Rioyalty Leasing

Oil and Gas Leasing Help
#1

I have Marcellus shale royalty income of about $19,000 per month.It has been flowing for a year and the decline curve is flattening out so it should be fairly steady for a while.

I am being overwhelmed with offers to purchase the royalty cash stream both through the mail and from brokers. I know it makes sense from a tax standpoint. Does anyone know what a brokers fee normally runs? Also I know people discount the projected future stream to come up with an offer. Does anyone have experience with what interest rates are normally used to discount the expected stream?

Thanks. I appreciate any information or help I can get. All I have heard to date is "It depends". I know other people out there have been through the same thing.

#2

Hey Jeff,

Congrats on having such a strong well and nice royalty income from that first completion in your unit. Keep in mind that any offer to buy your minerals or royalty will actually only be pennies on the dollar for what the true long-terms worth that the minerals will generate over the production time of your unit.

Depending upon the size of your unit and the final well spacing, it could be likely that your unit would see as many as 4 to 8 wells per unit and formation. That could potentially even be double that should you be in a location where there are stacked fomations (i.e. Utica shale as well as as Marcellus, etc.).

That said, it could take 20-30 years or more in order to fully develop the in-fill production plans for your unit so those additional wells would come online over that time and provide strong income for you and your family for decades to come.

Although the decision to sell or not sell is certainly a personal one, my own position is that I would never consider selling royaly/minerals unless there was some dire financial circumstance (i.e. I need a kidney, or if my bookie has kidnapped the wife) where I needed money immediately.

Once those mineral/royalty are sold, they are gone forever.

#3

Thanks so very much for you advice. I was aware of the potential for stacked formations. The only reason I was considering it was for tax purposes. I can get 15% capital gains treatment if I sell vs double that if I hold. It comes down to how much cash I can get up front. Thanks for the input. I will take all the help and advice I can get. Thanks again.

DJG said:

Hey Jeff,

Congrats on having such a strong well and nice royalty income from that first completion in your unit. Keep in mind that any offer to buy your minerals or royalty will actually only be pennies on the dollar for what the true long-terms worth that the minerals will generate over the production time of your unit.

Depending upon the size of your unit and the final well spacing, it could be likely that your unit would see as many as 4 to 8 wells per unit and formation. That could potentially even be double that should you be in a location where there are stacked fomations (i.e. Utica shale as well as as Marcellus, etc.).

That said, it could take 20-30 years or more in order to fully develop the in-fill production plans for your unit so those additional wells would come online over that time and provide strong income for you and your family for decades to come.

Although the decision to sell or not sell is certainly a personal one, my own position is that I would never consider selling royaly/minerals unless there was some dire financial circumstance (i.e. I need a kidney, or if my bookie has kidnapped the wife) where I needed money immediately.

Once those mineral/royalty are sold, they are gone forever.

#4

Hey Jeff -

I completely agree with DJC. Not to chastise, but it really would be unwise to sell your minerals.

Isn't there something you can do with the income, some tax free or tax deffered investment vehicle, that would address your tax concerns?

Ive been in the oil and gas industry for over 30 years and can show you any number of wells that have been continuously producing since the early 1900's.

Are you sure you want to sell out for what amounts to only 3 to 5 years' worth of income?

If it makes so much sense tax-wise to sell, then why do so many people want to buy your interest?

Charles

#5

Charles Thanks so much for your input. I am not sure I would sell. I am exploring the option. If someone would pay me a fair present value price for my royalty stream I would certainly consider it. I have a decline curve for my wells and I know my gas will flow for many years. The question is what is a fair present value for that future royalty stream. The answer is that it depends on the discount rate used in the present value calculation as well as a guess at future gas prices. I was trying to get a sense of what other people had experienced.

Thanks again!!
Charles Emery Tooke III said:

Hey Jeff -

I completely agree with DJC. Not to chastise, but it really would be unwise to sell your minerals.

Isn't there something you can do with the income, some tax free or tax deffered investment vehicle, that would address your tax concerns?

Ive been in the oil and gas industry for over 30 years and can show you any number of wells that have been continuously producing since the early 1900's.

Are you sure you want to sell out for what amounts to only 3 to 5 years' worth of income?

If it makes so much sense tax-wise to sell, then why do so many people want to buy your interest?

Charles

#6

Hey, Jeff -

I still don't understand why you want to sell something that didn't cost you anything and is making you so much money and has the potential to make you so much more, but if you want to, I'd say you should expect a lump sum payment of at least 5 years' worth of projected production income based upon an average of the past 90 days worth.

There are other, perhaps more sophisticated ways of determining an amount for such a conveyance, but that's the one I've always used.

I'm certainly not the most educated or experienced in this sort of thing, but I would advise that you only sell the presently existing revenue stream under a Term Royalty Deed, so you don't actually convey away your minerals or permanently convey away your royalty.

Using a Term Royalty Deed, you can even convey away a certain dollar amount of your future income, say 3 times the projected income over the next 5 years. Certainly a 3 to 1 return on their investment would appeal to some revenue stream buyers and the subject revenue stream would come back to you in about 15 years, depending upon declines.

You get to keep your royalty/revenue income streams from any additional wells drilled on your land.

That, and you never actually sell your minerals or permanently convey away your royalties, for which your family's future generations will hold you in high regard.

Hope this helps -

Charles



Jeff Bowles said:

Charles Thanks so much for your input. I am not sure I would sell. I am exploring the option. If someone would pay me a fair present value price for my royalty stream I would certainly consider it. I have a decline curve for my wells and I know my gas will flow for many years. The question is what is a fair present value for that future royalty stream. The answer is that it depends on the discount rate used in the present value calculation as well as a guess at future gas prices. I was trying to get a sense of what other people had experienced.

Thanks again!!
Charles Emery Tooke III said:

Hey Jeff -

I completely agree with DJC. Not to chastise, but it really would be unwise to sell your minerals.

Isn't there something you can do with the income, some tax free or tax deffered investment vehicle, that would address your tax concerns?

Ive been in the oil and gas industry for over 30 years and can show you any number of wells that have been continuously producing since the early 1900's.

Are you sure you want to sell out for what amounts to only 3 to 5 years' worth of income?

If it makes so much sense tax-wise to sell, then why do so many people want to buy your interest?

Charles

#7