I have written several blogs about the fact that the mineral estate, that's the nasty oil and gas, is separate from the surface estate (the buildings and the land). Not everyone sems to be aware of this but it can be very important, if you know what you are doing.
I am going to use a real life example, which I rarely do, because I like to protect the innocent. However, I am not going to use anyone's real name, just real numbers.
I recently became aware of a deal where someone was selling 10 acres for about $85,000. The seller had owned the property for several years so he also owned the mineral rights. However, he obviously didn't think they were worth anything because he did not mention them when he sold the property and went ahead and sold the land with a fee simple title. The new owner got the land and the minerals in the deal for the $85,000.
About 4 months after the new owner bought the land an oil and gas company approach him about taking a mineral lease for his land. He finally negotiated to give them a lease with a royalty of 23% and an upfront fee of $3,000 per acre. So he leased the minerals and got a check for $30,000.
About 3 months after that he sold the land for $150,000 after doing some basic work to get the zoning changed to single family from agricultural.
So here are the numbers. The investor paid $85,000 for the land and minerals. Then he got $30,000 for the mineral lease. Then he got $150,000 when he sold the land. Now he has a 23% royalty on any produced oil and gas. The well is being drilled now and the well that is directly offsetting this well has made 1.0 billion cubic feet in its first year. I won't go into all of the details but with a 40-acre unit and a 23% royalty, if this new well is the same the investor should get about 57,500 MCF (thousand cubic feet) credited to him. Assuming he gets $5 per MCF, which is a low value, he stands to make about $237,000 from his first years royalty.
So let's recap, His total investment was $85,000. He made $30,000 for the lease, $150,000 reselling the land and a potential $237,000 from his first years royalty. That's a total return of $417,000 on $85,000. With more income for years from the royalty. NOT BAD !!!!!!!
Comments(2)