We have a lease in place for 80 acres in Williams County ND (T 155 North, R 97 West, Section 18) and recently received an offer to sell the rights for $3,500/acre. My question isn’t whether this is a fair offer, but rather is it possible to determine the royalty potential? For example, if I knew the potential was $0 - $1M, I might sell knowing there is a possibility of receiving nothing in royalties. On the other hand, if there is a better than average chance that the royalties will be at least equal to the offer, I probably wouldn’t sell. Any guidance would be appreciated. Thanks!
You should be able to get well production in the areas around you from the oil and gas commission website of ND. Once you have an idea of what production might be, you can get a vague idea of what kind of royalties you could be looking at. I’d also google whatever formation they are likely targeting (is that the Bakken?). But realistically, the person who made you the offer knows a lot more about the oil in your area than you do. I doubt they’d be offering you $280,000 if they don’t think you’ve got a nice bit of oil. From everything I’ve read on this site, rarely would it ever be in your favor to sell your rights.
You can access the ND oil and gas @ NDIC.com Williams county looks to be directly in the Bakken section. Evidently they are going to drill (for sure) and want to own the minerals outright. I have minerals in Dunn County which is hot at this time, and was only offered $1000 per acre to purchase. This tells me that they think your minerals are going to pay off big time. I'm no expert, but holding onto your minerals seems like the way to go. Whichever you decide to do, I wish you much luck. : )
Wes
If you want to do it right, you will need a reserve report on the well drilled (you will not be able to gain access to one, in all likelihood).
Then you take the future monthly production and escalate and de-escalate the product prices over the useful life of the well, based on your prediction of future economic indicators, planned refinery outages due to maintenance, political unrest, hurricane seasons, overall demand in developing nations, etc.
Then you take all expenses, planned, contingency and operating for the useful life of the well and deduct them from the revenue in the month in the future that they are estimated to occur.
Then you use some discount factor, lost opportunity cost, cost of capital, whatever, to come up with a net present value.
Now, if future wells are planned, you discount the future wells based on the probability of success and do the whole analysis again (I personally like to risk reserves in this type of analysis).
That is the ways pros do it.
Thank you all for your input, I appreciate your insight.
Welcome to the mineral casino!
This is always the question associated with the wager.
My answer is that when an offer is made to purchase a mineral property, it usually is based on the multiple possibility of the offeror betting on earning 10 to 15 times more that they paid for it. The question you need to ask yourself; do I want to take the risk or do I want a certain amount without further risk?
If you think there are minerals on your property, you probably will not regret not selling it to a deep pocket investor.
You should also consider the difference in your passivie income tax rate vs. capital gains tax rate. If you're in the highest bracket, there can be as much as a 15-20% difference or more depending on the state. Selling for x can be 15-20% better than receiving x in royalties.
There are other topics on this issue you can search the forums for. Everyone always says hold your minerals, but there are always people willing to pay more for minerals than they are worth on a financial basis. Some of the big mineral buyers can do it because they are buying over a larger area that helps decrease their risk. Others just put a premium value on minerals compared to other investments.
While tax savings are a benefit of selling, I wouldn’t even consider it when deciding to sell or not. Theoretically, if I paid $1,000,000 in taxes from my royalty stream, I would have to have made so much more than than the million.
Your point is well taken!
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HELP!!!
I ALSO HAVE MINERAL RIGHTS (NO OWNED PROPERTY) IN LIMESTONE COUNTY, GROESBECK TEXAS. OF ALL THE YEARS I HAVE OWNED, I HAVE NEVER GOTTEN ANY MORE THAN A FEW THOUSAND DOLLARS OFFERED. NOW I HAVE A SIZEABLE OFFER AND DONT KNOW WHAT TO DO. HOW CAN I FIND OUT WHAT IS GOING ON IN THE AREA AS FAR AS DRILLING AND PRODUCING. AND WHO DO I BELIEVE. I CALLED BOTH THE COMPANY WHO IS DOING THE DRILLING AND THE COMPANY WHO GAVE THE OFFER AND THEY BOTH SAY THEY DONT SEE ANY OVER- ACTIVE OR UNUSUAL PRODUCTION.
PLEASE CAN SOMEONE DIRECT ME TO A PERSON OR COMPANY WHO WOULD KNOW.
THANKS,
DLH
Hi DLH,
My suggestion would be to contact Buddy Cotten and let him help you. He's very knowledgeable on Texas properties and is trustworthy. Here is how you can reach him. : )
Wes Luke
DLH,
If you are interested in identifying what is going on in a specific area of Texas in terms of oil and gas, check out the Texas Railroad Commission's website. This is a wonderful resource and it is cost free. I have provided a link to the site below. It would take a bit to type out step by step how to navigate through the site so if you have some free time and you would like to give me a shout, I will be more than glad to help you figure out what is going on with your acreage. Best regards,
http://gis2.rrc.state.tx.us/public/startit.htm
Rodney D. Summerville, II
DLH said:
HELP!!!
