BLUFF: Forgive me if this is a stupid question and for being long winded. I’m new to the mineral rights discussion and am learning every day. Is it possible to predict future royalties based on past production from wells in the same unit plus an unsolicited offer to buy the rights?
DETAILS:
My elderly mother has owned mineral rights Desoto Parish, LA, for decades (undivided 1/3 interest in a number of acres in two units in Holly Field). These rights are currently under two active leases. Significant (for her at least) royalties have been paid over the years but have been tapering off as expected. There have been no new wells in several years. I currently have PoA over her business affairs, and we have mostly completed her estate planning, including putting the mineral rights in trust to avoid dividing interests into even smaller shares between myself and siblings when mom passes.
We received an unsolicited offer for the acreage located in one of the units. The offer was probably close to 30 times the most recent 3-year average royalty income attributed to the offered acres. This eye-popping multiplier caused me to start learning about the O&G mineral rights and royalty game, including pooling and allocation. I’ve also been researching using SONRIS.
From SONRIS, I was able to determine that permits for 4 new wells have been granted on the unit in question. These proposed wells cross 2 units and the laterals are around 10,000’ with about 50% in each unit. The 4 wells run parallel to existing wells in the wider “open” spaces remaining in the units. The existing wells in mom’s unit produced significant royalties at their peak around 15 years ago.
We’re still not interested in selling because 1) an initial unsolicited offer is probably low, 2) mom would take a significant capital gains hit due to the 15% depletion deduction being taken for years of royalties, and 3) mom still wants to honor her grandmother from whom she inherited the rights who advised her to never sell the mineral rights.
Before now, I was able to fairly predict mom’s annual income and tax liability and, with the help of her accountant, do her tax planning. Now we have the complication of dealing with this potential extra income. Although this a good problem to have, it would be nice to be able to have some idea of the future income. Which leads to my specific questions:
- If an unsolicited offer is X, is 2X or 4X a reasonable estimate for the true value of the rights on the open market?
- Does the offer give a good indication of the expected royalties over the next 3-5 years?If so, what Cap Rate for the ROI is expected by investors in O&G mineral rights
- Is the history of parallel well production a good indicator of production?If so how do you take into account distance between the parallel wells to get a high and low range?
- Are there other good ways to predict production?
Thanks for your input
-E