Currently, my mineral interest is being leased by Marathon and they extended for 2 years. Section 28, T22S-R27E, Eddy County, NM Their lease will be up in March of 2025. I was approached by another company to sell my mineral rights. I own 8.44 net mineral acres. I am wondering if you think my land could be drilled on soon? Also, how would you calculate the sale price of this land? I think it would benefit me more to keep my land and lease out the mineral rights hoping for some drilling to take place. I would get more income in the long run. Thoughts?
V/r,
1 Like
Yes, you will get more money in the long run if you lease and get royalty income when/if they drill wells. The viability/productivity of wells here is not much of a reach, there are wells all around you as examples and confirmation. The flipside of that is that you will get a big lump sum of money today if you sell your minerals. That’s really the rub as I’m sure you know, future hypothetical cash flows discounted back at some rate to a present value lump sum. And because they are hypothetical (i.e. you have no wells right now), the discount rate applied by the market (the offerer) is likely fairly high (15-20%+). So, you either get 3-4x over 20 years if things get drilled or you get x today guaranteed. That’s the prop.
I’m assuming you are somewhere in the S/2 of Sec 28. Will wells get drilled soon? Don’t know. There are no permits. Its not Federal so permits can appear pretty quickly though. There have been 23 wells a year drilled in 22s27e over the past 2 years. Wells are two miles long. If we divide 22s27e into 1/2 mile x 2 mile wide units (640 acres), there are 36 units. So each unit on average gets 2/3 of a well per year. IF there are 6 wells to be drilled here in S2 of 28/29, and development continues at this average pace, that should happen in 9 years or so on average. (that’s not how things WILL happen, that’s just average math that says that 22s27e is getting drilled up at a moderate pace).
If we assume your royalty rate is 25%, if you got exposed to enough somebodies then somebody should be paying you around…I’d say $300k for that.
Thats based on 6ish wells getting drilled in the S/2 of Sec 28/29 over the next 2-8 years in the upper and lower Wolfcamp that produce similarly to the Papa Grande, Sundown, Sunrise, etc offsets. That’s how I would calculate the sale price of the land. If perhaps that was something I was equipped to do.
Long post, maybe too much info. These are my universal truths here:
- The straight hard math answer is don’t sell. This is why someone is trying to buy it, the math says on average its the smart move.
- But it’s like Deal or No Deal, sometimes you just have one chance and you open up the box with $50 in it after foregoing the offer of $200k. Risk tolerance. Need. Eggs in one basket. Sentimental. Etc.
- If you sell, don’t sell for too little.
Cheers
5 Likes
Thank you very much for your response. I really appreciate your insight.
One consideration people don’t always factor in is taxes. It is often the case that an individual inherited or acquired mineral rights decades ago, which usually results in the mineral rights having a very low cost basis. If so, the individual may want to consider the difference in tax rates of selling the mineral rights and being subject to long-term capital gains compared to leasing the mineral rights and collecting royalties at ordinary income tax rates.
It is also possible to do a 1031 tax-deferred exchange with mineral interests, but you should contact your tax advisor for confirmation and clarification.
In sum, there is no right answer - the tax difference is more impactful on some than others depending on the cost basis and the individual’s situation.