Offer to buy Minerals in Reeves County

[FTWWILDCAT817]

I have received offers to buy my Term Royalty that I own in Reeves County. I am trying to figure out how many acres I own based off my net revenue interest in the well. I have been told that I own 4 acres and I have been told that I own 35 acres. Most offers say that they want to pay me based on a Net Royalty Acre. How can I figure out how many Net Royalty Acres I own?

My net revenue interest in the well is .006945. The well covers 640 acres. How many Net Royalty Acres do I own?

Thanks in advance for anyone that helps!

[out_of_state]

I do not know what a “term royalty” is; however, I’ll try to help. I think you need to know the legal description of the tract under which your mineral interests lie, and also the legal description of the tract designated as the well unit. I’ll try to lay out an example to show how I think the math works.

Let’s say that I own mineral interests under the East Half of the East Half of Section 1. The E/2 of the E/2 in a standard section would be 160 surface acres or “gross acres,” also known as g.a. Let’s say I own 10% of the minerals under those 160 g.a. That means I own 16 net mineral acres or nma’s under 160 g.a. Let’s say I have leased at 25% royalty. My lessee drilled a horizontal well two miles long. The “lateral” or horizontal well lies under the E/2 of the E/2 of Section 1 and under the E/2 of the E/2 of Section 12, Section 12 being contiguous to the south of Section 1. So the well unit is 160+160 = 320 gross acres.

For the sake of simplicity, I’ll say the “take points” (the perforations that draw product up) go along the full 2 miles. So I own 10% of the minerals interests under half of the take points, and I have leased at 25% royalty interest. I can then calculate my decimal interest in the well. I calculate 0.10 x 0.50 x 0.25 = 0.0125. [To digress, that doesn’t sound like much, but if a good well produces 500 barrels of oil per day for 30 days sold at $70 per barrel, my royalty for that month is $13,125 minus severance taxes and other deductions if any.]

Purchase offers are usually calculated by the buyers based on “royalty acres.” Decades ago, minerals were almost always leased at a 1/8th royalty, or 12.5%. Royalty acres are calculated using an assumed royalty of 1/8th. If a person had 16 nma’s leased at 12.5% royalty, he would own 16 royalty acres. If on the other hand he has leased at 25% royalty, then he is said to own 32 royalty acres.

In addition to the above, the buyer wants to know whether the “owner” of the 16 nma’s owns all that free and clear of any burden to another party who may have been given an NPRI, or non-participating royalty interest. For example, I have inherited mineral interests in a tract where grandparents sold the ranch, retaining the minerals, except giving the buyer of the ranch an NPRI. So I have executive rights, meaning I am the only one who can sign a lease, but the owner of the surface acres and the ranch gets a cut of my royalties (and of my lease bonus). These kinds of nuances also affect the “royalty acres.” [Note that the owner of an NPRI is in the dark about the lease that’s been made until and unless he makes some inquiries or does some digging…]

If you post more information about your tract and the identifying information about the well, there may be people here who can help you assemble the factors you need for the math or arithmetic in your situation. Also, the operator may be willing to walk you through the details.

I hope I have laid this out accurately. Maybe others can check my math and make sure I did it correctly. Good luck.

[Hessy]

If your net royalty interest decimal and the size of the tract that the net royalty interest decimal covers are both correct, you hold title on 35.55840000 net royalty acres.

If you want me to cross reference the interest decimal and the size of the tract, I will need the name of the well/lease that the operator assigned that net royalty interest decimal to.

Typically, calculating royalty acres is straightforward, but overlapping units can confuse some who do not have experience discerning units. Please make sure that the interest decimal you are listing is coming from a revenue statement for that particular unit. I only bring this up because it is odd that you are getting such conflicting acreage totals.

All buyers are going to be buying based on how many net royalty acres you own because this also factors in the lease royalty rate. Every contract sent to you will have language in the agreement to this effect. That is why it is very important to make sure that your royalty acres are not overstated, and the price per net royalty acre is called out. The most important number to compare and review is the price per net royalty acre, not mineral acre, because you own what you own at a set royalty rate. The total is a best educated guess until title is run, and no buyer is going to spend money running title until there is a contract to purchase in place. The good news is that the operator has already run title in the past, and they assigned your net royalty interest decimal based on their title opinion. Using the net royalty interest decimal and the correct size of the unit attributed to that NRI decimal will be accurate 99% of the time. That is the most accurate way to calculate NRA aside from running title.

In this instance, I would suggest that you request that unleased acreage be viewed on a 1/4 royalty basis rather than the 1/8 basis that your agreements are going to state or imply.

I would also suggest that you require a proration clause that stipulates that the total sell amount listed on the agreement cannot be prorated down by more than 10% without written consent from the seller after title has been run.