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I have just over an acre and a half in Midland, TX that has been leased for a term of 3 years. The terms were seemingly favorable with 25% royalty, and I’m not to bear extra costs taken out of royalty. There is just over a year left on the lease. Nothing has been done yet that I am aware of, but I’ve been led to believe there might be drilling in approximately 6 months.
Another company has offered to purchase my lease rights for 18,000/acre. Therefore, I am posting here seeking some guidance on whether or not I should sell these rights, or simply keep the rights for future drilling.
What are the chances drilling finds something in this area, and what sort of output should I expect in terms of monetary value, and how long does it generally take to reach and eclipse the 27,000+ I could receive up front?
Then there is factoring in that drilling might start in 6 months, but there is only just over a year left on the lease. Thank you for any thoughts and advise on this type of situation.
We don't know the size of the unit, so I'm guessing a little bit. It would take about $46,000,000 worth of production for you to recoup $28,800 in revenue. That's a lot of production. Can't say it won't happen, but that is pretty prolific for one or more wells to recoup.
Further, you would secure the money now instead of waiting for it over time.
Regardless of the business aspect, I think the bigger question is what is happening in a seller's life. Does the seller need the money vs. wanting the money. Is there illness or doctor's bills that need to be taken care. Perhaps you are close to retirement and you want to pay off your house. For most sellers, not necessarily you, this is the concern that should be addressed.
My guide has been how long your royalties would take to get to the amount received if you sell and that is, of course, speculation. I have always held on to the payout and it has been a better deal so far. However, your offer shows confidence that there are minerals ready to be drilled so I don't know what your decision should be. Go to the experts.
If you do a search in the upper right there have been many threads on the pros and cons of selling versus waiting it out. I can tell you the business model of most of the mineral buyers, including the disguised mineral buyers that lurk on this site, is to try to buy minerals in areas they are confident are going to be drilled in the near future. Many of these buyer’s are touting their funds as safe dividend paying investments that average 12% returns. In short, the money you will get from a mineral buyer today is far less than the value, in today’s dollars, of a 20 year royalty stream. They have to make a substantial profit, after all, and they are taking some risk.
Lee, just something to point out, consider the tax consequences of taking $27,000 as ordinary income (royalty) vs capital gains (selling). You should discuss this with your accountant.