I have a 5 net acre interest on 1,278.56. Considering Royalty option, $4k upfront, 20% royalty vs. Participating interest, $42k cost upfront, .39% payout after 150%. Is this enough information for someone to offer advice on the participating interest? for someone wiling to take some risk, is the participating interest option considered a good route?
Cal,
Many variables to consider in a participating partnership in the well, you could be placing yourself in a position to lose more than the 42K PLUS shouldn't you be looking at 100% payout after the 150%??? non-participation non-consent, forced pooling has always sounded better because of the limited risk to you. There are others with more knowledge on this matter on this forum and I do hope they chime in before you commit........ just my 2 cents worth, which didn't cost me much ... Brian
go carried.
been there done that....my 2 cents.
Cal, if this is the same area you were talking about before T-157 R-101 3-10 I would consider it a very good offer. I looked at the area mentioned and the wells are good but not great. There is potential for greater gain but it will probably be far in the future when the well has declined considerably and while more money, not worth the trouble on 5 acres. There is work involved in owning a piece of a well, having a royalty interest is easier, the main work with a royalty interest is generally at the start of negotiations. Being non-consent there is little to do until you start receiving the 100% less expenses, you always have to watch your interest but from that point on you have keep constant eye on your interest, may have to audit the operator, set up an LLC, you have inherited a part time job and it's the same amount of work when your 5 acres production payment drops all the way to $50 a month. There are things you can do when it becomes no longer profitable, such as assign your portion of the well to the operator, they pay you for the salvage value and you are free and clear from that point on but you never get a check from that well again. You would need to learn a new skillset to know these things. If you are in the area above, I don't consider the wells in that area to be great prospects for going non-consent with an interest as small as yours, too long to payout and you would have to administer it/ them for a long time. You would work to earn every extra dollar. I would consult a good mineral manager and lawyer to make sure I got paid and append to or insert into the lease, clauses to make certain I did get paid, then I would lease. If the lessee would not agree with my clauses that insure I get paid, I would go non-consent, possibly sell my interest in the well if it didn't look worth my time. If your well is a high producer, if you had more acres, it could change my advice. With so little known it's a garbage in garbage out situation. So the answer is no, it's not enough information.
Cal,
You may want to consider the following externalities then apply them to the hard numbers before making a decision
Do you have a large amount of ordinary income this year?
Are you willing to take risk long term and save upside for later life or heirs?
Do you want to keep your options open to remake decisions over a 20-30 development life?
Do you have a liquid position of discretionary cash available?
Do you have a line of credit with lower interest than the 50% penalty would take?
Do you have confidence in the operator's track record and financial motives?
Would you like to walk away, do other things of interest and never look back?
Only you can measure those things. The other is just arithmetic.