Forecast for Blaine 4-15N-10W

#1

Have received a couple of offers on this during the past two weeks, $16K/acre (1/8 royalty–it’s an old lease) and now another offer for $24/K for a 3/16 royalty. My mother owns 12 acres. I act as her secretary for her oil business.

First question: Is there some formula to figure how much an offer to buy reduces per acre when you have only 1/8 royalty as opposed to 3/16?

Second: Does anyone know the production forecast for the region where this tract is located? Currently, we’re receiving monthly royalties on gas from a Fleenor well by Devon; the July check was $924 and Aug. went down to $615.

Third: (This makes me feel stupid, but here goes:) Why, if my mom owns 12 acres interest in Blaine 4-15N-10W is she getting paid on what is listed on the invoice as Blaine 17-15N-10W? Is this an example of unitization? The exact info on the invoice is as follows:

Venture/DOI: 118181-00003 WL: 40814-01 FLEENOR 9_4-15N-10W 1HX St/County: OK BLAINE Section/Twn/Rng: 017/015N/010W

I’ve read the recent discussions on why it may sometimes be a good idea to sell mineral interest and invest the money in a mutual fund or other account rather than wait for the monthly royalty checks to add up over the years. It’s easy to figure interest over so many years on a set amount I may sell the tract for, but hard to guess at what could be lost long term on this tract if we sold now.

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#2
  1. Divide 1/8 by 3/16, and you get 2/3; all else being equal, it is worth 2/3 as much
  2. This is a hot area, especially for the Meramec, with multiple wells being planned all around you
  3. A little bit of an odd well, with the actual surface location in the far NE corner of Section 17, but drilling through and producing from sections 4 and 9.
  4. You need to understand MULTIPLE wells being drilled in your section. If you do the math, make sure you factor than in. What if they drill a dozen wells in the Meramec? What if later on they drill multiple wells in the Woodford? and so on. Highly likely they will do so in the Meramec; certainly possible for other formations in years to come.
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#3

Quite a bit to answer here, but I would be glad to walk you through all your questions. Check your personal messages. The website I sent you via message has a blog post about royalty conversions and making sure you are comparing offers apples to apples as well as a few other blog posts that you might find educational. You can check your messages by hitting the round button in the upper right corner with your initials on it and then click messages.

Best, Cam

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#4

The first horizontal well was drilled from the very NE corner of 17 north into 9 and 4. That is were the “17” comes from. You are getting offers because Devon just filed a BUNCH (at least 21) of cases at the OCC for an additional 8-9 more horizontal wells in those sections. The engineer stated that 5,156,000 bbls of recoverable oil and 25.780 BCF of gas are in place. Your mom should have gotten all these mailings. If not, then that needs to get fixed quickly. In this case, if you are not in real need to sell, you should think about holding on as eight of these wells are already drilling. You can watch their progress at the OCC. Test Doppelganger 4_9-15N-10W 2,3,4,5,6,7,8,9,10HX. You should have some nice royalties coming in about a year from now probably similar to the first well-only nine more of them. You can invest the royalties from them after you pay the taxes. What they don’t tell you on those offers is that you have to pay capital gains tax on the sales. There are formulas to work out the balance of sell versus keep, but it you don’t really need to sell, hang on. If you do, then message me privately. These wells can hang on for decades at low rates. Nice for the heirs. You have income coming in and you can invest what has already come in. (I am in the “don’t sell” camp most of the time. There are times to sell, so we can chat if you want.)

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#5

Thank you for the information, very helpful!

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#6

Ms. Havel: I have an interest in this Sec 4-9 Devon operated unit. Before retiring I was a geologist for 35 years. I am familiar with the production on the first well Devon has already drilled in this unit, the Fleenor 9_4 # 1HX. Like the other contributors, I think you should not sell the interest if at all possible, or at least consider what retaining the interest long term might be worth to your family. Should you like, I could share (by personal email communication) my estimates about the possible minimum and maximum dollar values the production from the additional wells could be be worth. I have made a “ballpark” evaluation of the value range for the additional Doppelgänger wells to help me evaluate similar offers-to-sell that I have received in this unit.

