Looking to purchase gas well that is on our property still owned by the previous land owner. It is on the downside of production but still producing modest royalties. I have data from the well owner showing royalties for the past 5 years. Is there a formula based on this information whereby I can determine a fair offer to purchase?
Do what mineral buyers do, offer about 10% of the expected payout over the remaining lifetime of the well as a starting point.
I doubt that very many people have received more than 20% of the expected lifetime payout of the minerals they are selling. Your purchase is a little different, you own the land the well sits on, have you any idea if the purchase is just for the well and the formation it is producing from ?
What is your main objective with the purchase ?
Normally it is the total of the last 3 years production or the value of the equipment which ever is greater.
That form of valuation is outdated, when the deeper reserves were discovered and pooling modifications were necessary, valuation took on a new dimension.
Also consider that you will then be responsible to plug the well when production ends. Your statement about producing modest royalties is a bit confusing, if you own the well you own all production, and have to pay the mineral owners the royalty. Are they just trying to sell you the well and retain the mineral ownership - whereby you would have to continue to pay them a royalty? I would hope it is that you are purchasing all mineral rights and the operating well.
Have you ever operated a well before? If the answer is no I strongly recommend that you walk away from the deal. Even if you have, you have to think about the entire life cycle of the well. In order to maintain production you might have to swab and clean the well periodically. Does it generate brine? What about hauling costs, access, etc? You mention that it's decline is really starting to show. Will this production make up for the cost to plug the well?
We've plugged many conventional wells - it can cost between $20,000-$40,000 for a simple well and up to and past $100,000 for a complicated well with numerous issues. Is this something you want to potentially be on the hook for? Take a long hard look at the numbers.
Don't forget, you will probably be responsible to plug the well.
That cost must be figured into your calculations.
You didn't mention production rate. I would graph the well product(s) volume(s) vs time in years to see how fast the well is decaying down to 10% of the maximum production rate. Wells tend to drop in production at some rate, then hold at around 10% for long periods of time.
Knowing the current production % and volume you could calculate how much you will make each year using an assumption of what OPEC might set the Oil prices at.
Also well stimulation has worked at wells to improve production similar to the horizontal wells being re-fracking to improve production when wells have played out.
As those who have commented on this discussion, there is a lot to consider when owning a well. The one thing you won't have to deal with is Domestic Oil & Gas companies taking your well products and giving you a rationed royalty each month while making a fortune committing theft. PRICELESS
Consider having your oil processed into motor oil, then compete with Walmart and the rest of our sorry retailers who are still gouging using Post 2008 oil prices by selling oil for large sums by the quart.
The American way is to excuse the increase in price blaming it on the price of shipping the product to market, then forgetting to do a "price check" to return the product back to price it should be.
A good Federal Anti Gouging law could correct some of this behavior and put more cash in everyone's pocket where it belongs.
Let's get busy demanding and writing real laws to make America Great by putting corporations back in a support role, rather than allowing them to feed their Kings Wealth similar to the beehive where the bees exist only to feed the queen.
One more thing, if you want to pay someone, call Jeff Rokisky.
He was auctioning off mineral rights at one time by using surrounding well production to determine the value of the minerals for future wells.
He might be able to give you an estimate of the value of the well.
As always you should do your own research to support his findings. You won't get a refund after buying the well, and as always "Let the buyer beware".
There are numerous factors that go into determining a fair market valuation. Are you only purchasing the well? Any mineral rights? What is the original well lease language? Has a Pooling Modification been signed for the acreage associated with the lease? What County / District is the well in? Who is the current producer of the well? If you are purchasing the well, if in WV, you will be required to post a bond with the State. (I believe the current bond requirement is 5,000.00 for an initial single well.)
If you email me on this site, I will provide you with my phone number and will be happy to discuss the situation in greater detail.
Let me clarify: we want to buy the RIGHTS / ROYALTIES not the actual well. Well maintenance and capping is way beyond our expertise and budget!
We would just like the checks every month. When I say 'modest', the average monthly check went from $160.00 three years ago, to $85.00 last year and now is trending to $45. Production is steady with only a slight decline from the last few years from year 2010 (2717, 3381, 2166, 2160, 1940 prod mcf). From reading the financial news and other information, I do not see natural gas prices at the wellheads going up much more than they are now.
If I go by the "3X's Royalty Checks average, I come up with about $3000.00 for an offer for the royalty / mineral rights. I do not think we can go with the numbers given to us by the Seller because those days of high royalty and high wellhead prices are gone I fear.
The rights should be worth a lot more than the well. With so little information to go on it is very hard to give any good numbers. If you where just purchasing the royalties from this well it becomes a simple ROI question. If the royalties are $1000 a year and you want to make a 10% ROI it is worth $10,000 if you want to make 20% it is $5000. What the rights are worth depends upon the lease, where you are located and activity in the area. The rights could be worth from $10 per acre to $12,000+ per acre.
Look at WV's post from the 21st those are the questions that need answered to get any kind of realistic number.
Your first post was like asking what is my car worth. Follow up post added it has 20,000 miles. We still need to know the make, model, year and condition to give you a range of value.