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Mineral Right Value: Producing vs Non-Producing



Started March 7, 2017 at 09:32 am by @william george allison in GoMarcellusShale

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william george allison
03/07/17 09:32:31AM
@william-george-allison

when selling mineral rights are producing minerals worth more than non producing minerals?

Barry D
03/07/17 10:06:00AM @barry-d:

That's a depends.

Depends how long the well(s) have been producing. Less product to produce. Is half a tank of gas worth more or less than a full one.

If not producing, it also depends where the property is located. Is it in an area that has the prospect of being produced sooner than later. If it is in an area where production is further in the future it will be worth less. One of the factors that investors use in valuing mineral rights is ROI (return on investment). If they will get their investment back quicker the mineral rights are more valuable. The longer the ROI the less those investors will be willing to pay.


Werner Kostendt
03/07/17 10:45:00AM @werner-kostendt:

There is also a difference between selling mineral rights outright, and leasing your minerals, and also selling minerals subject to a lease that might not actually be producing but might be held by production or might not be held by production. 

William, if you can have more details about a specific situation you are dealing with, you might be able to get more useful answers to a very good but very broad question. 


Matt Lanctot
03/07/17 11:00:44AM @matt-lanctot:

Depends on the production.   Shoot, there's so many factors to this, I wouldn't even know where to begin.  

Basically, if they believe that production will earn more in a non-producing unit, you might get paid more than the producing unit, and vice versa.  But I do know that they will almost ALWAYS attempt to devalue the minerals in either case. 

E.g., if it's producing, they'll tell you it is worth less because of time lost, deductions, etc.  If it's not producing, they can say that it's still "exploratory", and they have no idea what production results will be. 

Trick is to do your research and work with an attorney who is local, understands the market, and will help negotiate the right price.  Just as an example, I have a father who is an attorney, who read many leases and PSA's but didn't know enough to help his clients negotiate between gross and net leases, or a higher royalty %.    They would only know to do that with a few years of Oil and Gas experience.  Likewise, they would only know a going rate for selling royalties if they were experienced.  And preferably local to your land/minerals. 

I can send a list of a few Ohio, WV, or PA based attorneys, if you'd like. And no, I am not an attorney, nor do I play one on TV.  I can also provide you with (local to marcellus/utica) reputable mineral buyers, and no, that's not my profession either. 

Matt


william george allison
03/31/17 02:30:07PM @william-george-allison:

matt I am getting quotes on my mineral rights if you have some good companies buying in brooke county wv please let me know thank you bill


Heidlebergman
03/07/17 11:40:28AM @heidlebergman:

The oil and gas royalties market...  It is somewhere between cash for gold, and mortgage derivatives.  They are only worth what someone is willing to pay.  I have some really valuable baseball cards.  I have never ever sold one for what I thought it was worth.  A good rule of thumb is take the current lease bonus for your area and multiply it by 2 for the low and 3 for the high.  This price is for open/unleased non-held by production properties.  If your property is leased you can get pretty close to your market price by multiplying the bonus by 2 or 3 then subtracting it by the current lease bonus.  So if the bonuses are currently going for $5,000/acre...your royalties are worth between $5,000 and $10,000/acre (add the bonus for the total).  This really only is applicable for active areas.  In West Virginia there is proven production east of Interstate 79...but current lease bonuses are $0.  Of course the minerals are worth more than that...but how much are they worth?   I have tons of data, contacts, information...and I cannot keep up with it.  One problem is these companies consider their current lease bonus dollar amount...confidential, and a contract landman will get fired if he leaks the amount and the company finds out.  So...how can we properly apply that formula to these areas when the variables are confidential?

Never in the history of man has there been a fair land deal.  This is from a movie...which one I dont know. 

You can tract mineral deeds at your courthouse.  If you know of some companies that are currently purchasing minerals you can query them and some of them do put in the deed the price they paid and the net acreage being purchased.  And you can do some quick research and find out the status of the property (hbp, leased, open, shale producing) do a little math and you have yourself an idea of what some companies are paying or willing to pay. 


Heidlebergman
03/07/17 11:46:08AM @heidlebergman:

Basically to get an accurate value of your minerals you would need a reservoir engineer, a production engineer, a pipeline engineer, an oil and gas accountant, a really good landman, and for good measure a title attorney.  Then have an oil and gas finance professional put it all together.  That's about impossible to put together for your average mineral owner, hell its almost impossible for a large company to put that together.   One of these days someone will put together an algorithm...as far as I know it does not exist.


Lerret
03/07/17 01:53:17PM @lerret:

There is a lot of BS about "Valuing Mineral Rights".  Rules of thumb are handy but without local knowledge they are dangerous.  I suggest you call the National Association of Royalty Owners and ask if they can sell you a book on the methods of appraising minerals.

The intrinsic value of a mineral is the value as of a certain date.  In theory the peak value lies the moment the first drop of product starts out of the hole. It is a wasting resource thus each day there is less and less of it to sell.  BUT the caveat is that you don't know what that total EUR (expected ultimate recovery) is nor do you know what price it will end up selling for.

