Good Morning,
I currently own 25.7 mineral acres in Howard County that lies within the Wolfberry play. I have a lease that covers 5000 ft and below with a company that has just apparently started drilling (just prior to the expiration of my 3 year lease). I have been receiving offers to purchase these mineral rights from me, and I'm looking for a little guidance if possible. I have a 1/4 royalty contract in place at this time on the future production of this lease, and the initial offer of $3500/mineral acre seems low with all the activity and projections that I have been able to see/research out of this play. Since this well is currently non-producing I understand that it is more of a gamble for the company offering to purchase these rights if my logic is correct. I'm just looking to see if anyone has any insight as to what a ballpark, reasonable, and fair price per mineral acre that I should counter with would be? I was already told by the company making the offer that there is "room to negotiate" from the initial offer. Thanks for any advice that you can provide.
I'm not an expert, but I'd think some other questions would determine the value.
1. Do you own 100% of the interest in that 25.7 acres? If so, you could do the math on a vertical well with 40 acre spacing, at say, 30 barrels of oil/day, at say. $90/barrel, and then take 64.25% of that number (25.7/40), and take the 1/4 royalty. Using those numbers, the POTENTIAL royalty using 1/4 royalty could be as high as $158,000/year initially. It is a gamble for both you and the people offering to buy the rights. Unless you need the money now, I'd wait and see what the well produces. But if it doesn't produce much, they could shut it in and you don't have much of anything, at least not now. If it does produce, say, 30 barrels a day for a while, and then averages 15 or 20 for 7 or 8 years, the average annual payout could equal what they're offering you now for the rights, in other words, a home run.
2. Most of the wells I've seen go at least down 5,000sf so you should basically have all of the production.
3. Is it in an area where there's already a lot of producing wells in the immediate vicinity? You could reasonably extrapolate the potential production from the production on nearby wells, or at least get a start on it.
As I said, I'm not an expert, but I can do math. I'd keep it.
Glenn-
Thank you for the reply. It's actually a 160 acre tract, and I own 25.7 acres of this tract (the other owners being family), so 16% of the total acerage.
At 40 acre spacing, there may be room for the equivalent of 4 wells on that piece. I'd get on the RRC website and go to the GIS viewer and find the API numbers of the closest producing wells, then go to the completion logs and see if they were drilled within the last year or two and see what the initial production was. If you're in an area with heavy recent activity, versus an outlying location that some driller just happens to be experimenting with, that could tell you something about it. But just doing basic math, IF they were to eventually drill 4 wells at the same time there, and they all averaged 30 barrels/day and sold at a price of $90/barrel, that's $10,800 in total revenue per day initially (4x30x90), or $3.9 million annually. If you have a 25% royalty, that's almost $1 million per year initially for the entire tract, or about $160k to you. That production would deplete fairly rapidly, and then level off, but you still might be making $30-$40k/year for a long time. From the buyer's perspective, looks like they're risking over a half million dollars to buy the rights. If a single well is drilled on the whole site and hits 30 barrels/day, they make their money back in two years and then start making a profit. The other 3 well potential would be gravy. Their risk is it doesn't produce much and maybe the driller shuts it in and they lose out. The fact is it would be worth enormously more money if you knew definitively what was there, or if it had already produced. The question is, do they know something you don't know?
Glenn: are you sure on 40 acre spacing???
Glenn Watson said:
I'm not an expert, but I'd think some other questions would determine the value.
1. Do you own 100% of the interest in that 25.7 acres? If so, you could do the math on a vertical well with 40 acre spacing, at say, 30 barrels of oil/day, at say. $90/barrel, and then take 64.25% of that number (25.7/40), and take the 1/4 royalty. Using those numbers, the POTENTIAL royalty using 1/4 royalty could be as high as $158,000/year initially. It is a gamble for both you and the people offering to buy the rights. Unless you need the money now, I'd wait and see what the well produces. But if it doesn't produce much, they could shut it in and you don't have much of anything, at least not now. If it does produce, say, 30 barrels a day for a while, and then averages 15 or 20 for 7 or 8 years, the average annual payout could equal what they're offering you now for the rights, in other words, a home run.
2. Most of the wells I've seen go at least down 5,000sf so you should basically have all of the production.
3. Is it in an area where there's already a lot of producing wells in the immediate vicinity? You could reasonably extrapolate the potential production from the production on nearby wells, or at least get a start on it.
As I said, I'm not an expert, but I can do math. I'd keep it.
If this is 40 acre spacing, that's too little $$$. This you already knew by them saying there is "room to negotiate." If all that I have read here is correct I would pay considerably more. I will not bug you, let me know if you want to talk. John