Selling MIneral Rights vs. Royalities

I have been getting offers to sell my mineral rights. Last night, I had an offer of $12,000 an acre.  I said I wasn't interested.  But how do I determine which will get me more money--mineral rights or royalties. First of all, I have no way of knowing how much royalties would be if I were to get in a unit. Is there a range of amounts for royalties? How much per acre?  I also heard that these fracked wells have a life of about 7 years, with a dramatic drop off in productions after the first year. Comments?

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Permalink Reply by Nancy LeNau on January 17, 2014 at 10:53pm

Gusher, Where did you get this amount for taxed royalty ? 

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on January 20, 2014 at 10:41am

Nancy, royalty is taxed as regular income. So whatever bracket you're in is the rate that your royalty is taxed.  Selling your interest--assuming you've owned the property for more than a year--is a long term capital gain and is taxed at 15%, unless your ordinary income is already in the top bracket.  If that is the case your cap gains rate is 20%.  

Permalink Reply by Nancy LeNau on January 20, 2014 at 9:40pm

Thank you Marcus ....  Appreciate your time and information !  

Permalink Reply by Gusher on January 20, 2014 at 10:46am

35% fed and 7% state assuming you get enough that it will all be in top bracket. and as Marcus states the capital gains (selling rights that you have held more than a year) will be at either 15% or 20% depending on your situation

Permalink Reply by INVICTUS on January 18, 2014 at 5:48am

 You will have to do a cash flow analysis of the current offer (cash in hand, now, after taxes) vs what you expect the cash flows (monthly royalty checks) to be in the future. One must discount those future cash flows to arrive a number - The number is compared to the cash offer you just received. Take the higher number as the better deal.

So what will the cash flows be for your DEVELOPED mineral rights?

That's the key question all of the investors (Hedge funds, former O/G execs) want to know.

It's time to crunch the numbers and brush up on financial analysis.

It's not easy but if you are thinking it terms of 7 figure returns, it's worth getting the education, in my view.

Permalink Reply by Jimmy Wilson on January 18, 2014 at 8:17am

Evan.... did you see that Carrizo release yesterday ? It's worth 20,000 an acre and will get there bud... be patient

Jimmy

Permalink Reply by evan on January 18, 2014 at 8:56am

No Jimmy I didn't see that but I will look for it today. There has to be a cutoff point somewhere when it reaches its peak I would just like to know what that number is.

Permalink Reply by Jimmy Wilson on January 18, 2014 at 9:17am

A lot more than what it is now, one thing , my friend, quarterly production reporting will allow the true value picture to be brightened.

Within a year or two, the EUR's (Estimated Ultimate Reserves) will be more accurately calculated and then plugging in market prices to establish truer overall value.

Any investment site, Yahoo finance, ect, will show you those Carrizo PR's from yesterday, good little well for sure !

Permalink Reply by catt on January 18, 2014 at 12:34pm

Rick.....I  hope all works out for you. I know Eclipse is joint venturing with Antero in and around that area.  Antero will be doing the drilling for them. They will be drilling very soon. Good job on keeping the Trenton black river.....I believe that they will drill for that layer in years to come. So what was your final total per acre on your sale? I forgot how many acres you had on Jacks Run road.

Permalink Reply by Rick on January 19, 2014 at 12:01am

200 ft. below the Trenton-Black River. never thought I should have tried for the river...lol But that was in the lease! I sold only what was in the eclipse lease.

5.0 acres gross/net and grave 51,500 total. Plus 26,500 signing bonus! 

Do the math for 5.0 acres!...lol not bad!

Every nice people to work with! 

Permalink Reply by INVICTUS on January 20, 2014 at 5:54am

Another point that was alluded to in this post:

If you sell anything that affects the subsurface rights you have now brought another NEW partner into the mix. Generally it is understood that subsurface rights trump surface rights. You really begin to cede control of you say on what happens on the surface.

Your new partner who provided you with cash upfront, now has a say in your affairs concerning their new cash flow. And to reiterate, they have an over riding amount of control over the surface development.

For some perspective of where sales numbers of mineral right are going, SE Ohio County has one deal closed at $19k/acre for 20% lease. Terms and conditions beyond that are not available.

Permalink Reply by Philip Brutz on January 20, 2014 at 8:27am

What if the surface owner retains over 51% of the mineral rights?  Would the minor partner still be able to control what happens on the surface?

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