Non-producing minerals are best valued by comparable sales, the most recent and closest being the most useful sales.  In rank wildcat areas, a dart board is about as accurate.  For producing wells, only the most general idea of production can be determined before hand. You can use other wells as a proxy. You can guess or base it on published estimates of EUR.  But again, each day a well produces it has that much less product to sell.

Once enough data is established, you can run a decline, and a reservoir engineer can make a calculation or someone not an engineer that knows what they are doing can do the same.  But a decline curve improves as more data comes in.  An erratic well, or a well produced erratically, or that has mechanical issues, will be very difficult to decipher.  But once you have that single well, is that going to tell you what the entire property is worth?  IF room for other wells exist, then that production is only a portion of the oil and gas remaining in the drilling unit that your property likely lies in... One well does not tell me about the whole unit.

So there are a number of ways to value minerals. None are overly accurate. But doing two or three different methods provides a range of values from which to select.  But from a theoretical viewpoint, the maximum amount of gas and the least amount of risk exists the moment the first production goes into the wellhead.  Before drilling, the risk factor reduces the value, and production reduces the volume afterwards.  The earlier in the development of a field or play, the lower the value because the risk of failure (geological, mechanical, or simply luck) is higher.  Drilling and producing eliminates the risk but the asset is still a wasting asset that will deplete to the end point eventually.

Buyers of minerals intend to arbitrage the value by taking a small risk and offering well below what they expect the well to produce. As such, you can sell minerals but need competition between buyers to get a good (fair market) price. 


James T Monyak
03/08/17 09:12:26AM @james-t-monyak:

There is no such thing as a fair price for mineral rights.  Their value is about predictable as Trump is without a written script in front of him!  Seriously, I could tell your stories about the change in values of mineral rights that you would not believe. When you take an industry that has NG priced at $1.20 one year and $13 in another, how can someone value mineral rights?


Lerret
03/08/17 10:06:22AM @lerret:

Regardless potential uncertainty that surrounds the valuation of mineral rights, the IRS, courts, and others require a point value valuation at FAIR MARKET VALUE.  And having done this as well as written books about it, I certainly am not going to argue that mineral right values are not a moving target. They are far more volatile than land prices, but OTOH, they are not dissimilar to that of some slightly less fungible stock...like a OTC stock that doesn't get much trading.

There is in areas an element of speculation. But in the regions I work, you find mineral rights being sold outright, often on properties that are not producing any income nor have wells; or, especially now in W. Oklahoma, they may have some older shallow wells holding the leases but companies are breaking those leases or dealing with the leaseholder to exploit deeper areas with horizontal drilling.  And those tend to vary, but will consistently be purchased around a central mean value.  So yes, some $600/acre mineral sold; some $6,000/acre sold, but the bulk of the sales were between $2,000 and $2,600 per acre, then you have established a range of probable values.

So any appraisal worth its salt has to define the DAY of the value, the TYPE of value, and the limitations of such value. And the definition of value has to conform to that required of the project. In other words, to claim a step up value basis, it must define the value as of the date of death of the mineral owner, who owned the property as of that moment and do so using the IRS's definition of "Market Value".

Wild swings in market activity are usually the result of a new well report or a filing in the Oil and Gas Commission (RR Comm, OCC, AOGC whatever) suggesting a well will be drilled nearby.  As crazy as it appears there is a commonality in the change of values and why they change.  The appraiser can only work with the data that is available as of the date of appraisal.  And they work with the historical data.

Yes, some folks will pay a premium.  When a huge well was struck years ago, some of the big shot oilmen who wanted bragging rights, bought tiny pieces of the well via mineral rights so they could claim to "own a piece" of the well so they could impress their buddies down at the Petroleum Club.  They paid far more for that tiny fraction that it was worth, but that does not mean the mineral right is impossible to value and do so reasonably in light of the market conditions given. Such vanity is not common however, most buyers are buyers who are making a living at it.  And like any investment, some pay off well, some do not.


Werner Kostendt
03/08/17 09:31:22AM @werner-kostendt:

While there are many different types of value, the Uniform Standards of Professional Appraisal Practice (USPAP) defines Market Value as follows:


Definition of Market Value


 

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is consummation of a sale as of a specified date and passing of title from seller to buyer under conditions whereby:


  1. buyer and seller are typically motivated;
  2. both parties are well informed or well advised and each acting in what they considers their best interests;
  3. a reasonable time is allowed for exposure in the open market;
  4. payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.[1]

[1] Source: Board of Governors of the Federal Reserve System, under Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)

Particularly with respect to mineral rights, important points to remember about this definition are that value is

-"most probable" 

- buyers and sellers acting prudently and knowledgeably

- un affected by undue stimulus

- as of a specified date

-buyer and seller are typically motivated

-both parties are well informed and advised

An appraiser provides an "opinion" of value or a prediction of most probable selling price subject to all these caveats.


David Allen Lilly
03/09/17 08:17:06AM @david-allen-lilly:

Regardless of anything else, if someone is buying your mineral rights they are only going to pay you a fraction of what they are worth, otherwise why would they even bother ?

