I am new to the forum but I think this is the place to post. I and my siblings received an offer to purchase mineral rights on 13 net mineral acres at $6000/acre. Is this in the ball park and can anyone tell me what is the activity in this section? Yhanks for any help.
Welcome to the group. You need to be very careful about offers as there are many unscrupulous parties out there. Iâm sure somebody will chime in with some values. Richard Winblad
As an asset, there is no âcarryâ in owning minerals in Oklahoma. So the first question is, why do you want to sell?
If you donât have an urgent need for cash, then consider heeding the old adage ânever sell your minerals.â
For perspective, ask yourself âwhat if my ancestor had sold the minerals to buy a fur coat?â
1 Like
We do not necessarily want to sell but being new and not understanding everything trying to get enough information to make an intelegent decision.
Does anyone know if any wells have been completed in this section? If so is there a way to know the volumes?
We have had no contact about these mineral rights until we received the offer to purchase. As far as we know there is no lease on this acreage.
Considering old adages such as âNever sell your mineralsâ is a simplistic view. Things change, and while many old adages can still hold some great lessons, they shouldnât be viewed as absolutes.
Mineral valuations/prices in the STACK/SCOOP are at all-time highs, and mineral owners need to educate themselves and be aware of the varying levels of risk associated with the economic considerations and value of minerals.
I fully understand and agree that there are many low-ball bidders out there and mineral owners need to be cautious. In general there are a couple of types of mineral buyer â (1) those that throw out low ball offers in the hope of catching deals from the less informed, (2) those that dig into the technical side of the business and analyze the geology, potential, etc.
I fully agree and encourage buyers to arm themselves with as much information as possible. As debated on this website on many occasions, blanket statements are dangerous. Every mineral owner is in a different position financially, or even emotionally than the next.
Some mineral owners are in an extremely fortunate position of owning a broad array of minerals spread over a wide area as compared to most mineral owners who only own a single asset. This fact alone creates concentration risk, and I think many times that people, donât truly consider all the risks when stating âdonât ever sellâ, equally as much as those on the opposite side saying to âsell everythingâ. No single position is correct, and no single position is the same for everyone as situations vary from person to person.
Having a huge amount of value tied up and concentrated into a single asset may not be the best decision for most peopleâs financial security. However, taking any bid without being informed is as poor of a decision that an owner can makeâŚ
As we all recognize, there are many factors that go into valuation and prices, some are driven by external forces, such as prices, geology, operator (are they good at what they do, are they crooks, etc.) and some are driven by internal forces (medical bills, desires to diversify, tax and estate planning, etc.) âŚâŚwell there are a lot of risks and assumptions that go into the value of minerals and into valuing minerals.
These unknowns influence the level of risk, and hence required return. When you invest in any investment, you are looking to achieve a rate of return commensurate with the risk you are taking. Higher risk investments require higher rates of returns, thatâs why the perceived safety of US government debt have very low rates of return, while junk bonds, or penny stocks have high rates of return. Mineral interests (and ownership) are more akin to real estate investments (and ownership) than stocks or bonds, but still with a bunch of significantly different risks.
The items above are just some of the risk mineral owners face. If you are a mineral buyer, you probably need to cover an âreturn hurdleâ as well, which is just another risk they need to consider. Many mineral buyers are using pooled investment vehicles and need to hit returns hurdles in the high single-digits to low-teens to cover cost of funds and overhead (some have much lower return hurdles as they are essentially division of insurance companies, pension funds, or family offices that are trying to beat inflation and therefore are looking for low single digit returns). Itâs not cheap to analyze oil and gas investments, and reach out to thousands of mineral owners, and cover losses on the ones you get wrong.
On the flip side, the question for the potential mineral seller is âwhat risks I am willing to takeâ, and âwhat type of return I require or that I am willing to give upâ. Additionally, for a mineral owner, what portion of my net worth am I willing to have tied up in a single asset â depending on the size of the mineral value to your overall net worth, it may not matter much, or it may be a situation where the value of your minerals dwarf everything else. Some high level items/risks to consider may include:
(1) Commodity prices â this is a risk that everyone takes â there are many opinions. I think the general consensus is that prices are range bound, there are as many downward pressures as upward pressures. Prices will be volatile, have periods where they seemingly go up each day, and periods where they seem to drop every day. I caution anyone thinking that $80/bbl is likely and/or sustainable⌠Similarly, $40/bbl is just as unsustainable as $80. So, when evaluating what prices and hence your potential revenues, will be, take a look at various scenarios. Then think about how those scenarios would impact you.
