Is there a formula or industry method for putting a value on mineral assets? It would seem that an assets’ worth is somehow related to how much it earns. Does that hold true for the O&G industry.
Typically, it is done through decline curve analysis and then a discounted cash flow model is applied to the type curve. Reservoir engineers are normally responsible for this. It is quite difficult for conventional reservoirs as pressure and volumetrics must be calculated against the recovery method. I would hesitate to say that it is easy (maybe easier) for unconventional plays as the values can be approximated through analog wells. It is more black magic than science at times because of the constant variables (price, completion technique, reservoir depletion etc.) Using a present value equation on the expected cash flows helps to normalize value and can take some of the variability out of the back end of the curve. What PV value one uses is probably one of the more debatable aspects of how NMAs or NRAs are valued. I do it as a hobby of sorts. I prefer to use a PV10 equation for a producing well that has transitioned from the hyperbolic stage to exponential decline. PV15 for a well that has IP’d or has 60 days of production and closely resembles my type curve. I would adjust the PV up for DUC’s, permits, or PUD locations. Often an NMA/NRA’s value is tied to the unit size or lease proration and remaining locations. It is a difficult interplay between PDP and PUD credit. Especially if you are a seller (or representing) trying to negotiate with a buyer. I hope this is helpful. It is not a one size fits all approach. Requires some geologic/land/engineering/finance acumen. I come from a land background but found myself asking this same question about 15 years ago. Have endeavored to self-teach ever since. Armchair engineering doesn’t really put you on the same level as a real PE but it certainly helps to speak their language when negotiating deals.
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There’s alot of people that spend a lot of time and money to attempt to know how to evaluate minerals and they’re still wrong. It’s ultimately worth what someone will pay for it. End of the day point, there’s no magic formula or simple answer to exactly what they’re worth, only educated guesses and varying situations.
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yes for the most part. But like real estate, if activity or development is coming your way or getting closer, then the value goes up. Same with o&g, if the property is in a sleepy county without much activity, its a function of how much income. The multiplier runs anywhere from 3 to 6 years of the average revenue received.
If you’re in a hot or active county, then value may be great, because companies have interest in the area.
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There are methods of valuing a mineral property. Note that valuing a WELL is a far cry from valuing the MINERAL RIGHTS. Wells involve equipment. Mineral rights do not. One method is a multiplier of income Buyers often offer something that is either a multiple of annual income or the sum of the previous 3 years incomes. You can also determine the remaining reserves in the existing producing zones and set an in-ground price based upon sales. You also must include an allowance for any potential zones behind pipe that are not being produced and that involves a petroleum engineer or geoloist estimating those potential reserves and some value for them. There is also a sinking fund method. And simple sales are involved in zones that are not producing which requires one to predict the future development time line.
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Thanks to all for your replies. We’re in a unique situation. We are a group of investors that bought into LPs that invested in O&G assets (NMAs, Wells, and other rights). Our managing partner died and left the businesses unmanaged for a couple of years. We now have control of the entities but we’re all passive investors with no O&G background. Most of the assets that were purchased were never conveyed. We are completing a due diligence phase with the brokers and should have all the deeds in the 30 days. The problem now is…what’s it all worth.
This is a great post! I’ve seen people buy mineral rights near wells currently being drilled thinking and wishing for a big pay day and don’t get a thing but the rights they purchased and nothing happens! I know because I’ve done it myself!
Suggest that you get a professional petroleum engineer to evaluate the minerals, wells and other rights. Then you will know where your starting point is. The broker may not have your best interests in mind if they are working for the buyer.
Has anyone reached out to you to try and buy everything that you own or even just the minerals or working intererest in the last 2 years? You can hire an engineer that will give you a guestimate on futured production and what it might be worth, but if buyers dont agree with that, then what do you do? At the end of the day it doesnt matter what you or anoyone else think its worth, the only thing that matters is what the companies will pay you for it.
No ones contacted us to buy what we own, the reality is we may want to keep the minerals. When all the titles are conveyed and we can establish what the monthly income potential is we’ll have a better feel for what they’re worth. How does a professional engineer differ from a landman? Is one more experienced in assessing value?
A landman is concerned with the title to the land and the ownership of the minerals, the net acres and the title path since statehood that proves who owns it. They have a good feel for the market price of leasing and sales.
The professional petroleum engineer is concerned with the performance of the wells as to the product volumes, prices and pressures. They can do a reasonable prediction of the future performance of a well based upon its past performance. Then a reasonable price deck is used for lease costs and product prices at a certain date in time and projected out into the future. Of course, the prices are never perfect for the future, but it gives an idea. The petroleum engineer can also give a general idea about what unleased acreage is worth. A landman may do a better job of that. My engineer runs our wells out to the lifetime of the well to their economic limit. They adjust the value for the time value of money in the future. Our family thinks generationally and plans many decades out.
Buyers have their own internal folks that do both of those jobs. Some buyers only make offers based upon 3-5 years of production of the current wells. Others do longer. Offers may only be based upon current production for a few short years. They know what the potential is for infill wells and that is why they like to buy up minerals in hot areas. They plan on making a profit off the undrilled wells. The risk is whether or not they get drilled and the price of the products when they do get drilled.
So you can see the difference in what might be offered versus the full potential of the acreage.
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