$58,000 an acre in the Permian Basin. Is this Bloomberg story reality?

I came across this Bloomberg story. Please watch the video. Anyone have any thoughts.

https://www.bloomberg.com/news/articles/2017-03-29/land-swaps-let-permian-drillers-expand-shale-wells-on-the-cheap?cmpid=socialflow-twitter-business&utm_content=business&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social

Carolyn-

I am cautious assuming that prices paid for leases between companies are an apples to apples comparison to what mineral owners should get for a lease. Many of these lease sales include producing wells and other infrastructure. The company has also incurred landmen commissions and expenses in acquiring the leases. There may be side development deals which skew the price also. Plus, they are making some profit, normally, on selling the lease. Finally, selling a bloc of acreage is worth more, per acre, than acquiring individual leases, especially if the bloc has some drillable tracts put together.

However, when these deals first started being announced roughly Spring 2016, we saw an almost immediate 50% + jump in bonus prices, and rates have continued to go higher. In short, there is a correlation, just not dollar for dollar. It also shows just how small the land acquisition costs are as part of the bigger picture. Development costs, infrastructure, and drilling costs are a much bigger part of the equation.

Yes it is. As an inherited mineral owner advocate, geologist, engineer and mineral economist, I have been involved in the evaluation, negotiation and sale of tracts at prices exceeding that amount as a fair market value. The key for the owner is understanding the geologic potential of a property and matching that potential up with the buyers who have a demand for the potential and know how to evaluate risk of investments properly.

I've been preaching for years to MRF members that the oil business has developed an entirely new economic and that the next lease will most likely be the last one ever signed so make it count. The old business concept of getting a few hundred dollars more in lease bonus and expecting a renewal in 3 years will bite hard with respect to the cash control and tax advantages of a sale. If owners don't adapt to the new economic, land agents will be the beneficiaries of the lost profits the owners could have enjoyed.

Land prices in parts of the Permian are not similar to the unsupported prices of tulip futures. These prices are real and based on the exploitation of oil resources known to exist for decades combined with the newly developed technology of horizontal drilling and permeability enhancement. It is not your grandfather's oil business any longer. Far sighted and well financed producers know how the new business works. They invented it and they are willing to pay for the right to produce for the long term. Risk of fining has been eliminated. They know where in oil is located and now with new technology, they know how to get most of it out of the ground.

Gary L Hutchinson

Minerals Managment

Let me see if I understand. That would mean that the actual value if the royalties themselves would exceed that on the open market or is a lease the same value as the royalties? Please explain value of royalties vrs value of leases. Larger tracts help increase the value. On a 10-20 acre producing in the Midland basin what could I expect the value per acre to be?

Carolyn,

A lessor has zero control of the minerals leased. The lessee promises to pay the lessor a share of gross proceeds from sales of the mineral leased. The lessor can sell its share of the future income stream on a well by well basis. Since the geologic potential of each well has been proven, the greatest risk of the non-operator buyer is the competency of the operator and the price of the product.

Also, the lessor/owner can sell the underlying mineral rights to a buyer who knows it can only get the potential income stream but can assess the risk of receiving the royalty income under the lease for both the existing wells and future wells.

That is why buyers must base any analysis on the geologic potential of each property. Now they may only make an unsolicited offer or 1/20th of the value to get things started but if the owner/seller also knows the geologic potential they can get close to the definition of FAIR MARKET VALUE.

Since fair market value is a function of inventory of oil in the ground and not a last sale retail number, every seller's need is different, and every oil resource is different. Therefore every location is different.

The value of unleased minerals is more complicated and more risky for the buyer because profits must come from the capital investment in operating costs.

The Midland basin will be one of the most prolific oil producing area in the USA. Those that want to be a part of it will pay dearly for the right but at these prices they won't pay more than the geologic potential.

Gary getting multiple offers in Reeves county. The leases these day look like an owners nightmare. some how I feel the need for an attorney. I don't want one to negotiate for me just to examine the lease and advise. Any referrals ?

Phyllis,

Right on. You don't have to look far in MRF to read some horror stories. With so much money and geologic potential in the Permian Basin (Reeves and surrounds) the problems are exacerbated for mineral owners. Besides that the rules of the old lease for bonus are totally gone. If you are unleased in parts of Reeves today, the next lease will most likely be your last. Make it count. You are on the right track.

