or more donations to your church and/or a charitable organization. Use the cash to help a family member, friend, or even a stranger.

Use Proceeds towards Retirement:

Planning for retirement can be extra tricky if you're erroneously counting on your producing royalty interests to provide you with the same level of monthly income for the ensuing decades ahead. Trading an illiquid asset for a liquid asset can make planning for retirement that much easier.

Depletion Timing:

Muck like the mining and old-growth forestry industries, the petroleum industry is also faced with harvesting depleting non-renewable resources. Whether it be a well that is currently producing or one that has yet to be drilled every well eventually depletes and will cease to produce. The longer it produces the closer it is to depletion. Depletion timing is one factor contributing to value erosion risk. If your interest is currently producing can you estimate how much more it will produce or for how long? Unknown future reserves at unknown future commodity prices equate to unknown future monthly run checks at unknown future tax rates.

Financial Risk:

The oil and gas business as a whole is extremely unpredictable and comes with a very high level of risk. For this reason minerals and royalties are subject to countless factors that can have serious impacts on their investment grade; and to make matters more complicated most of those factors are completely out of our control. Those mineral interests that are currently subject to an oil and gas lease but are not producing can easily be viewed as being exponentially subject to more financial risk than the producing mineral interest. Owning assets whose worth and cash flow are subject to a plethora of factors the royalty owner can't control has the potential of carrying great financial risk.

Commodity Price Risk:

Fluctuating oil and gas prices are quite possibly the greatest risk the average royalty owner faces. No one has been able to accurately forecast every price collapse or price escalation. Many either forget or fail to realize the continued exploration, development, and overall success of every major "new play" (whether it be the Bakken, Eagle Ford, Wolfberry, Niobrara, TMS, Haynesville, Woodford, Barnett, Marcellus, Granite Wash, or whatever) is only viable at certain commodity prices. Each play requires unique drilling, stimulation, completion, and production techniques; all affecting costs differently.

Every play is also associated with producing a majority of one particular type of commodity (i.e. oil vs. gas) over another; in addition, the amount of recoverable oil or gas is also different across each play. The use of science, new technologies, and the expansion of old technologies don't come cheap. A prolonged reduced oil price of say $60 per barrel coupled with a prolonged increase in natural gas to say $8 per mcf may make one play in one region completely uneconomical but may increase the activity in another region substantially. One the other hand a more substantial prolonged price collapse in both oil and gas could easily make all the new unconventional resource plays uneconomical. Only owning oil and gas interests in one region, which is commonly associated with the production of mainly one commodity, can increase the exposure to fluctuations in the price of commodities.

Operator Risk:

The competence of the company that is in charge of actually drilling, completing, or producing the commodity can play a large part in the success or failure of the project. Experience, technological knowledge and practice, capital constraints, and focus areas are all operator risks that have the potential to effect the bottom line of every mineral and royalty owner.

Lessee Risk:

If your interest is currently non-producing but subject to an oil and gas lease do you know anything about the company, or individual, you leased it to (the lessee)? The increasingly competitive nature of the oil and gas industry has given rise to the use of lessee proxies, land brokers, and landmen to acquire leases on behalf of the end user. In can be important to know who the end user is (see Operator Risk above) and what their plans are for your interest. In addition there are Lessee's that are not working on behalf of an end user at all but are simply leasing for speculative reasons. Though these actions are usually not mischievous, nor performed in bad faith; they do have the ability to add another layer of risk to the mineral owner.

Timing the Hype:

An environment of high commodity prices, low interest rates, and rapid technological advances tends to increases the level of competition among oil & gas industry participants. Leasing frenzies are often born out of such an environment. Unfortunately; interest rates, commodity prices, and technology alone can't make a non-hydrocarbon bearing reservoir produce hydrocarbons. Non-producing mineral interests often carry more risk than producing mineral interests for this very reason. The risk seems to exponentially compound if the non-producing mineral interest is located in an area that historically is associated with very little existing oil or gas production. Some mineral owners would rather take advantage of the prices being offered now rather than risk reduced offers, or no offers, when the hype fades.

Aspen Grove Royalty understands these type of environments and the hype and frenzy that often surrounds them. For that very reason we set a budget for acquiring mineral and royalty interests in areas we feel are driven more by hype than results. Once we've met our budget we cease making any more acquisitions in the area until actual results prove otherwise. We don't know if there will be any merit to the hype or not. We could come out ahead, break even, or lose our entire investment. This is one of the reasons we prefer buying only a percentage of your interest rather than all of it. Capitalizing on current hype by selling a portion of your interest rather than all of it puts cash in your pocket and has the potential of both reducing the risk associated with the interest sold and increasing the potential for gain associated with the interest retained.

