Offers to purchase minerals: Love Co. OK T8SR2E Sec 1 & 12

I first came here last year after inheriting minerals and receiving lease offers. Got a lot of great advice and help, here. Thank you. Apparently things are heating up in this area as I have had 7 contacts in the past 2 months offering to purchase my minerals. The offers began at $2500 nma and are now up to $5000 nma. Dad always said ‘never sell your minerals’ but this is getting tempting. I have 12.5 nma and I know there are a lot of variables but could anyone comment on what a typical ‘monthly’ royalty check might look like based on what is currently being paid in the area based upon my minerals at 3/16? Thanks in advance for any input/advice.

Lots to consider here - Cost basis & Capitol gains Tax, especially (0%,15% or 20% dependent on income), sale terms, fluctuation in commodity price, production declines, etc.

You’re on a good track by looking at revenue you’ll potentially forego if you sell. Lets go down that road. Say you sell your 12.5nma for $5,000 yeilding $62,500. For discussion sake let’s assume you’ll pay 20% CGT ($12,500) - leaving $50,000 in income.

Now lets assume you leased at your 12.5nma for $0/nma, 3/16th royalty, the operator develops a Multi unit Horizontal Well (2 sections or 1,280acre), at an average oil price of $55/bbl and a Gross Production Tax of 5%. After the hypothetical well has produced $30,000,000 in sales (545,455bbl) you would realize roughly $52,000 in O&G income.

Again, for discussion sake, and because production decline curves are complicated, lets assume the well averages 500bbl/day. 545,455bbl/500bbl/day = 1,090.91days/365 = 2.98 years. $52,000/36months(3years) = $1,444.44/mo.

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How are you figuring annual decline? Your reply, if I understand it, doesn’t factor that in.

I’m not so sure. Capital gains is the difference between the Basis (cost of acquisition) and price obtained.
However, when property is inherited you are entitled to a Stepped Up basis. But you will be entitled to Stepped-Up Basis. See: IRS Page It states: To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of property inherited from a decedent is generally one of the following:

See also: 26 U.S. Code § 1014 - Basis of property acquired from a decedent

No need to pay full capital gains if there is a basis. This is why it is better to inherit, rather than be gifted, appreciated assets.

If you intend to sell first determine the value of the minerals as of the date of death of the individual from whom it was inherited.

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Thanks so much for the reply and the numbers. With the little research I have done over the past few days, as you say, this would be ‘capital gains’, not ‘income’ and I would pay 0% up to $78,750 on a long term gain. Not sure what the production would look like on a ‘typical’ well in that area but you are close to answering my question. I have no idea how royalties are calculated other than at 3/16, I would receive a portion of 3 out of every 16 bbls? or, conservatively, if the well produced 300 bbls per day, I would receive a portion ( what portion?) of 54 bbls? Would my % even equal a bbl per day? Thanks, again. Any and all replies so very appreciated.

The equation for calculating royalties is: net acres/actual spacing acres x royalty x % perforations in your section or spacing unit.

For example, a simple vertical well at 80 acre spacing and 12.5 acres for 3/16ths would be: 12.5 / 80 x .1875 x 1.00 (Since all the perforations are in your spacing unit.)= 0.02929688. You may only have one vertical well on that spacing. If another was drilled, you would get the same decimal amount.

If you have 12.5 for a horizontal well that goes through two sections (sec 1 has 639.72 acres and sec 12 has 640 acres) with 3/16ths and a 50/50 split, then it may be 12.5/639.72 x .1875 x .50=0.00183186. That is a decrease in your decimal amount, but you may get more than one horizontal well in that roughly 640 acres in section 1 as one well cannot drain the full 640 acres. You would get paid on each of them according to the splits on the wells. That is your amount of every dollar that comes from a well. Remember that you may have both oil and gas payments minus any taxes or post production charges.

Folks that offer to buy know what is going on in an area and they plan to make a lot of money off of any acreage purchase. They frequently offer about the amount of one or two wells, but not the value of any future wells that they expect to be drilled. And they won’t tell you about those future wells. XTO has quite a few wells pending in the sections just to the west of you, hence the interest in buying your acreage. 228 leases in section 1 and about 70 leases in section 12 tells me someone is leasing with a purpose. If it were me, I would not sell and would just see what happens in the next year or so. Sounds like that is why you are getting so many offers.

For an example of what royalty checks would look like, I would look at the production curves from nearby wells in the same reservoir drilled at about the same time with modern technology. XTO had a nice horizontal well in section 3 that has been online for about four years. Looks like it will give about 700,000 bbls oil (rough estimate) and about .7 BCF. Room for more wells there. These HZ wells can last for decades but the majority of the payout is in the first four years.
Royalties can be anything from 1/8th, 3/16ths, 1/5, 1/4, or another factor as long as it is above the statutory minimum of 1/8th for OK. Note that production decreases sharply from day 1. That is normal. Prices change over time, completion techniques vary, etc. etc.

At a very rough level 700,000 bbls at $50 makes about $35,000,000. That was a one section well. So using it as a guide only and multiplying by a decimal of 0.00183186, that is about about $64,000 or so in oil money only. (Not factoring in the time value of money, changing prices or additional gas). If you have 12.5 acres at 3/16ths and they are offering you $5000, then that is $62,500 (not counting taxes on either). Looks like they are offering about the value of one well, but not anything for possible future wells.

That is how I look at offers. To me, all my offers have been lowball compared to the value of my current wells and any future wells. In areas with active drilling and planned wells on the OCC docket, I do not sell. May win some and may lose some, but so far, have won most.