I’m wondering if there’s a simple way to establish a rough estimate of mineral rights value. I had heard that if you take the royalties from the last 3 yrs and multiply by 7 yrs, this could give an approx value. Can anyone please tell me if this is true? If so, the total we have rcvd over the past 3 yrs is $741.32. Multiplying by 7 yrs would give an approx value of $5189. Appreciate any help anyone can give. Thanks
Lindsey:
I haven't heard of that formula you described but there are a number of variables that must be considered when determining the value of mineral rights. A few things to consider is the amount of acreage involved and the proven productive formations in the area. You might do some research by contacting others in the area who have recently sold minerals.
The more precise estimation is to take the monthly average of the last 12 months and multiply between a factor between 36 and 78. There are a ton of variables to take into account. For example, minerals are more valuable than royalty. So you sell royalty for a term and limited to a formation and retain the other potential productive zones.
Having said all of that, there is no higher expression of capitalism than the buying and selling of stocks, bonds or mineral rights.
There is much landowner abuse in the buying and selling of royalties if the seller is not properly counseled.
The formula you use to determine value is not viable. If the royalties from the past three years included the initial first months of production, you would have in all likelihood gotten a large portion of the production that will eventually be attributable to the well. Producing royalties are often traded in multiple months of production, based a past three months average revenue. The present value of the interest being determined by the price of gas or oil, the projected price of gas or oil, a comparison of cumulative production from similar wells in the same field or area, the characteristics or the producting reservoir and an analysis of the well log.
When prices for oil or gas are up, the multiple of months is greater. When prices for oil and gas are down, the multiple of months is lesser.
Gas royalty that would be selling for 60 months production in 2008, will only bring 30 months today. An oil royalty in 2009 that sold at a 30 month multiple, would now bring 60 months or more.
Thank you all for your much appreciated help! I am much more enlightened now.
Lindsey
There are multiple ways to estimate the value of oil and gas properties and minerals. Using a set formula to estimate the value of a royalty can get you in trouble. In the oil and gas industry, the value of oil and gas wells are determined through "decline curve analysis". This method is applicable to producing properties (that is, royalties, but not mineral rights). Decline curve analysis looks at historic oil and gas production and uses it to create a mathematical model to forecast future production. By applying oil and gas price forecasts, tax information, operating costs (for a working interest), and a number of other variables, the value of an oil or gas well (and similarly a royalty stream) can be estimated. Unfortunately, prices are extremely difficult to predict and mechanical or other problems can cause a well to stop producing prematurely. So, although decline curve analysis is a very good way to estimate value, there is inherent risk involved that no evaluation method can eliminate.
Mineral rights are much more difficult to value. The most accurate way to value mineral rights is to estimate what kind of revenue stream they can generate - that is, if a well was drilled on the minerals, how much money would it generate for the mineral owner. That involves a lot of speculation. Another method of evaluation is to look at the sale price of similar properties. Unfortunately it is very hard to find this data, and just because a similar property sold for some amount doesn't mean that it was sold for too little or too much. A third way to value minerals is to multiply the acreage lease bonuse by a factor of roughly 1.5 to 3 (some states will allow this method for estate tax determination) and assume that is a reasonable value for the minerals.
Essentially, it comes down to this - valuing royalties from producing wells can be done with a fair amount of certainty (and is done daily by oil and gas companies). Minerals, however, are extremely difficult to value. All it takes is one lucky wildcat well to discover a new field, so it can be very easy to under-value minerals. My advice is this - a reasonable price for royalties can be determined, but minerals are so hard to value that they should not be sold.
Good luck.
Jason, thank you very much for your response.
Jason Stewart said:
There are multiple ways to estimate the value of oil and gas properties and minerals. Using a set formula to estimate the value of a royalty can get you in trouble. In the oil and gas industry, the value of oil and gas wells are determined through "decline curve analysis". This method is applicable to producing properties (that is, royalties, but not mineral rights). Decline curve analysis looks at historic oil and gas production and uses it to create a mathematical model to forecast future production. By applying oil and gas price forecasts, tax information, operating costs (for a working interest), and a number of other variables, the value of an oil or gas well (and similarly a royalty stream) can be estimated. Unfortunately, prices are extremely difficult to predict and mechanical or other problems can cause a well to stop producing prematurely. So, although decline curve analysis is a very good way to estimate value, there is inherent risk involved that no evaluation method can eliminate.
Mineral rights are much more difficult to value. The most accurate way to value mineral rights is to estimate what kind of revenue stream they can generate - that is, if a well was drilled on the minerals, how much money would it generate for the mineral owner. That involves a lot of speculation. Another method of evaluation is to look at the sale price of similar properties. Unfortunately it is very hard to find this data, and just because a similar property sold for some amount doesn't mean that it was sold for too little or too much. A third way to value minerals is to multiply the acreage lease bonuse by a factor of roughly 1.5 to 3 (some states will allow this method for estate tax determination) and assume that is a reasonable value for the minerals.
Essentially, it comes down to this - valuing royalties from producing wells can be done with a fair amount of certainty (and is done daily by oil and gas companies). Minerals, however, are extremely difficult to value. All it takes is one lucky wildcat well to discover a new field, so it can be very easy to under-value minerals. My advice is this - a reasonable price for royalties can be determined, but minerals are so hard to value that they should not be sold.
Good luck.
Here is an example of a decline curve forecast. It basically consists of a plot of historic production, a forecast of future production based upon a mathematical model of historical production, and what is called a cash flow forecast, detailing financial data for future production months. Note that this is for a working interest (an oil and gas company, not a royalty, so it includes operating expenses. Also, note that the veritcal scale on the production chart is logarathmic (not equal increments) - this is standard in the petroleum industry because it “compresses” plots and allows one to see both very high values and very low values on the same plot. Also, in the oil and gas industry, the Roman numeral “M” indicates 1,000 of something, similarly, “MM” indicates 1,000 x 1,000 or 1,000,000 - kind of confusing because in the metric world, M indicates 1,000,000. 2988-ExampleDeclineCurveAnalysis.pdf (217 KB)
Dear Jason,
You and James are absolutely correct. I did discuss this more fully at
http://www.mineralrightsforum.com/forum/topics/how-should-one-evalu...
Thanks for uploading the Decline Curve Analysis. It should help a lot of people remove ambiguity from an ambiguous and uncertain situation.
Best,
Buddy Cotten
BBA-PLM-UT