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General Questions

Did you know the US is one of two countries worldwide that allow private individuals to own mineral rights? That’s a big deal! It means organizations or individuals can explore for, extract, and sell a mineral commodity without authorization from the government. To define mineral rights: Mineral rights represent the ownership of underground resources like oil, natural gas, gold, silver, copper, iron or uranium. Mineral rights are often severed from the surface rights (called a “split estate”), which give the owner the right to improve upon or sell the surface of a tract of land. If severed, the mineral rights are known as the dominant estate, meaning the mineral owner has the right to use the surface of the land to explore for and produce minerals.

Net mineral acres represent the true “net” acreage owned by a mineral owner out of the total gross acres in a given tract of land. NMA is calculated by multiplying the gross acreage by the owner’s undivided interest in the tract. If you own a 50% interest in the minerals under a 100-acre tract of land, you would own 50 net mineral acres (100GMA x 50% = 50NMA).

The net mineral acres formula looks like this:

Gross Mineral Acres x Interest Rate = Net Mineral Acres

If you’re confused by this term, you’re not alone. The industry currently has two ways of defining and calculating net royalty acres, which we like to call the “old” way and the “modern” way.

Old Way:

The old way was first defined in the 1950s when a ⅛ royalty was the standard rate. To clear up confusion surrounding some royalty assignments that occurred in the 1940s, a Mississippi court came to the conclusion that 1 NMA = 1 NRA leased at ⅛. Because ⅛ is no longer the going lease rate, the industry has had to adapt this definition in order to “normalize” a higher royalty back to what it would translate into at ⅛.

NRA Normalized to ⅛ Example:
You have 100 NMA leased at 18.75%, and an offer to purchase for $100,000
(100 NMA * 8) * 18.75% royalty = 150 NRA to 1/8
Price per NRA = $100,000/150 NRA to 1/8 = $666

Because ⅛ is no longer a “normal” lease rate, the formula used above can cause confusion and miscommunication, inflating numbers so that your net royalty acres actually appear higher than the number of net mineral acres you own.

Modern Way:

The modern way of calculating NRA (sometimes called NRA to 100%) is actually the first step in getting to your wellbore interest, which is your share of actual production from a given well. Calculating NRA to 100% allows for a better understanding of the value your minerals as they are extracted.

Modern Example:
If you had 100 NMA leased at 18.75%, and an offer to purchase for $100,000
100 NMA * 18.75% royalty = 18.75 NRA
Price per NRA = $100,000/18.75 NRA = $5,333
>>If you want to take it a step further and calculate your interest in a wellbore, just divide this NRA by the drill spacing unit (“DSU”). Example: 18.75 NRA/1280 DSU = .015 wellbore interest.

If your minerals are currently unleased, calculate your NRA using the royalty rate you could lease your minerals for on the open market, which often varies from basin to basin.

An NPRI is an interest in oil and gas production which is created from the mineral estate. The term “non-participating” indicates that the interest owner does not share in the bonus, rentals from a lease, nor the right to make decisions regarding the execution of those leases (i.e. no executive rights).

ORRIs are created out of the working interest (the interest vested in the company that was granted the lease) in a property and do not affect mineral owners. ORRIs burden the lease, above and beyond the royalty rate paid to the mineral owner. An ORRI is often reserved by or assigned to a geologist, landman, oil and gas company, or any entity that was able to reserve an interest in the properties.

At Flat River Minerals, we value your interests based on our technical forecasts of future development and the production associated with that development, discounted back to today. That means instead of waiting to see if a rig ever drills your minerals, and if it does, earning revenues over the 30-year life of the well(s), you get to realize that value in one lump sum, today.

Flat River Mineral’s team of technical experts understand the rock and what it takes to get the hydrocarbons out of the ground. Rather than speculating and making you an offer we can’t stand behind, Flat River Minerals is able to project how many wells may be drilled, by who, when, and what the production streams will look like. If you have an existing offer you aren’t sure about, we’d be happy to provide you with a free valuation.

Think of us like any mutual fund or diversified portfolio you are familiar with. By aggregating a large portfolio of minerals, we are able to diversify and therefore decrease risk. Just like a mutual fund comprised of various securities such as stocks and bonds, there may be some big winners, but there are inevitably some big disappointments. Unlike an individual, a large company like Flat River Minerals is able to limit its commodity price risk through hedging production in the futures markets. Through a diversified portfolio of mineral assets and hedged production, we look to achieve consistent long-term growth with less volatility.

The decision to sell minerals can be an emotional one, especially if they’ve been in the family for generations. If you have time on your side and don’t need the cash, you may prefer to make a bet yourself and hold on to your minerals. If you would rather diversify your family’s wealth or limit your exposure to volatile oil and gas cycles, it may be the right time for you to sell and reinvest your cash proceeds. Feel like you don’t lean to one side or the other? You can always sell a percentage of your minerals and keep the remainder to make your own bet on future drilling activity.

