One of the most common pitfalls for mineral owners when evaluating purchase offers is that the offers presented are not “apples-to-apples”. A lot of times, one mineral buyer may be offering on a “per NMA basis” while another is offering on a “per NRA basis”. (you can read all about the difference between NMA and NRA here) Other times, a buyer may be offering under the assumption that you’re leased at 1/4th royalty, when you’re really leased at 3/16th royalty -- which will result in their offer being drastically inflated. Let’s dive into what your “lease royalty” really means, and how to ensure you and any prospective buyers are talking apples-to-apples.
There’s a good chance that your minerals are already leased. Perhaps your grandfather signed a lease with an operating company in the 1960’s on his 20 NMA, that company drilled a well, and that lease has been producing ever since. Therefore, you’re still collecting royalties based on those lease terms negotiated by your grandfather. Now let’s assume the royalty on that lease that your grandfather signed is 1/8th. This means that as the mineral owner, you are essentially entitled to 12.5% of the production from your mineral interests.
In this scenario, you’ll want to triple-check that any purchase offers are taking your 1/8th royalty into account. If you receive a letter in the mail offering to pay you $22,000/acre for minerals leased at 1/4th, then your alarm bells should go off! The lease your grandfather signed is only for 1/8th royalty, not 1/4th, therefore, the likelihood of that company actually offering you $22,000/acre is slim to none. The fact is, they’re probably going to offer you half that, something like $11,000/acre. Let us explain further…
When buyers offer on a per-acre basis, they will simply proportionally increase/decrease that per-acre offer if your royalty is different from the royalty they’re assuming. Meaning, if you represent that your minerals are leased at 1/4th royalty, but they’re really leased at a lesser rate of 1/8th, then the buyer will proportionally adjust their offer downwards. Use cross-multiplication to determine the proportioned offer:
Example:
XYZ Minerals offers $15,000/acre for minerals leased at 1/4th (or 25%)
You’re actually leased at a 3/16th royalty (or 18.75%)
The information we just reviewed will be helpful when evaluating offers on a “per-acre basis”, however, some buyers will send out “lump sum” offers. Meaning, they’ll say something like “we can offer you $235,449.71 for your interest” with no explanation of how they arrived at that number. You need to be even more cautious when evaluating these offers as they often don’t mention the assumed royalty or your NMA at all!
For any offer that you evaluate, make sure that you know the answer to these 3 questions:
What royalty are they basing this offer on?
Based on that royalty, how many NMA do they believe you own?
Assuming this royalty and this NMA, what is their lump sum offer?