My family owns the mineral rights for 75.73 net acres in Reeves County. The description is S/2 N/2 Section 27, Block 4, H&GN RR Co. Reeves County, TX. We have received an unsolicited offer of $16,000 per acre to sell our rights. We are currently under a lease agreement until November of 2018. Does anyone have any comment or feedback about this offer or about the wisdom of selling our rights? From what we can tell, there is a lot of activity in Reeves County right now, but we don't know if it is close to our area.
EXL Petroleum is currently drilling one horizontal well that includes your tract and is probably the reason for that unsolicited offer. EXL has made some good wells in the area and there is potential for multiple wells per section/pooling. I won't speak to the wisdom of selling just because everyone's situation is different, but you should be receiving royalty income in the next several months or by the end of the year, anyway.
Kathleen,
EXL has an approved permit(389-35695) as of Jan 6, 2017 for a 10,800' Wolfcamp well starting in section 28 and ending in Section 27.....Also another EXL well was permitted(389-35539) Jan. 17, 2017 for a 11,300' Wolfcamp well starting in Section 30 and ends in Section 27. To the South is a producing gas well(389-33240) Operator is Silverback Operating, LLC....Link to Production Data on gas well 33240:
GIS Map of Reeves County Section 27/Block 4/A-394 and surrounding area:
CLICK ON MAP TO ENLARGE
Clint Liles
As Marcus T said "everyone's situation is different" but you might consider selling a portion of your minerals at that price just in case the well is bad or it is a dry hole.
No different that doing covered calls in the stock market
That is a phenomenally good area to own minerals, and it's almost a guarantee that the well is going to be a monster. I would not sell for $16,000/ac knowing there is a well being drilled on the property. If you intend to sell all or a portion of the minerals, you might consider reaching out to one of the forum sponsors to see what the highest price is that they've seen in your area. Realistically speaking though, any offer you get will probably not equate to what your total lifetime royalties would be if a couple wells were drilled. Best of luck!
Thanks Charles. That's an interesting idea. I'll definitely pass this along to my family. While we are excited that two wells are being drilled, it is also a little scary to think that the wells could come up empty.
Thanks so much for your reply. It's difficult for us to make these decisions without all the information. We have no idea what the relative value of royalties could be compared to a sure, definite amount for selling. I like your suggestion to reach out to the forum sponsors - who are they?
Marcus,
Thank you for replying - and thanks for the information about EXL. The person making the offer didn't mention any of that, of course. What we can't figure out is the approximate amount we would receive as royalty income (we have 1/4 royalty in our lease). Knowing that would give us some idea as to the wisdom of selling.
Clint,
Thanks so much for the information. It will certainly help us as we move forward. Family members are divided about the best course of action. We need someone "on the ground" there who understands this business and could be totally neutral, to talk to. Do you have any recommendations?
Kathleen,
My opinion is that you need an oil and gas attorney to sort through this for you and your relatives. I suggest Wade Caldwell/San Antonio. He is very knowledgeable about what's happening in Reeves County and the Permian Basin area.
http://beclaw.com/attorney.php?pg=g-wade-caldwell
Clint Liles
Doing some quick calculations, it would take somewhere around 800,000 barrels of oil production at today's oil price from that and future wells to get you $16,000 per acre at 25% royalty. That's a very basic calculation assuming a 640-acre production unit and doesn't factor in any gas sales so it could take far less oil depending on associated gas production. The basic point is that it will take a good amount of oil and gas production to get you that amount of royalty income. None of the wells in that immediate area have been exceptional but many were drilled several years ago when the play was in its very early stages. The number of permits in the area now is a good sign of operator's expectations for the area and, depending on how things develop, there could be 16 or more wells involving your tract in the future.
Kathleen, don't forget about the possible 15% capital gain tax on the sale nor the 15% depletion deduction on the taxes you pay on royalty received. I have also noticed that if you get a good well you might collect the royalty for a couple years, the best years and then sell for the same price that was offered before the well was completed because you are selling all the oil that remains in the ground, not just the oil from one well. Much to think on.
