Do Your Homework Before Accepting Unsolicited Offers to Buy Your Mineral Rights!

Unsolicited Offers for Minerals and Royalties

I've noticed that recently that a certain well-known oil and gas company has been sending out letters to mineral owners in my area inviting them to sell their mineral rights to the company for a period (term) of 12 years, in exchange for as much as $6000/acre if unleased, and as much as $5000/acre if leased at 3/16. At the end of the 12-year period the mineral rights revert back to the mineral owner.

Not a bad sounding offer eh? In fact, it may be a pretty good offer for some people, but it always pays to be knowledgeable about your area before agreeing to any sale, especially one originating as an unsolicited offer. If, for instance, a very promising well was just completed on or very near your property, it's unlikely the buyer is going to volunteer that information to you, even though armed with such knowledge you would be better able to determine whether the offer was worth considering compared to the income you might make if you did not sell.

The company mentioned above was also sending out notices LAST year to people they'd already leased, offering to buy their "royalty rights" for a period of 12 years (as opposed to mineral rights.) That offer basically let the owner retain ownership of their mineral rights, but gave the company all their royalty checks (if any) for a period of 12 years.

They were offering $5000/acre for this royalty deal, and some people happily accepted it since they didn't currently HAVE any royalty payments and no well (that they knew of anyway.) What the company DIDN'T mention in several cases I am aware of however, was that they had just completed wells on some of these properties, but had not sent out division orders or began paying royalties yet, so most owners, especially those living out of state, had no idea a good well had been completed and were thus thrilled to get their $5000/acre offer. The company of course knew about the well, and more importantly, since they had drilled it, knew how GOOD it was.

Short Payouts When a Well Has Been Drilled

I did the math on one of these sections, and the owner (who I advised NOT to sell) ended up making at least $1000 per month for each acre she owned the first few months her royalty checks started coming in. I estimate that after just TWO years (not 12) she will have made at LEAST $6000 per acre owned, and that assumes the well's production declines by 50% during that time! She'll likely make MUCH more than the $5000/acre she was offered over the next 12 years, even as the well continues to decline significantly; in fact I estimate she will make more than $20,000 per acre within just a few years, and in the event they drill another well in her section, she will receive even more! If the offers had been for $20,000/acre in the first place I wouldn’t have felt so bad about their tactics because at least the offer would have been reasonable then.

While I do feel that mineral owners have some responsibility to “mind their minerals” and learn how to value them properly, I also feel that it was somewhat deceitful of this company to make those offers to her and others without telling them they had just completed a VERY nice well in their section; something most of those owners did not have the expertise to determine on their own unless they lived on or near the property.

After I called the guy sending out these offers and told him people were getting "annoyed" (a kind word) at them after eventually finding out about the wells from others, the company did an about face the very next day and amended their mailings to exclude any recently completed wells, while keeping the dollar amount the same. After this "adjustment" I felt the offers were fair, and even darn good in some cases. Whether they made the change because of my call doesn't matter; I'm just glad they did, because I actually like doing business with this company. They've always paid my leases on time (with a check instead of a draft in most cases!) and have always been competitive on bonus. Perhaps they just made a bad decision when sending out those original royalty offers last year (too optimistic you say?)

Be an Educated Mineral Owner

Moral? Know what's going on in your area before agreeing to sell to anyone or deal with a reputable buyer you feel you can trust. The current offers being made by this company and others could very well be great offers, but you need to do your homework as none are likely to volunteer any helpful information regarding production or other activity in your area (unless perhaps it will help them get your minerals for LESS.)

Alternatively, if you find through your research that your minerals are NOT in a hot area, and/or are more than ten miles from away from any real activity, then don't expect to be treated like you're sitting on a gold mine if you decide to sell just because you overhear someone at the coffee shop saying they, or their "cousin" etc. got a huge offer to sell or lease. Even honest buyers need to be able to make a decent return on their investment in order to accept the risks of ownership, and even they aren't going to pay you $5000/acre for "goat pasture" just because someone at the coffee shop thinks they're worth that. You gotta be able to justify your asking price if you expect to get it, so you'd better do the homework yourself.

Hope this has been helpful/enlightening/inspiring/sleep-inducing etc. Whatever helps ha ha!

Frederick M. "Mick" Scott CMM RPL
The Mineral Hub

I'd be interested to know if the oil and gas company had a good idea they would fully develop the lease over the next 12 years. What's the logic behind 12 and not 10 or 20?

As companies begin drilling and completing multiple wells at a time in the shale plays, the loss could really add up. In some places, it could be 5-10 wells drilled and not just one.

Thanks Mr. Scott

If I were the company, I'd try to suck as much oil and gas out of the property as I could during my 12-year "reign." I figure they think 12 years is enough to do that with current technology. They are taking a risk though, albeit a small one in my opinion, that their purchase won't pay out in the event the wells are not as good as they hope, but being the operator I'm sure they are pretty confident that they will get their $5000/acre investment back and then some. For an owner without a current well this might be a good offer, though I would still suggest that before selling they check around to see what kind of production is being found in their immediate area.

I think I know the company in question. In the first part of November, they established a “Royalty Trust.” Previously, I was unaware of this type of investment. A little research on line opened my eyes. It would seem to me that may be an attractive investment for someone in their later years.

As for selling royalty interest, I sure wouldn’t.

I have thoroughly enjoyed this information. I have always never considered selling my mineral rights, but was not aware of these types of offers. Basically it is a long term lease. This is something I might consider after doing my homework the way you have advised. Thanks Mr. Scott - great information.

I and my husband just read this information and appreciate your taking the time to inform us on some of the tactics of royalty buyers. We had recently received several of those offers of up to $6,000 an acre (after we had it leasted at 3/16 ) for our royalty in Stephen's Co. 2N 4W. Even though it was tempting because this was the first time in several years we had leased it we did our homework (as you say) and being fortunate enough to live in the area and hear about drilling going on in that area we trashed the offers. Now that is a hot spot and they ARE drilling on our Sec. 16 as we speak. They just completed a dandy well on the Sec. 17 (The Poteet) and we are hopeful ours will be somewhere close to as good (especially since we sort of talked a friend out of selling hers in the same section). After reading your blog I thinking these buyers knew a lot they weren't telling us all. We have been trying to keep those royalty owners (especially those who live out of the area) informed about what we see and hear going on down in that area and this Stephen's Co. forum has allowed us to do that. We have also learned a lot from people like you. Thanks again for the insight.