Do you have a lease and have you looked at any deals to sell a percentage of your rights? I'm looking for advice, warnings, what to watch for, etc.!

Thanks! Christiane

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Offers are made on the basis of several metrics. The most common one is 3 x annual income or the total of 36 months income as = to market value.... You will pay taxes on the sale. Undeveloped property will generally get an offer of about 3x the going lease bonus in the area

In some states the information is public record and you are required to pay deed stamps (also called revenue stamps or documentary stamps). Arkansas and Oklahoma require deed stamps. this is very important to appraisers and others who value land with mineral rights and is widely used.

So, for eastern Ohio, what is the present low average monthly income for one Utica well?  Anyone?  Thought I heard $300,000 per month, but that might not be correct.

Every well is different. Every drilling unit (pool) is different. Trying to estimate what one well will do is not possible until it is drilled and evaluated and for the landowner the only evaluation you can get is the monthly production / income statement and you need a year or more such data to gauge any individual well.... HOWEVER, in a broad field play, there is a high corrrelation between the IP and the total EUR (expected Ultimate Recovery). Below is the plot of IP (first 30 days production) v. the projected EUR on 80 wells from the Fayetteville Shale.  Note that basically if it makes 3 MCF per day then it translates to 1.5 BCF EUR.  BUT for oil the metric is likely much different.  Even in dry gas basins like the Barnett, it was higher - roughlty 1 MM IP =  0.8 EUR...

 

Thanks Lerret,

                        An interesting curve that in a way illustrates the challenges in prediction.

There is a lot of scatter in the data to which a curve was fit.

This is a situation in which the Royalty owner can only fully understand matters when viewed in the "rear-view" window. Some answers can only be seen in retrospect.

 

All IMHO,

                  JS

 

No - I have worked up no data from that area - I stick to about 4 states in the Southwest.  I have taught mineral rights for Appraisers in PA and will be trying to set up classes  later this year through a local school in Hazelton.

There is more than one way to skin a cat without getting hair in your teeth and the oil companies have proprietary information with which they can project total reserves.

 

Reply by LERRET

"Offers are made on the basis of several metrics. The most common one is 3 x annual income or the total of 36 months income as = to market value.... You will pay taxes on the sale. Undeveloped property will generally get an offer of about 3x the going lease bonus in the area"

i've heard that 3x metric before, but in reality, here in nepa, the offers are far lower.

if, " Undeveloped property will generally get an offer of about 3x the going lease bonus in the area", were true, then here in nepa we would have had offers of over $15k/acre since the going bonus rate was over $5k/acre. the best i've ever been offered was $8k/acre, and that was based on my having a very high R%.

lately, it's been fun talking to mineral buyers. after listening to their schpiel, i politely inform them that their offer doesnt even equal my yearly royalties on one well, so why would i bother. they then inform me that if i send them my royalty statement, they can recalculate a price.

gimme a break already.

wj

true story.
last summer i was cutting the grass and my daughter brings the phone out to me. at first i thought it was a mineral buyer...i needed a break anyway, might as well have some fun.
instead of being a mineral buyer, the guy is asking me if i want to BUY some minerals.
where are these minerals i ask. the eagle ford he says. how much i ask. $30k/acre he says. $30k! what a deal...
after a question and answer exchange of about 15 minutes he asks, "are you an accredited investor?".
never had a credit card in my life i says. (lol)
he transfers me to his supervisor whereupon i get an education on what it takes to become an accredited investor.
so we hang up, me being much the wiser and thinking...so, they snookered granny down in texas outta her minerals for about 3 or 4 grand an acre, and they wanna peddle 'em to me for 30 grand.
there aint nothin' wrong with makin' a buck, it's the american way afterall, but these comapnies oughta at least try to not be so transparently greedy.
i would never advise anyone else what to do in such situations, but i have told my kids that if they ever sell their mineral rights after i die, i will come back to haunt them and inflict such emotional torment on them that they will wish they'd never been born.
but thats just me thinkin' out loud.
wj

WJ, 

It is amazing to me that most people assume that O&G Companies, mineral buyers/sellers are all corrupt and trying to take advantage of the mineral owner. More than likely, the outfit that contacted you had purchased minerals and was looking to flip a portion of the them at a profit to cover the cost of what they were going to keep.  Additionally, if you think minerals are going for $3-4K in the EF Shale you are very misinformed. Depending on the location, minerals are going anywhere from $6k-25K per net mineral acre.  

