How Does A Landowner Evaluate An Offer To Sell All Or A Portion Of Royalty Interest ?

What information is available to a royalty interest buying company evaluating a  tract of land to arrive at an offer price for royalty interest for a potential customer before drilling has begun in a section?  Are they looking at production rates from current nearby wells?  Is there some math formula a landowner might use in hopes of determing if a current offer is fair or not ?   How do royalty buying companies arrive at an "educated" dollar offer amount  that landowner  gets in the mail and  does not know about while no wells are being drilled in the section but are being drilled in nearby sections?   How can a landowner insure that an offering royalty interest company has made a current fair price for future, unknown production revenue (s) before a drilling operator drills in a section and just accept a  price offer blindly, which may winding up being foolish in the future???   This is not a question if one or one does not need the immediate cash.  Thanks in advance for your information.

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landownerPermalink Reply by David Smith on October 21, 2010 at 9:03
If you sell your minerals and reinvest the money in commercial real estate, you can defer capital gains taxes, which is another good reason to sell.

I'm preparing to auction my minerals with a law firm preparing a bid package.
Permalink Reply by Chris Campisi on October 21, 2010 at 9:13
Sorry for that, I had forgot you cant do that.

Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant on October 21, 2010 at 9:20
Chris, it is a violation of site rules to make or solicit offers.

2) Solicitation and Commercial Posts: There is zero tolerance for unauthorized solicitations or commercial posts that promote either a company, business, mineral interest or website unless authorized by site admin. We reserve the right to ban you from participation should you violate this tenet. We do have advertising available if you desire to promote your biz. Spam, flooding, advertisements, chain letters, pyramid schemes, and solicitations are also forbidden.
Permalink Reply by Parkdota on October 21, 2010 at 10:27
David, that's a good idea also. I think you can do the same with residential but I've never done it as I'd rather pay the piper and get it over with. An auction is a good idea also. I'd like to know how that goes.

Right now one can gets steals on both residential and commercial. If I were to sell, which I'm not, I could pick up 20-50% just in equity alone.

Oil & Gas ProPermalink Reply by John Brewster on October 21, 2010 at 12:24
I find the comments on this to be confusing. People seem to be addressing two distinct situations: (1) where a speculator attempts to buy minerals or royalty before a well is drilled; and (2) where an individual or company seeks to buy producing minerals or royalty after production has begun.

When there is no production, but drilling is permitted or anticipated, the market price is whatever a willing buyer will pay a willing seller. Certainly if there is nearby production, one can use that to caculate what he or she hopes to realize from your interest if the well is successful. Remember, however, the offset well may be better or not as good as the one to be drilled on your minerals. The party making an offer is doing the same calculation. Most have more experience in oil and gas than a typical mineral owner so they may be better equipped to use appropriate assumptions. However, the comments about oil and gas people being "snakes" are regrettable and misguided. To differing degrees, offers made before a well is drilled are subject to considerable risk. That will be reflected in lower offers - and that is completely legit.

When a well is on production, the multiple that one should expect to be paid by someone buying your producing minerals or royalty depends on the nature of the production. Some wells decline exponentially, and others hyperbolically. The former is more of a straight line decline. In the latter, the wells have high IP (initial production) but rates drop rapidly in the first year or perhaps two, then level off. A buyer will probably know the expected profile and bid accordingly. Having said that, in general, producing minerals and royalty sell at prices ranging from 36 to 72 months (or 3X-6X your average check), depending on the quality and character of the production.

Hope that clarifies things a little.

landownerPermalink Reply by ledlights on October 21, 2010 at 14:12
Mr. Brewster,

I find the remark about oil and gas people regrettable, but had it been made more specifically about mineral buyers I would have no problem with it. I would not be surprised if there are honorable buyers, and a broad brush is rarely totally fair. However I have received way, way, way too many offers for my minerals that were based solely on historical non-shale production that did not provide even a hint of value for or mention of the very real prospects for shale gas from my property - based both on industry analysis and nearby results. And these offers were clearly not just for shallower production zones.

