My brother and I each own mineral interests in 3.12 acres in S/4 Section 26, Block C-8 Public School land Reeves County, Texas. The operator is Colgate Energy. This 960 acre tract is called Guam State 26-21, it has 3 wells. The royalty interest is 0.25, however, it’s burdened by a 1/32 NPRI, therefore dropping the royalty rate from 0.25 to 0.21875. My brother and I have each received $14,354 in royalties during the last year and production on these horizontal wells is declining rapidly. Colgate is hedged for the remainder of 2020. I asked them about plans to drill new wells and they said that due to current conditions there are no plans to drill additional wells at this time.
Can we expect royalties to drop to zero or will the decline curve flatten out for a number of years?
Is the ad valorem tax value appraisal estimate that we will receive from Reeves county a good estimate of what these interests are worth? If not, can anyone give me an idea of what these mineral interests are worth right now or how to find out? I’m trying to get this information for my brother because he needs to sell his interests due to financial hardship.I need to ascertain the approximate value without having to hire an appraiser or landman.
The decline on your wells should flatten out as they get older. Currently you are in the situation where the production is declining fast on the two newer wells (2H and 3H) and the oil price has cratered (extremely so for April and May production). So it probably seems even worse.
You should have something like .000711 NRI in the existing wells. Here is a possible forecast of how each of the 3 wells should decline. I stuck that in a table for $40 oil (w/8% taxes) and got this kind of expected monthly revenue from 2021-2025 for a .000711 decimal. Assuming nothing else ever happens I would guess your brother could sell for about 48 times your 2021 monthly revenue. So that would be 48 x $567 = $27k.
At > $50 oil drilling more of these wells is likely economic. These wells are drilled along the West and East edges of the Guam unit, there are no wells in the middle. There could be another, say, 10 wells drilled here over the next 30 years. Which in terms of today’s dollars isn’t worth a ton, but is something to consider.
I have no idea what your ad valorem appraisal is, but it could be quite high/low depending on when they appraised it. I would not take that as a reflection of a representative sales value. It might be, might not be.
Thank you very much for this information. I REALLY appreciate your help in understanding the value of these interests based on various scenarios. Thank you.
