Have received a landman offer to buy 5% royalty West Half of the Northwest Quarter (W2 NW4) of Section 11, Township 21 South, Range 28 East, in Eddy County, New Mexico. How do I determine fair value? Any way to tell what is being mined and if it is currently productive?
There is nothing productive there, currently. If it eventually gets developed, the wells would be drilling (i.e. mining in a way) for oil in the Bone Spring and Wolfcamp formations.
That tract is in a large Federal Unit, the Big Eddy Unit. Operated by Exxon. Which means the lease doesn’t expire, which is good for you as it sounds like you have an override. The downside of that is that Exxon has around 12,000 wells to drill in the Permian and this area is not a priority. They have drilled zero wells in the Western Big Eddy since taking over from Bopco in 2017.
So, while there are wells just north of you, it will likely take a long while until Exxon drills up the Western part of the Big Eddy. Thus, this tract is probably going to be worth less in value simply due to time value of money (and the chance that nobody drills any wells there).
I have an idea of what’s fair. It’s probably a lot of money, but that’s relative. It’s mostly a bird in hand vs bird in bush deal, and a lot of that is contingent on the owner’s perspective.
Thank you for all of the interesting backstory on the location. You write that you have an idea what is fair. What does fair look like in dollar terms? Would it be a function of net price per acre? (I believe that I have seen NPA figures for this area around $7K/acre) or would it be based on some other calculation? Maybe some number of years/months of projected revenues for the tract (assuming it were developed and producing)?
The long story on “fair” would be some projection of future production. Based on these X wells in these Y zones seem viable and here is when I think they might get drilled…here is their production rate over time, multiplied by a future oil price to get revenue…converted to a present value at some discount rate commensurate with their risk. Math, but subjective math. And the backstory goes into the timing expectation. Yeah, as you say, similar to some ratio of what it might make in future revenue. In the end, a price per net royalty acre.
Blah blah blah. Some people will tell you to never sell. Maybe they are right, maybe the aren’t right. Holding/selling minerals is a bet. The betting line is subjective, and not public, and there is probably only downside to me telling anyone where I think that line is. But what the heck, I would not sell for less than $10k/NRA today. If you have 5% ORRI in 80 acres, that’s 32nra so > $320K.