Straight Answer?


#1

If I have an undivided 7/973.05 of 8/8 interest in minerals in Howard Co., TX in a section containing 648 acres, and if a company is offering $13,000 per net mineral acre owned, can anyone tell me roughly how much this would work out to?


#2

Deborah, that is a very good question. I look forward to hearing what someone with more knowledge than me says.

I have been told that with production, they offer based on Net Royalty Acre and that is adjusted as if production was based on a 1/8th royalty.

Now another thing, you show 7/973.05 which leads me to believe you might own 7 net acres on a 973.05 tract.

Is this land leased and if so what is the royalty? Is it producing or even yet permitted for drilling? what is the activity like around your tract.

One last thing, the deed will say something like '…and any other land in the county…"

I would approach with extreme caution.

Doug


#3

Deborah, where in Howard County are your minerals. my family has minerals east of Big Spring off Midway road… lease runs out next august… not drilled. thanks


#4

Southwest Howard County.


#5

According to my calculations U own 4.66 net acs. in that 648 section.


#6

Can you explain how you came to that figure?


#7

648 acres times 7 divided by 973.05 equals 4.66163 acres. If you are unleased, $13,000 per acre equals $60,601.19. If your minerals are leased, you need to be sure they are not basing their offer on your royalty interest. For instance, if you have leased for a 1/4 royalty, then they may try to tell you they are only offering 1/4 of the $60,000 number.


#8

Deborah,

Did they provide an acreage breakdown in their offer? It’s important to know because sometimes they fish with basic offers that don’t provide many details other than a lump sum price to try to entice you.


#9

Yes, thank you for your interest and reply


#10

What’s your lease royalty?


#11

ones 25% another 20%


#12

To add to the confusion, you sometimes hear prices (usually for purchase offers) quoted per “royalty acre.” The traditional definition of a royalty acre is 1/8 royalty in one acre. If you own 4.66 “net mineral acres” in this section, and leased them for a 1/8 royalty, you’d have 4.66 “net royalty acres.” If you leased your minerals for a 1/4 royalty, you would own 9.32 “net royalty acres” (4.66 times 1/4 divided by 1/8). If you leased them for a 1/5 royalty, you would own 7.456 “net royalty acres” (4.66 times 1/5 divided by 1/8).


#13

Interesting. Never heard net royalty acres explained that way. Is that written down somewhere? I can sort of see it from a buyers viewpoint with regards to a 1/8th royalty, but you still only own 4.66 net acres. When I get sales offers, I can only sell the “4.66”.


#14

Barnes,

The buyer will either make an offer in terms of “royalty acres” which is a standardized method for valuing minerals, or they can make an offer in terms of “mineral acres” that would be based on the underlying number of royalty acres. So, if they used mineral acres, their offer for minerals leased at 1/8 would be half that of minerals leased at 1/4. Whereas, the royalty acre price remains consistent regardless of the lease royalty.


#15

Makes sense from a value point of view. Just didn’t want folks to get confused that their acres “doubled”. True net “mineral acres” stay the same, but the value of the acres has the term “royalty acres”. Nice explanation.


#16

Exactly, the number of mineral acres remains constant while the number of royalty acres fluctuates according to the current underlying lease royalty. True value lies in royalty acres, but leasing and such is done in terms of mineral acres and so that term is more commonly heard from mineral owners. Only true mineral buyers/investors tend to throw around the term royalty acres.


#17

If I was ever tempted to sell my mineral interests, I would use a quit claim deed rather than a warranty deed. In a warranty deed, you are guaranteeing the amount of your interest and the buyer can come back if it turns out to be different. In a quit claim deed, you are merely conveying whatever you own. The mineral buyers out there have competent landmen and attorneys. If you want to accept their dollar offer, then put the burden on them to confirm your interest.


#18

There’s a discussion forum on this site that you can read:

There are also other definitions of “royalty acres” in other states (sometime more than one in a given state):

(This latter may require registration to read.)

The real question when valuing your mineral and royalty interests is how much revenue will they generate? With regard to unleased mineral interests, how much can I expect to receive in bonus payments when and if my interest is leased. This is highly dependent on where they are and whether they are in a “hot” area (like the Permian). Since bonuses for oil and gas leases are usually quoted “per net mineral acre” this is a useful way to think of the value of unleased minerals for leasing purposes.

If the minerals are already leased, I prefer to use decimal or percentage shares of production revenue. If you can estimate how oil or gas revenue will be produced over how long a period of time, and you know your royalty decimal or percentage interest in that revenue stream, you can arrive at a “net present value” of the estimated future cash flow. Investors use this method all the time in valuing all kinds of investments. If you are contemplating a sale of your royalty interest, it might be worthwhile to get an estimate of this to compare to the offer you’ve received. You’d probably need a petroleum engineer to estimate future production rates. You also need to make estimates about future oil and gas sales prices, which are historically pretty volatile. A given tract of land may produce multiple different revenue streams from multiple different wells and your decimal share of the wells may differ.

When presented with an offer to purchase your minerals or royalties, the first question should be: What do they know that I don’t know?


#19

Dave, that’s ideal for the seller, but most legitimate buyers won’t touch a quitclaim these days. Also, the purchase and sale agreement could hold some merit with a proportional reduction clause, so it could become tricky. Ideally the seller is reasonable and won’t have a problem paying back money they should’ve never received. On the other hand, most buyers are diligent and wouldn’t place blame on the seller for poor due diligence on the buyer’s end. Quitclaims are usually only used to cure title defects where parties involved are very familiar and comfortable with the situation, and where warranties would be unadvisable given the details of the title defect situation. They’re not really intended to be used otherwise, although they can be.

If you sell, just make sure to use a “special warranty” clause as opposed to “general warranty”. That way, you are only liable for the time period of your ownership. Basically, it makes sure the seller doesn’t know about any adverse claims/lawsuits that they don’t tell the buyer about.


#20

Oh, and a very smart move in my opinion is to start an LLC and convey the minerals to the LLC before selling them to an end-buyer. That way, the LLC is liable to the buyer and they can’t touch your personal assets if they came back with a lawsuit. Also, you could immediately distribute the LLC’s proceeds to yourself personally and that money would be untouchable for the most part. Worst case is the LLC is sued and has to file bankruptcy, which doesn’t matter because it owns zero or minimal assets. You on the other hand can be liable personally if you don’t do this and can be devastated financially by a lawsuit. This is for extreme cases, but you can never be too careful.