Can someone tell how to get a ballpark estimate how to calculate the value of your minerals based on the your monthly checks? I know that there are a lot of variations gas, oil, horizontal, vertical, how long has the well been in production, etc.
I get offers to buy my producing production all the time, so he seems there must be some type of formula to use. Any comments would be appreciated
Thanks Bob King
You will need to estimate both production and prices going forward and then calculate the Net Present Value (NPV). To calculate NPV you will need to choose a discount rate. When I worked on project economics we used 12% which I thought was way too high and in today’s interest rate environment would be even more egregious. Maybe someone here knows what the buyers are using to do their valuations.
Back in the “old days” for conventional wells and more predictable exponential decline curves, the ball park estimate was the last four years of oil royalties and seven years of gas. Now, with horizontal wells, that doesn’t work as well because the decline curve shape is very different (usually more hyperbolic early on and then changes). Early production comes on hard and high and declines quickly. We use the term “hockey stick” to compare the shape. There are firms out there that will do the estimates for you. Last time I did it, the accepted rate was 10% (which I still think is way too high…), but that was standard. Each company that makes sales offers had their own strategy. Some only buy producing wells and don’t pay for any future wells. Some pay for current wells and a discounted price for future wells depending upon whether they are drilled, but not completed (DUC), permitted, or reasonably certain within a five year time period.
Most of the offers I have received this year are just ahead of the bit. Many are auto emails right after increased density cases are filed or right around a pooling for a new well. Always check out the OCC activity near you to see what is happening.
Thank u very much for your help. I will start my calculations.
The Department of Human Services values minerals at 3 times the last 12 months of revenues for producing minerals unless a lower value can be shown. This valuation is used when someone applies for nursing home Medicaid benefits. So this may not be useful for a private sale.
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