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#7

I also have an interest in section 4-9 Devon Energy. I would like to track their progress, but have been unable to figure out how. Can you provide me with additional information. I am definitely a novice, and need all the help I can get. Thank you

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#8

You can track the progress of the wells as far as permit. spud, completion on the OCC well record site. You have to track by the surface location. Hit the Word “Test” in the message above from me and it will take you to the site.

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#9

Hi Gondjawella56:

Didn’t see your message until now. I’m not going to sell, but I would like to hear your estimates, will contact you by email. Thank you for your help.

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#10

Very difficult for owners to track the well’s progress between permit and completion. All the wells have spud, except the # 9. I think Devon may have amended their Commission application to allow for the drilling of only 8 additional wells. True as M_Barnes suggested, there are permits and spud notifications on the 8 approved wells that are available on the OCC site. Operators I don’t think have to provide completion paperwork until the very end.
When I was working my employer subscribed to first reports, drilling progress and completion information published by PI / Dwights and Drilling Info. These companies sell subscription services costing tens of thousands annually and are out of reach to me now. I’ve decided to join either the Tulsa or Oklahoma City log library later this year in order to check on the progress of eight Section 4-9 wells if I’ve not been able to turn up any free public information by then. The log library fees are far less expensive.

I’ve reviewed the dates for the drilling, completion and first production of the Fleenor 1HX well and tried to use it as a guide to when owners might expect revenue on the 8 additional wells. Much guessing at this point, but maybe Q-2, 2019.

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#11

I’ve noticed that sometimes completions are not available until well after there is already production. As you said, not much info available between time permit is issued and well is reported completed.

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#12

Maybe the ompletion is paid in full by CLR?

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#13

Not to rehash an old post…but as Martha and I have discussed on many occasions, I would like to present some of the arguments on the other side of the “sell/don’t sell” debate. I also included some insight into the analysis I perform when evaluating minerals for acquisition. I think many on this site will agree that there are many unscrupulous minerals buyers out there. There’re also some pretty shady sellers as well, but that’s a discussion for another day.

I also think that everyone will agree that the key to making the right decision for any mineral owner is to be educated about their acreage, its potential, and the risks/rewards of holding minerals no matter what.
First and foremost, your acreage is sitting in a great location, you’re very fortunate in that regard. This area is some of the best in the STACK play.

I also understand being cautious about selling and the offers you have received. As a mineral owner and investor, I am on the receiving end of offers and negotiating leases often, and I can assure you that for the most part everyone you deal with is generally looking out for themselves. It is not personal to them, it is an investment. For you however, it is your asset and it may be very personal. I always tell mineral owners that in most cases, if you can it’s best to hold onto your minerals and not sale. HOWEVER, sometimes offers are so good, as investors are willing to take on so much risk, that it is hard to say ‘NO’. Either way it is an individual and personal decision that should be made with as much insight as possible, and there are options such as selling only a portion instead of all of your minerals – that way you can take some chips off the table, while maintaining some ownership in case something comes along down the road.

GENERAL THOUGHTS With that said, I think in general there are a couple of types of mineral buyer – (1) those that throw out low ball offers in the hope of catching deals from the less informed, (2) those that dig into the technical side of the business and analyze the geology, potential, etc.

As for as the 1st group – I don’t have a high opinion of them and don’t really know how they stay in business. As for the 2nd group – those that are digging in and evaluating, they analyze a lot of items to get to a purchase price.

Some of the main items to keep in mind including relating to risk/return – the more ‘unknowns’, the greater the risks. Some of the big unknowns that mineral buyers wrestle with include: (1) commodity prices, (2) timing of development, (3) number of wells (4) production profiles, (5) Lease Terms, (6) exit value/strategy, (7) taxes, and ……well there are a lot of risks and assumptions.

