Selling Mineral Rights

Hi, has anyone been approached with offers to buy your mineral rights?  We just had a very lucritive offer from a company ..... $5,000 per acre.    Just wondered if any other have had such offers. 

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Permalink Reply by Jeffrey Beunier on June 26, 2018 at 11:48pm

15 cents on the dollar?  Yeah, how did you come to that calculation. 

Furthermore, everyone is entitled to an opinion, we see that everyday on the news.  But like many of those on the news, it sure would be nice if people could base their opinion on some resemblance of fact.

I understand being cautious, as a mineral owner and investor, I am on the receiving end of offers and negotiating leases often, and I can assure you that everyone is generally looking out for themselves, it is not personal to them, it is an investment.  I always tell everyone that in most cases, it’s best to hold onto your minerals and not sale, if you can.  Sometimes offers are so good, as investors are willing to take on so much risk, that it is hard to say ‘no’.  Either way it is an individual and personal decision that should be made with as much insight as possible, and there are options such as selling only a portion instead of all of your minerals – that way you can take some chips off the table, while maintaining some ownership in case something comes along down the road.

 

GENERAL THOUGHTS

With that said, I think in general there are a couple of types of mineral buyer – (1) those that throw out low ball offers in the hope of catching deals from the less informed, (2) those that dig into the technical side of the business and analyze the geology, potential, etc.

 

As for as the 1st group – I don’t have a high opinion of them and don’t really know how they stay in business.   As for the 2nd group – those that are digging in and evaluating, they analyze a lot of items to get to a purchase price.

 

Some of the main items to keep in mind including relating to risk/return – the more ‘unknowns’, the greater the risks.  Some of the big unknowns that mineral buyers wrestle with include: (1) commodity prices, (2) timing of development, (3) number of wells (4) production profiles, (5) Lease Terms, (6) exit value/strategy, and (7) …..well there are a lot of risks and assumptions.

 

These unknowns influence the level of risk, and hence required return.  When you invest in any investment, you are looking to achieve a rate of return commensurate with the risk you are taking.  Higher risk investments require higher rates of returns, that’s why the perceived safety of US government debt have very low rates of return, while junk bonds, or penny stocks have high rates of return.   Mineral interests are most akin to real estate investments than stocks or bonds, but with a bunch of different risks.

 

The items above are just some of the risk mineral owners face.  If you are a mineral buyer, you have risks as well as a need to cover an “return hurdle” – most mineral buyers are using pooled investment vehicles and need to hit returns hurdles in the high single-digits to low-teens to cover cost of funds and overhead (some have much lower return hurdles as they are essentially division of insurance companies that are trying to beat inflation and therefore are looking for low single digit returns).   It’s not cheap to analyze oil and gas investments, and reach out to thousands of mineral owners, and cover losses on the ones you get wrong.  

 

On the flip side, the question for the potential mineral seller is “what risks I am willing to take”, and “what type of return I require or that I am willing to give up”.  Additionally, for a mineral owner, what portion of my net worth am I willing to have tied up in a single asset – depending on the size of the mineral value to your overall net worth, it may not matter much, or it may be a situation where the value of your minerals dwarf everything else.

 

  • Commodity prices – this is a risk that everyone takes – there are many opinions.  I think the general consensus is that prices are range bound, there are as many downward pressures as upward pressures.  Prices will be volatile, have periods where they seemingly go up each day, and periods where they seem to drop every day.  I caution anyone thinking that $80/bbl is likely and/or sustainable…  Similarly, $40/bbl is just as unsustainable as $80.   So, when evaluating what prices and hence your potential revenues, will be, take a look at various scenarios.  Then think about how those scenarios would impact you.

 

  • Timing of development is a huge question for everyone…including the operators.  If you are a mineral owner, it has huge impacts on value, the sooner may not be the ‘better’ but usually you want to see your acreage developed and put into production.    This is also a big challenge for mineral buyers.   Unless fully permitted with rigs on location, a mineral owner (and buyer) is speculating on when the wells will be drilled and completed.  The reason this is so important, is that the longer the time until development, the longer the time a mineral buyer is incurring the cost of its investment (remember they have to deliver a return to their investors). 

 

  • Number of wells developed – this is somewhat related to Number 2 but is still somewhat different.  It is also related to the size of the unit – a good way to compare units in the same thermal maturity area is to look at the number of lateral feet of well bore(s) in the unit divided by total number of areas in the unit. Operators have been experimenting with the number of wells they can fit inside of a unit.   In general, mid thirties is a decent number of lateral feet per acre – due to some mineral owners not leasing and therefore ‘no perf’ zones arise and I’ve seen some units with as little as 18’ of lateral per acre.

 

  • Production profiles (what the wells will produce over their lives) – depend on a huge number of factors – location (geology, etc), operator (how they complete wells, etc).  Operators complete wells differently as their objectives may be different.  The production profile for the first well in a unit can be different than in-fill wells if they are drilled at different times.  Overall, you really need to look at all the factors that influence production and base your assumptions on those factors to make your best guess.

 

  • Lease terms – lease terms vary wildly – it’s not just about the royalty rate, but also what deductions (if any) an operator can take.   I took a look at your Blaine 14N12W and 13N12W leases (at least what I think are your leases), your royalty rate of 3/16th is good, but your leases permit deductions.  Operators can deduct the cost to transport and process gas, sometimes these charges are a large percentage of your revenues.

 

  • Most mineral investors are not looking to hold the minerals they acquire forever, at some point in time most need to sell what they’ve acquired, and there are just as many unknowns when it comes to predicting how investors in the future will look at minerals.

 

All in, there are A LOT of assumptions that go into coming up with a purchase price and/or perceived value for minerals.

