Mineral Acres vs Royalty Acres
I have been getting a number of requests to provide my opinion on offers to purchase mineral rights based on mineral acres. Those who deal in the purchase and sale of minerals most often talk in mineral acres to mineral owners. Maybe they don't wish to confuse them or maybe it keeps them from having to admit that a mineral acre does not describe the true value of the minerals they seek to acquire. In the minerals market place, mineral companies talk to each other in royalty acres.
One mineral acre at a one eighth royalty equals one royalty acre. A one sixth royalty would yield 1.333 royalty acres. A three sixteenth royalty would yield 1.5 royalty acres. A one fifth royalty would be 1.6 royalty acres. A 22.5% royalty (nine fourtieths) would equal 1.8 royalty acres.
Mineral acres without the accompanying royalty fraction is worthless in determining fair market value.
I'm always happy to provide a value opinion with sufficient detail as to the mineral interest but the royalty fraction is an important factor as is the specific location which reveals additional value variables.
Think about it. Would you prefer to buy 10 acres in the same drilling unit with a quarter royalty or a one fifth royalty? The quarter royalty on 10 acres is obviously worth more.
Views: 746
Replies to This Discussion
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Permalink Reply by Mister Sunday on -
Let's not forget that seldom does an owner have 100% interest in those royalties! I only have/ had ≈11.5 surface acres. In that, I have half interest in the minerals. Then with the 22.5% royalty it divides it down once again. I'm stating this because, from what I understand, more often than not, people have a sixteenth or less interest in their minerals.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Many mineral rights are "co-owned". If you don't know what portion of the whole you own, and don't care to research it, the operator of a well or unit will determine your acreage and percentage interest in the course of a Division Order Title Review. The other ownership element to keep in mind is the quite common difference in acreage between what a conveyance deed states as the legal property description and what a modern ground survey measures. Operators, as part of their title review process, will have a survey done which informs their royalty calculations. It is common for a deed to state 40 acres, for example, but a modern ground survey to reveal a tract as 38.7 acres, or 40.9 acres. The operator's survey is used, not the acreage on a deed.
The most basic and important royalty element is the eight place decimal fraction that appears on all royalty statements. If you know all the variables, it is simple math to calculate. The number of acres owned by the royalty recipient divided by the total number of acres in the unit multiplied by the royalty fraction of an O&G lease. So, 10 acres divided by 700 acres would equal 0.01428571. Multiply that by 0.225, if you have a nine fortieths royalty fraction, and you get 0.00321428. Keep in mind that the three in this decimal fraction is in thousandths place. Therefore any discrepancies thereafter are extremely small. I find that few royalty recipients understand their decimal interest and just accept it as is. Every royalty owner deserves to know the surveyed size of their mineral tract and the number of acres in their unit. That's a battle that I have fought, and largely won, for royalty owners in Louisiana.
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Permalink Reply by Mister Sunday on
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So you are saying if I have frontage along a county road or a right-of-way that allows for access, those acreage numbers will be different than the number used in the acreage for mineral rights?
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Permalink Reply by Skip Peel - Mineral Consultant on
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No. Mineral rights are not affective by either a surface right-of-way or frontage on a public road. For those mineral owners who own rights through donation for a public road, it is always a good idea to provide a copy of that deed to ensure that those acres are included in their mineral interests. This is for minerals reserved under a surface donation for a non-private road.
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Permalink Reply by Iris on
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Wow, the more I read the less I know. So, how to find out what my royalty acres and potential royalty acres vs. my surface acres. And how long should I expect before attorney returns my call? I know it has been a long weekend. When would they measure a royalty acre?
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Permalink Reply by Skip Peel - Mineral Consultant on
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Iris, you are not leased therefore you have no royalty acres.....yet. Once you have executed a lease and have a royalty fraction, then you can calculate your royalty acres. The concept of royalty acres is not relevant for those not contemplating a sale of their mineral rights. All of my attorneys are swamped at the moment as they usually are with the end of year commitments and holidays complicating things..
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