These unknowns influence the level of risk, and hence required return. When you invest in any investment, you are looking to achieve a rate of return commensurate with the risk you are taking. Higher risk investments require higher rates of returns, that’s why the perceived safety of US government debt have very low rates of return, while junk bonds, or penny stocks have high rates of return. Mineral interests are most akin to real estate investments than stocks or bonds, but with a bunch of different risks.

The items above are just some of the risk mineral owners face. If you are a mineral buyer, you have risks as well as a need to cover an “return hurdle” – most mineral buyers are using pooled investment vehicles and need to hit returns hurdles in the high single-digits to low-teens to cover cost of funds and overhead (some have much lower return hurdles as they are essentially division of insurance companies that are trying to beat inflation and therefore are looking for low single digit returns). It’s not cheap to analyze oil and gas investments, and reach out to thousands of mineral owners, and cover losses on the ones you get wrong.
On the flip side, the question for the potential mineral seller is “what risks I am willing to take”, and “what type of return I require or that I am willing to give up”. Additionally, for a mineral owner, what portion of my net worth am I willing to have tied up in a single asset – depending on the size of the mineral value to your overall net worth, it may not matter much, or it may be a situation where the value of your minerals dwarf everything else.

(1) Commodity prices – this is a risk that everyone takes – there are many opinions. I think the general consensus is that prices are range bound, there are as many downward pressures as upward pressures. Prices will be volatile, have periods where they seemingly go up each day, and periods where they seem to drop every day. I caution anyone thinking that $80/Bbl is likely and/or sustainable… Similarly, $40/Bbl is just as unsustainable as $80. So, when evaluating what prices and hence your potential revenues, will be, take a look at various scenarios. Then think about how those scenarios would impact you.

(2) Timing of development is a huge question for everyone…including the operators. If you are a mineral owner, it has huge impacts on value, the sooner may not be the ‘better’ but usually you want to see your acreage developed and put into production. This is also a big challenge for mineral buyers. Unless fully permitted with rigs on location, a mineral owner (and buyer) is speculating on when the wells will be drilled and completed. The reason this is so important, is that the longer the time until development, the longer the time a mineral buyer is incurring the cost of its investment (remember they have to deliver a return to their investors). In your case, your wells are fully permitted and you’re in a hot area - so timing is not in the too distant future - after drilling and completion, then you would probably anticipate another 6 months until 1st check on new wells.

(3) Number of wells developed – this is somewhat related to Number 2 but is still somewhat different. It is also related to the size of the unit – a good way to compare units in the same thermal maturity area is to look at the number of lateral feet of well bore(s) in the unit divided by total number of areas in the unit. For your unit, this is a known with the permits in place. The number of wells and how tightly spaced they are will influence production profiles - too close and the wells will interfere with each other - however, the positive thing is that overall recovery of the hydrocarbons in the section should be higher.

(4) Production profiles (what the wells will produce over their lives) – depend on a huge number of factors – location (geology, etc.), operator (how they complete wells, etc.). Operators complete wells differently as their objectives may be different. The production profile for the first well in a unit can be different than in-fill wells if they are drilled at different times. Overall, you really need to look at all the factors that influence production and base your assumptions on those factors to make your best guess.

(5) Lease terms – lease terms vary wildly – it’s not just about the royalty rate, but also what deductions (if any) an operator can take. I took a look at your leases, your royalty rate of 3/16th is good, but if your leases permit deductions then the impact on revenue can be noticeable. Operators can deduct the cost to transport and process gas, sometimes these charges are a large percentage of your revenues. I have seen discounts anywhere from 10% to 50% - since you are already receiving checks you can probably anticipate what those discounts will be.

(6) Exit value/strategy - Most mineral investors are not looking to hold the minerals they acquire forever, at some point in time most need to sell what they’ve acquired, and there are just as many unknowns when it comes to predicting how investors in the future will look at minerals.

