Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on November 17, 2013 at 14:25

Katie, your 80 acres are part of a 640 acre drilling unit which qualifies for 8 total horizontal Haynesville wells..  All mineral owners within the unit boundary, usually a section, receive royalty on any and all wells (in your case alternate wells) drilled within the unit.  It doesn't matter whether it is on your 80 acres or not.  Think about it, no one in their right mind would make you an offer for the unit well (first well drilled in the unit) which has largely depleted.  The offer is based on the company's opinion that CHK will drill those other wells and the timing of the drilling of those wells.  The normal development scenario in the Haynesville at this time is to drill multiple wells in succession.  In some cases, as many wells up to the maximum as the gathering system capacity will allow.  If you know how to look up alternate unit orders and well permits you can get an idea of what the company is thinking.

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Permalink Reply by Katie Waterson on November 17, 2013 at 14:42

Aha.  Thank you very much.  This is the topic on which I've received much conflicting information.  I've got it now.  I'll see what I can dig up on plans for alternate wells and will do so before we make any decisions that are final.  

Thank you, Skip.  

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Permalink Reply by john goodday on November 18, 2013 at 11:46

If the offer to buy at 400 X  - is for real - would you mind sharing the name of the purchaser?

Permalink Reply by Dion Warr, CPL on November 21, 2013 at 16:21

Katie:

I am generally loathe to comment on "what's a fair offer for my minerals?" and such types of questions. My pat answer is usually something on the line of "whatever you think they are worth that you can get someone to pay for them", which is a standard market-based answer for mineral rights, producing or otherwise. But given your stated parameters, let's analyze against prior "known" offers made during the early part of the HS era.

Median range offers on valuations of producing properties in 2008 and early 2009 were generally paid in a range of 36X to 72X during the "prospective period" ie. when no one had decent production tails to measure against. (For purposes of discussion, I throw out the 100X offers as extremely limited in area or capital paid, or at least far above the stated norms. I would also throw out the lowball / nutball offers designed around "flat fee" valuation designed to impress the otherwise unsophisticated mineral or royalty owner.) What we "knew" at that time was that 30-36X is what is payed for more conventional reservoirs, and higher multiples were reserved for unconventional reservoirs which would have high initial declines but anticipated long gradual tail-offs from year 5 on to a projected 30 years. What has been revealed is that these tails were in general highly optimistic in early wells, and maybe not quite so in later wells, but the valuations are closer to conventional multiples after adjusting for time value of money and tails that are not quite so optimistic as they have become realistic.

Ok, so adjusting for 50X valuation of a six-month average of production near first production, your unit wells are probably performing at about 10-15% of average monthly production extrapolated at Day 100. (If not, please say so. Given random completion date for any day in a month, I would say look at your royalties paid on the fourth month (third full month) of production.) If this holds, look at 50X of this figure versus 400X of your current month's figure. They are likely pretty close to each other. Again, if they are not, please let us know (in terms of X are fine; I have no interest in knowing real numbers from your monthly checks).

The premise here is to apply perspective to market factors and assessing values of oil and gas properties based upon and weighted by the defined points in time along a production curve. At month 60, your well is likely producing at a small fraction of month zero, month 1, and a slightly larger fraction of month 3 / 4.

Without conveying a specific comment as to any offer, I usually would offer the following thoughts as to any offer of this type: for producing properties, I would be decidedly against bargaining all right, title and interest, unless your situation is dire or you are looking to liquidate in favor of a significant and life-changing event (e.g., "This will give me enough money to pay all of my bills and retire", or "I'll have my seed money to fund my dream venture that I couldn't otherwise pay for if I worked for another 20 - 40 years", or "I can pay for (my) life-giving surgery that my insurance(?) will not pay for"... You get the idea). Additionally, I would seek out matching offers from other legitimate purchasers if possible. If you have less confidence in the offer, sell less as a fraction of the whole. A legitimate royalty offer should stand as to any significant portion that you would want to sell on a pro-rata basis - for the purchaser, they are buying widgets - the offer for 100 widgets should be virtually half of what they would pay for 200 widgets and half of what they would pay for 50 widgets.

Based upon what you've laid out, I'm not all that much more impressed at their offer of 400X production at month 60 as I would be at 50X of average monthly production of months 0 through 6.

This is a cold read on my part. Let me / us know how far afield I appear to be.

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Permalink Reply by Andrew on November 22, 2013 at 14:01

Dion's analysis is on point all around.

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Permalink Reply by Katie Waterson on November 24, 2013 at 8:39

HI Dion,

I did this analysis and the offer was almost exactly 50x our fourth month of production value.  So, 400 x what we're making now is the same as 50X what we made in our fourth month.  So seems like the offer was fair enough.  I'm going to hold off on selling mineral rights for now.  I appreciate the info very much!

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Permalink Reply by Dion Warr, CPL on November 24, 2013 at 20:37

Katie:

Please continue to do your own analysis given your own circumstances. Understand my point was to provide context and relevance, not to evaluate the offer as good or bad, great or terrible. It just appeared to me that an offer of 400x was getting a "wow" factor that was not so far off of standard metric as it might have otherwise seemed after an examination of the facts. For the average landowner, cash is and can be much more flexible and convertible to other use and investment than an expectancy of royalty proceeds. IMO, this is an important factor to consider when weighing a royalty offer. Unless you are "in the business", royalty proceeds can be somewhat difficult to convert at fair market value at times (e.g., for producing natural gas properties, times like now). Proper valuation is still only one part of the equation.

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Permalink Reply by Bobi Carr ("parker") on November 27, 2013 at 9:39

Katie Waterson,

  If I were you, I would check with a reputable landman like Skip or Dion, to see if they have buyers interested in your area too, before you proceed with just one offer.

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Permalink Reply by Glenn Pickett on November 21, 2013 at 6:37

I personally think at some point in the not too distant future, (completion of the gassification plants in South Louisiana) drilling in the Haynesville Shale area will pick back up.  The potential for profits for the companies will be there and they already have the lands leased just sitting there waiting for the market to improve.  The last figures I read, and it has been a while now, was that gas was around $14.00 a thousand in the Far East.  And those plants in South LA  will open up that market for U. S. gas over there.  Regardless, my instincts just tell me that when there are offers to purchase my mineral rights and those offers seem to be very good it makes me think somebody does know something I don't.  They have far more information about what the future looks like than I do.

 

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Permalink Reply by 1kw6x71km1v37 on November 21, 2013 at 7:03

Ms. Waterson,

You might get some idea of mineral rights value from this story about Devon buying a position in the Eagleford Shale:

http://fuelfix.com/blog/2013/11/20/devon-scooping-up-6-billion-in-e...

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Permalink Reply by Ed on November 26, 2013 at 8:55

Good points. I usually advise a mineral owner to "hedge their bets" with a good offer. That would be: sell half and take the profits, then keep the other half as a bet on future production. But you really should be selling only your mineral interest in the certain zone of production (Haynesville Shale zone), not all of your right, title and interest in everything you own.

Your buyer would get what they want and you would still benefit from future wells drilled in your scope of influence that are not Haynesville Shale wells. (Consult an Attorney)

Consider that "a bird in the hand is worth two in the bush"

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Permalink Reply by Katie Waterson on November 27, 2013 at 4:04

Right -- mineral interest, definitely not all rights and title.  I think you're right, I'm considering it.

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