In effect what you are doing is taking the first few months worth of royalties up front and the giving away all the remaining royalties to the buyer, plus in most cases you are selling any and all other formations which may pay a royalty in the future.

The buyers I have experience with are far less than honest and in fact will and have told mineral owners anything they think will get said owners to do what is not in the mineral owners best interests.

There are a very few and very rare instance where selling is the right thing to do. In the vast majority, 99.9% of the time, selling is a mistake for the reasons I have noted in this comment.

I know this comment will garner some scorn just as my other comments on this question have.

Just remember, I have no interest or benefit in what you do with your assets and, they are yours to do with as you wish, no hard feelings either way.


James T Monyak
03/09/17 08:32:55AM @james-t-monyak:

Buying mineral rights is similar to buying stocks.  With stocks you hope to select the right company and hope the stock market does not crash on you.  Buying mineral rights, you hope to buy the right location and hope the natural gas market does not crash on you.   If you need cash, selling mineral rights make sense.  There are plenty of mineral owners in Bradford county PA that wish they sold their mineral rights.  However, there are many mineral owners in Washington County Pa wish they didn't. sell.  ;)


Matt Lanctot
03/09/17 08:39:44AM @matt-lanctot:

a few months of royalties? I understand your position.  I brokered royalties for a few years, and there are definitely folks who try and low-ball their offers.  A "few months" of royalties, however, is way off.   A few years, maybe. 

And have you seen a royalty check lately?  With all of the deductions, and I've seen up to 75% with my own eyes, I went from being an investor to selling most of my royalty interests.  Of course, now I'll keep my eye out for zero-deduction leases, and even then, it's all how it's interpreted by the operator. 

Also, keep in mind, the buyer bears risk as well.  4 years ago I paid (not my money) a guy in Jefferson County, OH., 7,500/acre for his mineral rights.  He was shaking in his boots and his family did all but disown him.  Seriously, they stopped speaking to him because they knew with certainty it would be worth millions more. The family held onto about 160 acres, and he kept 40 and sold 40. 

Anyone who has been in the game or lives in Jefferson knows what happened next.  The new number was zero.   If you tell me this only happens the .01% of the time, then I know this reply was not worth writing.  

And please consider that many of these folks are in their 70s and 80s and want to be able to enjoy the free money.   You can't take it with you!


David Allen Lilly
03/10/17 08:49:33AM @david-allen-lilly:

I have seen my royalty checks, no deductions, with Chesapeake. Regardless, deductions will be figured into the equation either way, and you still will not get any where near 50 cents on the dollar for the value of your royalties or your lease.


Matt Lanctot
03/10/17 10:32:42AM @matt-lanctot:

You must of had one heck of an attorney and lease.  Whoever helped you negotiate a lease like that, you should probably recommend to people that will be leasing or selling mineral rights on this site.  Chesapeake is well known for unfair deductions that affected 1000s of landowners. Here's one article but there are plenty out there if you want to google them.http://www.naturalgasintel.com/articles/104632-pennsylvania-ag-sues-chesapeake-for-royalty-deductions-following-investigation


Lerret
03/10/17 11:17:35AM @lerret:

Interesting thread.

Regardless of anything else, if someone is buying your mineral rights they are only going to pay you a fraction of what they are worth, otherwise why would they even bother ?

Valid point. But the same can be said for an apartment complex or other investment.  Value is the anticipation of a future benefit. No one is going to pay you what a property would ultimately bring...why pay $1 for a dollar bill?  You have to at least THINK you will make the time value of money and something for the risk of buying and holding the investment for that "future" benefit.

I valued an estate recently using sales of other properties in a Western Oklahoma county.  The heirs wanted to sell. The buyers so far are complaining it is "too high". Why wouldn't they? they want to buy it as cheaply as possible.  But when I see royalty companies buying minerals, bundling them up into larger bundles and selling for say 15-20% more than what they gave for them to other royalty companies, then I have a pretty good idea that is what they (the pros) think it is actually worth.

Can that change?  Certainly. In Blaine county, OK in 2012 mineral rights were selling for $1000- to maybe $2000/acre.  Now $8000 in the same area sounds "cheap". But over in Logan county and other areas where "risk" has risen dramatically with the threat of earthquakes shutting down injection wells and many wells moving 10x the water they are oil, the price of mineral rights is actually lower than it was in 2012.  Mineral markets are far more active and rapidly moving than are most other real estate.  Yes, it is a moving target but keep one thing in mind.

When you see the "trades" (oil magazines) touting a sale of $40,000 per acre for between companies, keep in mind that the sale usually involves certain geology, seismic data, and perhaps even wellheads, etc. in the sale. AND, the sale is the working interest, not the royalty interest. When you sell minerals, you are selling the right to lease your 1/8th, 3/16th, etc.  But the companies are trading the remainder - that 80% or so that is theirs. And the operator of that company is going to charge 10% to the partners for being the "operator" and makes money in that aspect as well.  So if you sell a 1/8th, there is still 7/8th to contend with and even after tranches are taken out and the net working interest reduced to about 80%, that's still a lot more than the 12.5% or 18.75% of a lease.


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