Measuring an Offer to Sell Mineral Rights

I have offer on table to sell 50% of my mineral rights for ~$1Mil. I am viewing this that investor thinks  the property is going to generate well over $2 mil in royalties. It seems to me that I will get a second million by time investor breaks even.  Is my thinking wrong?

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Permalink Reply by JK on November 30, 2012 at 2:33pm

Take the deal.

Permalink Reply by Jim Litwinowicz on November 30, 2012 at 2:41pm
Hard to say. You don't say where you are, how many acres you have or if you are in production. Also, I am assuming you think that your royalties will be paid out at the same rate to each of you so that you will get your second million as the investor gets their first.

However, he/she may beat you to the second million. Say you are not yet in production and there are no wells in your immediate vicinity. That means the offer is based on speculation of production. If a well is drilled and the production exceeds expectations (maybe due to better production/drilling methods or a sweet spot). The investor could then sell his/her 50% for $2 mil or even more.

The other issue is time related. If no wells are drilled for five or ten years but the price of gas and constituents doubles due to exports, vehicle conversion, or Obama bans coal, the the rights will be worth much more. The investor could sell at double or triple the price while you are still waiting on production.

But if wells are drilled nearby that don't produce or the price of NG drops even further, the investor may lose money. So by selling now you may gauranttee your million. Hard choice to make.
Permalink Reply by Jim Litwinowicz on November 30, 2012 at 2:42pm
PS I am sure there are other scenarios that I haven't considered.
Permalink Reply by patrick on November 30, 2012 at 2:47pm

Depends on how much per acre.

If you sell you are deversifyng your risk

If you do it before the first of the year taxes will be much lower.

And  a most difficult  thing is where you will be able to get a return on the money that might equal the potential return off 100% of the mineral rights

Permalink Reply by Samuel J. Orr on November 30, 2012 at 3:01pm

I need to know where property is and how many acres to calculate the price per acre for 50% of the mineral rights. I do think you would be better off to divide the property into two parcels of equal size and then sell him 100% of the mineral rights to just one of the two parcels for $1,000,000. I think this eliminates a lot of potential problems down the road. I believe that if a driller wishes to then lease parcel A, he will also want to simultaneously lease parcel B. My advice might change some depending on the answers to the questions I have just posed. I think you should be very happy..

Permalink Reply by Jim Litwinowicz on November 30, 2012 at 3:02pm
Fang F Fang; that is a possibility. The royalties should be much higher, assuming a good producing wells and stable or rising prices. Even so, it would be over a few years of production, long after the investor's break even period.

Here's another caveat; the poster didn't say how many acres is involved. It is possible that a single well will be drilled and the royalties diluted among other landowners. If a single well is drilled and the royalties diluted to 1280 acres, it may be a long time for royalties to reach a million. And the land will be HBPd for decades so a second well may not be drilled for a long time.
Permalink Reply by cheliped on November 30, 2012 at 4:15pm

i have over 1oo acres and would sell 50% of the mineral rights for a million

Permalink Reply by James T Monyak on November 30, 2012 at 4:33pm

I have 10 acres in Clearfield I am selling for $3,500 per acre.  Need the cash now since my daughter is starting college.  I don't think anyone will get $10k per acre as Cheliped is wanting.

Permalink Reply by David Perotto on November 30, 2012 at 5:32pm

James,

I have watched this play for  a couple of years. I believe that over the life of a well,10K per acre is on the low side. If  you are in a wet gas/oil window it would certainly be higher. If one were to sell all of their rights, nothing less than 10K should be sought. Just my 2 cents.

Dave

Permalink Reply by 0llbnp780fs53 on November 30, 2012 at 8:48pm

At $3,500/acre are you selling or leasing? 

Another question not addressed by the OP is WHAT mineral rights are on the table?  Is there a horizontal cut-off?  Are they ALL mineral rights (e.g. coal and other shallow minerals)?  Obviously, if the mineral rights are sold, the surface acreage is going to be hugely devalued, not just for lack of mineral rights, but also for the potential for the mineral owner to totally disrupt surface activity. 

Permalink Reply by S. E. North on December 1, 2012 at 2:42am

I have coal oil and gas in several counties including some not leased.  What's the best place to go to get an offer?

Permalink Reply by rmc on December 1, 2012 at 11:54am
I was offered ten thousand an acre here in Greene County PA for a 50% stack from a company by the name of Bounty Minerals
The problem is I believe some of these companies are making offers on information not available to the general public.

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