Land is all about the acres. Land with exploitable minerals such as oil and gas is about a bit more. When mineral interests are involved, you may wonder if you’ve wandered into the weeds (so to speak) when you start hearing the terms net mineral acre and net royalty acre.
Where oil and gas are involved, understanding the difference between the two is essential to obtaining fair value and fair price for your mineral interest, whether you are buying or selling. It's also crucial when comparing offers.
Ready? Let’s dig in.
Mineral Acreage Measurement
There are three common units of measure for mineral acreage - gross acres, net mineral acres (NMA), and net royalty acres (NRA).
- Gross acres refer to the total amount of acreage in a tract of land. It has nothing to do with minerals present, just how much land is there. It can be split between owners, but determining the percentage of ownership is pretty straightforward.
- Net mineral acres represents the specific ownership you have out of the total gross acreage. In other words, net mineral acres refers to your percentage of ownership of a tract. NMA can also be thought of as a 100% mineral interest in one acre of land. However, most oil and gas leases split the mineral interests of an acre between more than one entity, which brings us to…
- Net royalty acres - a method of measuring or valuing your net mineral acres according to the fractional nature of royalty awards. These days, net royalty acres are calculated as if your net mineral acres are leased at 1/8th (12.5%) royalty rate.
You can convert your net mineral acres into net royalty acres like this:
- Convert royalty from a fraction or percentage to a decimal value.
- Divide the decimal value by 0.125 (12.5% or 1/8th).
- Multiply the result by the number of net mineral acres.
The final figure is the net royalty acre measurement.
If you own 40 NMA leased at 25% royalty, then:
- 25% converts to the decimal 0.25
- Divide 0.25 by 0.125, which equals 2 (0.25/0.125 = 2)
- 2 x 40 NMA - 80 NRA
If it seems odd to you that 40 net mineral acres can become 80 net royalty acres, you can "old-school" the calculations by considering that 1/4 divided by 1/8 equals 2. (Go ahead and work it out as fractions on paper, you'll understand.)
What if things were a little more interesting? If you own 43.64 NMA at 3/16th royalty, how many net royalty acres do you have?
- 3/16 converted to a decimal is 0.1875.
- 0.1875/0.125 = 1.5 (remember, NRA is considered 1/8th or 12.5% royalty)
- 1.5 x 43.64 NMA = 65.46 NRA
That wasn’t too bad, was it?
Fractions and Royalties
The next concept, class, is the difference between owning a mineral interest and having the right to receive royalties.
Having the right to receive royalties does not automatically mean you own a mineral interest. It just means you receive an agreed-upon amount of money when the minerals are sold for profit in a lease venture. You may not be the owner of the land or its mineral estate. Having the right to receive royalties instead of ownership of the mineral interest makes calculating NRA a bit more complicated.
The right to receive royalty leads to learning the difference between fractional royalties and a fraction of royalty when speaking of royalty interests.
- Fractional royalties refer to owning a percentage of royalty interest, say 1/16th, in a tract of land.
- A fraction of the royalty refers to owning a percentage of the total royalty payout for a tract of land. For example, you may hold a royalty interest equal to 1/4th of the royalty.
When owning a fraction of a royalty, the amount you receive depends on the royalty reserved in the lease of the mineral interest involved. If the lease reserves 1/4th of the royalty, and you own 1/2 of that royalty, then your royalty is 1/2 of 1/4th, resulting in ownership of a fraction of the royalty of 1/8th.
If you own 1/16th of the royalty interest in a tract, then you own 1/16th of production, no matter what royalty is reserved in the lease. If the tract is 500 acres, your net royalty acres are 1/16th X 8 X 500 or 250 NRA.
If you own 1/2 of the royalty in a tract of 500 acres, you own 1/2 X 1/4 X 8 X 500 or 500 NRA.
Why Should You Care About All This?
First of all, it’s always good to understand the lingo that gets thrown around during land and mineral deals. If you don’t know there is a difference between net mineral acres and net royalty acres, you may not be making the deal you think you are.
Furthermore, most mineral buyers make their offers in terms of dollars per net royalty acre. To determine dollars per NRA, simply divide the offer for the total sale by the number of net royalty acres. If you are offered $100,000 for your tract of 400 net mineral acres leased at 25% and your neighbor is offered $100,000 for their tract of 400 net mineral acres leased at 12.5%, how do you compare the offers?
Convert the net mineral acres to net royalty acres in each case.
$100,000/400 NMA = $250/NMA
- 25% converts to 0.25
- 0.25/0.125 = 2
- 400 NMA X 2 = 800 NRA
$100,000 / 800 NRA = $125/NRA
Your neighbor’s offer:
$100,000/400 NMA = $250/NMA (the same as yours).
- 12.5% converts to 0.125
- 0.125/0.125 = 1
- 400 NMA X 1 = 400 NRA
$100,000 / 400 NRA = $250/NRA (very different from yours).
It looks incredibly counterintuitive, but it normalizes the figures, so you are comparing the same measurements. In the example above, your minerals are leased at twice the royalty of your neighbor's. Therefore, you receive twice the amount in royalties for the same number of mineral acres as your neighbor owns.
If you accept the offer as it stands, then you are leaving money on the table. Your 400 acres are worth twice what your neighbor’s are worth in royalties.
Wrapping Things Up
Net mineral acres are not the same as net royalty acres. It all depends on the percentage royalty the lease spells out. If you receive a 1/8th standard royalty (12.5% of 0.125), then NMA = NRA. However, if you receive 1/4th royalty (25% or 0.25), then your NMA = 2(NRA).
Understanding the difference means you know you should convert any offer for your mineral acres into dollars per royalty acre to ensure you are receiving a fair price in comparison to other owners.
As always, if you have any questions, CourthouseDirect.com is happy to answer them. Give us a shout!