Horizontal vs Vertical Royalties

I currently own a small 0.00152 interest of a vertical lease in the Permian, around 163 acres and royalties have essentially dried up. Permits were recently approved for 5 horizontal wells and my original lease is roughy 25% of this new unit. I’m receiving crazy offer to purchase my interest but am being told that the royalties for the first year will be sizeable. My two questions are 1) are there any surrogate horizontal producing wells to gauge production/royalties and 2) after initial flush production, do horizontals dry up and will my value in five years be zero or close to.

Thanks Cindy

You need to provide some more location information in order to get an answer. The Permian is a big place and well results vary all over the place.

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It looks like you own in the Bernice “30” Unit operated by Endeavor in the NE/4 of Section 30, BLK 35, T2N of Martin County, TX. Does that sound right? If so, then you are correct that the tract you own in will be roughly 25.24% of the new unit proposed by XTO, the Cassidy Unit 2 and it looks like it is going to be a lot more like 12 wells in there. This tract will also be included in an allocation unit, the Cassidy 1 & 2 Allocation Unit, also proposed by XTO. A similar XTO unit to the west (a 640 acre unit with 10 wells) came online in Sept 2018 and did 173,847 barrels of oil and in Feb 2019 still did 140,073 barrels of oil so expect your royalty income to jump significantly once those wells are drilled

Thanks JB. That’s exactly what I own. Forgive my ignorance but is that production stated in your response monthly? I’m trying to establish an estimated royalty stream for first 2, 3 or 5 years in order to make an informed decision to sell or not. Assuming $65/barrel, can I multiply monthly production by my 0.00038 interest? Is there a ramp up period? And to confirm, are saying permits have been filed for an additional 6-7 wells in my tract? TX RR Commission not showing those. Thanks so much!

Cindy,

I show that XTO has permits for the following wells that cover your 163 acre tract:

Cassidy Unit 2 - proposed 645.9 acre unit - 12 Wells

3025SH (Well Numbers) 3076JH 3066DH 3006BH 3017AH 3027SH 3077JH 3067DH 3007BH 3018AH 3028SH 3015AH

Cassidy Unit 1 & 2 Allocation - proposed 1,292.78 acre unit - 3 wells

3005BH (Well Numbers) 3065DH 3075JH

You can multiply your decimal by the production to get a rough estimate but the production is not guaranteed to be the same and the price is always unpredictable in a specific sense. Also, just because wells have been permitted does not mean they will actually drill all of them.

As for the production itself, as new wells come online the production will jump and be much higher in the first 6 or so months than any others, this is typically referred to as the “flush” production. During and shortly after this period the wells production will decline sharply but as the life of the well(s) continues the decline rate will level off some but will always continue to decline over an extended production sample.

Something to consider when making the decision on whether or not you want to sell your minerals in this particular situation is that a lot of the offers you might be receiving are based on the fact that all of those permits have been filed. What will the offer be in 3 years if XTO never drills the wells? What if they drill only 1 or 2 of them? I see a lot of people say that some of the first offers you receive are the lowest ones but I have found just as often that they are the higher ones because companies are sending out offers on “speculation” and if that speculation turns in to a reality far less than the current possible outcome then no one will be sending out the “crazy” offers you are currently getting.

I guess what I am trying to say is, if it was me and I was considering selling my acreage in here, I would make sure it was to a well funded reputable company that will pay a premium on the potential upside of XTO drilling all 15 new wells on this acreage.

Hope this helps

I have been offered $80k for 1/4 of 0.015625 royalty interest in N/2 of Section 35, Block 36, T2S, Glasscock County, TX, which XTO is now handling. Do you have any information on this? Or what the value should be. I currently only receive about $100-$200/month from XTO. That sounds like a big offer for such a small share. Any insight would be very appreciated. Thanks, Gail