Understanding a mineral lease offer

I had posted here a month or two ago… and it’s been slow going for me to learn info about the mineral rights that have come to my family. But, we are starting to get more offers from companies to buy them and selling is what we’d prefer to do. I’m trying to do some research to see if the $3,000 per net mineral acre we are being offered is fair – my assumption is that it’s a lowball offer.

Background: A relative on my father’s side passed away and through some twists and turns of probate my family now owns: 2.5 net acres of mineral rights. The well is Peggy 1-33H and the location is 33-T1N-R5W. I’ve submitted the court decree to Marathon and while Marathon admits it’s a valid document to update ownership records, it won’t tell me how long this will take… and I can’t get any useful about royalties until the update is made.

An important note about the 2.5 acres is that I’m basing that off information one company told me. The rep said his firm had an older copy of the title and saw how much my deceased uncle had originally owned (5 acres) and based off the probate/court decree, that translated to 2.5 to my family. Which is a lot to say, I can’t even verify, yet, that we do own 2.5 acres. The Court Decree just has the details of how the rights are to be divided up. It does not specify how many mineral acres are being divided.

One post from my earlier thread got me to a site that had some production information: PEGGY 1-33H – looks like good old Peggy started to produce in 2014 and is still producing in 2019, but production has dropped off?

2014 the site says: 1,158,333 2018 the site says: 740,010 (30% less than 2014?) 2019 the site says: 108,629 (not sure how many months this is…)

Any thoughts on what a fair range would be or what I can do to better research the value of the mineral rights would be helpful – or do I really need the royalty info from Marathon and just need to wait for that process to play out?

My opinion… You need to wait to get your well into pay. You need that title cleared up no matter what. Patience is the name of the game. A typical horizontal well has most of its production in the first four years of its life, but can last for decades at a lower level. Most offers that you get are lowball as those buyers are actually paying you for the value of one well, but they know that many sections have the potential for many more wells. They hope you do not know that. I just got back from a two day conference put on for mineral buyers and they were gloating at the low prices they pay for mineral buyouts of families and what they are flipping them for to other buyers. The difference is quite significant. If you sell now, you will miss out on the royalties that are due to you from the first well and the royalties from any future wells. If you do need to sell because you don’t want to wait for that long time payout, then you need to have a clear understanding of what this first well will do, do research on the wells around you and figure out if that offer is fair (probably not). If you want to sell, ask for more! “Fair” to them and “Fair” to you are two entirely different numbers. Negotiation comes into play then. Also remember that you may have to pay capital gains tax. They don’t usually mention that…

How is well valuation done? Is a sort of present value calculation for x years?

Example: A well produces X gas. This is $10,000 in royalties per year, on average. To get a fair selling price, one does the math on the present value of 5 years of royalties (the present value of $50,000 in this case)? Something like this?

In the old days, you might have done a four year average royalty on oil and seven years on gas on a vertical well. The new horizontals are a totally different beast. Note that I said AVERAGE royalty. The horizontals have the majority of their production in the first four years but you cannot take one year of production because the first year is huge, the second much less, third even less and fourth even less. Then they tend to flatten out and last for decades. Many of us get a reservoir engineer to give us a value based upon standard engineering practices.

If your well was not producing as of the date of death, then you probably cannot use a producing well valuation at full value. You need to use a lease value or get with an engineer and your tax accountant and figure out how the best way to do it. Some of them will use a permitted well and discount the value based upon surrounding wells and a chance of success.

Looks like the remaining PV10/acre from the Peggy 1-33H (over the next 20 years) is just under $3,000/acre - assuming you are leased at a 3/16th. Given that your $3k/acre offer is basically paying out the next 20 years of existing production today it is not unreasonable but it is likely that you could find somebody willing to take a risk and pay for potential future horizontal wells getting you north of $6k/acre…