Continuous auction sales for 2011 have set a new volume record relative to the past 10 years.

The overriding royalty interest (ORRI) and royalty property auction metrics, through September 2011, moved around considerably throughout the year, within a band from 70 to 100-plus months of the average six months, monthly cash flow, prior to each respective property sale. Working interest properties have fluctuated from 40 to 60 months of average monthly cash flow.

The ORRI and royalty property sales ranged from a high of $281,000 per barrel of oil equivalent (BOE) per day, to a low of $141,000 per BOE per day for oily properties. Gas-heavy ORRIs and royalties have maintained a more modest range, moving between $210,000 and $172,000 per BOE per day, respectively.

The working interests traveled a band between $81,000 per BOE down to $60,000 per BOE per day for oily properties. The properties producing primarily gas traversed between $136,000 and $72,000 per BOE per day. All metrics are expressed using a 20:1 gas-to-oil ratio.

Why such a wide divergence during the year? First and foremost, as always, it is the quality of the properties, which, if high, results in premium metrics, regardless of the commodity price.

The second controlling factor, of course, is the price of oil and gas at the time of or leading up to an auction event. As the price of oil peaked in April and began its slide, sale metrics, by and large, followed oil down. Cushing storage was at a record 41.9 million barrels. More recently, armed with the knowledge that Cushing inventories have eroded, ORRI and royalty metrics have increased, because those buyers are more affected by short-term commodity price movements.

Toward the end of the first quarter, both working interest and royalty buyers were reducing their dollars-per-flowing-barrel bets as the West Texas Intermediate spot price rose. This contrarian behavior led to the lower flowing-barrel and cash-flow multiples in February, March and April for oily royalty and working interest properties, respectively.

Buyers were concerned that oil would rise and then cycle back down after they had paid multiple and flowing-barrel peak metrics. Royalty and ORRI metrics rose to their second highest yearly level for oil properties in August, reflecting the contrarian phenomenon in reverse, as oil prices ascended.

These continuous auction metrics reflect the sale and purchase of 831 lots containing 2,347 properties through September 2011. They are the result of 5,513 unique bidders placing 21,230 bids.

This year’s auction sales consist of just over 80% conventional production with the remaining 20% made up of unconventional and resource assets. As has been the case in the past two years, conventional properties continue to be divested in order for sellers to redeploy capital into unconventional plays.

Oil-asset divestitures have been largely driven by “seasoned” sellers who watched oil peak at $145 per barrel in July 2008 and then plunge to $40 per barrel five months later. They made the conscious decision to avoid falling prey to a repeat of that experience. Gas property buyers, on the other hand, believe their acquisitions are so deeply discounted that they can afford considerable time tolerance for upside realization.

The best news is that the continuous auction pipeline of properties being prepared for sale remained at record-breaking levels throughout 2011 and promises to continue into 2012.

—Bill Britain, president and chief executive, EnergyNet Inc. (806-242-1509)

For details on assets on the market, see A-Dcenter.com