I am looking for a firm that loans mineral owners cash to participate. I am curious to know what the interest rate would be. Also can I still get 20% of the royalties and 80% goes to pay off the note? I have unleased minerals in ND and a well will be completed soon.
Kevin, you can get 16% of the royalty and the other 84% goes to pay off the cost of drilling and operating, it's call non-consent. It does carry a 50% penalty of actual cost of drilling and completing the well.
People say WOW 50%, but they never look closely at what that 50% means. That 50% is penalty, not interest, if you missed a payment on interest it would grow, not so a penalty. There is a very good chance that a well will pay out for a non-consent before 250k barrels. On average I've been hearing numbers of 750,000 bbl oil per well. If that is the case, you have 16% of the first 1/3 of production and 100% less cost of production of the second 2/3. Not a bad deal when you consider there is little risk to you.
If it takes your well longer to pay off, the penalty would be much preferable to a loan at interest.
There is also the matter that if it takes longer to pay out, are you really paying a penalty? The buying power of a dollar has been deteriorating. If you borrowed $500,000 today at zero interest and paid it back in 7 years, how much buying power do you think the $500,000 you paid back would have in today's terms? Half? Two thirds? Did you really suffer a penalty at all?
Kevin, in my opinion, non-consent that relieves you from risk would be preferable to a loan. I doubt you could purchase insurance that would cover you as being non-consent does as a matter of course, for the difference between 16% and 20%.
I am looking at all options. If I borrow the money at 15% for 5 years, I do come out saving money. I understand what you are saying about the risks involved. Maybe the extra money spent is worth not having that to worry about. I still would like to know what the going interest rates would be so I can do the math and see where I stand. Thank you again for your help.
How do you calculate the "risk" in that math? What you are saying scares the *&^% out of me. I'd hate to loose my house to a bad well.
Kevin said:
I am looking at all options. If I borrow the money at 15% for 5 years, I do come out saving money. I understand what you are saying about the risks involved. Maybe the extra money spent is worth not having that to worry about. I still would like to know what the going interest rates would be so I can do the math and see where I stand. Thank you again for your help.