We have received a handful of offers to buy our minerals in 10N-11W ranging from 2000/ac to 4000/ac. We knew immediately that 2000 was too low since there is leasing going on at 1500/ac. I have been told as a general rule that mineral value is very subjective, but a good starting point is three or four times the rate of lease bonuses on a per acre basis in the area. That would mean even the best offer we have received would be considered low (3 x 1500 = 4500). We are looking for guidance as to what to counter any of these offers with, should we decide to sell. Any input is appreciated.
Hi Kristin, Mineral rights can be valued several different ways. If there is a lot of activity in the area, you can use a combination of looking at comparable sales (the “Market Approach”) and having a qualified person perform a cash flow analysis (the “Income Approach”). The multiple of lease bonus rule of thumb may significantly under or over-value your interest. The best bet is to have an engineered valuation done as it will take into consideration all of the variables specific to your property.
In general, the value depends on the activity level (timing) and production rates for any offset wells as this will dictate what a likely buyer would be willing to pay. You can also look at recent comparable sales as well (and know enough about each transaction to understand whether or not it is representative of true market value).
I cover this in a lot more detail on my website and I have a podcast episode that covers this as well if you prefer to listen to content. Here’s an excerpt on the topic from my website:
To understand comparable sales prices, in some states like Oklahoma, you can back calculate the amount paid in a mineral transaction by looking at the Documentary Stamp fees. Check the county clerk & recorder’s website for info on how much the fee is per $10k and you can use this to come up with how much was paid based on the Documentary Stamp fee shown on the deed. Most county recorder’s websites allow you to search by the legal description (Section, Township, Range) and document type so that you can narrow down the relevant transactions in your area. The other important piece of the puzzle is understanding how many net acres were purchased to determine the Price per Net Mineral Acre (simply, the sales price divided by the number of Net Mineral Acres). The net acreage amount is not always obvious (unless it is mentioned on the deed). If it is not mentioned on the recorded deed, you may have to do a little title research to determine the net acreage.
The “Income Approach” refers to the calculation of future cash-flows which are discounted at a certain interest rate and then added together in order to determine the Net Present Value in today’s dollars. This is also called a “Discounted Cash Flow Analysis“. Future cash flows (royalty checks) are worth less in the future than they are today because of the time value of money. Any money you receive today can be invested and receive interest or dividends and thus would have grown over time vs. the same amount of money received in the future. Money received further out in the future will have less value than the same amount of money received today because of this. What this means is if you were to invest the lump sum of cash (the Net Present Value) at that interest rate, it would be equivalent in value of your future royalty checks over the entire life of the well(s) from today’s standpoint. The undiscounted sum of all your royalty checks over the life of that well will be higher than this lump sum value today due to this time effect on the value of money. The higher the interest rate used, the bigger the difference between these two amounts.
A qualified person can analyze nearby production from analog wells to determine likely reserves on your tract and estimate when wells would be drilled based on current activity level and available information from active operators in the area. This information along with your Net Revenue Interest based on likely spacing unit size and expected oil and gas prices over time feeds into this discounted cash flow analysis to come up with how much your minerals would be worth today if that scenario were realized. It should take an experienced person 2-4 hours to perform a high-level analysis of a property so ballpark cost to perform a cash flow analysis would be $400-$800 per tract. If you have a bunch of tracts together in the same Township, the price per tract may be lower if the same reserves estimate could be applied between the different tracts in that Township.
For non-producing minerals, you can still use the Income Approach if your minerals are in an area with a lot of activity and well understood geology. This approach is often a good fit for relatively mature unconventional / shale plays with a lot of recently drilled wells. This is because the well productivity is somewhat predictable, so you can closely approximate the future production rates from any future wells that are drilled. The discount rate range used varies and may be adjusted (up or down) based on the risk associated with the property (e.g. how much nearby production history is available, the type of property, if there are nearby environmental concerns, or infrastructure constraints in the area).
I hope this helps and please feel free to let me know if you have any questions!
Thanks, Matt Sands
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Excellent summary! Just remember on an offer to buy, both the Market Approach and the Income Approach usually only have the “value” of the currently known wells. (These are called the Proven and Producing) You as a mineral owner have to factor in the chance of potential future drilling, additional reservoirs, advances in technology, etc. which will increase the future value of your mineral rights. (These are called the Probable if drilling is very soon and Possible if drilling is past five years out in the future.) You can be sure that the buyer has already done that and the offer he/she gives you has factored in a nice tidy profit that they are not telling you about. Also remember, that you may have to pay a capital gains tax on the proceeds.
Hi Matt, I’m new to the forum and looking for help on recent offers we have received to purchase minerals owned in Loving County TX. We’d like to get an independent value of the interests as well as find other potential buyers or possibly lease interested parties. How would you suggest we proceed? We want some independent but not expensive valuation as well as independent info on exactly what’s going on in our parcel. I’ve found the TX Railroad Commission site but haven’t had much luck in finding specific info on our property.
Appreciate any assistance you can provide. Thanks, Susan Allison
Nice summary Matt.
Market approach by definition should give you market value…it’s what the broad market of mineral buyers will pay for acreage…as everyone is aware and has stated multiple times, they receive tons of letters offering to buy their minerals…prices ebb and flow over time, but with as many buyers as there are in the market, the matrket for minerals is pretty efficient these days.
A location is considered ‘proven’ if it’s offset by existing wells, or in an area of continuous known geology (at least under the sec guidelines, which is what most people refer to these days).
Most ‘discounted cash flow’ (income approach) utilizes anticipated wellsin the calculation, unless a unit is fully developed, ia mineral buyer isn’t going to be able to buy acreage in the mid-con utilizing only pdp cash flows. Mineral owners lacking a large diverse Porto.io should be just as cautious about betting ever increasing improvements in technology and prices is dangerous.
In today’s active mineral market, it takes at least 4 or more wells to just break even in the core. And lately as mineral prices have creeped up, it takes upwards of 8 in the core…that is assuming everything goes perfect, prices stay where they are, the wells come on in the assumed time frame, etc… The big unknown of time is a huge risk, not all acreage is going to be downspaced in the next year or two. As time until full development and the associated cash flows gets stretched out risk goes up, time value of money decreases and overall value decreases.
Furthermore, I would love for someone to show me a fully downspaced unit where the wells are producing to the pubco’s type curves. The pubic type curves are the best case scenarios, ‘hype’ used to sell stock… I’ve fiudntime and time again that the b factors used in the hyperbolic portion of the curves are too optimistic, and the terminal declines are too low resulting in overly opotomistic returns.
Pubco’s overstate their reserves and their ability to downspace without interference between wells. The reality is it’s great for mineral owners because if the wells are too tightly spaced, they will recover a higher portion of reserves, however the results for each well will be impacted. But the reality also is the aren’t going to get 10X the published type curves from the Wells in a unit. Furthermore, if there is an existing (parent) well in the unit, it usually takes a pretty bad frac hit and will struggle to regain production for an extended period of time (months upon months) if it actually ever does fully recover. You can see the results if you look across the basin at the highly variable wells results…even between wells within individual units.
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Susan, I would suggest moving your message over to the Texas side in the Loving County board. You might get more traffic there.
Matt, I would like to visit with you about some acres we have in the Carr, Colorado area. I can’t figure out how to use the PM feature so this was my only option. Could you please initiate the PM or suggest an alternative? Thanks and sorry for the intrusion in this thread.
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I’m not sure you can do this anymore. I can’t aend messages anymore either