What is 1% of royalty per acre worth BEFORE its developed?

I currently have about 200 acres in Bradford that a portion is set to be drilled this year.  He wants to sell me 1%.  This would take me from 9% to 10%.  We have looked and asked all over the place and no one seems to have a good formula to figure this out.  Can anyone help?

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Permalink Reply by Mike C. on March 7, 2010 at 9:19am
Well we each have 50% of 18%. So 9% each. If he wants to take his rate from 9 to 8 and my rate from 9 to 10%. What is that 1% worth?
Permalink Reply by Brian on March 8, 2010 at 5:17am
contact one of the companies that advertise they will buy your mineral rights or royalty rights from you. Then whatever they offer you for your 200 acres, and 18% royalties figure out how much 1% is worth. Don't tell them why you are inquiring obviously.
Permalink Reply by John Reed on March 10, 2010 at 11:50am
I'm curious if it's just me or if anyne else is confused. Are you in a drilling unit ? If so what is the size of the drilling unit ? How many acres does the person who wants to sell you the 1% own within the drilling unit ? These answers are needed to determine an approximate value. To get the most value you need this information along with an estimated production level ( I have this), an estimated price for NG (let's say 6.00 to 7.00 MCFE) and we can make the assumption that the unit will eventually be fully developed. If you can give that information it's pretty easy to figure this out with a royalty calculator.
Permalink Reply by Mike C. on March 10, 2010 at 12:52pm
Again it is undeveloped. The lease was just signed and we each have 9% of the overall 18%. Production is unknown. We are not located in any pooling units and our acreage is spread out over several townships. If I knew any of the other info this would be a lot easier to figure out but obviously everything is an unknown until production happens. So depending on the price he may sell me 1% for way less than its worth or way more depending on how the variables fill themselves in. Make sense now?
Permalink Reply by John Reed on March 15, 2010 at 12:42pm
Hi Mike, I'm not asking you for production numbers. I can use historical numbers for that along with a pricing estimate. You do need to know the size of the drilling unit and how many acres in the unit your friend has that you are looking to purchases 1% of his royalties. An average unit is 640 acres. If you each have 50% interest in 200 acres and NG is at $6.00 and it produces at 4.5 and is fully developed (say 5 well heads) and in a 640 acre drilling unit your combined overall royalty amount over a 20 year period with a production decline factored in would be around $6,720,000. Your friends share is half of 6.72 mil or 3.6 mil. 1% of 3.6 mil is 36k.

640 acre drilling unit (average unit size)
200 acres in unit
price of NG= $6.00 MCFE
production= 4.5 MMFCE (X5 wells if fully developed)
Total Princ. Royalty of 20 years= $6,720,000
Your friends royalty is half or $3.61 mill.
You want to purchase 1% of his royalties
Approx value = $36 to $37 thousand

That is if I have your story correct. If I don't obviously these numbers are no good.

Also, production numbers I used are estimates. They could be better or they could be worse. Too many variables determine this. Only time will tell. Same thing with price of NG. Right now its at about $4.50. Long term is $7.00 to $8.00. Again, only time will tell.
Permalink Reply by Robin Fehrenbach Scala on March 19, 2010 at 4:53am
What you are saying is that you JUST signed a lease for 18% royalties and there is NO production happening on the property now. Is that correct?

Plus, your land is spread out over several towns so the 200 acres is NOT ALL ONE piece.

And you own a half interest in the 200 acres (and therefore in the royalties).

Based on my conversations with people who buy mineral rights, you should not pay a high price for the 1% that the other owner wants you to buy. There are several reasons for this.

First, there is no production data for ANY of the lands (and they are spread out all over) so you could actually end up with 1% of nothing. Though that is not likely. Second, the lands have just been leased but none are in a drilling unit and may not be in a unit for some time. You have no way of knowing if or when they may be drilled. Finally, you need to figure out a number based upon the location of each piece of land. For instance, you might have 30 acres in a good location, 70 acres in a questionable location, and 100 acres in a terrible location. Or whatever. Since it is not all one piece, you can't value it all the same.

Anyway, I am no expert in this but that is my 2 cents worth. Good luck.
Permalink Reply by John Reed on March 20, 2010 at 7:28am
I agree with you. My calcs. were based on average numbers of what we know in prosprective areas thus far. Since he wanted an estimate I went with middle of the road numbers (probably conservative)presuming some criteria. Bottom line there are too many variables to truly determine the worth.
Permalink Reply by alexandra on March 21, 2010 at 6:11am
On Friday I received an offer from a mineral company based in Oklahoma City, Ok. I never approached anyone for an offer to sell my total mineral and oil rights, so I was surprised to hear from them. I have a 20% royalty on 9.83 acres in Wilmot Twp. They offered to buy my mineral and oil rights outright. I would never have a claim to royalties on my land again for $6,400.00 an acre. The total amount to be paid to me would be $62,612.00. I thought some of you would be interested to know this. As far as I am concerned, they are going to have a long wait. I am right on the borderline of Wilmot Twp and Terry Twp within a few mles of the Welles wells being drilled. So at this point I am feeling optomistic that within a few years they will get to Wilmot, and my unit.
Permalink Reply by John Reed on March 21, 2010 at 5:27pm
Yes, in my opinion I would 100% pass on that offer. Your potential reward far outweighs the offer. Based on the same criteria above, (which obviously is speculation) but at the same time about all we have to go on right now, if you were in a fully developed drilling unit you could potentially receive in excess of $62,000 in two years. The key to this is "fully developed." If your O/G company is committed to developing fully you have far more to gain than what was offered. Let's hope the price of NG and the demand go up in the coming months.
Permalink Reply by CJC on June 23, 2011 at 11:46am
What do you mean by fully developed? Based on my calculations 9.83 acres with a 20% royalty burden will take much longer than two years to generate 62K.
Permalink Reply by Finnbear on June 23, 2011 at 3:33pm
What is the land worth if you were to sell it? Who owns the other 80%? Are they selling their 80% interest for $25,600/acre? If 20% interest is worth $6400/ac then the other 80% is worth $25,600/ac making the total interest worth $32,000/acre at the rate they offered you. In most rural places the land isn't worth $32,000/acre.
Permalink Reply by Finnbear on June 23, 2011 at 3:41pm
Remember, he only holds 20% of the mineral royalty interest on these 9.83 acres. Someone else holds the other 80%. He is not entitled to 20% of the royalty on a well that might be drilled. He is entitled to 20% of whatever royalty % the eventual lease specifies. Say a lease is done with a 16% royalty, his 20% interest is actually 3.2% (20% of 16%) on those 9.83 acres which isn't going to make him rich, even with a great well. It might give him a little spending money, or pay his taxes.

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