Marcellus shale question 2

[tripleZ]

I'm not a petroleum or natural gas guy, so please bear with me as I may be missing a lot of detail.

My parents have a 60-acre farm in western PA (Jefferson Twp, Fayette County) that they are looking to sell. The property does have natural gas on it (Marcellus shale) and they have been approached about drilling and are slated to have the wells dug within the year I believe. In trying to sell the farm, they are not going to sell the natural gas rights unless the buyer decides to come up with additional cash (the farm sells itself and the gas is an added bonus to the place). What they are trying to do is to estimate the value of the gas return so as not to overprice it. Essentially they'd like to value it such that the buyer breaks even after about 5 years.

Ultimately they are looking to estimate what the yearly income would be from the well at their 15% royalty rate. The gas companies have not given them an estimate of potential yield, so I'm wondering if you all know of any studies out there that might list what the historical yields have been in this portion of the state. Any ideas or is this a crapshoot? Worse comes to worse they'll just keep the rights and take the income until the well taps out. However I get the feeling that they'd like to sell the whole kit and are looking to get a fair market price.

Any advice is much appreciated. And if you have specific questions, please let me know and I'll try and get the info from my family. Thanks!

 

[BigInch]

Keep the rights as they are, or hire your own geologist to do a study for you. The gas co sure isn't going to give you a real number.

So the buyer breaks even, then the well runs out of gas. 5 years could even be after the well runs out.

Pleanty of gas wells don't last 5 years, or the production has declined so much that it isn't worth producing by then and they'll shut the well in. Production isn't a flat line. You might get half the gas in the first year, 25% the next and something like 10% for the next 3, if there are 3. While you're at it, have your geologist give you a production forecast, then divide by 4 to get a realistic number. In fact, while you're at it, ask him if he thinks there'll be any gas at all. You're counting a lot of chickens here and you don't even have eggs yet.

Let your acquaintances be many, but your advisors one in a thousand’ ... Book of Ecclesiasticus

 

[zdas04]

Assuming that the state of Pennsylvania can pull its collective head out (which is not certain), and that your parents signed a royalty agreement with a reputable company (there are several that are very good, some that are quite bad) then the Marcellus wells will mostly still be producing at the end of the century. The wells coming on today are doing very well and there are a bunch of companies spending billions on infrastructure (pipelines, compression, and plants).

Selling mineral rights in that play is just about as dumb a move as you can make. My expectation is that a 15% royalty on 60 acres (probably 2.8% of a 320 acre drill block), would give you something like $40k/year for the next few decades. I would hold off on a decision until the well was drilled and connected to a market. There have been wells in that field that produced 10-15 times the averages I used in the $40k/year guess--then you are talking about real money and you could leave the farm in weeds without affecting your bottom line.

Take a look at the Marcellus Coalition web site. There is a ton of information and you can find links to geologists and engineers that can give you an unbiased assessment.

David

 

[tripleZ]

Thanks to you both for your opinions. I've passed it on to my family and it sounds like they're looking to retain the rights for now unless they can't find a buyer. Thanks again!