Calculating Mineral Value at Time of Inheritance from a Relative

Oil and Gas Leasing Help
1

I inherited minerals from a relative and need to calculate the value when I inherited them, so if I sell the minerals later, I will know what my basis is.

I THINK I have a solution that will give a pretty close value of what they were worth, but I wanted to see if anyone had a better idea.

Given the value of the minerals, it is not worth hiring someone to determine their value.

I inherited only the minerals without leases/wells, and no surface land.

Location: Tyler County, WV.

Several of the mineral tracts I inherited were also included in a “Notice of Lis Pendens” and resulting court orders to “quiet the title”. In WV, if the oil company wants to lease the minerals AND they are unable to find all the owners, the oil company can show the court they tried to find the owners but were unable to. If the court approves, a “Special Commissioners Deed” is issued to the county to document the owners that could be “found”. This court approved deed does several things: (a) It lists the owners who could be located, (b) It Quit Claims the owners who could not be located, and (c) It lists the dollar amount of a bond for the minerals for the owners that could not be located. The bond is paid to WV.

If the unlocated owners approach the court within 7 years the money put aside by WV for them is paid to them for the minerals (but they don’t get an oil lease). This allows the oil companies to drill, the located mineral owners to get their share, and WV gets its cut of the revenue.

Knowing the value of the bond, and knowing the “Unleased Interest” in acres, I can calculate what the value is of the minerals per acre. I can then compute what my minerals are worth.

Example:

Acreage of Owners That Could Not Be located: 5.86 acres total

Total Consideration Paid for Unlocated Owners: $29,710

Calculated Worth per mineral acre: $5,070 per mineral acre

I also have access to other “Special Commissioners Deeds” from the time frame of my relative’s death that are in the same area as the inherited minerals, which I can also factor in.

Does anyone have an opinion on this approach?

2 Likes
2

Kudos for trying to analyze this based on this information. However, there is a flaw in this analysis.

What the applicant for the Special Commissioner’s lease receives is an oil and gas lease. The amount paid for the lease is the bonus for leasing it. That does not make that the value.

In other words, it is fairly common to receive an offer of, say, $1000 plus a 3/16th royalty on a lease. (To all people who post, this is a hypothetical and will not apply to every single acre, because not all acres are created equally.) That does not make the interest worth $1000/acre. It is worth substantially more.

My suggestion is, if you have received the back pay from the General Receiver or from the applicant, determine what the production was in the first seven years and average it out, then multiply it by five years. I suggest five, because many mineral buyers will buy acreage based on a five-year average revenue over a relatively recent period.

A couple of notes. The bond may or may not be based on the bonus paid to the General Receiver. The bonus paid is a greater determinant, subject to the above.

And there is a lease in effect. The Special Commissioner signed a lease on behalf of the missing unlocatable owners. They are all subject to this OGL.

1 Like
3

Tim’s right that the bond is a lease bonus, not value, so $5,070/acre is a floor at best. For basis, though, the number you actually need is fair market value on the date your relative died, not today. His 5-year production method estimates what a buyer pays now, which can be far off the date-of-death figure if leasing or prices shifted since. Post-death production only helps as evidence of what was reasonably expected back then. The value is frozen at death.

I’d also rethink the “not worth valuing” call. Basis sets your capital gains tax at sale. A thin, undocumented number either inflates your gain and overpays tax, or gets cut on audit. Getting it right usually costs little next to the tax it protects.

Were these tracts leased or producing when your relative died, or unleased at that point?

4

@Larry18 I know you have decided that it may not be worth the expense of hiring someone to do a value-at-date-of-acquisition report, but I had one done when I inherited and it has been extremely useful. In some cases, I sold properties that were worth more when I inherited them and the capital loss has helped reduce my taxes quite a bit and carries forward year-to-year. Granted, I had several different properties so it may still be different for you. The company I used is called Pecan Tree Oil and Gas and I would highly recommend them.

5

Pecan Tree is listed in the Directories tab above.