The Seller's Dilemma

Oklahoma Oil and Gas Mineral Owners:

It is a weird feeling to get an unsolicited offer to purchase an asset from another party. Berlin's initial thought is something like "well, if Shortline Minerals thinks these are worth $5000/ac, they must know something I don't as I would be happy to sell for half of that." Berlin could sell for the $5000/ac price and turn around and deploy those funds elsewhere. However, it will always be in the back of her mind how and why Shortline is able to pay that much for her fringy STACK properties. Maybe they have a company landman on the take and Shortline knows that the section is scheduled for a density test. Maybe there was a seismic shoot in the area that Berlin didn't know about and the interpretations look promising. But it's also possible that Shortline has a low cost of capital, their sponsor has a low hurdle rate or that they are paid a commission on an acreage basis. Just because someone is throwing around a lot of money, doesn't make them right or that their project will ultimately succeed.

 Should they sell their Oklahoma royalties and re-invest in their cash crop or hold and wait for horizontal development? They are in the horns of a dilemma.

Should they sell their Oklahoma royalties and re-invest in their cash crop or hold and wait for horizontal development? They are in the horns of a dilemma.

This internal monologue is the second most often cited objection to not selling minerals (the first being, "pa told me never to sell and for some reason this is the one thing that I never questioned my parents about..."). Berlin thinks of it as a dilemma. After all, it sounds like a decent trade if someone is willing to pay 4-7 years of cash flow for the asset and assumes the regulatory and commodity price risk of owning producing Oklahoma royalties. And if the mineral has higher and better uses for the cash it can be a decent trade. After all, a leased mineral owner cannot easily add value to the minerals by increasing production through development. However, one could take the cash and invest it into an enterprise that they do have control over.

Berlin would be interested in hearing your thoughts on the issue, both from the buy and sell sides.

More to follow,

Berlin