I will PM you and provide legal references when I know what you need. I currently use at least 4 different firms and lawyers to meet my special needs.

Gary L Hutchinson

Minerals Managment

Gary, I have many properties in the Permian. I have had a few companies want to do 3-d seismic tests on my acreage, but they refuse or stonewall me when i want a copy of the results. How can i force them to give me at least a certified summary of the results so that I will at least have some knowledge of my property? I can always refuse the seismic, but i have a sneaking suspicion they do it anyway, since i live in Austin, and barely know where the properties are. Advice? Not sure how to have an offline conversation from here.

Seismic companies produce raw data which is saved in a library and licensed to an oil company for its limited use. The oil company must then either pay an expert to interpret the data or if it is a large company may have in-house capability with specialty computer program and analyst. You would need to own extensive acreage to get a seismic company to give you the raw data instead of a payment. No seismic company would ever agree to give you anything more than the raw data which would not be useful unless you either have the expertise to analyze or hire someone to do so. You can refuse the seismic and keep the seismic company off your property is you own 100%. If there are multiple owners, any one of them can approve the project.

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Dear Mr. Marrow,

I negotiate frequent data gives for my major clients. That would generally include just the tapes, with faulty headers. That way, with faulty headers, when the oil company or the data acquisition company gets a call, it is a "warning bell" that someone is working their data. My clients are sophisticated and will call on geophysicists when needed.

The oil company will not give you interpreted data. Once given, that would anchor them to that one interpretation. Seismic Data is reprocessed all the time and sometimes what looked good, looks iffy and vice versa.

If you have thousands of acres that you own 100% of the minerals on, then you could negotiate a data give with a one mile halo. If not, you don't have much of a chance.

What does all of this mean?

If a lease hound comes around later than 4 or 5 months after the data is shot, then you can bet that they are buying on a prospect and the price should at least triple.

Best,

Buddy Cotten

Thank you. I have several large tracts-one of 600 acres that the State has the minerals but I’m their agent and another of 800+ for and was promised by the large seismic and their large client that I’d have access to the “report” when finished but now the client has reneged. This is like getting an ultrasound on your kid and then betting with the doctor what sex it is. He/she holds all the cards. But I’ve never had anyone offer me really large sums for bonuses and have tried to negotiate better terms, but when I saw the Pioneer guy, made me wonder how much I’ve left on the table.

James.

Being responsible for such a large amount of acreage puts you at an advantage with geophysical companies. I have found a better way to get reasonable payment that respects the high risk of the geophysical company's investment in high grade technology giving them the chance of staying in business.

In the management of over 100,000 acres in another state with extremely limited drilling data, I have found that by giving up some unproven upside, I have been able to get cash now and reserve seismic data for my use should the exploration company go away.

In your area, keep in mind that vertical faults with large throws are the bitter enemy of horizontal drilling prospects as are the escarpments between the small prolific basins and the marginal deposit of the same geologic formations up on the highs. At 6-8 million dollars per well, Operators must know exactly where the faults and escarpments are located. Seismic is much much cheaper and more important than blindly putting dow vertical wells.

As a mineral owner, one should encourage seismic efforts in the permian. As I've preached forever, leasing is not a retail operation for the mineral owner. There is no one size fits all for the owner or the risk taking operator. Every deposit is different just like the needs of every owner are different. The more an owner can know about the geologic quality of his property, the less he will leave on the table when it really counts.

As Carolyn has confirmed by the lead in this tread, the oil companies will never, never, never overpay for geologically proven and probable reserves. Good seismic data may however increase their assessment of potential resources.

oh how I love the business. It creates wealth for mankind.

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Did you get their commitment in writing?

If not, you are out of luck.

Best,

Buddy Cotten

Yes I did. But their lease expires in 6 months and they’ll be put in the back of the line to re-lease.

Curious how much they offered per acre to perform the test. I recently received an offer of $16 per acre and they subsequently sent my sister an offer for $20.

I have mineral rights and 1/4 royalties on 2.5 acres in Howard county tx at W/2 section 41 block 31 T1N and am looking to find the worth of the rights i currently am leasing to grenadier energy partners llc have a 3yr lease with a 2 yr extention option they hve not drilled yet i am wanting to know if it would be wise to sell my rights possibly keep 1 acre and sell 1.5 acres can u plz help me??

I am looking to sell mineral rights in Reagan County Texas. What services do you provide?