Just where are your minerals anyway - as you don't appear in either the Belmont or Monroe County recorder's records? 

 

Permalink Reply by Bullfrex on June 27, 2018 at 7:09am

Jeffrey,

Thank you for taking the time to post a well thought out alternative to the 'never sell' position.

Don't forget the income tax ramifications of selling an asset you have held for a while VS. royalty tax rate.....this could be significant.

Full disclosure here....our family group was near selling a portion of our rights when the well permits came in. We knew something was going to happen, as the offers doubled and tripled and more, so we 'held', but we were lucky. There are those nearly bordering our PU's who have had their leases surrendered recently....how long do you think it will take for those unfortunate folks to get a producing well?

Permalink Reply by David Allen Lilly on June 27, 2018 at 9:13am

Your comment is long on content and short on the most relevant part, which is the percentage of the value of your lease you are giving away for the pleasure of having your money up front. This is a favorite ploy of mineral buyers who have a stake in persuading landowners to sell their mineral rights, load them up with as much information as possible but do not ever discuss the absolute truth of the matter, which is the seller is giving up a large percentage of his royalty revenue.

No matter what combination of scenarios one could contrive from your comment the buyer knows more than the landowner ever could, putting the seller at a distinct disadvantage. No matter what combination of scenarios could be contrived from your comment your minerals will have a dollar figure attached to them equal to the expected payout of the lifetime of the lease and the seller will offer and/or pay less than half of that amount even in the best situation.

You do not agree with my 15 cents on the dollar but you do not offer your opinion of a more accurate amount that a given buyer will pay. 15 cents is a starting point for some buyers, I would not feel any better about it were the figure 30 cents on the dollar, a seller is still giving his money away.

I use my real name on this site and have stated over and over that we have 30 acres in Millwood Township, Quaker City OH. We also lately bought an additional 36 acres in Liberty township, Guernsey County with the mineral rights.

Permalink Reply by Jeffrey Beunier on June 27, 2018 at 11:41pm

Um...OK...well   As they say, you can't reason with the unreasonable.   I'm sure everyone is happy that you have an outlet for your frustrations.  

Permalink Reply by David Allen Lilly on June 28, 2018 at 4:21pm

What am I frustrated over ?

I have a great lease and haven't made any mistakes with my minerals. My comments are obviously much more to the point than yours, I especially like how you seem to doubt I have minerals because you didn't look for me where I am but rather where I am not.

No matter, you are a buyer advising to sell. I am just some dude on a web site in a discussion where I don't profit from any of the discussion.

And no matter what, you nor no one else can refute that a seller is giving away the larger part of his money for a smaller part paid up front.

Permalink Reply by David Allen Lilly on June 26, 2018 at 9:27am

Now I have an additional point to make:

This thread motivated me to some further research which uncovered a part of the story worth discussing.

Where I live the Utica Shale is covered by the Marcellus Shale. I am learning of new and improved drilling methods which produce BOTH plays from the same pad, giving landowners royalties from two plays at the same time.

How many of you who sold your royalties sold only the predominate shale formation in question but reserved the others for your future income ?

How many of you buyers informed your sellers that this is a consideration ?

The most striking aspect of this entire industry is how quickly things change, both in the market and in the technology. The market did take a turn that hurt landowners but that is the only market aspect that was not to our advantage in the age of shale. Oil has never gone down and stayed down, other than the 2014 downturn the market has pretty well favored the landowner who has retained his mineral rights.

The technology has always benefited the landowner who retained his royalty rights and always will. Don't think in static terms as in what today brings is what tomorrow brings. What you think you sold today might be twice what you sold tomorrow, as in the scenario I am presenting with this comment.

Seller beware.

Permalink Reply by william george allison on June 26, 2018 at 11:43am

every mineral buyer that I spoke to I asked this is just for the Marcellus right? they said nope this will be for ALL PLAYS.i said no thanks.

Permalink Reply by Bullfrex on June 26, 2018 at 12:33pm

Selling is the right decision sometimes. Like if you really need the cash to save the farm, or health expenses, lack of heirs, a wanderlust....the list goes on. Not everyone wants to deal with the waiting, negotiating and uncertainty of when you might be drilled.

Sorry, but no one knows Mitchell's circumstances, and while holding is a good strategy for most, it may not be the best choice in this situation.

Just sayin.....

Permalink Reply by Jeffrey Beunier on June 26, 2018 at 11:19pm

Absolutely correct.

Permalink Reply by LewPa on June 27, 2018 at 9:36am

DAL,

Rex Energy has been drilling different layers from the same pad here in Pa for years. Nothing new, I've been collecting royalties from two different layers for about four years now.

Permalink Reply by David Allen Lilly on June 27, 2018 at 6:47pm

Thanks Lew, that is great news, I wonder how much more the royalties are for developing an additional layer ?

Here is Eastern Guernsey county we appear to have the Marcellus over the Utica. The motive for the drilling outfits currently seems to be converting leases to HBP before the initial 5 year term is up.

I wonder when that part is over if the desire will be to drill additional units or go back to existing units and develop the additional layer on an existing pad in an existing unit ?

Permalink Reply by Jeffrey Beunier on June 27, 2018 at 11:35pm

Marcellus in East Guernsey???  check your maps, it might 'exist' in name, but you have less than 25-50' of formation.  IN PA its much much much much thicker. see slide 13.   A formation has to have several characteristics to be productive, thickness is rather important, as is depth.  Hopefully you aren't counting on the Marcellus in Guernsey getting drilled anytime soon..

http://geosurvey.ohiodnr.gov/portals/geosurvey/energy/Marcellus_Uti...

BTW - REX is in BK and is being liquidated.

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