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 James T Monyak on December 4, 2012 at 9:33am

I am not looking for millions, but I am looking for just $3500 per acre for a total of 10 acres in Clearfield County.  I own 50 acres and looking to sell 10 acres.   I just need cash now since my daughter is starting college.  They said the well will be drilled in a couple of years, but I can't wait that long.  I looking for someone that can wait and can write a check for $35,000.  I would expect that person to receive well over $500,000 in the next 15 years. I can't understand why someone would not buy when alot of Marcellus land owners are asking $15k to $25k per acre. 

Permalink Reply by jonathan M. on December 4, 2012 at 10:14am
James,

Although I don't think the 3500/acre is too much to ask for you numbers of $500,000 on 10 acres are far fetched. If investors believed they could make $465,000 on a 35,000 investment they would be beating down your door. Look at the some people's posts here that are actually receiving royalties and you will se they are nowhere near that much per acre.
Permalink Reply by James T Monyak on December 4, 2012 at 10:39am

Jonathan,

The people posting here are Chesapeake lease owners.:(

I own 6 acres in Greene County which I am part of 170 acre unit.  There are 3 wells in the Consol Energy unit so all of the acres have been frac and stimulated. "unlike CHK's track record."   I am receiving around $5k per month after deductions. Based on my actual production numbers and using the royalty calculator I expect to collect over $350k in the next 15 years.

I thought I was doing well until I check out some of the production numbers from other wells throughout the Marcellus.  These numbers are for real, but Chesapeake does not follow the other E&P companies production and payment methods.  Many of the Chesapeake units are 640 or 1280 acres and have only one well. 

My $500,000 estimate on 10 acres could be low considering the number does not include a Utica well too.   I think the reason people are not buying is they can't wait or don't have money for a long term investment.  I had to wait 5 years for my first Marcellus royalty check.  I don't want to sell, but I need the money since I have no other income than my Greene County monthly Royalties. 

 

Permalink Reply by jonathan M. on December 4, 2012 at 10:52am
Wow 5k/month on 6 acres? That's great congratulations. I would think with that kind of production you could find a buyer. Have you had any success contacting anyone? Have they contacted you? Wish you good luck.
Permalink Reply by James T Monyak on December 4, 2012 at 11:03am

I am not selling the production well in Greene County since the monthly royalties are what I use to live on.  I am selling 10 mineral acres in Clearfield that does not have a Marcellus well as of date, but is expected to have one in a couple of years.  There is a Marcellus well permit filed with the DEP right next to the property.  

Permalink Reply by jonathan M. on December 4, 2012 at 11:07am
Sorry I was confused. Well difficult to compare the two properties and expect similar outcomes. The Greene county is in wet gas territory and clear field looks to be dry gas. Hope you can find a buyer.
Permalink Reply by J Hankins on December 4, 2012 at 11:24am

James,

 

That is a nice return on 6 acres. However, you have to look at the EUR (estimated ultimate recovery) for each well. It's not feasible to say $5k a month x 180 months. The well(s) will not sustain the current production. That is why investors use a PV discount factor when calculating price per acre economics. 

 

Just looking at rough economics.....If you assume 4bcf EUR per well x 3 wells= 12bcf x $4mcf= $48,000,000 gross

$48,000,000 x .00441176 (6ac/170ac unit x .125 royalty)= $211,764.70 gross (remember royalties are taxed at ordinary income)

That is over the life of the well, which is estimated to be 25-30 years.

An investor will look at these numbers and say, "I want a 2.5 or 3 to 1 pay out for giving you a lump some now in exchange for a declining 25-30yr annuity", and would probably offer you $70-$85k. IMO

This a very rough and elementary example, but could be used to "shoot from the hip". A professional oil and gas investor has engineering and financial software to calculate a value.

Permalink Reply by jonathan M. on December 4, 2012 at 11:29am
Thanks for that breakdown. Does this software work for non producing properties as well. Guess they would just use surrounding production as a guide?
Permalink Reply by J Hankins on December 4, 2012 at 12:44pm

Yes, they would look at activity in the area, and surrounding well production. If it's non-producing they tend to de-risk the investment by a percentage straight off the top. Meaning there is a certain risk a well will never be drilled. Not all acres in a play are geographically equal and productive.

If you want to look at economics in the wet gas window..... We can use 4bcf per well and 281mmbbls (24mbbls condensate & 257Mbbls NGL's), which would roughly be $31,000,000+/- per well in gross revenue. 1ac with a 1/8th royalty in a 400ac unit would pay approximately $10,000ac gross over the life of the well.

The unit size is debatable, but the trend is towards larger units. I've seen 175ac drilling units in Ohio with 400+ac production units.

You may get more than one well you may not, depending on the results of the first one. At $3,500ac (1/8th royalty) I would be inclined to sell a portion and keep a portion. I look at it from a business point of vew and not a personal attachment.

Permalink Reply by jonathan M. on December 4, 2012 at 12:47pm
Thanks for the insight. I've been dealing with a few companies and I am also inclined to sell a portion. I too look at it from a business standpoint (I'm small biz owner) I'm in western guernsey which is still unproven and up in the air....
Permalink Reply by 0llbnp780fs53 on December 4, 2012 at 1:07pm

"If you want to look at economics in the wet gas window..... We can use 4bcf per well and 281mmbbls (24mbbls condensate & 257Mbbls NGL's), which would roughly be $31,000,000+/- per well in gross revenue. 1ac with a 1/8th royalty in a 400ac unit would pay approximately $10,000ac gross over the life of the well."

Just curious:

Where (what region) do you get the lifetime production figures?  What are you using as a price for the products (gas, NGLs, etc)?  How many years are you counting as the productive lifespan on the well?

Thanks

Permalink Reply by J Hankins on December 5, 2012 at 4:37am

The EUR's came from investor presentations from major operators.

I used $4mcf gas, $86bbl for condensate and $52gal for NGL's.

Range and CHK used 500months(40yrs) life span in their calculations of well economics.

Regardless, if it's 30 years or 40 years, you can still look at the estimated EUR to determine what the well may ultimately produce over it's life expectancy.

There is a key word in the abbreviation EUR, and it's "estimated". Several analyst feel Range, CHK and others have exagerated their EUR's for investor confidence. Guess time will tell. I'm optimisitic.

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