Expert: Frederick M. - 8/8/2009

Question
Mr. Scott,

I have been offered the opportunity to purchase some minerals from an elderly distant relative in Beckham County, OK.  The minerals are in four separate sections (all of which are leased). Those sections are as follow (all in Beckham County):

24-10-26
&
20-10-25
21-10-25
29-10-25

I'm just an active duty military man and don't have a bunch of money, but I also don't want to low-ball this gentleman.  I was hoping you might be able to help me determine a fair price.  Thank you.

M.L.

P.S.  You have already been a ton of help to me.

Answer
M.L. This is a pretty good area of the county really. Some of the biggest gas wells in recent history have been completed in the two Townships above. The "Buffalo Creek 1-17" was completed in 2002 but is still, at over 200,000 MCF per month, producing more gas than most new gas wells produce; even the "good" ones. If you owned just one acre in this Section 17-10N-25W well (directly north of your Section 20 above) your income would be about $200 per month currently. If you owned 100 acres in the section, it would be about $20,000 per month. Pretty good, and this well is within a mile or two of sections 20, 21, and 29 above. If I were selling an acre of minerals in Section 17 I would expect to get around $8000 per acre or so due to the prolific production still occurring.

The sections you are wishing to purchase from the gentlemen you spoke of are not nearly as prolific as Section 17 and so are not worth $8000 per acre currently, but they could be someday. I would estimate that the non-producing sections you want to purchase in Township 25 are worth $2000 to $2500 per acre currently if they are leased at 3/16 royalty, and the one in Township 26 (Section 24) may be worth a bit more as there is more activity there. This is quite high, but this is a good area as I mentioned. The wells in this area are expensive to drill but if they continue with development as prices rise it is likely that there will be more wells drilled in this area.

Sections 13, 16, 17 and 25 of 10N-25W have all had pretty good wells drilled on them since 2001, and these sections are all within three miles or less of the ones you are after in that Township.

Section 20-10N-25W already has a producing well on it (The "Reed 1-20) as does Section 24-10N-26W. Neither of these wells are "great" currently. I would estimate income-per-acre from the Reed to be around $20 per month currently, and from the well in 24 I'd estimate only about $5 per month per acre.

If a larger well similar to other wells in the area were drilled in any of the above sections, income per acre would probably be around $150-$200 per month at first, and then would decline fairly rapidly during the first two or three years but it would then level off somewhat and still be a decent well as the newer wells out there are pretty deep gas wells.

Some buyers would base their offer only on 48 times the current monthly income or so for the two producing sections you're after, which in this area would not be fair in my opinion as it would amount to only $960 or so per acre. A little low for my taste.

Price could be even higher depending on other factors which I don't have time to research here such as current drilling permits, lease terms on the current leases, and who the operators in the area are (mostly Chesapeake I think.)

The best way I know of to determine fair market value for minerals is to put them out to buyers that I know and see what the consensus is. Since you want to buy these yourself however that will not be possible unless you offered them money to do an evaluation for you..kind of like an unofficial appraisal of sorts. They're not going to evaluate them for free unless they can buy them. If you end up buying these, and later want to sell some let me know (email address below.)

You've got to determine what you think is fair. Without doing a full analysis of these minerals I can only "guess" at what I think they're worth. Some near here are definitely worth $3000+ per acre. Others may not be. I wouldn't offer him any less than $2000 per acre for the non-producing ones though.

Hope this helps you out.
Frederick M. "Mick" Scott CMM RPL
scottminerals@aol.com
Beckham County, OK (Elk City)