There are many reasons to sell minerals and each individual mineral owner has different circumstances.  However, as an example on why some would consider selling all or a portion of their minerals today vs royalty payments over time, I will use the lottery.

The lottery advertises the "Jackpot" as $40 million (arbitrary number), if you win the lottery however, you have the option to take $40 million over 20 years or you can take a lump sum payment of roughly 64.5% of the jackpot.  In this case, it would be a lump sum payment of $25.8 million.  In this instance, the mineral owner is like the lottery winner that will not sell.  He is going to take his yearly payments of $2 million.  However, let's take the winner that chooses the lump sum payment.  He receives $25.8 million before taxes and let's assume a 40% tax rate on lottery winnings.  He will wind up with a lump sum payment of $15.48 million.  Now it looks like the annual installments would be the way to go.  However, let's look at the long term.  The recipient of the lump sum takes all but $10 million to play with and buy all of the things he has ever dreamed of and invests the remaining $10 million very conservatively, getting 6% annual return (this is very conservative) the future value of his $10 million at the end of 20 years is now $32 million and change.  Now you might argue that is still less than the $40 million paid in annual installments, but you would again be forgetting taxes.  The annual installments would be taxed as ordinary income which at this amount would be the 39.6% tax bracket ( but for consistency, we will call it 40%).  Now the yearly payments are reduced to $1.2 million and a 20 year total of $24 million.  As this pertains to royalty payments, the one big difference is that you are NOT guaranteed that the monthly/quarterly/annual payments will remain the same.  In reality, as the well ages, the production will decrease and your royalty payments will decrease.

Now, the idea that your should never sell your mineral rights becomes less clear cut .  I am not advocating to keep or sell any or all of your mineral rights, but it is disturbing to read some of the negative comments on here about selling your rights.  There are risks/rewards to both strategies, viewed in the context of an investment, the decision is what is your risk tolerance?

As a side note, owning mineral rights in a highly productive area of the United States is very much like winning the lottery.  Most landowners, did not buy their property with an eye towards future O&G development!!

Another side note is that no one 15 years ago thought there was a snowball's chance in Hades that you'd get economic amounts of gas from shale.  But it is real and it happened. This is a technological break through.

Buyers of minerals do so because it is profitable. Some are traders - buying and selling. Many small firms accumulate minerals and flip to bigger outfits that do not want to do the leg work.  MAP11, MAP12, etc. is a royalty firm from OKC that routinely buys from such royalty accumulators and pays a premium of 30% or more.

 

Chesapeake bought a lot of minerals at high prices... and hosed their investors with it.  Notice how these companies hold back 10% or more of the money when a deal is sold?  That's their estimate of flawed title.  CHK also has claimed the "market value" of a marginal well is zero...yep no dollars.  And they also in the Fayetteville sold off 20% of gas to BP on all their production. BUT they cut separate checks and CHK pays 80¢ less per MCF than BP does to the same owners coming out of the same well.  If SWN is in the well - well...it's about another 20¢ higher for SWN gas.

