Hello everyone. After a couple of years of radio silence, the purchase offers are beginning to arrive on a pretty consistent basis again. I’ve recently received an offer for 12k per NMA for my five acre block. This section is producing, and I receive consistent monthly royalties, although they were lower than in 2021.
Just looking for some opinions as to whether I should consider this offer, or wait. I do not need to sell…
Thanks everyone for any input. Jeff
Now have another for ±14k per NMA with a draft LOI
Who made the offer? I’m north of you about 13 miles in Block C18 just over I-20
Prior to 2021, the purchase offers were mixed in with lease offers. As you say, you are held by one well with another well holding the other half of the section, both Wolfcamp B. There are 7 2-mile permits just south of you by Greenlake, with Tall City and Noble permitted around; as well as, Centennial (your operator) that drilled five wells just north of you. What you are now seeing is mineral buying companies chasing the drill bit. Like a magnet, the offers are only going to grow stronger as permits arrive. At that time, the discounting will be gone and they’ll be of the most value save from production and a check into your account. There is near term sight to production for 5-10 more wells, a couple in the WCB and another few in the WCA.
Thank you for the reply and the great information.
Fred. I live in WV as well. There is a NDA associated with the LOI.
I am guessing that some drilling company is looking into more wells in your area. You will be the last to know - but Landmen are out there with nose to ground. Be smart and make inquiries - you didn’t say where your mineral rights are located. Always, hold on to your mineral rights. As you said you don’t need the $.
You might want to check where you are at in respect to the production decline curves. The steepest part of the curve is usually within the 1st 5 years of production, hence responsible for a large part of the decline in your royalties (not taking into consideration natural gas prices at the wellhead).
You can take your royalty check details to plot your own actual production curve decline based upon the actual production numbers and see how much of the total production has declined over the years you have been receiving royalty checks.
(As an aside, I am expecting about a 80% decline in daily production rates before the curve starts to flatten out for the long term on my mineral rights in the Marcellus formation. This decline is based upon projections based on other wells in the area, since my well is just being completed this year).
You can then do a flexible financial analysis going forward where you estimate wellhead prices for the next 5-30 years (you could simply take the average price over the last 5-10 years or so)and construct a royalty payment schedule based upon those averages for whatever time frame you use.
For example, you could assume that the remaining 20% (or whatever your actual numbers show) of the well decline potential going forward is going to be straight-lined until the well plays out. If I assume the well will last for 30 years, I would spread the decline over the next 25 years ( 20%/25 years= 8/10ths of one percent per year,) this gives you the ability to project the cash flows into the future by projecting production decline. The big wild card during that point in time being the wellhead price you will be receiving for the projected production.
I then run a discounted cash flow analysis on those estimated cash streams using a discount rate ( my desired rate of return per year) to come up what the worth of the cash flows will be in present value terms. What someone might be willing to pay for them if they are looking to receive the rate of return you set as the discount rate.
The purpose of this analysis is not to come up with the right number since that would only happen by sheer happenstance due to the time period you are analyzing, anything can happen especially in respect to price at the wellhead price. But it will give you a good “ballpark” estimate of what your rights may be worth on the open market based upon the expected cash flows into the future.
Once you have that number you can go online to see what they might fetch at auction BEFORE considering the margin of safety (RISK to the buyer) and that will tell you how much risk the buyer is factoring into the purchase over and above the discount rate you used for your analysis. Assuming the auction possibilities are pricing the rights well below what your numbers show, that will tell you the level of risk buyers are factoring into their analysis of what your rights are worth.
At the very least you will know what he rights are potentially worth on the market, versus what you anticipate receiving from them in respect to cash, by not selling. This is the approach I am taking as the royalty checks start to roll in with the actual production numbers. Within the 1st 2 years of production, I will have a good handle on whether it is following my estimated production curve and re-adjust if necessary. This analysis will bring a good dose of reality into your decision of whether or not to sell. If the buyers market is factoring in a large margin of safety into what they are willing to pay, the decision to hold the rights and collect the royalties or sell, will be made for you.
The good news, is since you have been receiving royalties for some time, your production decline curve will be based upon REAL numbers for the time period that is already history. That is VERY valuable information, especially as it relates to the future cash flow capabilities of the well.
I would think its a HUGE red flag if they make you sign a NDA.
Ha Ha, imagine that… those clever mineral buyers 
Of course they don’t want to tell others what they are offering, but don’t fall for these kind of things. I am always for honoring your word in all things - just don’t promise to “not tell” anything. Remember, it was not you who contacted them, it was them who contacted you. And a letter unilaterally sent to you does not a promise make. Don’t let anyone ever make you believe that you can’t say anything you want about any letter. you receive. Personally, I take these kind of statements from mineral buyers as welcomed information - it provides me real data on who NOT to deal with. They’re the rookies and the intimidation crowd.
Everyone. Thank you for the replies. Jim Santmyer, that makes sense. Yes, I have been receiving royalties for 2+ years now, and the original “bonus” that was paid was pretty generous. Has anyone else is the area had an onslaught of interest?
Jeff
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