Bonus vs royalty

Over the past 15 years my interests in several counties have yielded over 30 leases with no production to speak of. Recently I'm seeing structured leases with a fairly high bonus per acre and a 1/8th royalty or a low bonus per acre and a 3/16 royalty (pick one) My question is it better to take the max money up front rather than bet on an uncertain low probability max royalty. My elders would advise the latter approach but experience suggests that maybe I should take the money and run. Any thoughts?

Give me some sections, township & range and we can look . If any of it is Horizontal it could be different then what happen 15 years ago .

Sec 5-16n-9e sw/4 nw/4 Thanks for your help.

William, it all depends upon the geology of the play. If you are in an area with massive horizontal drilling in shale plays, then it makes more sense to go with the low bonus high royalty since the risk of not drilling is low and the predictability of the payout is better known. And they tend to drill multiple wells per section, so you want the higher royalty. If you are in an area of conventional vertical wells, then you have to consider each reservoir on its own merits. Safest is usually to take 3/16. The 1/8 is rarely in your best interests.

At the moment, your area of Creek county does not have any horizontal wells. Not to say it won't, but not many in Creek county right now. There is one horizontal well in the township to your north. It was completed in the Mississippian for 317 BBL oil and 449 MCF gas which is pretty good.

I am attaching a spreadsheet which may give you a feel for the options. Plug in your number of acres and see a range of possibilities. I set the production rates based upon this nearby well. The declines over the four years are based more upon Woodford wells in Stephens county, but it will give you an idea of might happen with 1-9 wells over 1-4 years.

1866-NMACalculationsimplemodifiedfor3bonus.xls (50 KB)

The play is just getting started in Creek county; therefore, it is not known how good the production is going to be, so more money is the best bet.

"More money now" or "More money total" is the question. If your acreage is going to be drilled horizontally, then usually, the lower bonus and higher royalty rate will make your more money in the long run if you think they will drill multiple wells. Early on in the play, it is sometimes hard to tell. Don't take anything less than 3/16 if you go with the higher bonus now. Never take 1/8.

If they drill a well and it doesn't work / produce enough, they are done. 100% of no well is worth the same as 1/8 of no well. Early in the play..............more money is the best.


Ron McKenzie said:

Give me some sections, township & range and we can look . If any of it is Horizontal it could be different then what happen 15 years ago .

Always better to take the higher royalty percentage, especially if there is a possibility of horizontal drilling in the future. Once you set the royalty percentage it is fixed forever. My great-grandfather signed for 1/8 in 1918 and we are stuck with it still. So we are talking about a lot of lost income.