This is the hardest question that every mineral buyer tries to answer, including us. The truth is, minerals aren’t worth much if there’s nothing being pulled out of the ground. To answer this question, we can use a statistical but realistic example for simplicity:

Assume there are going to be 300 wells drilled in the Powder River Basin (PRB) in 2024. On average, 2 wells will be drilled together in the same 1280 acre drill spacing unit (“DSU”), meaning 150 new DSUs get developed. The core of the PRB covers about 3,000,000 acres. That means in 2020 the chance of a given tract of land getting drilled would be 64.5 out of 1000, or 6.45% (formula = 1280 acres *150 DSUs / 3,000,000 PRB acres).

In some states, permits can tell you a lot about drilling activity, but in others, they don’t mean much. Wyoming is a first to file state, which means operators use permits to secure a future option to develop minerals under certain lands. Unfortunately, this has led to a major land grab by operators that don’t intend to drill any time soon. The table below illustrates the conversion rate of permits for select operators in Wyoming between 2015-2018, which is to say how many permits actually turned into drilled wells.

Groundwater is part of the surface estate, even though it is located below the surface.

We would suggest contacting a CPA specializing in taxes to help you plan for the future and get the most out of your sale proceeds, but here are a few tax advantages to selling mineral rights that are worth discussing:

1. Tax Savings: Taking advantage of the long-term capital gains tax. As long as a mineral owner has owned their property for over a year, the sale of mineral rights is taxed as a long term capital gain. This differs from lease bonuses and royalty payments, which are taxed at an individual’s regular income tax rate.

2. Paying NO taxes at all: “1031 Like Kind Exchanges.” When a mineral owner sells mineral rights, the transaction is classified as a sale of real estate. Under IRS Code Section 1031, the proceeds from this sale can qualify to be used in what is called a “1031 like kind exchange.” In this scenario you could invest your profits from selling your mineral rights in another, “similar” piece of real estate (like another home or a vacation home).

They’re your minerals – you don’t have to sell all of them – or any of them. Selling a portion of your minerals may be a good way to generate the cash you need without parting with the whole family heirloom. As an alternative, if you are interested in taking a loan from Flat River Minerals and pledging your minerals as collateral (rather than surface), please contact us.

Mineral interests are typically held as tenants in common as “undivided interests,” meaning each party is free to will, sell, or mortgage their interest without affecting one another.

>>Let’s use a quick example to clarify this “undivided interest” language before we confuse you too much. Let’s say you own 25% of the S/2 of a 640-acre section. The S/2 would not be then divided into 4 smaller pieces, rather you would own 25% of all the minerals under that S/2.

This is why oil and gas companies must lease from all parties, and each party is free to negotiate their own lease form and royalty rates. Selling your minerals will not impact the remaining undivided interests in a given tract.

Mineral royalties are a type of mineral right. A mineral royalty is owned by an investor of the mineral rights who receives mineral royalty payments, a share of the profit, that comes from a mine or the minerals being produced. There are both net and gross royalties. Net royalties deduct production costs, while gross royalties encompass the total value of the minerals, without any deductions.

Every mineral rights agreement is different. However, most mineral rights agreements can last anywhere from 2 to 20 years. There is typically a primary, and sometimes a secondary, term for mineral rights leases that determines mineral rights expiring, depending on if any drilling has occurred.

There are quite a few stipulations when it comes to fair market value. Fair market value of mineral rights must be a fair equivalent to cash, and around the average value typically paid for mineral rights acquisitions. The property must also have been offered to the market for a reasonable time. However, mineral rights transactions are typically not publicized, so it may be difficult for you to find the right value for your mineral rights. However, at Flat River Minerals, we have the experience necessary to give you the best, fairest deal for your mineral rights.

Yes, Wyoming does tax mineral rights. However, unlike other states, Wyoming only taxes mineral rights once: when they’re produced (drilled). Wyoming does not tax mineral rights based on the estimated value in the ground before the minerals are extracted.

There are several ways to find out if you own mineral rights. Some easy ways include:

1. Family records and deeds. Check first with your family or any previous owners of your property to see if they know anything about who owns your mineral rights.

2. Checking your local tax records for title deeds. These can tell you if there was a previous mineral rights owner of a property.

3. Loan and foreclosure records. If the bank ever took over a property, the mineral rights may have also been passed to them.

Please note: Flat River Minerals and its subsidiaries do not provide title services. Please contact us only when you have access to a title.

In a typical situation, mineral rights will be passed down through a will, just like any other property. Through this, you can either be transferred mineral rights or begin a mineral rights lease. To transfer rights, you’ll need an attorney to confirm your rights to the minerals, and then a mineral deed will be created. If the previous owner leased out their rights to a mineral acquisition company such as Flat River Minerals, the executor can transfer the lease to you so the mineral royalties then go to you.