Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on October 8, 2020 at 0:17

Insufficient information, please provide the section-township-range.  There is always something going on in DeSoto Parish.  Without a little detail, it's impossible to provide an informed response or opinion.

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Permalink Reply by GEORGE D BROCKNER on October 8, 2020 at 2:28

Well, it ain't because they love ya'. I have also been made (IMO) obscene offers from Indigo to purchase mineral rights. We have to assume they know a lot more about future gas prices and current affairs than we do. (Or they think they do). I feel a little like I'm in a high stakes poker game every time I turn them down.

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Permalink Reply by Skip Peel - Mineral Consultant on October 8, 2020 at 2:48

Indigo can only guess at the future price of natural gas.  They don't have to guess about the rock quality and the timing of their plans to develop the units/sections in question.  How high must their offer be to be classified as "obscene"?  Curious mineral owners would like to know.  :-) 

No need to sell a full ownership interest.  Those interested could sell a portion and lock in some guaranteed income with tax advantages if there was a good use for the funds.  The best time to sell or make a counter offer is while the wells are drilling or in completion operations.  Lots of options.  If there is no need or opportunity that sale proceeds would go to, sit tight.

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Permalink Reply by Renee Brown on October 8, 2020 at 4:02

Thanks for your input, gentlemen. I do realize that it’s always a good idea to hold on unless you really need the money but our family has never seen offers like these presented in more than 100 years ownership of this land. Last year I negotiated a right of  passage deal for 50% of what was initially offered. Part of me thinks these opportunities could be fleeting. I’m not a land expert by any means but I do use a great O&G attorney that Skip referred me to almost 3 years ago. Mostly to make sure those contracts are worded properly. I have attached the land specifications. 

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Permalink Reply by Skip Peel - Mineral Consultant on October 8, 2020 at 4:42

Thanks, Renee.  Every mineral interest is unique.  I often attempt to lay out some of the more critical value issues and won't repeat them here and now.

The best offer that I have direct knowledge of was a ~100 acre tract in a section with proven Haynesville and Bossier reserves and five new wells approved, permitted and the rig onsite.  The lease was a quarter royalty with all the basic protective and beneficial lessor clauses but nothing really out of the ordinary.  The bulk of both reserves were intact, so another five or six potential wells other than the five being drilled. The offer, that was not accepted, was $11,000 per net mineral acre/ $5,000 per royalty acre.  I consider that to be in the ballpark as far as best buyer situations from location to early return of investment to future revenue from additional development.  If that tract had been offered to the right buyer at a somewhat higher price, I suspect it likely would have been accepted.  The current price of an mcf rarely, if ever, figures into the value equation.

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Permalink Reply by Renee Brown on October 8, 2020 at 5:00

I have undivided interest over several sections so it’s always really complicated for me to figure out what’s reasonable or not. Given their offer and my understanding of  me owning roughly 40% interest within those undivided sections, their offer is about 10k per royalty acre. The guy texted back last night and offered to buy part of my interest if I wanted to hold on to some. I just don’t really understand why Indigo would want to purchase my mineral interest when they were already making money off of several wells. If I recall, I negotiated only 22% for myself off of those wells. Are there any paid consultants in that area that help land owners navigate these situations? 

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Permalink Reply by Skip Peel - Mineral Consultant on October 8, 2020 at 5:13

Renee, are you sure?  $10,000 per royalty acre for a nine fortieth (22.5%) royalty would be $18,000 per net mineral acre and that would be far beyond any offer I have ever seen.  I think you need to double check that. 

You can contact me on my personal page if you need help.  If you are not already a GHS "friend", you will need to send me a friend invitation as I keep all the information and discussion on my page confidential.

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Permalink Reply by Renee Brown on October 8, 2020 at 6:01

I’m probably wording it wrong. O&G terminology is definitely not my strong suit. I’ll direct message you. 

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Permalink Reply by Dion Warr, CPL on October 12, 2020 at 10:43

Renee:

Given that it is known that Indigo is your suitor, I would say that one reason that WI owners / operators seeking to acquire mineral and/or royalty interests is to "improve their lie" in order to make economics more attractive for drilling.  Let's say in the given area of interest that Indigo owns 80% of the interest in leasehold at an average royalty rate of 20.5% (mix of 1/4 RI leases, 22.5%, 1/5, 3/16, etc.) and assume no ORIs.  Their NRI would be 79.5% (100% - 20.5%) times 80% of the unit = 0.636 NRI (net revenue interest).

Let's then assume for this example that Indigo would ordinarily not drill a well in this area (unless obligated to contractually, or in order not to lose leases) unless their NRI is at least 65% of the net revenue.  Assume 640 acre unit size - the deficit would be 1.4% of the net revenue interest in the unit.  At 22% RI (78% NRI for indigo in your lease), you would only have to sell them about 6.4% of your RI across the entire unit (41 net mineral acres under lease) for Indigo to hit their target number.

This could be a "win-win" in the short term given that selling a portion of your interest gives your operator incentive to drill a well sooner rather than later (assume that would want to drill it eventually for this hypothetical).  If it's not all that critical to you - you can pass.  Again, this is a scenario which only works given the facts - no other purchaser can create a similar scenario.

Good luck to you.

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Permalink Reply by Renee Brown on October 12, 2020 at 10:50

Very useful information, Dion! My ultimate goal is to maximize the earning potential of my land. If you were in a similar situation, what kind of partial interest would you potentially sell to Indigo? 

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Permalink Reply by Dion Warr, CPL on October 12, 2020 at 11:34

Renee:

It is difficult to assess without understanding more about your specific situation (and theirs, if they are willing to share any details other than "we want to buy your royalties").  One would have to weigh the entire picture.

As Skip states above (and you've acknowledged some willingness on Indigo's part), it would seem you have the ability to sell all or part of your interest.  And, as Skip would also agree, you generally have your ability to sell portions of royalty rights for a shorter term, or for as current production continues - also, in LA, royalty deeds are not perpetual (they are subject to prescription due to non-use).

Unfortunately, all of these variables probably create terms of a discussion outside of the existing forum.  Did I mention that I am also a landman?!  (So not just speaking idly - lol)

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Permalink Reply by Renee Brown on October 12, 2020 at 11:42

No, you didn’t but I can tell you are knowledgeable about how the O&G business works. I’m learning as I go along. Thank goodness for my O&G attorney. I witnessed some less than favorable deals made when this land was in my mom’s name. It’s easy for these big companies to take advantage of people. I’d love to hear your insight beyond this public forum. 

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