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Permalink Reply by GoshDarn on July 7, 2009 at 19:06

Tough one. I wouldn't even try to guess at this because it's a fairly complex equation with numerous fluctuating variables (but others here have, in fact, generalized about similar values (at different points in time in this boom/bust cycle), so someone may offer an opinion when they have time).

Do you know how many acres he owns in that specific section with his .0005?

And can you verify what his royalty percentage was in his lease?

Permalink Reply by Dion Warr, CPL on July 8, 2009 at 17:24

P. Daddy:

This works out to a net gas price of about $2.38 per mcf if the figures you cite are correct. Is this accurate?

Producing properties are usually valued on multiples on existing royalty. The steep early decline of HA wells results in a lower multiple assigned to HA well payments early in their productive life of such wells, which will adjust back to a more conventional value as time goes on. Nearly all valuations on royalty purchases are calculated in this manner. On a strict basis at this time, I would believe that many l/o's would be disappointed with current valuations.

IMO, many l/o's would prefer that valuations be based upon the total EUR, discounted on a conservative basis over the expected productive life of the reserves; further, with the depressed price of ng, l/o would want that valuation further calculated and based upon a long-term projection of natural gas prices. Virtually no royalty buyer calculates in this manner. If this is what the l/o is expecting, they will generally be better off holding on to their royalty and keeping the mailbox money coming.

I know I didn't give you a number, and as such you may not find this post as much help. If you email me, I will be happy to give you a better handle on quantity. Also, you would probably find Skip a great resource as far as 'spot prices' for this type of thing.