Possibility of buying producing mineral rights in Wilkenson county Ms. bout 30 acres give or take 1 or 2 producing 2 years with last royalty check 1000.00. What would be in todays market fair value. Was told rule of thumb is 32 times last check but that seems pretty vague.
Hi Rodney -
There are various ways to arrive at a "fair value" that range from expensive, detailed Reserve Studies to simple formulas like the one someone quoted you.
The simple one I was taught to use for producing mineral interests was to take the average of the most recent 3 months worth of royalty checks (not the last three royalty checks, the last three MONTHS worth of royalty checks) and multiply those by anything between 36 months (3 years) to 60 months (5 years), depending upon the expected remaining life of of the Well(s).
If the Wells are expected to last another 10 - 15 years, then you could begin your bargaining at 36 months. If the Wells are expected to last another 20 - 30 years, then you could begin your bargaining at 60 months.
And it the seller argues that there are additional Wells to be drilled, explain to him that you can't sell oil still in the ground. People try it all the time, but that's nothing but "pie in the sky". Might not ever get drilled.
Hope this helps -
Charles Emery Tooke III
Certified Professional Landman
Fort Worth, Texas
Dear Mr. Fortenberry:
A short discussion and a portion of a valuation that I performed:
Methodology Discussion:
While there is a strong market for proven reserves and mineral rights in many areas, they are most often sold in one of the following ways:
- 1. Outright Sale of Mineral Rights - Unleased.
There are standing offers by individuals and firms who are actively willing to buy mineral rights. Blind mail-out offers and checks are received regularly by mineral owners within the established fields. Some offers are disguised as “leases” but are in fact mineral deeds and allegations of fraud have been discussed by public officials who are concerned with the elderly or uninformed who might sign such instruments and cash the attached checks. HOWEVER, if the properties have been condemned by drilling on or in the immediate area, a nominal rate was assigned to those properties.
- 2. Outright Sale of Mineral Rights – Leased but Not Drilled
Undeveloped mineral rights often are valued for IRS estate purposes and/or sold for multiples of 3-5x (300-500% of prevailing bonus rates) paid per acre. Personally, I hold this category to be well in excess of market bonus pricing and have assigned a multiplier of 1000%.
- Outright Sale of Royalty and future income streams in existing wells generally sell for between
36 months and 60 months of income (however up to 10 years of income; (see June 2006 Oil and Gas investor p. 53) depending on the following variables which are lease and/or well specifics.
a. Age of well(s) [pre or post “flush” production]
- water produced
- BTU of gas
- Oil/distillate produced, etc.
b. Percentage of monthly net royalty income which varies according to:
- operator
- pipeline / pipeline contract
- lease provisions
- pooling provisions
- pipeline pressures
c. Depth limitations, if any, as many sales and leases are depth/zone specific, leaving other zones above or below the producing formation having significant although speculative present and future value.
d. The type of royalty deeds or mineral deeds varies widely with some inclusive of additional conditions and terms.
e. Individual characteristics of wells for additional well locations.
f. Geology
g. Quality of operator
Valuation
Producing Properties
Fair Market Valuation is Simple to Complex to Simple:
- Value is dependent upon decline.
- Value is dependent upon longevity.
- The combination is generalized as a geographic area.
- Value is dependent upon product prices.
Valuation methodology combines two basic, generally acceptable approaches for valuating oil and gas properties, i.e., the Market Approach and the Income Approach.
The Income Approach takes wells in where enough history was available so that an auto fitted decline curve analysis could be produced for forward modeling with the future value stream discounted to present day dollars.
The Market Approach uses actual market information from recent sales and listings of comparable, substitute assets. The largest problem with the Market Approach is that comparable sales are rarely disclosed to the public. There is no multiple listing service available for sales of oil and gas properties.
If you have numerous producing wells, all of which have sufficient production history to use the Income Approach, this is by far the more accurate of the two approaches.
Best,
Buddy Cotten
Thanks so much for the information.
Rodney E. Fortenberry III
Thank you so much for the information.
Rodney E. Fortenberry III
Rodney, These are great answers. Just wanted to add a couple of things to keep in mind. Rules of thumb using the last historical check or an average of historical checks have two caveats, which are magnified in the current environment. #1) Price - Given volatile and declining oil and gas prices, today's prices now are significantly different than what they were over the last 3 royalty checks meaning actual future royalty checks may be much lower than historical, assuming today's prices and #2) Production: Depending on the age of the well, the volume of oil or gas may be significantly less than prior month's production, also meaning lower royalties. In other words, multiplying historical checks by 36-60 does not necessarily mean you should expect to recoup your investment in 36-60 months. When looking at property valuation, I prefer to adjust historical royalty checks for current prices, and consider the age of the well(s) to get a sense for likely production declines.
John Mark Warren
SableRockEnergy.com
Thanks so much for the heads up.
Rodney E. Fortenberryy III