I ALSO HAVE MINERAL RIGHTS (NO OWNED PROPERTY) IN LIMESTONE COUNTY, GROESBECK TEXAS. OF ALL THE YEARS I HAVE OWNED, I HAVE NEVER GOTTEN ANY MORE THAN A FEW THOUSAND DOLLARS OFFERED. NOW I HAVE A SIZEABLE OFFER AND DONT KNOW WHAT TO DO. HOW CAN I FIND OUT WHAT IS GOING ON IN THE AREA AS FAR AS DRILLING AND PRODUCING. AND WHO DO I BELIEVE. I CALLED BOTH THE COMPANY WHO IS DOING THE DRILLING AND THE COMPANY WHO GAVE THE OFFER AND THEY BOTH SAY THEY DONT SEE ANY OVER- ACTIVE OR UNUSUAL PRODUCTION.
PLEASE CAN SOMEONE DIRECT ME TO A PERSON OR COMPANY WHO WOULD KNOW.
THANKS,
DLH
THANKS RODNEY,
I WENT TO THE Texas Railroad Commission's website AND IT LOOKS LIKE THERE IS ACTIVITY ALL AROUND ME BUT NOT RIGHT ON TOP OF ME, AS FAR AS I COULD SEE.
DLH
Here is a link to the presentation given by Lynn Helms, Director of the Department of Mineral Resources, North Dakota Industrial Commission to the North Dakota House Appropriations Committee:
https://www.dmr.nd.gov/oilgas/presentations/HouseApprop2011-01-07.pdf
On page 10 of the presentation, Director Helms provides the Appropriations Committee with information concerning the typical ND oil well. The information appears to be based on the price of a barrel of oil at $68.00 (but prices are now hovering at or above $100):
What Does Every New Oil Well Mean to North Dakota?
A Typical North Dakota Oil Well Produces for an Average of 37 Years.
• If economical, additional secondary recovery efforts can be made to extend the life of the well.
In Those 37 Years, an Average Oil Well:
• Produces over 838,000 barrels of oil (60 barrels of oil per day)
• Generates $57 million in gross profit
• Pays $5,775,000 in taxes
• Pays royalties to mineral owners of $9,520,000
• Pays salaries of $1,552,000
• Has operating expenses of $1,666,000
The average cost of completing a well in North Dakota in 2010 was $6.1 million.
A few years ago I leased a small interest in Gaines County, TX. When the lease was about to expire, I got a phone call (or maybe a letter--don't remember) with a purchase offer on my interest. I had actually forgotten about this one, so I did a little quick research. Results were:
1. The RRC website showed a drilling permit by the original lessee.
2. The party offering to buy the interest was just another name that the lessee uses--i.e., the SAME PERSON.
Not too many months later, I got a division order and started getting payments. I'm supposed to know a little bit about this stuff. Sure taught me a lesson.
From the info you have provided there is a working Horizonal on your unit. See attached website :
www.dmr.nd.gov/oilgas/ I would not sell . . . .
Taking Eric's original post back to the question...Is it a fair offer? ...
Large acreages and hot potential certainly call for substantial research and even professional assistance.
However, for small mineral holdings, some 'estimating' can STILL be done. There just needs to be a semi-disciplined approach to putting the analysis together. Yet, when I search this forum, I see no mention of NPV (net present value) or discounted cash flow. Even when these approaches are done 'back-of-the-envelope' with mostly qualitative or estimated numbers, the effort can produce some guidance. (Sophisticated and detailed spreadsheets with lots of real numbers from extensive research may not be needed or even available.)
My mineral rights knowledge is mostly limited to what I have learned on this board (and, NPV is quite a few years back in my former life). Are these techniques called something else in the world of mineral rights?
Isn't this how Eric can deal with his royalty question?
Buddy…Oops…my bad. Skimming through all the posts on this thread, I missed your specific ‘net present value’ comment. Having just previously searched the whole forum with no ‘net present value’ or NPV results, I wasn’t looking for it real closely. Your good comments were so comprhensive that I got lost in the detail and missed the summary. (Doing a brute force google search of the forum again only produced 2 npv comments.) Still, I am surprised that there hasn’t been any “short-form” NPV discussion. For future wells, how do you “risk reserves”?
DG…I browsed through the ND report you referenced. It would be nice to know what the average ‘net mineral acres’ are for that average well. What was the average lifetime per acre payout of that $9,520,000? (The price variation per barrel can be dealt with separately.)
DG or anyone: What is an average figure for lifetime payout per net mineral acre (average for dry holes and gushers)…ND…Texas…Colorado?
Exploration Companies will either risk reserves or risk costs.
For example, if the company estimates that the prospect could produce:
For a bad well (1,000mdf/d) 20%
For an average well (3,000mcf/d) 20%
For a good well (5,000mcf/d) 20%
Probability of failure 40%
The the Probability of success equals 60%, as shown by adding the min med larg above.
.2 *1,000 = 200mcfpd
.2* 3000 = 600 mcfpd
.2* 5000 - 1000mcfpd
Total risked probability of success equals a well of 1.8mmcf per day.
OR, with 3D seismic, you could say that it is either there or not. Let's say the geophysicists give the well a 70% probability of success. If successful, the well will produce 8BCF. Risked reserves would be .7*8=5.6BCF
To risk costs, let's say a well has a 50-50 chance of success or failure. The true well costs are $10MM. Risking the costs gives a risk capital cost of $20MM. Make sense?
There was a good demonstration at Offshore Technology Conference many moons ago. There was an acquarium behind a sheet adn the sheet had a 4" viewing window in it, You were to guess how much water is in the tank. This is generally what the petroleum engineer begins with. With lots of science and history of fields that are similiar in size and depositional environment, they can begin to use look-alikes to get some idea of what is going on.
Interesting topic, No?