Auction results: 100 acres of mineral rights in southern part of county.

Already leased with Patriot  flipped to CHK.  Therefore no "bonus" on these rights,  just the royalties based on signed lease.   Appears to be a royalty of 1/8th ( 12.5%) NET so certainly far from the best deal written.  Of course it was negotiated in 2008.

It does give an idea of what the mineral rights add to property value.  This would be a "worse case scenario" for a royalty provision, what would the same rights be worth on 100 acres with a 20% no deductions clause?

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Replies to This Discussion

Permalink Reply by dr j on April 19, 2012 at 3:17am
Permalink Reply by Paul Martinelli on April 19, 2012 at 3:37am

So what was the selling price?

Permalink Reply by tacoma7583 on April 19, 2012 at 3:39am

$319,000  it looks like  

Permalink Reply by Paul Martinelli on April 19, 2012 at 3:41am

way too cheap!

Permalink Reply by Utica Shale on April 19, 2012 at 4:52am

Paul,

" ... way too cheap! ..."

 

 What is your estimate of how much royalties the 100 acres would generate in the 1st year, if fully leased by the average well in that area? Rough estimate? You must have a Dollar figure in mind for you to proclaim "way to cheap!".

 

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on April 19, 2012 at 6:11am

Assuming a well recovers 75,000 bbl in year one on a 320 acre drilling unit that's 234 bbl/acre.  At an estimated $100/bbl you get $2,340,000 x .125= $292,500 year one LOR. That of course is assuming a certain level of production that is impossible to quantify at this time.  You could be in a unit that produces almost nothing and is a dry hole or you could be in a well like Buell that has much better numbers.  I must say I'm a little surprised at the auction price.  But the seller got some money in his/her pocket and a buyer got what they wanted.  So win-win maybe?

Permalink Reply by Utica Shale on April 19, 2012 at 7:07am

Marcus,

Is this declining production graph accurate ?

http://geology.com/royalty/production-decline.shtml

 

If true then ... 

2nd year is significantly lower than 1st year.  About $117,000 in 2nd year?

3rd year is significantly lower than 2nd year.  About   $58,000 in 3rd year?

 

 So, an investor risked a $319,000 Lump Sum payment today for a CHANCE at $467,500 over the next three years, if and only if, all 100 acres are put into a Horz Well PU. And you assumed a 12.5% Gross Royalty but 12.5% Net royalty is more like 10% (+/-), no ? So, more like $374,000 over next 3 years. And what if only 50 acres is put into the Production Unit and other 50 acres is an "island" - now the investor will lose money!

 

 Would you pay someone a $374,000 lump sum today just for than CHANCE of getting your original $374,000 investment back over the next three years? Where is the premium for the risk the investor is taking?

 

 $319,000 is not way too cheap given the risk.

 

 

 

Permalink Reply by Paul Martinelli on April 19, 2012 at 7:18am

US....you may be right.....I hope not....for my sake.

Permalink Reply by Paul Martinelli on April 19, 2012 at 6:19am

In that area, I would figure around $2500/acre  for first year....so $250K  if all producing.

Permalink Reply by Kathleen on April 19, 2012 at 4:11am
Another way I bet the owner looked at this is they would have had to make somewhere in the neighborhood of 470,000-500,000 to make that 319,000. Due to being placed in a much higher tax bracket as the royalties came in since the wells are supposed to produce the most of their money in the first year or two. Of course time will tell here if that holds true but as of right now that's all we got to work with.
This money is guaranteed while being drilled is not and they still get to keep the land they most likely love (I know they could lose some to a pad)
I personally won't sell but I can see reasons why some people would.
I lost my first reply so I hope I don't double reply here.
Permalink Reply by dr j on April 19, 2012 at 4:48am

In a case such as this, this landowner also "missed out" on the big signing bonuses surrounding landowners received so this was a way to realize a lump sum payment.   Also if you read the lease it appears it's for 189 acres total so perhaps he kept the mineral rights to the remaining 89 acres. 

Permalink Reply by Kathleen on April 19, 2012 at 6:36am
Just being nosey but did they get 37 hundred and change (hard to read) per acre or a dollar for the up front bonus. If they got the 3700 (rounding numbers since again I can not see the correct amount listed) in bonus per acre than they made double+ just on the sign on for that 100 acres This family did fine but again I can't read what is written very well and I swear in places it says a dollar.
Maybe I would sell too if in two years I made almost 3/4 of a million and still retained almost 90 acres.

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