I need to figure out what a fair cut of revenue is for my operator. They say my ROI is too high to provide incentive. I'm willing to negotiate with them but I need to get an idea of what a common and fair net revenue is for this industry in this area so I can use that as the basis of our negotiation.
What is the range? What are the factors that affect it?
I'm new to this forum, and to the world of mineral rights in general. I've just been a check collector for decades until recently being challenged by the operator. I apologize if my terminology is incorrect.
Bill, nobody can answer that without knowing all the knowable details and a great deal of the speculation. The more profitable the well is calculated, surmised, hoped to be the more you can hold out for. This is the part where the industry does not want you to know what is going on because it would help you negotiate. I would say pick a number you think is adequate and stick to it.
I remember from the other thread where they threatened to cap the well/s and in the same breath offered to buy you out. That is garbage. They are not going to cap the well/s until they no longer show a profit and they can't sell to someone else. If you can even give the well to someone else and avoid having to cap it you made money because money saved is money earned and money saved is all after tax dollars.
To give credit where credit is due, Buddy Cotten came up with some excellent solutions in your previous thread. Sliding scale royalty for one, your royalty would rise as the well reached payout, 2x payout and so forth so you can preserve some upside. It's a suggestion so reasonable that if the operator is not enthusiastic about it, I would be sure they were just trying to chisel off a chunk of what I have. Buddy Cotten is a professional pay close attention to his advice.
If they turned me down on this reasonable offer, I would just tell them to do whatever they are going to do. You can be sure they will not cut their own throats just to get back at you, if there is profit in those acres, they will not cap the well/s and lose a lease they could sell to someone else, especially if they think there is a possibility that a modestly profitable new well could be drilled. In my own opinion, they know you are a novice and they are trying to talk you out of part of what is yours. The take a lower percentage, sell out to us or we are going to cap the well/s makes me think they are running a game on you. I really think that if they were being honest that they should have offered the drilling commitment for your reduction in royalty so it wasn't just something for nothing, considering that the well might never be drilled but your interest is guaranteed to be reduced.
In any case to get good information, you need to give specifics. Short of that, my advice is to hold what you've got and depend on the operators rational self interest to lead him to the right decision. The reason you should do nothing is that someone put that interest in that position long ago, you can't better that decision at this date but by not knowing you could worsen it. It's why many people say never to sell mineral rights, it's because most people are not qualified to understand what they are selling, they don't have the background. Those people telling you to sell or just do whatever agreement they want to keep at least some money coming in from it, do not know a single thing about your position. Your well/s could still be showing a modest profit and in no danger what so ever of being plugged and abandoned, you just don't know.
The short version of Mr Kennedy's explanation is to measure the risk the operator must take to get a good well and then develop the resource. They need a much higher multiple of return for a wildcat and much less for a close in well and even less for a slam-dunk development well. You have every incentive to encourage the drilling of a first well through your lower share of the pie. Upset tax treatment can also work in your favor. If the operator desires to convert a carried interest to a working interest, be careful of the commitments you make when you have no control of risk dollars spent. Most importantly, don't give away long term profits to you by providing incentive.
Dear Bill,
Is there currently a well(s) in production? If so, you have some additional options.
Buddy Cotten