Wesley, I emailed the sales agent this morning with my refusal of his offer and he responded with this:
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Glen,
Yes, I had called your brother to see if we could take the three of you out to Joe T. Garcias when you came to town on Monday and he informed me of your conversation. I'm glad that you have found me honest and informative throughout this process. We take pride in being honest and forthright about what we do. We also do not try to persuade anyone to sell that does not want to. We provide the opportunity to sell for a competitive price, and although, you may feel that our price has come in low, I can assure you that 2300/acre is a very high price on our end.
It is also very easy to overestimate a well's return and we did this same thing when we first started out in the business. It is not uncommon for a well in Payne County to have initial test production of 100 Bbls/day to 300 Bbls/day, you are right. However, these initial tests are not in any way representative of what a well will do over the course of a year or even for the first few months of production. A unit that produced 250 Bbls/day for each of two wells for an entire year would not only be the largest, most successful unit in Payne County, but Oklahoma as well.
Current drilling in Payne County targets the Mississippi Lime formation, which in the last few years has shown tremendous drop offs in production after even the first month. An ideal well for us, and something that we hope for, and are excited for when we own in one, will produce 175 Bbls for the first week or so and then taper off over the next few weeks to average at about 30-55 Bbls/day for the next 9-12 months and then continue to taper off from there. Whenever we buy in Payne County, we try to purchase for a price that we would hope to be able to make our money back in five to six years.
If we were to assume an average of 75 Bbls/day for a year for the two possible wells in your section, we would calculate as such:
2.5/640 acres = 0.00390625 x 1/8 Royalty = 0.00048828125 x PRODUCTION (when production equals 27,375 Bbls/year & $85.00 price of oil) = $1,136.17 for the first year.
If we were even able to suppose that a sandy formation could hold up this kind of production consistently for five years, which is contrary to the historic production of other horizontal wells over the past 5 years for the area, then we would be looking at a five year total return of $5,680.84. (once again, this is an unrealistic assumption) We are offering to pay a total of $5,750.00 for your interest. Realistically, however, it will likely take us 8-10 years to get our money out of your acreage assuming that the price of oil doesn't skyrocket, or that if another 3 wells aren't drilled in this section.
When we made our offer of $1,600.00 per acre, we were basing this price off of our experience with the other wells that we own in this area. The only reason we rose to 2300/acre was to beat the competing offer you told us you received. And although this is higher than we would care to purchase for, we strive to be competitive and were not wanting to lose an opportunity to own in another unit, since our business model is based off of diversity and that we would like to be in as many units as we can. Since we first spoke, we have acquired other interests in this section for the $1,600/acre price and have had no mention of another competing and higher offer. So, it seems like whoever made the other offer realized they had overextended themselves and pulled out of the section with this offer. We have even purchased 5.25 acres in this section in the last week for 1600/acre from another Royalty company that has 25 years experience in the area and that considered our offer to be fair.
I am attaching the production figures we have seen in Payne County over the last year for wells in this immediate area. We purchased this acreage for $1,700.00 per acre and, as you can see from the monthly checks we received, there is usually a large check for the first month and then a sharp decrease from there. We will be lucky to make our money back on these within ten years, and these were leased at 3/16ths Royalty.
I wanted to try to explain what sort of production you should expect coming from someone who owns producing minerals in Payne and has worked in Payne county for almost eight years. Of course, you never know if a well is going to be a historic gusher or not until it is drilled, or a dry hole for that matter. You could see slightly more or less than the numbers we have estimated for your section, but we certainly feel that we made the best offer that we could given possible production.
Please let me know if you have any further questions about our offer. We would be glad to extend our offer to be valid for the next 15 days and after the 22nd, we would need to reassess the area.
I hope this information helps.
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I told you this guy was good. What do you think?