Alternative Energy Risk:

Advances in technologies that many consider environmentally friendly have substantially increased the use of, and debates over, alternative sources of energy. It seems plausible increased competition from alternative sources of energy will only rise as time progresses. Will oil and gas still be the world's major source of energy 30 years from now?

Political and Social Risk:

For a majority of overwhelmingly unjustified reasons it seems as if the oil and gas business is increasingly becoming more and more vilified. Federal policies that negatively impact the bottom line of production and operating companies in the oil and gas industry can easily have the same negative impact royalty owners. An otherwise economical prospect has the real risk of becoming un-economical simply due to the whims of politicians.

Mechanical Risk:

Even experienced and competent oil and gas operators are often faced with the challenges of keeping wells on line and producing every day. The older the wellbore or surface equipment the greater the challenge. Just like any other business the income generated must exceed the costs required to generate it.

Whether it be from commodity prices, depletion, increased mechanical costs, or increased mechanical failures, every well eventually doesn't produce enough income for the operator to continue producing it. Shutting the well in, and eventually plugging and abandoning the wellbore, are not far to follow. Disruption or cessation of production initially caused by casing leaks, rod parts, pump failures, surface equipment failures, and injection or disposal issues; are literally just a tiny sampling of the risks affecting oil and gas interests in one way or another.

Reservoir Risk:

Reservoirs are not uniform. For a multitude of reasons even two wells drilled in the same reservoir directly offset to one another will likely never produce the exact same amount of hydrocarbons as the other. In the oil and gas business the completion of one good well is not a guarantee for a second one.

Eliminate the Paperwork:

Tax preparation, operator and purchaser correspondence, maintaining division order files and property tax records, and creating and maintaining depletion schedules are just a few of the difficulties associated with the proper management of mineral and royalty interests. When combined these small hassles have the ability to be very time consuming. This is especially true if you own or manage a portfolio of interests. Moreover, if those interests are held in trust or pass under a decedent's will, the paperwork and costs associated with managing those interests can be very high.

Eliminate the Anxiety:

The terms of an oil and gas lease have the ability to encumber your mineral interest for decades (and possibly for generations). For those mineral owners not actively engaged in the oil and gas industry the thought of successfully negotiating the specific terms of an oil and gas lease can become daunting and quite intimidating. Simply negotiating on the lease royalty, primary term, and some surface stipulations rarely result in an optimum lease for you and your family. Even if you ultimately decide to retain your interest we still strongly encourage you to contact a trusted oil and gas attorney for expert advice prior to negotiating any agreement that you are not intimately familiar with.

Reduce Payroll Obligations:

Even a small to mid-size portfolio of minerals and royalties are likely to require at least one employee to manage them effectively. Either selling out completely or selling off those small interests that don't contribute much to the bottom line can turn the burden and financial obligations associated with managing an entire office into a one-man, or one-woman, show.

Portfolio Reclassification:

Current income and age, risk allocation, and expected return are usually foundational points of discussion regarding a personal investment strategy. An individual having a larger than desired portion of their net worth in a depleting resource, such as minerals and royalties, may desire more of their worth to be held in non-depleting resources such as stocks, REIT's, fixed-income securities, ETF's, commercial real estate, mutual funds, certificates of deposit, etc.

Conversely another individual may not care that the majority of their net worth is in a depleting non-renewable resource but does care about the amount of risk surrounding mineral rights and would rather see a greater portion of their net worth in an investment vehicle that is subject to less volatility and will provide a certain rate of return. For this individual they may prefer fixed-income securities, certificates of deposits, or other investment options.

A third individual may not care about depleting resources or risk but simply feels they have the majority of their wealth tied up in real property (mineral interests, homes, farms, ranches, etc.) and wish to diversify into other investments. Discussing your current and long term investment goals with a trusted and competent financial advisor as well as taking a hard look at the assets and liabilities currently affecting your net worth is a wise exercise at any age.

Tax Savings from a Sale:

If your mineral rights are producing than any funds you receive from the production of those rights are most likely currently taxed based on your ordinary income tax rate. The same is true for any bonus you may have received for executing an oil and gas lease in connection with any non-producing mineral rights you may own. If you decide to sell all or a portion of your mineral interest the taxes attributable to that sale would likely be based on the long term capital gains rate. This could translate up to a 20% tax savings. The main caveat for long term capital gains treatment is that you have owned the interest for over a year. Prior to selling we strongly encourage you to discuss your particular situation with a reputable and trusted tax accountant. Knowing what your particular tax liability will be from a potential sale should always be at the forefront of you decision making process.

