What is the process for determining the value of a royalty interest? When looking to sell royalty interests, the various companies ask for recent check stubs and well location. What information are they using to make an analysis and how do they come up with a number? The more information and detail the better.
Is there a basic way to value using well production data found online?
Buyers ask for check stubs because it's one of the easiest ways to get your decimal interest in a well or wells, get well names, and verify monthly income. The location of your interests down to the survey level of detail helps them look at area activity and determine the future potential for additional wells if your tracts are already producing. They will also use online production data to look at your and area well production profiles to get an idea of future income potential. For instance, $20,000 per month from one property may become $15,000 or $10,000 very quickly if that $20,000 is from eight new horizontal wells going to sales at the same time.
Most buyers will say that you can black-out your name and address, SS#, etc. when providing those documents. You can also just list out your wells, decimals and state in which they're located if all of your tracts are producing. They can find the rest from there most of the time.
There's no simple calculation for valuing royalties based on production because the potential of new wells or lack thereof makes a huge difference on a case-by-case basis.
Andrew,
Marcus is exactly right. You have to give basic location information to even get a start in figuring out what the potential is for the property(s). One of the easiest/most efficient ways of doing this is through check stubs - simply, most of the information is there. If you decided to sell your house, potential buyers would obviously want to know the address - they would also probably like to know the square footage, how many bedrooms and baths and what percentage of the house you own! Some of this information the buyers might be able to figure out for themselves, but they can't even start without the address!
As far as what the property is worth, it's an impossible question to answer. It is basically worth what someone will offer you.
I sent you a message trying to help you with this a few weeks ago and still haven't heard back from you. Drop me a message if you would like help.
Good Luck
Hi, Andrew -
It is true that some companies use software to come up with a proposed purchase price.
Others will use Engineering Studies roughly determining the projected volume of production over a number of years reflecting the natural decline in production down to zero.
From my experience, however, it is simpler just to take the average of your last three (3) royalty checks (hopefully monthly royalty checks) and then multiply that average by 36 months (3 years).
Some companies you can negotiate up to 60 months (5 years) worth, but only for Wells that can be determined to be very long lived.
Those are your Ballpark proposed Sales / Purchase prices.
They will naturally want to be able to look up the property(ies) the interest is in - to map it out and research the area for additional development potential.
And probably a copy of your Lease(s) and Division Order(s).
Hope this helps -
Charles Emery Tooke III
Certified Professional Landman
Fort Worth, Texas
I would not divulge a thing at the beginning of contact. There are a lot of snake oil salesmen in this business. Sell to referrals only. My advice to you. Earnest money up front, for sure.