I’m still not clear what we should expect to net on a 3/16th royalty of 10 mineral acres in 8 Township 15N Range 12W. We had a very large offer to buy all 10 acres but still considering it. I just wonder how much we could conceivably net from a large strike. Is there any rule of thumb to go by? For instance, on 10,000 barrels a month at current prices, how much would be net?
To make such a decision, I strongly suggest obtaining the services of someone to evaluate your property. Things to consider:
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You can bet the people making the offers did their homework and are not expecting a loss in their investment.
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This well is likely not going to make 10,000 barrels a month for any great length of time. Maybe for a few, but it will still see a decline curve. I’d expect it will be producing about 15-20% of its second full month volume about 24-30 months. Here is a chart on a well in the same formation, by the same operator that is located just north of yours.
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There is always the potential for more wells to be drilled in this same formation. Both Devon and Cimarex have applied for increased density of 3-4 more wells.
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There are other formations that could be drilled. The Woodford is present there, but the Mississippian is the hot target right now. There are Woodford wells producing within 5-7 miles.
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The check stub you have shows the decimal interest in the well. If you want to use the 10,000 a month number and current price, you can multiply it: 10,000 x the price of oil $70 x your DI to see what your part would be before taxes. Calculating your DI, if you have 10 NMA @ 3/16 in a 640-acre unit, you come up with .00293. Since this is a multi-unit well with 47.6645% of the unit going to Section 8, your DI should be .0013969642.
We got about $4,600 for 10 acres for the first quarter we received the check in June, so obviously they are late. However, due to our age (in our 70s) we don’t know if it’s worth it or not. We got an offer of $17,500 an acre to buy. But how can we know how much they will produce there? They are in the STACK and the way we get offers it seems very hot there right now.
In my opinion, that is too low. Someone else received an offer much higher than that for sec 8.
Cimarex has a completed well for that section. The STACK is a prolific area with multiple reservoirs and probably will be for decades to come. The possibility for future wells is good. They drill one well to hold the section and then come back and drill more later if they like the area. As you know, you checks will go down over time. The well went to sales in December 2017, so a check in June is not late. They have six months to pay. That first check included six months of royalties, so the next one will be a monthly.
If you have heirs, then you need to speak to your accountant and a good oil and gas attorney about your options. If you pass the acreage to your heirs or a favorite charity, there are definite tax advantages to them as they get a step up in value.
I am attaching the Cimarex recent investor presentation. Start reading at page 22 and you will see what the upside potential is. Do not think that this is a one well short term choice. It is the possibility of many wells lasting decades.
Cimarex JPMorgan-presentation-GMB 1806.pdf (5.3 MB)