Calculating the Value of Mineral Rights
Mineral buyers will try to entice mineral and royalty interest owners with a super fast and surprisingly simple way of valuing their assets with a “mineral and royalty calculator”.
Do they really work and do they provide an accurate picture one can rely on?
The process of placing a value on mineral and royalty interests is not a simple calculation and it’s one reason why we don’t offer a calculator on our website.
We don’t want to fool people into thinking they can receive an accurate picture of what their interests are worth by plugging in a few numbers. That would be unethical and dangerous for owners to do as it would give them a false sense of security, be a waste of time, and cause unnecessary headaches for them down the road.
99.999% of the time, calculating a value for mineral and royalty interests is more than just coming up with a number. It starts with the motivation of why one wants to know. Maybe you want to know because you:
- Inherited them and know nothing about them,
- Need to sell because of personal reasons,
- Want to know the tax implications if you are considering selling them,
- Are receiving offers from buyers wanting to purchase your assets,
Or for any other reason you please!
How much are my mineral rights worth?
To answer this question, sellers first need to be aware of the price gap between buyers and sellers that I find is ALWAYS present in every deal that I do.
Let me first say that it’s a part of the negotiation process and it’s the part of the process that I love, but it can also be the knot that never gets untied and causes deals to fall apart.
This can happen when sellers want way more than what their interests are worth.
This is the main point of this article because once a seller understands the buyer’s perspective, they are more open-minded and understanding of the process and therefore the less emotionally complicated the process has to be.
Mineral and royalty calculators don’t take into account the following factors and never will:
1. Sellers are not familiar with the production stages of development
Do you know what stage your interests are in? Find out your stage of development.
2. Buyers can’t and won’t compensate sellers for every drop of production their interests are capable of producing
It is simply not possible for an Operator to attempt to extract every bit of oil or gas from a well. At some point, it will not be economic as the cost of attempting to do so will outweigh the reward.
3. The decline rate matters
Oil and gas wells are forever depleting.
They typically come on very strong and then start their decline quite rapidly until they reach a point where the production starts to level off and become more flat. This level is considerably less than where the first well started.
Both vertical and horizontal wells do this, however, horizontal wells drop off significantly faster.
4. Risk vs. Reward
Let’s face it, no investment comes without some level of risk and buyers will certainly have a risk factor built into their pricing.
This risk factor is going to be dependent on several factors, i.e., development stage, producing vs. non-producing, permitted vs. unpermitted, undrilled permits and/or DUCs, commodity prices, etc.
5. “Something is only worth what someone is willing to pay for it.“
All things considered, buying and selling anything also boils down to this statement.
You can have the best scenario possible out of all factors mentioned herein, but at the end of all negotiations, the price will boil down to this simple fact.
At some point, there will be a cap on a price in which someone is willing to pay. It’s as simple as that.
In addition to these, sellers need to know there are more factors that are just as important when determining their mineral and royalty values, including but not limited to:
- Lease terms (Operator obligations)
- The commodity price of oil and/or natural gas (which is also tied to supply and demand)
- The forecasts and drilling plans of the Operator(s) in the area your assets are located
- The stage of development your interests are in
- Take-away capacity (Is there a market? Can the Operator sell the production?)
The more educated you are on the ins and outs of your interests, the better off you will be.
Minerals and royalties can be top notch investments, but they require personal responsibility and edification if you are going to make them work for you.
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If you’ve inherited mineral and royalty interests, there is never a better time than now to learn about your newly acquired asset. A mineral appraisal is especially important if you’ve inherited them, are looking to sell, or haven’t had one done in the past 2+ years (trust me, A LOT can happen in two years).
The industry is always changing and we can help. Reach out to us today.
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