(7) Taxes are another consideration, royalties are passive ordinary income, if you sell you may get hit with capital gains – depending on what your ordinary income is for the year. Usually taxes are not a major consideration in when deciding to hold or sell and investment.

All in, there are A LOT of assumptions that go into coming up with a purchase price and/or perceived value for minerals.

I model acreage for living you could say, and sometimes people would say that I actually do a pretty decent job at it. In my valuation model, I try to account for as many variables I can, including those mentioned above. Using the current Fleenor well, nearby wells including the child wells in the Ludwig multi-well development as proxies for anticipated production profiles, I get to around 1.35 MBoe for each of the in-fill wells, including roughly 480 thousand barrels of oil. Of course, changes in completion techniques can have a huge influence on production. Furthermore, changes in geology can as well, hence why I utilize nearby wells when evaluating acreage.

When apply the production profiles and utilizing current forward commodity prices adjusted for basin differentials (regional discounts on gas and oil prices), as well as operating costs published by the operators (helps estimate the life of the wells and length you would receive checks), etc., I think that the offers at $25,000/acre would yield a pre-tax low teens IRR (rate of return) and an investor would make 1.5 times their investment over the life of the wells. This assumes first cashflows come mid-year next year. It will take around 5 years for the investor to recover their investment before they make any profit. Of course, this depends on everything going right, prices not dropping, etc. There is always the chance that prices go up, wells come in better than the surrounding analogous wells, etc.

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#14

Jeffrey, Thanks very much for a pretty comprehensive look at the subject. I had been watching my families royalty interests for many years but the past several years started looking at much more closely and tried to learn a lot more since our rights increased considerably from some very low production vertical wells to the possibility of a fair number of horizontal wells with good production. Like many owners we started getting a large number of offers to sell and I moved back and forth as whether to sell or keep. Finally a landman who was referred as reliable brought a seller that made an offer that was well above all others and fit my idea of what our properties were worth. I’ll try to make this brief although it went on over quite a few months. I received the offer, signed a purchase agreement, the buyer said a check would be in escrow within a couple of weeks then nothing. Couldn’t contact the buyer or the landman, although both had previously assured me that everything was good and they had completely researched the wells, etc. Finally well over a month after payment was to be made the buyer finally got back to me saying the production was not as represented (they had all the records of production and payments for a couple of months) and he wouldn’t honor the sale agreement. BUT, then he offered to pay a much lower amount. I just said no, was angry and learned a lesson and decided to keep our royalties since a number of new wells are planned and being drilled now and over the next several months. So, I completely understand why so many mineral owners are worried, upset, and disillusioned when it comes to trying to find honest buyers and landmen. I certainly can’t recommend the people that I was dealing with but I’ve been told by others in the business that this type of situation happens frequently. For people like me who don’t a lot of experience it’s a real mine field.

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#15

Do a 1031 on any sales.

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#16

This is very good info. I had been turning down quite a few offers because I was waiting on a new well in the 16-16-11. However, after receiving the first check on the new well I was a little disappointed in the amount. I haven’t seen a completion report yet but the amount paid for the 3rd and 4th and 5th months is SIGNIFICANTLY lower than the 1st month. Unless there are a lot of additional wells drilled soon I think I will strongly reconsider my decision to sale. Of course if the plan was to drill 8 more wells within the next year like noted in the 15-10 then it’s a no sale for me. Marc

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#17

Thank you John, I try to get very granular in my analysis. As far as your experience goes, stuff like that really ticks me off on a number of level, basically its not easy being a mineral buyer (inset picture of kermit the frog)…

As an example, I’ve been working with a family that owns minerals across the Stack for over a year now, great people, genuinely fun to speak with and discuss what’s going on in the play - they send me their offer letters and share check stubs (so I can track discounts/deducts) and I help them evaluate their assets.

The background theme has been that when the time comes to sell, I’ll put a bid in and if its competitive, I would buy the asset. Now obviously, I could always send them bids and not do any of the other stuff, but its a symbiotic relationship.