You may also be surprised by the knowledge and intelligence level of many participants on this board. I have received too many sloppy, unprofessional offerings from potential mineral buyers to warrant any kind of assumption of competence or forthrightness from me.

Oil & Gas ProPermalink Reply by John Brewster on October 21, 2010 at 15:22
Thank you for the response. I have been in the oil & gas business over 30 years. I've purchased minerals and royalty for many years via direct solicitation. I did so with integrity. One key to my success was treating people fairly. This started by telling them what is going on, and why I wanted to buy their interests. I do not under estimate folks, whether they are mineral owners or on this board. Having said that, as much as I enjoy this board and believe it helps many people - which is why I comment occasionally, the quality of the postings is inconsistent.

I stand by my statements: (1) Most buyers know more than most (not all) mineral owners; and (2) The person who made rude comments about minerals and royalty buyers was "painting with too broad a brush."

landownerPermalink Reply by ledlights on October 21, 2010 at 16:17
Mr. Brewster,

It is only natural for an honest practitioner to take negative remarks about their profession personally.

I also stand by my position that your profession has a serious p.r. problem that is not undeserved (unfortunately). The very difference in knowledge that you refer to between buyers and sellers lends those transactions to potential abuse.

I believe that this board exists primarily for the education of participants in the Haynesville Shale and most particularly for the less experienced mineral owners who find their way here. Any honest and enlightening posts that you can provide from your special perspective and experience would be most welcome.

landownerPermalink Reply by adubu on October 22, 2010 at 1:14
John-ledlight-parkota-steel shoot---the problem is the buyer wants to value the minerals based only on present production at a multiple as you said of 3-6X which would be OK value if seller was selling royalty only in that one well or several wells in the unit. The seller should understand this price offered does not include the value of future wells that will be drilled or the fact a lot of these plays will have mutiple formations in the unit. This is why some buyer do not want to buy minerals that have max out all infield drilling and nothing in future to drill or other formation know in the play. Then watch out for the small print in the contract that they are buying for all the minerals you own in the county. The full disclosure of what you are selling is not in the contract. Find a GOOD oil & gas attorney with knowledge of your area minerals located plus talk to a CPA before you sell anything---just IMO. Then if you need to sell or desire then do it with complete knowledge of what you are selling and the possible future value. Yes the buyer want a mutiple pay out return on his investment and nothing wrong in that as long as he doesnot take advantage of unknowledgable seller by "Stealing" even thought legal in business to do, but there is Ethic in everything.

Oil & Gas ProPermalink Reply by Steel Shooter on October 21, 2010 at 11:20
I agree with some of the comments herein, however, all I do everyday is buy minerals. Ultimately, the deal has to make sense for both parties. I don't think acquiring minerals where the lease has to be fully developed to pay out makes good business sense. Over the years I have watched people price themselves out of the market, or aggrevate the production company to the point where there acreage is boxed out of the lease all together. If you don't have to, or want to sell, then don't. If you do want to sell you are gonna have to give up some future income to the buyer. We would all like to get a 100+ month multiple but that isn't realistic for most deals. Make sure that you understand how quickly the buyer can close. Can they close in a lump sum payment? How quickly can they evaluate the deal. I have heard of lots of entities out there that take 30 days to evaluate and up to 90 days to close. Effectively all they are doing is taking your minerals off the market for 4 months and will be back at the table negotiating if spot prices drop.

landownerPermalink Reply by ledlights on October 21, 2010 at 15:05
SShooter,

Thank you for the honest remarks and your identification of a less than beneficial tactic for owners that some buyers use.
Permalink Reply by Phillip Briggs on October 22, 2010 at 5:57
IMHO, owning minerals or royalty, is akin to owning a printing press to make money. I receive offers for all or portions of my minerals/royalty every month. I never respond, but if I did, it would be something to the effect, "give me a financial interest that'll produce as much income on a monthly basis as my oil and gas properties, and that should produce even more over the next twenty to thirty years, and I'll gladly sell"... of course, I know of no 'safe' vehicle that will perform this feat. I'd buy, but never sell. Having cash sitting in the bank is horrible, it should be out working.... but I'm old fashioned and like to know where my assets are, and I trust 'land', I don't trust Wall Street.

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