Readers Wells: Let's Do The Math -- An Example -- July 28, 2019

Updates

August 2, 2019: since the original post, three more Zavanna wells have been added that will include mineral acres in sections 16/21-155-100; see bottom of original post where #36544, #36543, and #36542 have been added.

Original Post

Disclaimer: I often make simple arithmetic errors and don't completely understand royalties.

Disclaimer: in a long note like this, there will be typographical and factual errors.

Facts:

reader has 16.67% base royalty in 1.0000 net mineral acre in the NW quadrant of section 16 in T155N-R100W
the reader is being offered $5,333.33 for that interest
this particular mineral unit is located in the "best Bakken"

Assumptions:

assume: almost all of the wells will be spaced at the current NDIC standard of1280-acre;
assume: there will be some section/line wells spaced at 2560-acre units but we will ignore those for now

Let's do the math.

First step:

the reader is being offered $5,333.33 for that 16.67% of that one net mineral acre
the reader has only one-sixth of that mineral acre (16.67%)
to acquire the entire one net mineral acre, the buyer must be assessing the value of that one acre at $32,000 (6 x $5,333.33)
again, to repeat: the buyer is valuing that one mineral acre at $32,000

Second step:

a standard drilling unit in the ND-Bakken is 1,280 acres
to buy the entire drilling unit, the buyer values the drilling unit at $40,320,000 ($32,000 x 1280 acres)
again, to repeat, the entire drilling unit (1280 acres) is being valued at $40 million (rounded)

Third step:

assume one nets $50/bbl of crude oil from each well drilled in this 1,280-acre drilling unit
how many bbls of $50-oil will yield $40 million? 800,000 bbls
let's check that: 800,000 bbls x $50 would yield $40 million

Fourth step:

how many wells will produce 800,000 bbls in the best Bakken?
right now, operators expect no less than 750,000 bbls / well in the best Bakken, and the current data suggest new wells now being drilled in the Bakken will eventually produce 1.5 million bbls of oil
therefore, the buyer is offering the equivalent of one well in this drilling unit
fact: Zavanna is currently drilling four new wells in this drilling unit (see graphic below)
fact: there is already one producing well in this drilling unit, on the same pad, and a very, very good well
assumption: there will eventually be eight wells in this drilling unit; perhaps as many as 12; possibly as many as 24, but certainly more than two

Bottom line for this section:

assuming I did the math correctly, the buyer is offering the reader the value of one well in this drilling unit

Important note: right now (July 28, 2019) there are four wells being drilled that apply to the reader's lease (see graphic below); a fifth well is already producing (it was drilled in 2012). It appears that three of the new wells are the standard 1280-acre spacing; the fourth well looks like it will be 2560-acre spacing which cuts one 's interest in this well by half compared to the standard 1280-acre well.

Pie in the sky, idle rambling, back of the envelope. Let's assume:

1280-acre spacing
12 wells -- very, very conservative by the way
EURs of 1.0 million -- somewhat conservative
12 x 1 = 12 million bbls EUR for those 12 wells
$40/bbls = $480 million at the wellhead
up above, I showed $32,000 / acre or times 1280 acres = $40 million for the drilling unit is what was being offered

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Decimal Units

One net mineral acre in a 1280-acre drilling unit = 0.00078125

A one-sixth (16.67%) base royalty of that interest = 0.000130208333

Example:

assumption: each new well will produce 150,000 bbls of crude oil in the first year
assumption: four new wells, therefore, will produce 600,000 bbls of crude oil in the first year
although WTI is priced at $50, Bakken oil is selling for about $40/bbl
now, 600,000 x 0.000130208333 = 78 bbls
78 bbls x $40 = $3,120 for those four new wells in the first year
if three wells are 1280-acre spacing and one well is 2560-acre spacing, then the amount should change to $2,730 / first year for the four new wells
there is an existing producing well, #21226, which has not been factored into this

Bottom line:

when the new wells finally go into production, the reader might see $3,000 in royalty payment the first year and then a decline after that. The decline will be slow the first year or so but then will decline quickly
the wells could be completed / fracked by the end of the year, though the company can wait as long as two years to complete the wells
even if things are "expedited," the reader should not expect to see any "new" money from these new wells for six to 12 months

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The Graphics

The wells:

21226, 996, Zavanna, Panther 16-21H, Stony Creek, t4/12; cum 426K 5/19; off line as of 6/19; remains off line 10/19;
36418, SI/NC, Zavanna, Panther 16-22 5TFH XE, API: 33-105-05170; Stony Creek, the name suggests this is a Three Forks well on 2560-acre spacing, which if accurate, would cut one's interest in half compared to the standard 1280-acre unit; not fracked as of 10/19;
noted to be on SI/NC in late November, 2019;
36419, SI/NC, Zavanna, Panther 16-21 4H, Stony Creek, the name suggests this is a middle Bakken well on 1280-acre spacing; not fracked as of 10/19; noted to be on SI/NC in late November, 2019;
36421 SI/NC, Zavanna, Panther 16-21 2TFH, Stony Creek, noted to be on SI/NC in late September, 2019; not fracked as of 10/19; not fracked as of 10/19;
36420, SI/NC, Zavanna, Panther 16-21 3TFH, Stony Creek, noted to be on SI/NC in late September, 2019; not fracked as of 10/19;
36544, drl, Zavanna, Blue Heeler 20-16-4H, this one was added August 2, 2019, as a new permit; 1280-acre spacing according to the permit; sections 16/21; noted to be on drl status in late September, 2019;
36543, 2 sections; drl, Zavanna, Blue Heeler 20-16 3TFH, added August 2, 2019; drl status noted December, 2019;
36542, 4 sections; drl, Zavanna, Blue Heeler 20-17 2H XE, added August 2, 2019; drl status noted December, 2019;