Earlier this year, one of the siblings decided to sell off a chunk of their acreage, I came in at something like $24,000/acre and another group came in with $30,000/acre out of the blue. I have title across the area, and therefore can track actual purchase prices with reasonable accuracy from the doc stamps. This $30,000 per acre bid was way way above any other transaction, and when I modeled it, the buyer would actually (if lucky) make about a 1-2% IRR. That rate of return makes no sense, the cost of capital for any fund is high single digits at best (money isn’t free), and that’s before overhead, etc. Heck, I spend upwards of $75,000/year on data alone.

Obviously the mineral owner went with the $30,000/acre offer - and then the circus came to town…the closing date came and went, and came again and went, and came again an went and there was always a reason or excuse. The deal never got closed…

Flash forward 6 months, the brother of that mineral seller was looking at selling a different parcel…once again I ran my analysis - came to $24,500/acre (a couple of wells less than the first parcel, although better rock). The same group that strung his relative along at $30,000/acre a few months prior…well guess what, they offered $30,000 per acre on this parcel…

See a pattern…and the mineral owner obviously thinks my bid is too low. My response is that I can’t compete against make believe and I wished him the best. Still good guys, and they still haven’t closed. Funny thing is that now people are trying to top the imaginary $30k/acre offer with yet even higher imaginary offers. They won’t close, at those prices you can buy Permian acreage that has 5+ productive horizons that yield much higher results.

The challenge I find is that when someone throws out a big number, mineral owners get locked in on the big number. Only problem is that the number is fake…it’s simply someone trying to tie up the property as they shop it around. But the number lingers in the back of mineral owner’s heads and they end up not selling. I personally am not going to chase a deal, I calculate a value, and I’m going to try to acquire it at or below that value. I’m going to be direct with a potential seller and lay out how I got to the value, and why its fair. But the reality is, there are some crazy buyers out there, sometimes they will close at prices that don’t make sense…just make sure you cash the check and hope it clears before they go belly up. and if it sounds too good to be true, ask a couple of questions - how did they get to their price, how much of the deal are they going to hold and how much are they flipping to someone else. And as I said above, the sell/no sell decision is as unique to everyone as their fingerprints. Sometimes, it makes sense to take some chips off the table, other times the upside is so good it makes sense to hold.

One item that I think is not considered is the risk that the auto fleet is slowly moving towards hybrids and electrical cars. Although it may be laughable to think all cars become electric/hybrid, I’m sure some buggy whip manufactures wish they would’ve considered that risk back in the day. So those long off in the future projects of continued cashflows, and additional development…well,m you may want to risk them down some, and when you do, see what their value is today. If you sell it doesn’t mean your cash has to sit idle, what else can you invest it in, what type of returns can it generate. I sure wish I would’ve bought Amazon in 2014 instead of diving deep into minerals…but then again, that would be too easy and boring.

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#18

I think that is common, we were paid for a new well earlier this year. The landman (and others) had estimate production but actual production was about 25% of what was estimated, then first months production was much higher than subsequent months, after several months it stabilized BUT then new wells in the area were fracked and production went down to nothing for several months and now is stating to come back. Just the way things work.

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#19

Jeffrey, thanks very much again! Yes, what you’ve said was pretty much my experience also. One offer came in out of the blue as I was about to sell to someone else who had offered a couple of thousand an acre less but seemed good. The only reason that I accepted the higher offer is that the landman and prospective buyer had been referred to me as “reliable and very well funded,” they were neither! I came to the conclusion after all the B.S. and a couple of months that the buyer was either shopping around to flip and/or he was locking me in so that I could sell to anyone else while he shopped around. As I said, in the meantime 6 new wells were proposed by the oil company so I decided to just keep everything and see what the royalties will be when all wells are completed, probably another year or so. Thanks again for all your info. It is a learning experience for me.

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#25

Marc

What were the volumes for the wells? Did they include them on your check stub?

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