Eliminate Current Tax Liability from a Sale:

Rather than the gain from the sale of a mineral or royalty interest being based off your ordinary income tax rate, or the reduced long term capital gains rate, the IRS currently allows the use of another option. A large number of investors incorporate this option into their acquisitions and divestitures. For a few the use of it is the cornerstone of their entire investment strategy in real property. A section 1031 like-kind exchange, currently part of the U.S. Internal Revenue Tax Code, essentially allows one to defer the taxes they owe from the sale of a certain investment or business asset entirely. Certain steps must be strictly followed to qualify for a like-kind exchange but at its core it provides one the ability to use before-tax funds to acquire a similar investment or business asset as the one they are selling. A possible example would be the sale of a mineral interest and the purchase of a ranch, a house, or other real property.

Having the ability to essentially swap one asset for another gives one the opportunity to grow their investment tax deferred. Possessing the inherent ability to continue "trading up" assets tax deferred can, over time, become a financially rewarding endeavor. We have no problem working with sellers wishing to utilize a section 1031 exchange in the sale of their interest. Whether you decide to sell to Aspen Grove Royalty Co., LLC or someone else, we strongly recommend contacting a qualified 1031 intermediary, attorney, or tax advisor before attempting a 1031 exchange. If you prefer we can recommend a few intermediaries based on our past experiences.

Eliminate Future Taxes:

Selling eliminates any future liability for paying ad valorem tax and severance tax as they relate to the interest you sell. Selling now, at known tax rates, also prevents the interests' exposure to future changes in tax law including, but not limited to, state or federal income tax increases, fees imposed, windfall profits taxes, abolishment of 1031 like-kind exchanges, and any increase to, or abolishment of, the long term capital gains rate.

Simplify Future Tax Reporting:

Divestment of a producing interest should reduce the amount of paperwork associated with properly filing state and/or federal tax returns. If you are selling a portfolio of interests and currently rely on employees, and/or third party accounting firms, to prepare your taxes the sale could substantially reduce their future time requirements; freeing them up to pursue activities that make you money instead of take your money.

Preventing Fragmentation:

Through inheritance and the passage of time some mineral and royalty interests create more problems for heirs than intended monetary relief. What started as a large interest for one generation can eventually become an ever increasingly smaller interest for future generations; eventually it can become so small that it isn't worth the time it takes to manage it. Fragmentation, also known as fractionalization, occurs when an interest becomes so small there is no monetary justification for owning it. Obviously the situation gets amplified and can occur much sooner for larger families.

In cases wherein each successive generation inherits their proportionate part of their parent's interest, the once large interest eventually gets divided up into smaller and smaller and smaller pieces. Fragmentation of a depleting resource interest has the ability to compound the situation. To make matters worse if your mineral interest is still subject to a very old oil and gas lease, the interest is likely subject to a very small lease royalty as well. This reduces an already fragmented revenue interest even further.

Fragmentation not only negatively impacts income but can also negatively impact your time and expenses. A smaller mineral interest obviously has less value than a larger mineral interest located under the same tract. All else the same, that smaller interest will produce less income than the larger one; unfortunately the small mineral interest requires the exact same amount of paperwork, management, and oversight as the large interest. Fragmentation can be a legitimate concern.

Proactively Pre-empt Probate Problems:

If you have assets you plan to bequeath via a written will the legal process of probating your will and administering your estate will most likely involve attorneys, courts, money, and a lot of time on the part of your executor or executrix. Depending on the size of the testator's estate, inheritance tax, income tax, or a combination of other state and federal taxes may be owed. Often times the executor will need to settle any debts of the estate before transferring assets to beneficiaries. Though depending mostly on the value and liquidity of the assets held by the estate (and the specific terms of the will), it is unfortunately not uncommon for an executor to be forced to sell some assets of the estate in order to pay the IRS and settle any other outstanding debts.

Family ranches, farms, minerals, and royalties have been lost for this very reason. Selling a portion of your mineral and royalty interest now, at a known value, tax rate, and commodity price, versus your estate potentially having to be rushed and forced to sell your interest at a future unknown value, tax rate, and commodity price, just to meet the demands of either the IRS or creditors, may be advantageous to some. If the overwhelming majority of one's net worth is comprised of non-producing minerals, or possibly even producing royalties, it may be advantageous to sell a portion of those interests now rather than go through the probate process. That being said, an estate advisor may be able to recommend the use of other tools that don't require the sale of mineral rights, or other assets. Everyone's particular situation is different. Whatever your particular case may be it is never too late, nor too early, to seek out and consult with a competent attorney specializing in estate planning, tax law, and probate law.

