America’s conversation place for mineral owners
I would appreciate some help in clarifying what I own and the relevant terms and calculations.
In 1929, my grandparents bought a farm in west Texas (Permian), 160 acres (SW/4 of section X, block Y,, ...)
After they divorced, they sold the land by warranty deed, but retained some interest:
"[grandmother] reserves unto herself an undivided one-fourth interest in and to all oil, gas and other mineral royalties which may be paid for oil, gas or other minerals produced on or from the above described land."
Same for grandfather.
QUESTION 1: The reserved interest is royalty interest. Would it be called NPRI today?
Grandfather's portion got passed down to my dad and his many siblings via will.
Grandmothers portion got passed down to my dad and his many siblings via Royalty Deed.
So my dad's share came to .042
My dad QCDed me his royalty interest to me.
I am interested in selling it. [I will be consulting a lawyer but would like some basic understanding now.]
The land is under lease at 3/16 royalty rate.
A deed would state something like:
.042....SW/4, section 13,....
However, potential buyers (and the county tax authority) are interested in the number: .042 x 3/16 = .0079
My Dad's QCD got those two numbers mixed up, so I need distinct terms to refer to these two numbers when describing the issue. (He has since passed on, so he can't just write a new QCD. Yes, I will be consulting an attorney.)
a) What is the number .042 called? The interest, correct? (a word which seems to be used for various numbers).
Please if there is a merciful God, can someone give me an industry-standard term for this number? Hopefully not "decimal" as in "a decimal of .042" or interest, as in "a 0.42 interest" but something more specific, BECAUSE, the words "decimal" and "interest" are also used for:
The number .0079 is the decimal interest (in the county tax rolls it is called Owner Decimal or Ownership Decimal.)
So, in this calculation:
.042 x 3/16 = .0079
?? x royalty rate = decimal interest
b) Also, I asked for clarification on an offer as to what they are buying, and they responded "It is a NPRI interest with decimal of .0079." Don't I own an NPRI of .042?
I am told that buyers think in terms of Net Mineral Acres...?
I was given a tip about the going dollar figure per NMA when the royalty rate is 3/16.
a) In the south-half (80 acres), my interest is undivided over the 80 acres. So, wouldn't the calculation be:
.042 x 80 acres = 3.36
What is 6.72 called? net acres? net mineral acres? royalty acres?
b) The north half (80 acres) has a pooled unit with the State of Tx due to a highway ROW of a few acres, so that my ownership is actually factored by .96 (tract participation factor?)
.042 x .96 x 80 acres = 3.23
What is 3.23 called? net acres? net mineral acres? royalty acres?
Any thoughts on whether I should use an O&G attorney in Austin, where I can come in person, or in Midland, where they would perhaps have their "finger on the pulse" a bit more?
Thanks very much for any information!
Question 1- depends on any other language. There are 5 factors in land ownership, and if they kept any executory rights, they would have a royalty interest that could participate in new leases and bonuses. Absent that, they would have an NPRI, and would receive the portion stated if oil and gas are produced.
Question 2- again, what you have provided is a percent ownership in some number of acres. The number .042 X 3/16 would describe the net revenue interest where 3/16 is the royalty rate, and the .042 is the owner interest.
2 (b), not an attorney, but they are buying a royalty payment stream. More correctly, you do have a .042 interest, which you show as 3.36 nma, and at a 3/16 royalty rate, provides a .0079 net revenue interest. if you had that land under a lease with a 25% royalty rate, you would still have a 0.042 interest, but your net revenue interest would then be a 0.0105 net revenue interest. The net revenue interest is what the tax assessors base their appraisal.
Question 3--I think the 6.72 you showed is a mistake. In the S/2 of 80 acres you would have an apparent 3.36 nma in the lease. Make sure that all of your property is physically within the oil and gas lease, as that changes the .042 and corresponding Net Mineral Acres, since you are using the lease (apparently).
3(b) -- the .96 is actually the factor to determine what you actually own in that section. Make sure that the highway ROW includes minerals, as i have several properties that the ROW is a surface only easement, and I still own the minerals beneath it. Again there are several terms that can describe you interest--net mineral acres or royalty acres are synonymous, but prefer NMA.
Question 4--there are a number of good oil and gas attorneys in Austin, one of which is John McFarland at Graves Dougherty. I don't believe you gain anything with a Midland attorney, frankly.
I have been dealing with landmen for 6 years, most of them leasing property in the Permian basin. I don't think anyone has ever offered a 3/16 royalty to me in that time. I do have some at 3/16, but they were in the 1980's. As I understand your situation, you have an older lease holding the land by production and they are at 3/16 leases. If you were going to sell the property, you might want the buyer to recompute a price at a 25% royalty rate, since the existing leases will eventually be gone and new ones which a knowledgeable executory rights holder would negotiate at that higher rate. just a thought.
Reading this thread, I generally agree with what James has said, except for this last comment about the 25% royalty.
An operator, especially in today's market conditions, will do everything possible to keep a lease sub 25%. As a mineral buyer, I cannot value a property based on 25% when it is clearly leased at 3/16 and shows no signs of changing. Assuming this is a typical lease with no depth pugh, my bet is that the lease will be held for many years to come at the 3/16 rate. In that time period, all formations will be drilled and produced. There is the possibility that the lease expires after all of this production ceases, but that will likely be many years down the road and a new lease would be for other formations not currently being explored.
I agree with that line of thinking.
NPRIs are tough.