If I have an undivided 7/973.05 of 8/8 interest in minerals in Howard County, Texas 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?
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 ââŚand any other land in the CountyâŚâ
I would approach with extreme caution.
Doug
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.
Southwest Howard County.
According to my calculations you own 4.66 net acres in that 648 section.
Can you explain how you came to that figure?
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.
Deborah,
Did they provide an acreage breakdown in their offer? Itâs important to know because sometimes they fish with basic offers that donât provide many details other than a lump sum price to try to entice you.
Yes, thank you for your interest and reply.
Whatâs your lease royalty?
Oneâs 25%, another 20%.
To add to the confusion, you sometimes hear prices (usually for purchase offers) quoted per âroyalty acre.â The traditional definition of a royalty acre is 1/8 royalty in one acre. If you own 4.66 ânet mineral acresâ in this section, and leased them for a 1/8 royalty, youâd have 4.66 ânet royalty acres.â If you leased your minerals for a 1/4 royalty, you would own 9.32 ânet royalty acresâ (4.66 times 1/4 divided by 1/8). If you leased them for a 1/5 royalty, you would own 7.456 ânet royalty acresâ (4.66 times 1/5 divided by 1/8).
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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 â4.66â.
Barnes,
The buyer will either make an offer in terms of âroyalty acresâ which is a standardized method for valuing minerals, or they can make an offer in terms of âmineral acresâ 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.
Makes sense from a value point of view. Just didnât want folks to get confused that their acres âdoubledâ. True net âmineral acresâ stay the same, but the value of the acres has the term âroyalty acresâ. Nice explanation.
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.
If I was ever tempted to sell my mineral interests, I would use a quitclaim 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 quitclaim 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.
Thereâs a discussion forum on this site that you can read:
There are also other definitions of âroyalty acresâ in other states (sometimes 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 âhotâ area (like the Permian). Since bonuses for oil and gas leases are usually quoted âper net mineral acre,â 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 ânet present valueâ 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 youâve received. Youâd 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 donât know?
Dave, thatâs ideal for the seller, but most legitimate buyers wonât 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 wonât have a problem paying back money they shouldâve never received. On the other hand, most buyers are diligent and wouldnât place blame on the seller for poor due diligence on the buyerâs 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. Theyâre not really intended to be used otherwise, although they can be.
If you sell, just make sure to use a âspecial warrantyâ clause as opposed to âgeneral warranty.â That way, you are only liable for the time period of your ownership. Basically, it makes sure the seller doesnât know about any adverse claims/lawsuits that they donât tell the buyer about.
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 canât touch your personal assets if they came back with a lawsuit. Also, you could immediately distribute the LLCâs 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 doesnât matter because it owns zero or minimal assets. You on the other hand can be liable personally if you donât do this and can be devastated financially by a lawsuit. This is for extreme cases, but you can never be too careful.