I recently received an unsolicted offer to buy my very small royalty interest in West Texas. Last month, I received a whopping $68 for 1 month production. For perspective, it was approx $100 six months ago. I was offered $2,800 (equivalent to 41 months of current production). What am I missing? If I accept this offer, what are potential future events that could make me regret selling it?
Many of the offers to buy come before the next round of drilling. In general, the buyers offer a certain number of months of royalties at a discounted rate for the time value of money. What they may not tell you is that there is another round of drilling coming. That is how they plan to make their money. That is why I would regret selling.
Not knowing exactly where you are located, I can just comment that many of my offers in West Texas have been for 60-80 months of production.
If you are content to just let things play out, then you benefit from the royalties you have now and maybe you will have more in the future. No guarantees, but if there wasn’t something there, then why would they make an offer. And first offers may tend to be low just to see if someone will bite.
Do you have a royalty interest in just the one well or do you have mineral rights?
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Sometimes, offers are made when they are putting together another deal for perhaps a horizontal well. Always remember: Knowledge is power. Research your property and know what is happening in and around it before you decide to sell.
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All that matters is where it is and what it is. The details as it were.
There doesn’t have to be something else that you are missing. If its just this interest, in an old field, on a 6% decline…then paying 41 months is buying PDP25 (current prod at 25% discount rate). That’s a great deal for the buyer.
If there is nothing else, and its at 30% decline, then they are losing money paying 41 months of current cash flow. So they probably aren’t doing that.
I have no idea if $100 6 months ago and $68 today are in any way aligned with the historical production decline.
If there are future horizontal wells, then somebody is banking on that above and beyond the PDP math.
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There can be several more formations above and below your current production zone or formations that may produce in the future. Do you want to give that chance UP?