Selling lease rights now vs waiting for future royalties

#1

Hello all,

I have just over an acre and a half in Midland, TX that has been leased for a term of 3 years. The terms were seemingly favorable with 25% royalty, and I’m not to bear extra costs taken out of royalty. There is just over a year left on the lease. Nothing has been done yet that I am aware of, but I’ve been led to believe there might be drilling in approximately 6 months.

Another company has offered to purchase my lease rights for 18,000/acre. Therefore, I am posting here seeking some guidance on whether or not I should sell these rights, or simply keep the rights for future drilling.

What are the chances drilling finds something in this area, and what sort of output should I expect in terms of monetary value, and how long does it generally take to reach and eclipse the 27,000+ I could receive up front?

Then there is factoring in that drilling might start in 6 months, but there is only just over a year left on the lease. Thank you for any thoughts and advise on this type of situation.

#2

We don't know the size of the unit, so I'm guessing a little bit. It would take about $46,000,000 worth of production for you to recoup $28,800 in revenue. That's a lot of production. Can't say it won't happen, but that is pretty prolific for one or more wells to recoup.

Further, you would secure the money now instead of waiting for it over time.

Regardless of the business aspect, I think the bigger question is what is happening in a seller's life. Does the seller need the money vs. wanting the money. Is there illness or doctor's bills that need to be taken care. Perhaps you are close to retirement and you want to pay off your house. For most sellers, not necessarily you, this is the concern that should be addressed.

#3

My guide has been how long your royalties would take to get to the amount received if you sell and that is, of course, speculation. I have always held on to the payout and it has been a better deal so far. However, your offer shows confidence that there are minerals ready to be drilled so I don't know what your decision should be. Go to the experts.

#4

Lee,

If you do a search in the upper right there have been many threads on the pros and cons of selling versus waiting it out. I can tell you the business model of most of the mineral buyers, including the disguised mineral buyers that lurk on this site, is to try to buy minerals in areas they are confident are going to be drilled in the near future. Many of these buyer’s are touting their funds as safe dividend paying investments that average 12% returns. In short, the money you will get from a mineral buyer today is far less than the value, in today’s dollars, of a 20 year royalty stream. They have to make a substantial profit, after all, and they are taking some risk.

#5

Lee, just something to point out, consider the tax consequences of taking $27,000 as ordinary income (royalty) vs capital gains (selling). You should discuss this with your accountant.

#6

Lee,

Yours is the question of the industry. I am a petroleum engineer and part of my business is to evaluate offers to buy &/or sell interests in producing and non-producing acreage. As an engineer, it's MUCH "easier" to make an "educated guess" when offsets have been producing around the acres to be evaluated. Undrilled areas are much more suspect in the value evaluation because there isn't any production around to provide an indication of potential value. Depending on the amount of information that is available, cost for this type of evaluation service can run from $300 to over $1,000. This fee usually provides the client an offset map, showing the operators, completion formations, producing rates, cumulative production and a reasonable estimate of the ultimate production around your acres, as well as, an economic projection of costs & revenue for your mineral interest, based on the offset development pattern. Many times this evaluation helps. Some times, not so much due to the risk profile for the area.

I suspect that an offer to purchase your mineral acres of $18,000/acre strongly indicates that whomever the potential buyer is believes he can make much more, over time, than the cost he is willing to pay you. This anticipated revenue is MOST LIKELY to come from multiple horizontal wellbores drilled within the productive unit. IF the potential purchaser represents an oil company, they may be acquiring acreage to get in the section to propose wells of their own. Either way, you should expect that they anticipate receiving much more money from the hydrocarbon production even considering a dollar today is worth more than a dollar 10-15 years from now.

If cash is needed, it will be hard to refuse a good offer. If not, it USUALLY pays to hold on to the acres, lease it & cash the checks when the oil companies drill, complete & produce their wells.

#7

My advise always has been when unsure, sell half and keep half.

#8

Hi Lee, as mineral owners we always tell people this...we never sell our minerals.

#9

Thanks. I don't need the money now, but would hate to pass it up for a slow producing well. I wished there was a report that gave the averages for wells in a particular area.

#10

And that makes sense. I am confident in the area, but I just don't know how long it will take to reach that point.

#11

Thank you. I have read some of it, but was looking for a more fine tuning of my situation. 1.6 acres in an overall unit I'm guessing will not yield much per month, but I don't know. Just trying to get a feel for how much I should expect per month. I've looked in the area, and it seems to be a successful area with wells having already been done within 1/2 mile. But I don't know how to read results or tell what it will pay. Some wells show 200,000, others 2,000,000 per month. What that translates to in a payout to me, I don't know.

#12

Absolutely! Very good advice.

#13

Thank you for the reply. The area does seem to be a good one, and my instincts have always been to simply hold onto the rights. That is why I have not done anything with the 4 different offers that have come my way. However, I would not want to just walk away from potentially 27,000 for something that will only payout 200/month. But I don't know what I should expect either. That's why I'm posting. I really don't know what to expect from what seems a measly little piece at 1.6 acres. Should I realistically expect 200/month or more for something of this size?

#14

I got a smile on my face. Here I am replying to other people about my small 1.6 acres, and you mention halving it. Does that even apply in my case? Note, I'm not trying to be a smart ass, it just doesn't seem like it would apply to me. :)

#15

And that has been my thought process throughout all this, but if something like this only pays 200/month, is that still sound advice? That would take a long time to reach anywhere near the up front money. But that's what I'm trying to clear up. Thanks for the reply.

#16

I figured I would post the area involved. It seems like a good area from what I've read, being in the Spraberry Field. Any thoughts on this area and it's production?

Section 25 26 Block 39 T-1-S

#17

Lee,

Before ANYONE can provide a SWAG as to the potential worth of you acres they would need to spend some time AND your money to review the offsets and the immediate area to determine the likely result of wells drilled in your spacing unit. If you know AND trust someone in the industry, ask them if they are familiar with your area and if they have an opinion. If not, the "ask an expert" advice is your best approach.

#18

Just finished a valuation. There was a sale where they had cut a parcel in half, 0.667 acres each. In towns in hot areas ½ acre lots are leased.