Reply by Unbiased Information

" Additionally, if you think minerals are going for $3-4K in the EF Shale you are very misinformed. Depending on the location, minerals are going anywhere from $6k-25K per net mineral acre. "

so...you're telling me that there is no way that granny sold her mineral rights to this company for $3-4k...ever?

wj

WJ,

Ever being the key.  I'm pretty sure the first reported EF completion was in late 2007 from Petrohawk.  At that time, it was still and unproven resource play, So, if "granny" sold her mineral rights prior to the proliferation of the EF Shale or even early in the development for $3-4K then she did not get taken for a ride.  The amount of money mineral rights are sold for has to be taken in the context of the time, not in hindsight.  The other factor to consider, land/mineral owners in S. TX are not new to the oil and gas game the EF play is not their first rodeo.  A large percentage are very educated about this business and able to make informed decisions.  Like I said before, I am not advocating one position or the other.  At the end of the day, every mineral owner must base their decision on what they feel is in their best interest.  Mineral buyers risk huge amounts of money to buy mineral rights.  I would be willing to bet that many land/mineral owners with offers to buy their minerals in 2007 and early 2008 in the Barnett, Haynesville and Fayetteville plays would gladly have taken those offers after gas dropped like a rock in 2009.  This is a boom/bust industry and guaranteed, we will see another downturn at some point in the future. 

Reply by Unbiased Information

"So, if "granny" sold her mineral rights prior to the proliferation of the EF Shale or even early in the development for $3-4K then she did not get taken for a ride. ."

ok, but i was only establishing that the $3-4k/ac that i posted was in fact a possible scenario since you called that into question after my original post.

and then you said, "The amount of money mineral rights are sold for has to be taken in the context of the time, not in hindsight."

and here's the problem with that sorta thinking. if we consider minerals as an investment, no matter if they were acquired for the purpose or coincidentally with an unrelated surface purchase, they should still be treated as an investment. as with all investments, it takes time to realize a profit, most investments dont make folks overnight millionaires, ya have to have patience.

but what you're saying there is, that an investor should not look at his "portfolio" with hindsight. i dont do a whole lot of investing mind ya, but the only way that i can tell whether i've made any money on them, is to look back at what i paid for it, versus what it is worth today.

similarly, when i'm considering whether to buy, sell or hold, i try to look to the future. will it be worth more at some point i ask myself. it's a gamble, but that's basically what investing is, calculated risk taking.

you seem to be suggesting that it's a good strategy for folks to sell out early and avoid the risks, insteading of taking some risk and realizing a profit. not what most good investment strategies are based on, is it?

then you say, "Mineral buyers risk huge amounts of money to buy mineral rights.  I would be willing to bet that many land/mineral owners with offers to buy their minerals in 2007 and early 2008 in the Barnett, Haynesville and Fayetteville plays would gladly have taken those offers after gas dropped like a rock in 2009."

oh puhleeeze, gimme a break would ya?

in 2 years i have received way more than the highest offer i ever received for my minerals, and that was at low gas prices on a single well. and then...i still have new wells being drilled, 10 or more wells coming in the next several years. dont ya think thats kindof a no brainer?

really what i think mineral buyers do, is buy 'em cheap, take the bonus if they arent leased and then some of the high initial royalties to recover their investment and then dump them to other investors for the later royalties for additional profits.

and dont get me wrong, there's nothing wrong with making a buck, it's the american way afterall.

ya know, any mineral investor worth his salt has done the research on what he is buying. agreed? he would know for instance that the current eur's on my minerals is about 20 bcf per roughly 80 acres. how many of the folks like granny do you think have a handle on those numbers? any full disclosure on your part before you get her signature on that deed?

and yes, folks should perform their due diligence before letting themselves be hoodwinked. but you know that they dont, at least not the granny's who sign.

i'm not knocking you for what you do really, everybody has to make a living somehow. but just as i skew my stories to one side, so too you skew yours' to the other. it's disingenuous to try to get us all to believe that you're doing us a real big favor by taking those risky mineral off of our hands for a fair price so that you can assume all of the "risk" for us.

some folks need to sell, others might be way better off taking the "annuity" cash for life option. sometimes thats a gamble that pays off handsomely.

wj

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