Be patient, if your offers went from $4,000 to over $6,000, your interest will probably eventually earn you 2-3 times that in royalties. The Buyer may have some inside knowledge.
You own 15.26 net mineral acres in a 638.7-acre pooled unit. My quick back-of-the-envelope calculations predict that your interest in one well in the unit with initial production of 800 BOPD, at a price of $85/bbl, will pay $190,000, or $12,400/NMA, of royalties over the life of the well. A well producing 1000 BOPD could pay $237,000, or $15,500/NMA.
We own an interest in some Strawn wells to the West of you in Scurry County that currently produce over 1,000 BOPD, so itās possible.
I studied the historical production for a sample of Strawn wells in Scurry and Fisher counties and came up with a 40% recovery factor, which multiplied by initial production x 4 years closely approximates the cumulative production of the sample wells, even though some of them actually produced for 5-8 years.
Like I said, itās a back-of-the envelope calculation, but probably not too far off.
It sounds like you did a lot of work, that was very nice of you to do that. However, I do think that you created an unrealistic expectation for @WestMcK .
Paying 4x the initial production isnāt factoring in the decline in production.
Also, thatās a pretty large area to base that off of, like @fwfrog91 og91 pointed out, the geology isnāt always uniform.
Iād sell all of my mineral interests if a company would pay me based on how you came to $15,500 NMA. A mineral buyer would lose money if they paid for minerals the way you calculate them. Simply factoring the income tax the buyer would be paying off the āpredictedā royalties demonstrates that they could never recoup their initial investment.
I may not have explained my calculation very well. I only took 40% of initial production into account.
800 BOPD x 365 x 4 x $85/bbl x 40% Recovery Factor x 20% Royalty = $7,942,400.
$7,942,400 Divided by 638 acres = $12,448/acre.
We were offered $4000/NMA on one of our properties and didnāt sell. Itās a good thing we didnāt as the sum of the first 4 months of royalties exceeded the total amount of the purchase offer when a 1000 BOPD well was drilled.
The risk we took in not accepting the $4,000 offer was that if a dry hole or a 300 BOPD well had been drilled, we may have been better off selling.
I think you capture the essence of the whole thing right there. In the end it all comes down to risk and not āits possibleā etc. Iāve seen people win the lottery, but on average a $5 lottery ticket is worth about $3.
The market for minerals in Fisher county is nowhere close to $15.5k pNMA @ 20% roy. For good reason. You get one well per 640. Just to breakeven over the life of the well each of these dicey Strawn wells has to makeā¦600kbo to generate $15.5k per NMA of revenue in this $85/flat case?
That seems a bad bet.
IMO, $6k/NMA isnāt too shabby. Could always ask for a little bit more and/or offer to sell half.
You still have to account for the 70 or so percent decline in the first year. People get 12K+ offers in multi pay plays that have more upside than a possibility at break even. This is a geologically complex and risky area where one well does not yet prove the play.
Another factory to consider in selling mineral rights vs. holding for potential royalties is the tax treatment of the income. Presumably, proceeds from the sale of mineral rights would qualify as capital gains, which are preferentially taxed at a lower rate than ordinary income. Of course, income from a sale would be all in one year, whereas income from royalties would normally be spread over more than one year, thus somewhat leveling an individualās gross income. Tax differences in sale vs. royalties may or may not be significant depending on an individualās circumstances.
Nailed it. Always everyone discounts the amount of taxes associated with mineral ownership vs selling. IMHO, selling half like NMoilboy said is the safest play. You take some risk off the table on exploration risk, took the bonus, hedged your bet on the production of the well and get cap gain favorable tax association. Unless you want to double down through some means knowing the production is great then take the money.
I have seen plenty of examples for both sides of selling vs not selling. It all comes down to risk tolerance. If you can use the money from half (or all) to do something meaningful for your family then take the money, however if not and you think the well will perform better than what they are saying risk it all and keep them. Dont know if that makes sense on the calc above at $85/flat oil pricing above. These wells produce copious amounts of water which will cut the life of the well down significantly. Also I think the Scurry wells are way better in productivity.
Short of driving out there and seeing a frac crew, probably not. Youāll get a division order at some point, but peregrine has been waiting a bit to frac these wells so itās just a hurry up and wait game.
Kind of like so called fast food. Hurry up and wait.
Thank you for the information. I have never been apart of this type of operation and just have no idea what to expect or the time frame to wait.