Unusual High Offers to PURCHASE NMA

[Archie_Smith]

I have a small NMA that I leased to Franklin Mountain in Section 1, Township 25S, Range 35E and obtained a 1/4 royalty and a good bonus. Franklin has a lot of wells permitted and appears to be consolidating the production in one larger play. I am not familiar with the methods used to max production and profits, but I assume it must be very good since I have received 2 offers to purchase all or part of my NMA for values that I have not recently seen even with my 1/4 royalty! One offer is for $20K/NMA, the other is for $40K.

They are offering to close in 2022 and it looks like the Franklin development is at least 5 years away before generating revenue. This looks like a “take it and run” if the offers are legit based on time value of money. Does anyone wish to share their insight as to what Franklin is doing to make this property so valuable?

[NMoilboy]

I’m not sure what you mean by “the Franklin development is at least 5 years away before generating revenue.” Is it? Right now DrillingInfo says there are 10 wells in Section 1/12 that Franklin spud in the last 3 months of 2021.

Now I’m not sure if that actually happened or not. I didn’t see anything in NMOCD well files that indicate that, but it may be that there was a spudder rig out there drilling surface hole or something (setting large casing at the surface). Or maybe DrillingInfo is wrong. But I would expect something to happen before 5 years.

Let’s say hypothetically that they drill, or have drilled, these 10 wells in the upper Wolfcamp (A or X/Y). And these wells make 600,000 barrels of oil each. So for simplicity’s sake, let’s say they will make 6 million barrels of oil from this 1280-acre unit from those wells. With, say, half of that production coming in the first 3 years.

Each NMA that you have will get you 1/1280 x 0.25 = 1/5120 of the production. So 1 NMA is 1,170 barrels of oil over the life of those ten wells. At, say, $60 per barrel, is $70k/NMA. With about half of that coming in the first 3 years. That’s a guess at lifetime cash flows. May be conservative.

With remaining development in the Bone Springs, deeper Wolfcamp, possibly the Delaware. On an infinite timeline, this acreage will probably cash flow > $100k/NMA. Forever is a long time. All down the line. If you took $40k/NMA today, it’s unlikely that this acreage would cash flow that much in the next 5 years (2 years until online and then 3 years of production). That’s assuming that these wells get drilled and completed. I’m with you, I would probably take $40k/NMA and run but $20k/NMA is not a very good offer. I think you have a reasonable handle on it, bird in hand versus higher lifetime cash flows and a discount rate/time value of money.

If you know these wells are really drilled and likely to come on soon then maybe the answer is more than $40k/NMA. If it was me and I had more than a few NMA I might drive to Jal and look. Either way, hell, ask for more than they are currently offering you.

“Offering to close in 2022” is pretty ambiguous. I’d want someone to close within 3 weeks or so. Shrug.

[Archie_Smith]

NMoilboy – Thank you very much for your input and info. I know Franklin has a lot of outstanding drilling permits covering Section 1 and 12 but I don’t think anything is drilled. I have limited info plus I live in California. I would love to have the opportunity to visit the site, but it is just not in the cards for me. As for my 5-year expectation, that is perhaps too pessimistic, but this is the oil biz. No plans for groceries money near term, but a good potential payout long term. Your calculations are especially useful and are certainly appreciated. My gut says a 20K offer just does not seem high enough, but 40K starts to make me listen.