Jared, since you are starting from scratch, I'll post a link to a blog I wrote years ago that explains how to go about thinking of fair market value and negotiating leases and sales. Some things have changed since then and each mineral asset is a unique case so ask some questions or provide some detail for context. Be careful when reading offer letters as sometime the wording is designed to give an impression that may be false. A good example of that is a statement that your minerals "may be worth up to x". Unless your minerals check all the value boxes, which is rare, it's unlikely that a buyer would pay that "maximum" price. Other than scrutinizing an offer to determine fair market value, there should be no stigma in a decision to sell mineral rights when there is a worthy use for the proceeds. Retiring to the mountains sounds like a good one.
Skip thank you for the link. It was very informative. I'll narrow this down to two of the three offer i have for reference.
Offer "A" is for we will use $100. The basic terms are to purchase 100% of my royalty interest for 5 years on my leased minerals.
Offer "B" is for $200, when compared to offer "A", to purchase 100% of my mineral rights.
The way i understand it, correct me if I am wrong, but under offer "A" I would still be entitled to any bonus payments from the extension of my existing lease, and also still be free to negociate a new lease when/if the current one expires. The company who purchased my royalties would recieve royalty payments only should a producing well be drilled.
Under offer "B" I would recieve the payment for the purchase of my mineral rights and thats it for the next 10 years or longer if a producing well is drilled.
I know I read something in your blog about tax implications in these situations but it was alot of information to take in so I will have to reread it. I realize there is no way to determine if a well in my section would be a producing well or not but is looking at wells in the adjacent sections an acceptable way to determine some sort of production value?
There are two types of royalty deeds. One is created from a lease and one is created from a mineral right. The wording can be confusing. A number of mineral owners in an older LCV play further east from the Haynesville Shale sold royalty that appeared to be limited to a five year period when in fact it was a sale for as long as there was production. I'm not an O&G attorney so I won't try to go into any detail. Suffice it to say, get the help of an experienced O&G attorney that works for mineral owners and has no conflicts with O&G clients to review and advise.
The $100 or $200 sounds like a lease bonus, not a sale of royalty or mineral rights. It is way too low. As I mentioned, the details of your mineral asset are important to determining value. Don't let anyone rush you. Ask questions, get explanations. The permitted well is the reason that you are getting this offer but the value of your minerals go far beyond one well. It's a question of "remaining reserves" and the number of future wells that could be drilled that would include your mineral rights.
If you want to provide the section-township-range of your minerals, I can be a little more specific but your offers sound like fishing expeditions hoping that you have no idea what your minerals are really worth.
The $100 and $200 amounts are just arbitrary numbers I used for the example. The actual offer is many many times that. The royalty offer was for 5 years but it was made clear that it did not expire if there was production from a well. The property in quest is in Sabine parish T9NR11W section 35.
There is no well permit for Section 35 - 9N-11W in the state O&G database. Are you referring to a notice letter you received to form a drilling unit and apply for well spacing? If the offer is for a lot of money then tax implications may apply. Selling your mineral rights, if owned for 366 days or longer, the proceeds would qualify for federal long term capital gains. Either 15 or 20%. You can look up the dollar amounts where the percentages change online. You Louisiana tax would likely be 4%.
What you are referring to as well permits is actually a Hearing Application Notice dated Nov. 22 and sent to you by the Patton Law Firm. This confuses many mineral owners/Interested Parties. Because the state requires that horizontal wells have a 330' set back from east and west unit boundaries and a spacing distance between wells, this is what we refer to as a "spacing order". Yes, I know the language used makes it appear to be a well permit but it is not. Before an operator can get a well permit approved, the state must approve the "horizontal well slots" by issuing a Field Order. Once the operator has that approval for the slot spacing, they can proceed to apply for a well permit to drill. The hearing application requires notice to all Interested Parties including you in this case. The state does not require that the operator send you notice when they grant an actual well permit to drill. You only know that one or more permits are approved by checking SONRIS, the state O&G database. The field order for your well slots, and the other well slots approved in the application, are effective indefinitely until such time as they are drilled or a subsequent application and field order dissolves them. Therefore there is no time deadline for SWN to drill these wells. It is more convenient and less expensive for SWN to get approval for all these well slots in one application regardless of their actual drilling schedule. In other words, the permits for all those wells will likely come in groups over time. Since the hearing application is of public record, you can expect more unsolicited offers for your minerals in the near future but the offers and the amounts offered will go up when there are permits to drill issued for the wells in your Section 35. And the value of your minerals will reach their peak when a drilling rig shows up to drill your wells. I would expect that the chances are good that SWN will drill all three of the wells approved for your section. Sit tight.
That is good information. I remember getting that letter and understood about half of it. I never researched the permit personally, just heard rumors through the grapevine. I don’t usually listen to them but when I started getting phone calls I figured something was in motion. I appreciate all of your insight Skip. This site has always been a great source for these issues. I am in no hurry to cut a deal so waiting for better offers to come is not an issue.
So far the offers to purchase just my royalty interest instead of my mineral right have been the lower offers. It feels like just selling the royalties might be better should something happen and no well is ever drilled. It will definitely take more research on my part before I make a decision.
I think the chances that you won't get a well are slim and none. It's merely a question of when. You're in a good location.
I agree. Thanks for your input Skip. Merry Christmas.
Merry Christmas, Jared.
Just jumping in ... My father said "never sell your mineral rights" - but he said that 50 years ago! He was right, but times and family needs change. I sold my rights, and I did what you say you want to do - retire to the mountains.
I'm not quite in the mountains, but there is 6 inches of snow in my yard, and I am still happy with my decision - and I still enjoy reading GHS. Skip Peel and other GHS members It helped me so much! There is nothing like this site for minerals owners.
HANG (still Hopeful About Natural Gas)