Canadian County, Secs 4, 9, 16 T11N R9W - working interest; acreage & percentage unknown
We received a letter from Mach outlining 5 options – 4 offers and one option to participate.
The family has agreed we want to divest of our working interests so we’re inclined to sell. But we aren’t sure how to evaluate the offers. They start with a “cash consideration … per mineral acre, delivering an 87.5% net revenue interest.” The next offer is less cash per acre with 81.25% net revenue interest and finally the smallest cash consideration with an 80% net revenue interest. The 4th offer is “no cash consideration and a 21.0% royalty interest.”
Due to our situation, we’re inclined to take the 21.0% royalty interest (income is preferred over cash in hand).
What does “net revenue interest” mean? And are any of these options reasonable? If we’re willing to forego cash now, is the 21.0% royalty interest a good offer? That’s our inclination but I feel way out of my depth.
Net revenue interest (NRI) is the amount that is paid from well revenue i.e. in the aforementioned context of delivering NRI you are effectively getting a cost free royalty of 12.5, 18.75, etc. for a cash bonus. The oil company, Mach, will pay 100% of the expenses for the interest and receive back the NRI you delivered to them. You’re correct in leaning toward the higher royalty if you prefer a larger payout later, but that depends on the cash amounts. Other factors include how many wells are drilling, how much do the wells cost, and projected production. In general, the more production the better the royalty option will be; while, if they are only drilling one cheap well to hold their interests you’d be better off participating. You don’t want to ‘bite the hand that feeds you’ because they decide how much is produced, but you’d do well if you could shop this around.
I appreciate your response. The letter that accompanied the AFE indicates they’re drilling a single horizontal well to test the formation.
If we opt for the $0 cash/21% override, doesn’t that apply to any and all wells eventually drilled in the area covered by our leasehold?
Yes, that is the concern due to the time value of money. Although you may eventually get paid on the production of all your interests, you’re allowing them to decide when that may be. In other words, another company could not come in and offer you better terms; and, if another company did come in they would have to value it based only on the 21% royalty versus all those options Mach gave you. There may be significant capital required so I understand if you have to take the royalty option, but I would even consider going non-consent or see if you can limit the assignment to the single well. That way the test well will not hold your interests by production.
Are you sure you have a working interest or is this just the usual courtesy letter before drilling that says we are about to pool and these are the options.
BCE-MACH is about to drill a horizontal well in those sections. If you do have a working interest, then you can offer it back to MACH and take the highest royalty offer for a mineral interest only. Which section are you in? If you do have a working interest, contact MACH and find out what the working interest amount is.
You need to get an attorney to review the offer iand also talk to the your CPA for tax information before making a decision, as capital gains may be another issue to consider.