Sale of royalties
a family member just got an offer to sell they O&G royalties. They own about 25 acres under a 1/4th royalty lease and the land is located just SE of Mansfield. There is currently one ten year old HA well that is still plugging along. CHK is the operator, and CHK just filed to create 4 CULs that include all of their section and another full section.
The offer is about $6,000 per acre, or $150.000.
For discussion purposes, let's assume that the owner is retired, has children that would inherit the land, doesn't badly need the money, but the money wouldn't hurt.
My suggestion to the family member is that if they don't need the money, then don't sell unless they are getting a huge permium.. Just the income tax hit on the $150K would diminish the value received. If they need money, consider selling 1/2 of their royalties. but shop them around.
If CHK drills all 4 wells, they may get close to $150K in the first 18 months, and can continue to collect for the next 10 - 20 years.
Thoughts by any of the knowledgable ones on here?
Views: 1386
Replies to This Discussion
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Permalink Reply by John Denison on
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Four HA CULs? I am in a similar situation in a different part of DeSoto and once an operator filed for unit well spacing, the calls started coming in. First $3,000 per acre, then $6,000. Last offer was well north of $!0,000. No sale for me, but your family member may negotiate for more than the initial offer.
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Permalink Reply by OLDDOG2020 on
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I wouldn't sell, based off MY FIRST YEAR with 4 CULs drilled at the same time I expect your family friend to receive WAY OVER the $150,000 followed by half that the following year. I made right at 15,000/acre the first year of my 4 CUL's
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Permalink Reply by Bobi Carr ("parker") on
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OLDDOG2020, I'm curious, when were your 4 CUL''s produced? Were gas prices in the range that they are presently at?
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Permalink Reply by OLDDOG2020 on
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Came online January 2019 so I saw some good prices or at least better than 2020.
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Permalink Reply by Bobi Carr ("parker") on
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OLDDOG2020, Thanks for the reply. It is always good to have a complete picture. Especially since Steve P's family are contemplating the ins and outs of a Mineral Sale.
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Permalink Reply by Skip Peel - Mineral Consultant on -
Louisiana law recognizes two types of royalty conveyed in a sale. One has the same tax advantages as the sale of a mineral right; long term capital gains for any qualifying asset owned for 365 days or longer. For $150,000 that would be 15% federal tax plus the applicable state tax with the maximum being 6%. So 79% net to seller or a little more.
The specific language in a royalty deed determines which type of sale it is considered and how it is governed in LA law. The language in the deed may also set a period of time for which the royalty sale is effective. One way limits the conveyance to that specific period of time but the other is effective as long as production continues uninterrupted and the lease is in force regardless of the number of years or months included in the deed.
Anyone who wishes to consider a sale of all or a portion of their royalty should seek the counsel of an experienced O&G attorney. This isn't as straightforward a transaction as it may seem. A lot of mineral owners in the Ruston area sold royalty several years back with a deed that called for a period of five years. Because they did not seek experienced counsel, the wording of those deeds made them effective as long as there was no cessation of production. Seller beware.
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Permalink Reply by Steve P on
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Skip: thanks. Not having much tax knowledge, I hadn't thought about it being a capital gain, so, if properly structured, that could make the tax impact more neutral since the earned royalties would be taxed primarily as regular income. I didn't look at the proposed sales document, but was told that the sale was for long as the lease continues to produce, Plus 5 years thereafter.
Relevant family members seem to disinclined to sale any of the royalties until such time as there is a need for cash.
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Permalink Reply by Skip Peel - Mineral Consultant on
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You're welcome, Steve. If a mineral owner is without any pressing need for cash, there is little reason is consider a sale. At this point a sale of royalty that is for the life of the lease isn't much different than selling the mineral right. The chance that there is any additional economic unconventional formations or intervals underlying the Haynesville in NW LA and E TX is slim and none. By the time the Haynesville is fully developed and nearing depletion, it is highly likely that we will be at the end of onshore and shallow water oil and gas production in Louisiana. Louisiana however will continue to see production in federal GOM waters for another decade or so after that. Trying to get a greater share of that federal royalty revenue will be a tough sell in Congress.
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Permalink Reply by Bill R on
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Yup... seems the the 'Dogs are baying at the Moon' right now with request to purchase some or all of our Mineral acreage out there... I received four proposals this last week for our existing producing Wells, but the hidden sector of their bid is that they also get any additional Wells that might be drilled on that acreage.... Seems to me that if they're that willing to hand out cash right now, they most likely know that something big is out there in the wind and they are just looking for suckers to panic and sell right now for quick cash!
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Permalink Reply by Skip Peel - Mineral Consultant on
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Buyers aren't attempting to calculate the potential/probable life time production volume/gross price for a mineral tract. State regulations will set the limit on the maximum number of wells a unit may contain but right now operators are choosing to driller a number less than the maximum (high intensity fracks). Buyers are only looking at a return on investment model for the wells that they can determine as highly likely to be drilled in the near future. The greater the number of wells, the quicker the return of the original investment, the better the offer given a seller that wishes to negotiate as opposed to accepting an "opening offer". Of course if the wells deemed likely to be drilled in the near future will complete all the unit acreage development, there is no upside for additional wells. Lots of moving parts but no offer is based on attempting to calculate the full life reservoir development and then offer say 50%. The risk of doing so would be high. The caveat is a risk factor based on the potential that some percentage of the recoverable reserves may be "stranded". There is risk involved on both sides of the equation.
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