In addition to Clint Liles' recommendation to enlist Mr. Caldwell's help, I can personally recommend David Murphy in Midland. David is not an attorney, but has been very helpful to me, in advising either not to sell, or if need be, to sell only a small portion for a large price, and wait until drilling and production of horizontal wells get going. The difference between vertical vs. horizontal wells is typically exponentially higher production from horizontal wells. Like 10-20 barrels/day vs. 500-1,000 barrels/day, per well. Your property is extremely valuable.
The long-term gain on the sale of a property is typically topped at 15% tax, but when numbers get very high, the evil Alternative Minimum Tax comes into play. The production income from the wells will be taxed as regular income, and depending on your tax bracket, can change markedly the percentage and amount of tax liability you have had. So, wisely set aside about half of the production money when it comes in to pay the tax with, and don't go crazy spending it all. jmho...
David Murphy does title research for oil companies "to keep the lights on", and does free consultation for individual property owners. Hilltop Royalties. He will advise you not to sell unless you must, and then only if the price is right. He did right by me. I sold a fourth of my small interest for about 300x the monthly production value.
To be clear, my property had only 1 producing well, vertical, about 300 barrels/month. Horizontal wells are springing up on either side, so we wait now.
I've been getting ever-larger offers for my minerals in Northern Reagan county as well. Turns out, Laredo had been drilling there unknown to me. They never tell us,(they don't have to send out letters of intent) they just go drill then send out division orders once the well is completed. I live in FL... Anyway...so I recently started talking to these mineral brokers, land men, attorneys and real estate folks etc...to get a handle on the situation. There's a learning curve that's initially steep but once you understand a few things, it's easier. 1) Mineral brokers will generally rob you. They will flip your minerals overnight for huge profits. If you truly intend to sell, then sell to an end-user 'mineral acquisition Company' like Blackstone. They've been around since the 1800s and HOLD the minerals. 2) Since this is all new money for you and your family,let me give you some advice. As for the money: you think you've hit the lotto.All of you.Maybe even some bickering within the family. Some may have already bitten the hook and sold.Too bad for them. The depletion curve on horizontals is about 15 months.After that the royalty payments drop dramatically...but they go on for 30 years or more,eventually dribbling out.There are several pay zones under you...not just Wolfcamp. AND remember, you're going to owe taxes to Uncle Sam AND your local county tax authorities bigtime...next April for federal and in 2018 for the county because they assess/bill in arrears...and thereafter...prepare yourself accordingly. 3) Mineral acreage is never worth what you're being offered via those unsolicited offers. David Murphy at Hilltop has told me that he's seen offers increase tenfold once they are presented to end-users and bidded up. Even then, when sold at that price, they're still valuable commodities. Otherwise, the market would not pay. I'd be willing to bet that your mineral acreage is worth much,much more than $16,000/nma. The rule of thumb that my wife and I use during the fat years is basically 'OK,this is great...but we're not spring chickens,we have two kids in college and then there is retirement to think about too. So why go on a spending spree?' So when the lean years come along...(and they will...OPEC just said 'no free ride for US shale producers' in Houston,yesterday)...we still have plenty. This credo serves us well. It has kept us on the rock...not on the sand. By the way...you can call the oil company to ask about the amount that they have in suspense in your name which will be released once the division orders are signed.That will give you a good idea of what to expect over the next years...
Alwys a keen thing to do , the wolfcamp is a worthy target and if EXL does a good well, youll have RIO status for years to come at 75/640 th times the % interests and then divided by the number of family members ...... Not huge money but if you take the what I consider low bid of $16 k an acre, divide that and consider the tax man,he always wants his share!
I see a lot of positive comments about David Murphy in Midland. Does anyone have his contact information? I am in th same boat with a huge offer in Loving County.
Thanks, Joy
David Murphy helped me greatly with 2 partial sales. He started Hilltop but now has accepted a position as general counsel for Permico. His partner at Hilltop, Cody Tucker, has been passed the torch and can be reached at ctucker@hilltoproyalties.com and I can recommend Hilltop Royalties from my personal experience.
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