Replies to This Discussion

Permalink Reply by william Allen. Ladd on July 6, 2015 at 11:13am

Once it's gone. it is gone! Just like selling off your timber or coal or whatever.

Bill L

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Permalink Reply by Bert Ault on July 6, 2015 at 11:23am

Anyone from the royalties buying groups have anything to say about getting fairer treatment from the oil companies after selling a percentage of royalties?

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Permalink Reply by Barry D on July 6, 2015 at 3:02pm

Bert,

Have you signed a lease?

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Permalink Reply by Bert Ault on July 7, 2015 at 1:03am

Yes I have a lease about ready to renew to an automatic 5yr extension. No drilling or unit established yet.

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Permalink Reply by Jeffrey Fort on July 7, 2015 at 8:26am

First, let's use the correct name. "Minerals" are what's in the ground. It is an interest in real estate. In contrast, a "royalty" is what is created by a lease in the form of a payment, by the lessee, or a percentage of the production in kind -- assuming production is achieved. It is personal property. I believe what this thread is discussing is the possible sale, or not, of a mineral interest. While buying and selling a royalty interest is possible, in my experience most were thinking minerals and much confusion ensues by calling the interest a royalty.

Putting a value on a mineral interest is exceedingly difficult, especially if there is no production. It requires a reservoir engineer who might be able to speculate as to the production to be achieved, which declines over time in a manner that is unique to the field, the well, and the proficiency of the producer. Then there is speculation about the price for that production and what might happen over the, perhaps, 30-year life of the well. Have you not seen the volatility? Then, like calculating the present value of a right to any future payment (whether it be a business, a rental property or a return on an investment) there is the problem of ascertaining or negotiating the discount or capitalization rate, which, after all, is a function of risk. Then there is the temporal component. That is, if seller is at the end of his life or in desperate need of cash, he may be willing to sell for a lower price than a person who can afford to hold out. Ultimately, the interest is worth what someone is willing to pay for it. Doing this intelligently requires, like I said, an engineer familiar with the locality, a CPA/tax advisor and an attorney experienced in such matters.

They say one should only invest in, buy and sell what they know. What is going on 7,000 feet down, how much is down there, the cost of reducing it to possession --  figuring out what its worth -- I can't imagine and I've been doing this for a long time. Buy or sell at your peril. And the words of my contracts professor come back to me, "The law does not protect someone from making a bad bargain."

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