Many oil and gas professionals often calculate valuations of minerals on a Net Royalty Acre basis. This is a mathematical concept to normalize variations in royalty rates. For example, if you and I each own the exact same net mineral acres in a parcel of land, but I have leased my minerals at a 1/8th royalty rate and you have leased yours at a 1/4th royalty rate, the revenues you will receive will be twice as much as I will receive. As such, your producing minerals are worth roughly twice as much as mine. The way these interests are normalized is as a ratio of the royalty rate relative to a “standard” 1/8th royalty rate. So, if we each own 40 net mineral acres at these royalty rates, I would own 40 net royalty acres and you would own 80 net royalty acres.
Generally speaking, the formula to calculate royalty acres is as follows:
Net Royalty Acres (NRA) = Net Mineral Acres (NMA) x (Lease Royalty Rate / [1/8 Standard Royalty Rate])
To amend our example, let’s say I leased my interest at a 1/5th royalty rate. We would calculate my net royalty acres as follows:
NRA = 40.00 net mineral acres x ([1/5] Lease Royalty Rate / [1/8] Standard Royalty Rate) NRA = 40.00 x (0.20 / 0.125) NRA = 40.00 x 1.60 NRA = 64.00 Net Royalty Acres This mathematical concept can also be used inversely to calculate your net mineral acres in a parcel based on the Net Revenue Interest (NRI) you are receiving in a well or unit.
THIS MONTH'S PRO TIP
Landowner Problem: You inherited a large number of properties and don’t know where to begin figuring out what or how much you own.
Pro Tip Solution: Start by looking for any source documents you may already have. Specific examples would be the probate records of your predecessor or the deeds whereby they acquired the properties. If you don’t have those records, you can start by listing the properties you are being paid for. Review your checks and list the names of the wells and their respective counties/ states. Then you can search the respective state regulatory agency or a fee-based service provider to find where those properties are located geographically. Contact the operators to see if they can tell you what your ownership is (both net and gross acreage) as a successor owner. Similarly, every time you are contacted to sell or lease your minerals, have the offering party provide you with a copy of the source document (they often have some access to the records that indicate your ownership). Create a database list of some kind that helps you list these properties and wells. Don’t feel that you must make it overly complicated at first—just make it something that you can build, work with, and understand. In the end, know that there is a community here at NARO that can help you gain control and confidence in the management of your assets.
This is just a sample of the many helpful and informative articles that you will find in our monthly newsletter: the Royalty Owners Action Report (ROAR).
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