Like many, I am contemplating whether to sell my mineral rights in Block 35 T2N in Martin County, where my Net Royalty Interest is .000375537 of XTO’s new Cassidy Unit 2 which is currently being drilled. I have an interest in 15 wells which are all coming on line at the same time, March/April 2020. I recently received a $69,000 offer which is very tempting UNLESS my math isn’t correct:
15 wells X 5,000-10,000 barrels a month X .000375537 X $50/barrel = $1,408 - $2,816/month
I sure would love to hear from someone with more experience as to whether the math above is correct? It seems that I’d be better off taking the $69K and investing NOW vs waiting 3-4 years for the same money.
Cindy, the first thing I noticed is the value you chose for production at 5-10 thousand bbls/month. Assuming those are horizontal wells, each one should produce about a thousand bbls/DAY when production begins, then decrease to a fairly stable value that should last 20 years or so. For the first year, you should figure on about 20,000 barrels a month as an average, in my opinion.
So based on my calculations you should be a monthly check of $5633 or $2816.00. I agree the offer is low someone is trying to get something for very little. If you invested yor 60k and it was invested wisely your return would be between 3% and 10% so I would hold out for a few years. If they came to the table with 2million maybe. That’s is IMO
Am just random guy on internet but I’ve looked at a lot of XTO econs in Martin county in semi professional capacity.
Martin Cty 2-mi long wells should have average peak rates around 23,000 bo. So, yes 5-10k barrels is low for the first month. But 5-10k average over 4 years is too high (on the 10k end).
Your first monthly check should be about $5k but it’s going to fall off rapidly. So getting $69k of revenue in 3-4 years is about right. The revenue is front loaded so it’s a better ROR investment than something that pays out in 3-4 years at constant cash flow.
Let’s have some perspective, it’s just under 2NRA. We are talking $35k per NRA. It may be worth $80k, might not. Depends on how wells perform when you drill 15 in a 1/2 mile wide strip. It’s not a unicorn or a robbery attempt.
Would I try to get more than $69? Sure. I think you could get a bit more. But like maybe $75k not zillions.
In the end IMO it depends what kind of person you are. Some people like the thrill/disappointment of a monthly check some would rather just lump sum it and be done.
so how might one structure a sale like this? would one just sell the minerals in the zone of the wells and keep the minerals above and below?? for instance, if this is in an area of potentially stacked reservoir formations then selling all one’s minerals based only on the bbl production of the wells in one zone is giving away all future rights on minerals not drilled for the value of production on what is being drilled so that could potentially make this offer quite low if it was for all minerals all depths . . . correct?
Pardon my ignorance, but how many NMA is your calculation made from? 15 wells would need quite a bit of surface land to drill. Last I read the RR Com is permiting 1 well per 20-25acres; that’s like 375 acres of land. I have interest in Blk 35 Sect 12 T3N too and we are about to bring in a petroleum engineer to asses the value of our mineral acres; our mineral offers have been all over the map this summer.
The Cassidy 2 unit is around 640 gross acres. I assume the surface acreage used for pads is about 15 acres of that. (I didn’t look I’m assuming three 500 x 500 pads with 5 wells each).
The original poster has around 1nma in this 640 acres (based on the decimal that was listed) and was offered $69k. If that is the calculation you are referring to.
This is a VERY extreme example. A whole ton of wells all getting drilled at once in a place where wells are pretty decent.
“we are about to bring in a petroleum engineer to asses the value of our mineral acres”
If you are looking for asses, a petroleum engineer is a good place to start
It’s nice to see someone doing some hard thinking about selling production.
You left a couple of things out of your assessment.
First is the depletion allowance. That is the mother of all tax breaks. As it stands today, the depletion allowance is 15% OF GROSS PRODUCTION of that produced. That means that the first 15% of GROSS production goes into your pocket, with no income tax of any type owed. You would be hard-pressed to find an asset to invest in that gives you that type of return after tax.
Second, any purchaser will want to buy all the minerals on the property owned. Do you know how many wells will be drilled and when and if they are in different producing horizons? Likely you do not. There certainly could be likely upside potential that you have not considered.
