Weighing the Pros and Cons - sell vs hold in 2-09N-06W

Oklahoma Mineral Rights Grady County, OK
1

My wife and her brother each have a decision that they need to make regarding selling their mineral rights in Grady County versus holding out for royalties. I was hoping some of you knowledgeable members with no stake in the decision could weigh in on the pros and cons of each possibility. I have my own personal thoughts on the situation, but I want to avoid steering the responses so that they can feel better about what decision they choose to make.

My wife and her brother each own a 25% stake in 50 net mineral acres in 02-09N-06W, with their aunt owning the remaining 50%. Each of them had previously leased their rights to Citizen Energy II for a lease bonus + 3/16 royalty. This past week, their aunt made the decision to sell her already-leased 25 acre equivalent for the price of $14,000 per acre. If my wife and brother-in-law were to also sell their rights for the same price, they would each gross $175,000 for the sale. That is a significant amount of money for the average person to receive at once, so the temptation is definitely understandable.

Some other factors to consider:

Leon 1H-2-35 was spud on May 5th by Citizen. Once completed, this would be the first well that could or would generate royalties for them.

http://imaging.occeweb.com/OG/Well%20Records/1DD5DDDD.pdf

Production for recently completed wells in a nearby section (taken from NewsOK on 10/12/16):

Citizen Energy II LLC; Rosemary No. 1H-1-36 Well; NW1/4 NE1/4 NW1/4 SE1/4 (SL) of 01-09N-06W; 1,355 barrels oil per day, 3,562,000 cu-ft gas per day; TD 17,929.

Citizen Energy II LLC; Rosemary No. 2H-1-36 Well; NW1/4 NE1/4 NW1/4 SE1/4 (SL) of 01-09N-06W; 1,123 barrels oil per day, 2,086,000 cu-ft gas per day; TD 17,927.

So considering this info and the known production capability in this region of the state, what are the risks and likelihood of leaving significant amounts of money on the table in EITHER decision? Does $14,000 per acre seem like a fair offer considering the rights are already leased, or is this still significantly undervalued?

2

full disclosure I am a mineral buyer, that being said It really depends on their situation, some people aren't able to wait the duration of a lease to start seeing income from it. You never know if the well will produce or not, more often than not the well does produce considering that advancements in technology allowing companies to more accurately reduce the risk of guessing where to drill. But again it really depends on the individual. I will say it sounds like their aunt made out pretty well, considering she got a signing bonus and then instantly sold it.

3

If you get wells comparable to the wells next door then $14,000 may be a little low. It all comes down to ones time horizon and risk tolerance. On average each of those Rosemary wells next door should return about $15,000 over 4 years based on $50 oil and $3 nat gas with a 3/16 royalty. So if you get 2 wells in your section that is $30,000... 4 wells - $60,000... 6 wells - $90,000... see where this is going. What is your time horizon and risk tolerance?

You should also speak with a tax accountant and see what the tax implications are. You lose the depletion allowance.

I know some mineral owners who have mortgaged their minerals to get investment capital for their cattle/farming operations. Lease/royalty revenues were used to help pay back the mortgage. Some have been doing it for years. Many of the mineral buyers are doing the mineral mortgage thing in order to finance/buy more minerals.

Good luck to your wife and her brother and you with the decision.

4

I should have said amounts based on one NMA (net mineral acre).

5

Don,

Great explanation.

Tom

6

Thanks for this feedback. My wife is 34, and we're in a strong enough financial position where we tend to look at the long term. If there is a strong chance of making out much better by waiting another 5-10 years, we'd be more inclined to do that. Her brother is in his 20s and is still sorting out his career path, so his short term goals may not necessarily align with ours.

7

I am not a mineral buyer, but if you want to give them away, my ear is on the rail.