(2) Timing of development is a huge question for everyoneâŚincluding the operators. If you are a mineral owner, it has huge impacts on value, the sooner may not be the âbetterâ but usually you want to see your acreage developed and put into production. This is also a big challenge for mineral buyers. Unless fully permitted with rigs on location, a mineral owner (and buyer) is speculating on when the wells will be drilled and completed. The reason this is so important, is that the longer the time until development, the longer the time a mineral buyer is incurring the cost of its investment (remember they have to deliver a return to their investors).
(3) Number of wells developed in the unit â this is somewhat related to #2 but is still different. Operators have been experimenting with the number of wells they can fit inside of a unit. I elaborate below to some of the changes occurring in the Mid-Con with Spacing assumptions below. Also, note that in areas where the formation has less pressure or is more oily/less gassy it will take more wells to drain the acreage than in the over pressured gassy/condensate areas of the play.
(4) Production profiles (what the wells will produce over their lives) â depend on a huge number of factors â location (geology, etc), operator (how they complete wells, etc). Operators complete wells differently as their objectives may be different. The production profile for the first well in a unit can be different than in-fill wells if they are drilled at different times. Overall, you really need to look at all the factors that influence production and base your assumptions on those factors to make your best guess.
(5) Lease terms â lease terms vary wildly â itâs not just about the royalty rate, but also what deductions (if any) an operator can take. If your lease permits deductions, then operators can deduct the cost to transport and process gas, sometimes these charges are a large percentage of your revenues. (6) Most mineral investors are not looking to hold the minerals they acquire forever, at some point in time most need to sell what theyâve acquired, and there are just as many unknowns when it comes to predicting how investors in the future will look at minerals.
All in, there are A LOT of assumptions that go into coming up with a purchase price and/or perceived value for minerals. You may want to consider some or all of these factors (or additional factors) when thinking about what the value of your acreage to you.
I also donât disagree with the concept that if you can hold onto your minerals over an EXTENDED period of time you will usually generate more cash than if you sell them - buyers are investors and expect a return on their investments.
With that said, as competition has increased across the various basins, including the SCOOP/STACK, expected returns have been driven down significantly and the need for investors to be more aggressive with their assumptions, and hence take on greater risks have increased tremendous. Some of these mineral deals are very mispriced and will result in low single digit IRRâs, if not actual cash losses on investments. There are all types of investors out there, and as more seek yield, more and more are woefully uneducated and over pay â creating situations where you may even get more cash now than if you held the minerals.
And while I agree with the majority of the posts on this blog about educating oneself, I completely disagree with the notion that simply looking at operatorâs presentations will provide enough insight to make a fair assessment of your acreageâs value.
Operators are generally full of S*@#. Think about it - if their presentations were 100% accurate, they wouldnât have safe harbor statements in them. Further, all well results would look like operatorsâ type curves ever time. Well (pun intended), well results rarely reflect operatorâs published type curves, and most donât even come close. They are essentially the production profiles assuming that everything goes right 100% of the time to the maximum extent possible - they are by definition, hypothetical.
Furthermore, in just the last two months we have seen operators step significantly back from their previous spacing/well density estimates (risk #3 above). For example, in Devonâs November Q3 earnings supplement presentation, Devon stated that their down spacing tests were âdisappointingâ, and results were âbelow expectationsâ. The wells interfered with each other (in other words they were competing for the same hydrocarbons) as âspacing was too tightâ. Devon is revising their base case spacing estimates to 4-8 wells per section, down from 10 to 12. That is a HUGE value impact.
Now if you were a mineral owner who decided to turn down one of those lofty offers from a mineral buyer because you based your expectations on DVNâs, NFXâs, or other operatorsâ expectations that they could jam 8, 10, or 12 wells producing at their type curve into a unit, then you probably will be rethinking and regretting that decision. Sure, youâre going to get some nice checks initially, but the present value of those checks is going to be much lower than what was offered a few months ago (And thatâs before oil went from $75 to $50/bbl). Individuals need to assess their situation and decide if they are comfortable with counting on the operators being 100% correct every single time especially when they only own a single mineral asset.
Mineral owners minimally need to ask themselves:
⢠What degree of variance are your willing to accept?
⢠What are my alternative investment options?
⢠What am I willing to trade off or leave on the table from a risk/return perspective to sell a portion of my minerals and diversify into other asset classes?
At the end of the day, minerals may be one component of a personâs portfolio of assets, but they probably shouldnât be the only component of a personâs portfolio. Thatâs where blanket statements become as dangerous as accepting a bid thrown your way without educating yourself as to the options and various potentials, be it potential risks, potential returns, and the potential options (including diversification). I cringe, when I see blanket statements from her or anyone else on here. Mineral buyers are providing a service, and a mineral owner that is considering selling should educate themselves as to what they have. There are plenty of buyers out there, and everyone is receiving dozens of offers - you see that mentioned all the time, so itâs pretty hard for me to swallow the idea that thereâs not a competitive market for assets in the SCOOP/STACK at this point in time.
