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.