Non-participating royalty interest is not the same as mineral rights. Most of the advice I see on here is to not sell you mineral rights. Does that advice apply to NPRI?
I own a very small royalty interest in 7 sections of land in Midland and Martin counties in Texas (4815 acres).
I have just received my fourth offer to purchase a portion of my royalty interest.
My thinking is that if I were to consider a sale, I should insist on selling the entire entitlement that stems from a royalty deed that I inherited from because of concerns about the paperwork involved in splitting off part. Is this a valid perspective?
Which leads me to my main question. I know how much money (at today’s interest rates) I would have to have in the bank to generate my current monthly royalty income. The latest offer is for about 10 times the current monthly income. I would have to have about 333 times the monthly income in the bank to generate that monthly income. I have messed with net present value calculations years ago, but am not clear how I would apply that to this situation. So is there a general guideline on how many times your monthly income an offer should be to start considering as a valid offer? There are currently about 116 wells on my holding with about 65 paying parcels (some including multiple wells) and continued drilling of horizontal wells seems likely.
NPRI advice and NRI advice should be basically the same. IMO there is always a reasonable reason and a time to sell anything and anyone who tells you otherwise has no cost basis and has a full fridge. I’d say grain of salt on ANY advice you get from randoms (hi!) on message boards.
The whole money in bank vs current income does not seem like a path I would take. What would anyone rather have, a stream of income OR a giant principal in addition to that stream of income? I think most folks would choose the latter.
You probably shouldn’t sell anything for 10x the current monthly income as generalized advice. But we don’t know if your currently monthly income is 4 months worth of back pay stacked up into a giant check, or if its been steady for 3 years, or if its on a screaming decline. Or anything.
I’d guess any offer you have is a valid offer.
If it has a lot of undeveloped tracts you probably don’t want to use any multiple of current cash flow. How much its worth is a combination of the the future value of what is currently producing (discounted back at some rate, say 10-12%) and then the future value of what might produce (discounted back at some higher %, since its FAR riskier). In reality, Fed rates being 5% makes all those discount rates higher and means your NPV is lower. But this all takes math. And some guesses that are beyond most folks. So…
Take your 4815 acres times your NPRI decimal times 8. Multiply that by 20k. That’s a reasonable guideline of what its worth.
You make some good points. I am hoping others will weigh in as well, as I am trying to figure out a viable way of valuing my holdings.
If one has money n the bank, they have an ongoing revenue stream based on current interest rates. If one has NPRI in producing acreage, their acreage is the bank and their ongoing revenue stream is based on their percentage of the revenue. With traditional vertical wells, eventually the revenue goes away. With horizontal wells, the revenue being generated is so much higher that holdings that were once considered almost worthless are now generating reasonable monthly incomes. Is there a limit on the number of horizontal wells that can be drilled at different depths in the Permian Basin?
My current monthly income is based on 2 months of current month only revenue after the most recent batch of horizontal wells was added along with catch-up revenue. I have only been collecting revenue for about 6 months after finding out I was a rightful heir of royalty interest that passed on the death of a relative almost 20 years ago. Thus, I have not yet developed any sort of feel for how stable and long lasting the income will be.
I agree that all 4 offers I have received are valid with respect to good intentions. However, I believe they are below what a reasonable person would sell for.
Would you shed some additional light on the formula you present in your last sentence? Why do you factor in the acreage? What is the basis for the $20k figure?
Would you shed some additional light on the formula you present in your last sentence? Why do you factor in the acreage? What is the basis for the $20k figure?
I converted your NPRI into NRA and multiplied by $20k/NRA. That is an attempt to capture an approximate # for developed/undeveloped value per acre. It’s a guess. I don’t know how developed your acreage is. Just a SWAG.
Is there a limit on the number of horizontal wells that can be drilled at different depths in the Permian Basin?
Yes. There is no legal limit, but in general there are X zone/depths you can drill, and each zone can handle Y wells per mile of width. I would guess for something on the MIdland/Martin border a reasonable rule of thumb would be about 20 hz wells per 1280 acres.
Again, grain of salt from anybody on message board etc.