And one should consider, if I sell my minerals for $5,000, or $10,000 or even $15,000 acre, am I really leaving much on the table, and can I reinvest that into stocks, bonds, real estate, or some other asset and generate a return greater than what I would earn if I simply held on and collect checks over time. It truly a valid question to think about, and something that everyone should evaluate when they are reviewing offers. In summary, donât sell if itâs not a good offer, or if you donât have any alternatives to reinvest at a higher rate, or consider selling if the rate of return on alternative assets exceeds the return of what you would earn by keeping your minerals.
At some point in time, ever bubble bursts, and some of the valuations thrown around out there remind me of bubbles.
DVN 2018 11 NOV Q3-2018-DVN-Operations-Report-FINAL.pdf (1.5 MB)
2 Likes
As a general proposition that is correct, but the only time in recent years where Iâve heard a professional mineral owner say âgee, I wish I had sold my mineralsâ referred to offers made by Provident Royalties, a Ponzi scheme whose high offers were not tied to actual values.
Just out of curiosity Jeffrey, when you buy minerals what valuation do you put on unknown future development potential? How much oil is left in place even after tertiary recovery methods have been exhausted?
The price paid for minerals sold by the ancestor 20 years ago may have been a really good price for known development prospects at the time. But horizontal extended laterals were not in the picture 20 years agoâthe upside that sellers gave up when they sold based on a discounted value of vertical production.
Whatâs the value you put on a hypothetical situation 20 years from now FrankâŚthat is discounted into todayâs dollars?
Thereâs a difference between speculation and investing FrankâŚand unfortunately I donât have a crystal ball, maybe you doâŚif so, please share with the rest of us.
Frank: How many professional mineral owners post on this website?
Todd M. Baker
Thank you, you just made my point.
That is why all of the old mineral buyers that accumulated significant holdings generally didnât sell their minerals. There is one qualification to the adage. It was common to see mineral buyers trade part of what they bought in one tract for acreage that a mineral buyer purchased in another tractâthereby spreading the risk (a form of diversification).
What is the definition of a âprofessional mineral ownerâ? What are the requirementsâŚcan I be one?
Does everyone have a crystal ball but meâŚbecause I might approach my evaluations wrongâŚTodd - do you have oneâŚplease shareâŚ
I wonder if the geologist/engineers that thought 10 -12 well spacing would work had some smudges on their crystal ballsâŚ
Why would they diversify if thereâs no risks?
oh waitâŚThank you for proving one of my points. You meanâŚgosh, I could sell some of my minerals that have been priced to yield single digits, and invest those proceeds somewhere elseâŚ
People who purchase mineral interests as a principle source of income, as opposed to an heir that acquired interests by inheritance.
They diversified because they understood the future upside was unknown.
By not answering my question, it is logical to assume you pay nothing for unknown future development potential when you purchase minerals. That potential can be a significant portion of the value of the asset you are buying, yet you give it zero value. That observation is not a criticism, just an observation that a novice mineral owner should keep in mind when contemplating a sale.
Probably very few post here, but I bet there are a number who lurk.
I certainly donât have a crystal ball, and that is the very reason why the old adage applies. My only purpose in bringing it up is the fact that many of the newbys probably donât have a good understanding of the nature of the asset they own.
Nope Jeffrey, I donât. But Frank does, or at least he seems to be able to predict that the future holds more than the present, no exceptions.
I have purchased minerals that I wish I hadnât and likewise, have sold minerals that I wish I hadnât. BUT, because I donât have a crystal ball, I didnât then nor do I know now, what the future holds. I can only control what I know.
Frank, should I retain my 1.00 acre so I can hand it down to my 10 grandchildren? Just sayân.
I think my answer is pretty clear FrankâŚ
Hey speaking of old adagesâŚhave you heard the one
âA bird in hand is better than some completely ridiculous hypothetical make believe situation 20 years from now when most of the auto and truck fleet runs on electric motorsâ?
Wait thatâs not how it goesâŚoh a bird in hand is better than two in a bushâŚyeah thatâs it.
Itâs all about risk and reward, and anyone making an âabosluteâ statement such as ânever sell you mineralsâ is simplistic and lacks a true understanding of finance and investments.
But to each their own, believe and do what you want, I really could care less.
You have 10 grandkidsâŚdang. Thatâs a lot of college funds. Want to adopt some of my kids?
Frank - read my original post - one of the items to consider is development potential and timing. And noone values hypothetical make believe items 20 years down the road - not a single âprofessional mineral investorâ because thatâs not investing, thatâs speculation and a sure fire way to go bankrupt.
However, since you value the unknown future - I have a bunch of minerals you could buy.
A valid considerationâfractionalization is a problem. If you have multiple small interests, form a family LLC to hold title and manage the interests.