Eliminating Management Issues for Heirs:

The complexity of properly managing both non-producing and producing oil and gas interests can either be more than some people think they can handle or more than they desire to handle. Rather than distributing assets that require continued management, expertise, and oversight, some families would rather leave their heirs cash or other assets that don't require the potential hassles of mineral and royalty interest ownership.

High Risk Tolerance:

If your tolerance for risk is high you probably have a propensity to keep a non-producing interest, or even a producing interest for that matter, rather than sell even a portion of it. For many high level risk seekers it simply wouldn't matter what was offered for their interest; it is less about the risk premium for them and more about deriving utility from future uncertainty. Risk lovers may obtain more pleasure from dreaming their interest will turn them into the next Jett Rink or Jordan Benedict someday than from the actual cash, or return on investment, they would receive from selling all or a percentage of their interest.

Risk Factors of No Concern:

Regardless whether you are risk averse, risk neutral, or risk loving; you may simply feel the underlying factors contributing to the overall risk associated with owning a mineral or royalty interest either don't apply to your interest or is of little concern to you. Such a person may not be concerned about the risks potentially impacting the short and long term vale of their interest; such as depletion risk, financial risk, commodity price risk, operator and lessee risk, alternative energy risk, political and social risk, mechanical risk, reservoir risk, and environmental risk.

Current Cash Flow Satisfies Risk Exposure:

You may feel the monthly income you currently receive from one or more producing properties is an adequate reward for the amount of investment risk exposure the ownership of the property carries. For whatever reason you may feel the reward will either carry forward indefinitely at its current level, get larger with time, or you're simply not concerned with the possibility of it diminishing in the future.

Cash Needs Indefinitely Satisfied:

If you are satisfied with your short and long term needs for cash, and not concerned with the financial return capabilities of your royalty interests, than a potential sale may not fit your needs. Having said that, just because a mineral owner may already be highly liquid should not preclude wise investing and divesting decisions.

Would Rather Receive Current Monthly Checks:

The seemingly steady rate of cash flow your royalty currently generates may satisfy your current needs, wants, and desires. Would you rather receive smaller checks every month or one much larger check (similar to the type of payout choice you're required to make when purchasing some types of lottery tickets)? *Note: If you're considering selling your interest but won't primarily due to your preference of receiving fixed monthly cash payments over a much larger one-time lump sum payment; a discussion with your financial advisor may be warranted. It could be possible to use the proceeds from the sale of royalty interests towards the purchase of a fixed annuity, whose primary purpose is to generate safe consistent income, with little to no amount of risk.

Unsatisfied with Current Offers:

The most obvious reason for not selling your minerals is a less than satisfactory offer. Though there is no guarantee future offers will be smaller, equal, or larger than current offers; sometimes it just feels good to follow your instincts. If the interest doesn't bring what you feel like should than don't sell it.

Investment Strategy:

You may be satisfied with your current investments or feel you are adequately diversified already. Conversely you may simply prefer holding the majority of your wealth in real property and are not concerned with illiquidity.

Management a Non-Issue:

Because of other business interests you currently own, the sale of your royalties would not substantially reduce the workload of yourself and/or that of your employees. If selling wouldn't help eliminate the burden of paperwork, the cause of anxiety, and/or the obligations of payroll; then management concerns are probably not one of the reasons you would ever consider selling your interest. If you like the offer that was made but believe you'll receive greater enjoyment from keeping the interest(s) then that might be reason enough not to sell.

Current Tax Benefits:

If you are effectively managing your interests than you likely take advantage of the federal tax benefits currently allowed by the IRS in connection with those acquired interests. Because oil and gas depletes over time (non-renewable) the depletion deduction allows an owner to account for the reduction of the products reserves. The depletion allowance (cost or percentage) attempts to do this. Although some politicians and non-industry investors view it as a tax benefit, break, or loophole; many owners and investors of depleting resources view it as a legitimate need due to the inherent nature of the resource.

If you benefit from depletion allowance, and feel confident the tax deduction will be available for the foreseeable future, you may desire to retain your interest simply for this reason.

Sentimental Reasons:

If you inherited your interest from a loved one the simple pleasure of owning something they owned may evoke a sense of nostalgia. Even if a mineral owner is in need of cash or capital, sometimes sentimental reasons are enough of a reason to keep a portion or all of a mineral interest.