A little over a year ago my Dad passed and left some mineral rights that originated from my Great Grandparents in Alfalfa Co., OK to me and my sister. The attorney involved in settling the estate does not know how to handle the value of these rights and basically has left it up to me to decide how to do this. This is the information that I was given:
"Valuing oil and gas properties held by individuals or estates at three times (3x) annual cash flow (“3x Cash Flow”) has been a widely used rule of thumb for decades. More sophisticated users of the rule might apply it only to working interests and apply a higher (say 5x) multiple for royalty or overriding royalty interests (“ORRIs”). The convention is to simply multiply the trailing 12-month cash flow figure generated by the subject property or collection of properties by three (3) and the result presumably represents the market value of such properties."
Here is a little background on the property in question. To the best of my knowledge, it was drilled on about 35 years ago but I am not sure how income was produced. Then it sat dormant until a couple of years ago when it was drilled again and to the best of my knowledge, there was about 50k drilled, could be more.
Thanks in advance for any thoughts and information!
I am sorry about your loss. With regards to valuing the mineral interest, are you needing to get that for tax purposes? What is the end goal for a valuation? Producing mineral interests have metrics for valuation, non producing interests are much harder to estimate.
In areas where development of mineral resources can utilize horizontal drilling and permeability enhancement, Mineral values can be more accurately be determined by Fair Market Value as defined by several governmental agencies.
If you look backward and use the history of production to evaluate minerals as you have sited above to estimate value, you will often come up with a small fraction of the Fair Market Value.
I've sent you a pm if you would like to know more.
Thanks for the reply, Gates. My immediate interest is to get this estate closed. It has drug on and on and the attorney has put in my lap the task of valuing this mineral right. I will be calling SandRidge tomorrow to see if they are able to tell me how much our wells have produced in the past year and whether or not there is a current lease but I'm not sure if they can tell me as the right hasn't been transferred yet as we are still in probate. Can you tell me- if the wells produced in the last year, would I basically multiply earnings X3 to get the value? As an heir, do I want a high valuation or a lower valuation? If I was someone who were to pass down to my heirs, would a valuation matter? If I were to sell, would i want a higher valuation for tax purposes? I thank you in advance for tolerating my ignorance.