We hold some minerals in Midland County (for example section 21, block 41, T1S). Wells were recently completed in March 2020, and my share of royalties is around 3 bbls per day; June check was around $3,500. How should I value the producing minerals?
I was told to value daily barrels x $25,000. Is this fair? Since the wells are so new, production will decline rapidly, so if I wait for a while, production would be much lower, and therefore, would I get less value if I wait?
Fightermko,
Are you trying to assign a value for your interests so that you can sell them?
~Rachel
Rules of thumb don’t work well for areas with modern new wells, for the reason you describe. If in April the wells were making 3 net bbls/day, in May they might be down to 2 net bopd and your check down to $2400. The value of your minerals only went down $2400 (because that oil is no longer in the ground, it’s in your pocket), not $25,000. Production DOES strongly influence the value of minerals, but it’s inaccurate to use a simple equation to ballpark a value when you’re in such an active area. A discounted cash flow analysis that takes into account the decline of the well(s) would be step one to valuing the minerals, and looking at the potential for additional wells being drilled would be step two.
How accurate you need it to be depends on your use of the value, which is why Rachel asks. For a ballpark, we can help you here. It’s possible $25,000 is fair but I’d need to peek at the area first. For use to make financial decisions (like when and how much to sell for) I’d recommend seeking formal valuation assistance and/or an agent/broker for your minerals.
are you looking to sell or get a value for your minerals>?
We just wanted to know how to value producing minerals. We own mineral rights and are looking to buy more during the current downturn. If the valuation was going to decline rapidly then we would just sell, but otherwise we are looking to accumulate more minerals. I wanted to know what valuation methods are used so we can evaluate how much to pay for these assets. Thank you
Many of the professional buyers use the Discounted Cash Flow approach. I heard an excellent talk by Detering Energy Advisors the other day. You might want to look them up and other professional buyers. In general, horizontal wells do decline rapidly, but that is also relative to their increased volumes over most vertical wells.
Most minerals are sold by the NMA(net mineral acre) or NRA(net royalty acre) not by the current production. Expected production , not current production plays a large part in valuing. If your minerals covers multiple pay zones as in the Midland and Delaware Basins then it’s value increases dramatically. Lots of factors come together in determining value. Current production tells you little.
“How should I value the producing minerals?” - Carefully. Valuing recently completed horizontal wells is not a simple process for many reasons.
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