The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: impedimenta on September 03, 2016, 05:40:23 PM
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A few years ago, my wife inherited mineral interests in west Texas. Approximately 350 acres in total with 6 different oil leases in place. The royalties & bonus payments are erratic, usually around $10k/year but as high as $85k/year. We regularly receive unsolicited offers to purchase the mineral interests, usually around $1M. We're interested in the possibility of selling and investing the proceeds to produce a more predictable stream of income. Maybe now. Maybe in a few years.
Problem is, we don't know these mineral interests are really worth. I can contact brokers who will make an offer. I can list them in a mineral rights auction and receive offers. We did this recently and received questions like "What amount would excite you?" Obviously they understand that we don't know the value of what we have and are looking to make a lowball offer.
Is there some sort of mineral interest agent who could help us ensure we're getting maximum possible sale price? Everyone we've found so far profits if we sell at a lower price. We'd like to find someone whose interests are aligned with ours.
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There is a dichotomy here. No fee simple title would be worth $1M if the mineral rights only generated $10k of income. That is only a 1% return. However, $10k seems really low of you really have 6 active leases. Are the wells going dry?
The property will be worth less than a few years ago when oil was over $100 a barrel. Even less of the wells are dry.
Since you don't know what you have, you should start with an oil & gas lawyer. A person with a fiduciary relationship with you can recommend an appraiser that will work for you, not try to lowball you.
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I think what you want is a "Landman." Now... I have no earthly idea how or where to find a good one.
We've had similar issues trying to evaluate some well interests we inherited... and finally located an acquaintance that would do some research for us.
I also wouldn't necessarily worry about the lows. We live in a very oil/gas driven area. There are always real highs and lows. Around here they will shut down wells for years waiting for prices to go back up. Inevitably, they always seem to.
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I don't have any useful information to help you out, but this is a very interesting topic... keep us posted on what you end up doing!
P.S. Watch out for this guy.
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I'm guessing the wells that are currently on the property are conventional wells (i.e., not fracked shale wells)? As Vagabond76 noted, they're not offering you $1 MM for that $10k income stream that the property is currently producing. They probably think the shale can be fracked to produce many times the volume that is currently coming out of the wells. Either that, or the current density of wells is far below what the property could support.
How much would it cost you to hire a consulting geologist to evaluate the mineral potential? If you've already been offered $1 MM, it's probably safe to say the minerals are worth much more, so spending $10k, $20k, $30k, or whatever to find out the true value probably would be worth it.
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http://www.mineralrightsforum.com
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Posting to follow.
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The wells on the property are conventional vertical wells. Some of the leases are to large companies, others to small companies. I've been told that the larger companies may drill horizontal wells in the future and that this would greatly increase production. The smaller companies will likely wait until oil prices are high and sell their leases to a larger company that is capable of horizontal drilling. I don't know about the possibility of fracking in that area.
I certainly agree that the $10k annual income stream from an $1M asset is tiny. That is the motivation for looking at other options.
Thanks for your suggestions. We're going to check out oil & gas attorneys and geologists. My understanding is that a Landman typically works for an oil company so would not be looking out for our interests.
We'd probably invest the proceeds of a sale into index funds for at least a few years. With low oil prices and high stock prices, now may not be the best time to sell. But we'd like to better understand the value to make more informed decisions. I'll let you all know what we find.
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pbkmaine's suggestion of http://www.mineralrightsforum.com led us to a consultant. Turns out our interests are located in a desirable area and are likely worth quite a bit more than the unsolicited offers we've received. The consultant is currently performing a title examination for us as well as auditing the royalty payments we've been receiving, determining acreage & depths not currently leased, and locating parties interested in additional leases. We'll see that turns out in a few weeks.
Thanks for all your suggestions.