Earlier this month I received royalties for interests we have that date back to June 2019 - May of 2021 - small amounts averaging $60.00 a month. I then get a call from a firm wanting to buy our interests for $4K per acre. Looked interesting until I received an increased density to drill an additional well to be able to gain access to the entire unit. The case will be herd September 7th. I’m left with what I see as 2 options sell now with a known amount or hold on and bet on increased production that will pay off in excess of the sell now price via the possible increased production. I would appreciate other perspectives on this opportunity…
Don’t Sell ! They are buying for a reason.
You are possibly receiving production from an old conventional vertical well. Those wells only have a small zone of perforations since they intersect the reservoir vertically. They are very old wells with low production volumes and sales. For example, the Whitney 2-10 has about 16’ of perforations in the Simpson sand.
The new wells that are being proposed in that area are for the Woodford and they are horizontal wells that are drilling down vertically and then turn and are drilled approximately horizontally through the reservoir for thousands of feet! You already have the Choate 0504 10-1HW horizontal well. (4901’ of perfs) Casillas has an increased density hearing for another well similar to the Choate. It is very common to get all sorts of offers when an increased density hearing notice goes out. In my experience, the offers are usually offering less than what the upcoming wells are worth. The offering company has done the engineering work on the area and knows what to expect. They offer low to see if anyone will bite, they want to make a profit and each has their own strategy for how they make the offers. That is their business and they know what they are doing. They are also factoring in the risk of failure. In this case, the reservoir is enormous and there is already a proven well on the section, so the risk is lower.
Another factor to consider is that Casillas bought the first Choate well from a previous operator. Casillas is a proven operator, the technoloy gets better all the time, so that decreases the risk and enhances the possibility of a better second well. The pressure in the reservoir may have dropped some, but this new well can do okay.
Each mineral owner has to choose what is best for their situation. You can sell, not sell, or sell part and keep part. If you sell, you may have capital gains tax, so consider that item they conveniently forget to tell you about in any offer. If you get royalties, you may pay state and federal taxes, but you can also claim the depletion allowance credit. Talk to your accountant to get a feel for what your tax liability might be.
Martha - as always your responses help me better understand the mineral interest management game. since I posted thais I received another, higher, offer on some other McClain co holdings. Thanks!!! stan
Any time I receive an offer, that is usually a clue that “someone knows something” that I may not know. So I do a good bit of research on the activity, check the OCC cases, read up on the operators and see what they are saying, etc. Some companies buy only the current well(s) revenue, some pay a little extra for wells that are well on their way to being drilled in the near future and some have other recipes for their offers. Some promise high numbers and then retreat back once they have someone on the hook. Staying informed is the best way to make a good decision.
Casillas is not the operator.
Operators are always changing names. Casillas Petroleum Resource Partners, Native Exploration and Acacia Exploration consolidated in May 2021 to form 89 Energy III LLC funded in part by Kayne Anderson. Plenty of expertise (and funding) in that group.
They will get around to changing names on everything. Still listed as Casillas on the OCC paperwork right now.
If you want to get a good comp, it’s always a good idea to offer it to the actual operator as many of them have funding to buy royalties now as a side strategy…and since they are the ones planning the wells, they are more likely to pay up if they know drilling is around the corner (they’d know better than anyone!).
Update on the Choate section 10. There are two new wells proposed, #2 and #3. Hearing date set for 9/7/21.
So far, there is a Change of Operator case 202101717 to change from Eagle Exploration Production, LLC (first Choate well) to CPRP, LLC (Casillas Petroleum Resource Partners, LLC). Hearing date set for 9/20/21.
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