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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.)

QUESTION 2:

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?

QUESTION 3:

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?)

So then,

.042 x .96 x 80 acres = 3.23

What is 3.23 called? net acres? net mineral acres? royalty acres?

QUESTION 4:

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!

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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.  

Thank you so much for your response. I know I am asking a lot, so I appreciate your time and effort.

QUESTION 1:
Thanks. This is in the Warranty Deed for sale of land (that reserves royalty interest): “Grantee is to have the full right to lease said land for oil, gas or other minerals, and to receive the bonuses and rentals...”

So, NPRI.


QUESTION 2:
I was asking about the term for the 1st number, .042, in:
.042 x 3/16 = .0079
?? x royalty rate = decimal interest

You said “.042 is the owner interest.”
What mucks this all up is that the county tax appraisals (2 counties) use the term “Ownership Interest” or “Owner Interest” for the other number, .0079 (which I have labeled as Decimal Interest)!

This is the kind of thing that causes me to pull my hair out!

Re: .0079, I was using the term NRI but then discovered that it is used for Working Interest owners:
“Net Revenue Interest is the revenue earned after burdens such as royalty interests and overriding royalty interest have debited from the working interest.”

But perhaps it is common practice to also use that term for RI owners.


QUESTION 3:
Thanks. Excellent tips.

I spoke to the DO analyst for N/2 and she said that my NMA should reflect 100% because the ROW doesn’t affect my ownership. This would explain why the former lease on S/2 gave me 100% credit, even though the highway runs through S/2, too.


QUESTION 4:
Great, thanks for the referral!
Actually, I just looked at some old offers I got in the mail and some of them do use the term NRI.
I’m betting the 0.042 is actually 1/24th or 0.041666667. What it means is that their combined 1/4 interest in 160 acres would have been 40 NMA. The other inheritors have each gotten pieces, so assuming there were 5 others, including you and they were all equal shares, each would have 1/4 divided by 6, or 1/24 in the 160 acres. 1/24 x 160 acres = 6.66667 net mineral acres out of the total 160. The tracts might be split by the Counties based on abstract numbers and that’s where you’d get the 3.333 nma. All of these are subject to rounding. The person they sold the land and 75% of the minerals to probably have the executory rights, and negotiated a 3/16 royalty rate and it’s apparently producing. With no production, you’d receive nothing but you’d still own the NPRI of 1/24th, and wait for the next lease to be negotiated. Newer leases will have a 25% royalty, so as I showed in my first answer, you would have a net revenue or net royalty interest percent of 0.0104...
I’m in Austin, too, so if you have more questions, I’d be happy to help. We are all in this together with sharp elbowed operators. :)
The .042 was just a truncated number to make reading my post easier. It’s an 8-digit decimal. My father was one of 13 kids but not all get my grandmothers part! Anyway, I understand your example calculations, so thanks.

Re: “Newer leases will have a 25% royalty”: That’s interesting. The 1983 lease on S/2 was 3/18 royalty, and the 2014 lease which covers the whole SW/4 (but they put a Unit/well on the north-half) is also 3/18. (Weirdly, the old S/2 well still dribbles out a bit of oil and is still on the tax rolls.)

My concern is this: I spoke to a mineral buyer who seems savvy and is not bidding on my interest. He has given me good info in the past, when I was not selling. He said that RI was going for “low twenties”(per NMA) in the general area for RI at 3/16 rate. I wondered about that royalty rate changing in the future and I believe he said no. Because the current operator would transfer the lease to a new operator who would pool more acreage to drill a horizontal well.

Re: “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.”
This is important. I have been able to find all the conveyance docs online. But I couldn’t find info about the ROW. Any tips?

Thanks again!
Which county is this? I think you said Permian Basin area. The land men I’ve dealt with in the past 6 years, have not offered anything less. Oklahoma is different and they don’t like anything but 3/16. I usually don’t lease with them for that reason.
My feeling is that if you don’t “need” the money now, I won’t sell. No more land in the future and prices will go up and down. Usually buyers are buying because they know something they think you don’t, and very few will lose money when they flip the interest.
You might check the county about the ROW. Not all are recorded
On Martin/Howard County line (more if it in Martin Co), at the northern end.

The mineral owner said 3/16 was in the middle. However, I assume he means for all existing leases. I have read / it does make sense that Permian royalty rates would be higher. I am going to ask about that.

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.

Good luck. 

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.

Thanks, Adam, for your perspective. Mine is that there is no set formula to set an asking price for your minerals. Setting a high price might obtain more money than simply using that existing level of revenue. My experience has not shown the operators very interested in exploring additional depths and will continue to milk a lease with little additional cap ex. Also, I suggested she not sell the npri unless she really needed the cash now, so why not set a high price? As an NPRI owner, there isn’t much you can do to find other lessees

I agree with that line of thinking. 

NPRIs are tough.

Well, I got a hold of the lease. It’s from 1979. It’s gone through at least 7 hands, but the DO analyst said some were just intermediaries. There have been 2 operators who have drilled viable wills. She agreed that the same lease would probably get passed on the the next oil operator.

Adam, why do you say NPRIs are tough? In my case the mineral rights owner seems unable to do anything either. As long as there is production or delay payments, the lease can not be terminated, it seems. That is also what the mineral buyer I spoke to said: assume that 3/16 lease will be in place.

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