FYI - although I like the guys at Petrovalues, I think his statement is rather off base. A sec compliant valuation is not “market value” nor is it the value you would receive over time if you held your minerals over the full life of their development.
SEC value is the requirements the SEC has placed on reporting companies for their reserve reports, it requires companies to use prices from the first of the month of the previous twelve months as their price deck (essentially a flat price deck based on the last year’s prices). Additionally, any ‘PUD’ proven undeveloped properties must be properties that will be in the drill schedule within the next 5 years from the date of the report - in other words, the reporting company must have line of sight to developing he wells in 5 years.
Market value of minerals is in it’s purest sense is exactly that - what would an arm’s length buyer pay for your minerals. The actual value of your minerals is truly dependent on perspective - what value are you looking for - the value you can get if you sell them today? The value you can collect over the life of the minerals? The value that you could get at some date in the future after some event, like drilling/development?
All of these “values” are dependent on a multitude of variables, driven by the quality of the underlying reserves, probability those reserves will be developed, the timing of the development, and local activity. Utilizing offsetting well performance, and other accepted engineering methods, you would determine the what the wells are capable of producing, and then try to estimate forward commodity prices, timing, etc. All of these and other variables can impact value or perceived value and therefore what someone is willing to pay for the minerals - there are many more scenarios than what is consider under an SEC valuation.
I agree that “back of the envelop valuations” are just that - estimates/guesses. Some mineral buyers use silly ways to come up with a price they would pay for your minerals, such as multiples of your lease bonus, multiples of your monthly checks, etc. Most of these are rather naive, but then again, there are alot of deals that are transacted on these methods…so that kind of makes them ‘market value’ if someone decides to sell.
To highlight the folly of using ‘lease bonus’ as a method to come up with the value of a mineral, lease bonuses tend to go down as the royalty rate in a lease goes up - in other words, if you ask for an 1/8 (12.5%) royalty, you may get a great lease bonus - let’s say $10,000/acre as a random number for this example. BUt let’s say you want and get 1/4 (25%) royalty, well then you’re going to probably get a much lower lease bonus, let’s say a $1,000/acre. Well if someone is going to buy you minerals based on some random multiple of your lease bonus, they would way over pay for the acreage leased at 1/8 and $10,000/acre as compared to 1/4 and a $1000 per acre, because when the wells are drilled and royalty payments start coming in, the 1/4 lease is going to produce twice the amount of cash flow as the 3/16 lease. Yet the mineral buyer would have payed 10 times as much if they used the lease bonus as the basis for valuation.
Additionally, non-reservoir items impact the value of minerals. The reputation of the operator can impact the value, for example, Chesapeake has a pretty bad rep with mineral owners, and some buyers won’t buy minerals under old Chessie. Political risks, such as the overhang of prop 97 is weighing on the market at the moment and affecting prices in Colorado (make sure you vote NO against this ridiculous proposition in November).
so at the end of the day, the market value of your minerals depends…on what you want to do and when, as well as a whole bunch of items driving the perceived value of those minerals to buyers… You already made a step in the right direction by reaching out on this website and asking the question, the key is to get educated on what you own and see what the potential is (that’s where petrovalues may be of help), and once you have a feeling for what the underlying quality of the rock looks like, and what the other variables are, you will be armed with the knowledge to negotiate the best deal with mineral buyers.