Value of Mineral Interests as Production Declines

Last year we inherited mineral interests in S/4 Section 26, Block C-8 Public School land in Reeves County. As far as I know this property has multiple wells that are relatively new. These wells have been providing substantial royalties as of June 2019.

I’ve read about the declining rate of production in horizontal wells. Last year we received an estimate of the value of our mineral interests in the range of $20 to $40K per net mineral acre. My question is as the production and royalties decrease on this property does the value of our mineral interests also decline? I am trying to estimate how much our mineral interests will be worth in 2-3 years.

Yes, there is a decline in value. The oil & gas in the ground are finite quantities. For every barrel or mcf produced, that is one less barrel or mcf available to be counted for future income. Horizontal wellbores deplete on average 80% the first year of production. The oil produced decreases rapidly while the gas may stay fairly constant.

Thank you very much for your reply. Everything you said makes sense, that these are finite resources that will deplete over time. My questions are centered on whether it’s best to hold on to the property or sell it. Everyone that sells wants the highest possible price, so it’s a question of timing. I guess it is possible the operators could drill new wells or re-frack existing wells. I don’t know too much about it. I have read how new technologies are changing production in the oil and gas industries.

Does your current lease have a Pugh clause? If not- you’ll be held until those current wells quit producing. However, if you do have one, it would expire and you could lease it again if the current lessor doesn’t continue to produce the minerals(drill more wells). If that happens, it’ll bring you more money in a lump sum again. Now how many wells are on the current property, the unit, depths etc will all have a big part in the value. Essentially, if they can’t drill much else, then the value will be based on current production vs potential production. And if they can’t drill, it won’t be worth leasing either. Do you know how many wells, unit size, etc?

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Thank you very much. Right now I believe there are 3 wells. Sorry I don’t have any additional information.

David,

If I’m looking at this correctly it seems to me like you’re in a production unit along with section 14. The two Iwo Jima 26-14 wells represent just a small fraction of the wells that could be drilled in the unit. Looks like the 26-24 1H was performing very very strong and then the 2H came along and might have been a little too close as it appears to have affected the production of the 1H. You might have better insight based on the check stubs versus just the public data.

If indeed there was negative interference from the child well then hopefully Colgate learns from it and better develops the rest of the area because you’ve got a lot of great acreage left to be drilled in the unit.

Also there are a lot of factors that can affect the value of the acreage. Sometimes new wells can come online and and really prove up the remaining acreage sending values even higher. It’s all case by case.

Bottom line is you’re in a great area with most of your acreage left to be drilled. I have a few minerals nearby as well and they’ve been good.A lot of the value in the next few years depends on how quickly Colgate will come in a develop the rest of the acreage and also seeing how the two Iwo Jima wells perform in the next few months.

Clint

Thank you very much for some of the details you shared. The wells on our property are referred to as “Guam State.” I’ve seen a lot people post information on wells. How do you get that information? Is it available to the public?