Trick offer for mineral rights?

Texas Mineral Rights Reagan County, TX
1

Need general help evaluating an unorthodox offer to buy

I own ten net mineral acres in Reagan County where there is much activity. The quadrants in which my acres reside, however, have no producing wells based on the RRC Viewer. I do not know whether or not there are active drilling permits or active leases on these tracts.

I now have an offer to buy the tracts that is structured in two tiers:

Tier 1: If the tracts are not “held to production” (whatever that means) or has active leases, then the offer is $100,000.

Tier 2: If the tracts meet either of the two conditions of Tier 1, then the offer is cut in half to $50,000.

This offer from my understanding of mineral rights, is that if a tract is producing or has leases, then it is worth MORE not less than if it is non-producing and does not have active leases.

Am I right? Is this a trick offer? Please advise.

2

It’s rarely to a landowner’s benefit to sell their mineral interest. I’m not well versed in mineral buying, but I am a landman. The only thing I could think of for how they would justify that offer would be the following:

A pretty standard royalty rate in a Permian Basin lease right now is 25%, which is what I’m assuming in this analogy. If the lands are leased and/or held by production, odds are your royalty rate is 25%. Assuming this, that means the terms of your lease can take your 10 acres and bring it down to 2.5 acres in terms of royalty checks. However, if you have no lease burdening your interest, and a well is drilled because the other mineral interest owners in the tract did sign a lease, then once the wells pay out, meaning they have recouped their costs, the person who owns those 10 net mineral acres will receive the full interest of the 10 net mineral acres. In this case, while it sounds odd, a lease on your land is less valuable to them than open interest would be.

I don’t know if you own executive rights or not. If you do, then that means if the company purchases your interest, they will control leasing and leasing terms if there is no lease or production on the tract.

It’s basically a matter of time and recouped costs. Its sounds like their business model places emphasis on owning Open Mineral Interest at best, and being able to control leasing terms and bonus at worst. If your lands are burdened by a lease, then half the value of that mineral interest, being the right to lease and earn bonus, is now gone, and may as well just be an NPRI at this point in time.

It’s best to assume they know something about the area that you don’t, aka, they know that a company/companies plan to start drilling in the area soon and they’re trying to get ahead of it.

I hope that makes sense. I’m happy to clarify anything that doesn’t make sense to you.

The offer itself makes sense to me. The question isn’t so much if the offer is fair/a scam, but rather if it benefits you as a mineral owner to sell your interest at all. If you aren’t in need of a large lump sum of money, then the answer is probably not, but that’s something you have to determine for yourself. I don’t know anything about the going rate for bonus right now in Reagan County. They obviously value Open interest at $10,000 an acre. If your land is open, and you decide you want to sell, you could probably get more from them. I doubt that $10,000/acre is the best they can do. You could probably get them to go up a little bit on either part of the offer if you decide to sell, even if your interest is burdened by a lease.

3

Thank you for you thorough response. Unfortunately, I am in an estate settlement situation that requires me to sell … but we are not in a panic or rush mode.

While counterintuitive, I understand your analysis as to why it would be worth less with a lease.

One question: Might there be a subset of buyers in the market who would view the deal differently and value the property at a higher level, assuming the property has a lease? What kind of buyer might that be?

Stated differently, is the Buyer’s perspective (and the Buyer’s structure) that we have encountered, an anomaly in the Permian, or will the majority of potentially alternative offers to buy that might come in, likely to be of a similar structure and perspective regarding valuation? Thanks, once again.

7

Would you mind explaining exactly what you mean by the quoted statement above?

Much thanks,

Buddy Cotten

8

As someone who has occasionally purchases mineral rights, I want to be in control of the leasing process when buying non-producing acreage. This is because I want an immediate return on my investment from the lease bonus and I want to be in control of the lease terms. There is a huge difference in a 25% royalty rate with costs versus without costs.

9

If you have to sell your mineral rights the best way to maximize your return is to list on an auction site. This way you can be sure that you are getting the best price possible.

My previous post was apparently edited for suggesting specific sites. There are several, but make sure it is one which is open to the public. There are a couple sites which promise to show your minerals to ‘their buyers’ for an offer but then won’t let you know who the buyers are…