Need estimate of FMV of mineral interests (non-producing) and royalty interests (non-producing)

General Mineral Rights Discussion
1

Greetings everyone. I searched around a bit but I didn’t find anything addressing my specific questions. I apologize if this has been covered before.

I have been tasked with determining the Fair Market Value of some mineral interests and royalty interests in Reeves County, Texas (much of it is non-contiguous) because of a relative who just died. (We need to figure out approximately how much it was worth when she died). I only need ballpark estimates and I’ve been told to just do my best. (Its just hard to do my best when I’m not even sure how to get started)

(By the way, I’m not trying to determine how much they are worth so I can sell. I’m well aware of the wisdom of hanging on to mineral interests)

Of the mineral interests, some have been leased, some have not been leased, but none of them are producing (ie, no active wells). So here’s what I’m wondering about:

(1) For mineral interests that have been leased, would I use some kind of formula based on the lease consideration to determine the fair market value? I have been advised by someone that I shouldn’t do that because the leasing company is basically gambling/speculating and they don’t know how much the minerals are worth. They are hoping/guessing/betting that they will find extractable resources on the leased lands, but they don’t know whether they will or not until they try and are able to begin producing. In other words, as someone online said somewhere else, “If the minerals aren’t producing, any value you put on them is speculation”. What would you all do?

(2) For mineral interests that haven’t even been leased, I’m even less sure of what to do. It was suggested that I check to see if mineral interests in the general vicinity have been selling and make my estimate based on those sales. The problem is: (a) I don’t know where I would find sale information and I have no budget to pay for a service to get sale information; (b) I have been advised that conveyances of mineral interests often don’t say what the actual consideration was (its usually “$10 or $100 and OVC (other valuable consideration?)”; and © mineral interests are often transferred between family members as gifts or inheritance (for instance, my family got its interests by gift and inheritance) and so there is not going to be any sale price. What would you all do?

As for Royalty Interests, we have a royalty interest in a producing well, and I think I have a handle on what to do about that, but we have royalty interests in a few pieces of land that don’t produce (that is, we don’t have mineral AND royalty, but JUST royalty). My grandpa had them when he died and passed them on to his children. My understanding is that you only get something out of a royalty interest when the land is producing. Well, some of these pieces of land have never produced as far as I know. Would they have ANY value? A friend suggested just putting them down as $1 or $10 (not per acre, but total to section) but that seems too arbitrary. What would you all do?

Well, I hope that’s not too confusing or lengthy. Any advice anyone might have would be helpful. And again, I don’t need the exact values - I just need to figure out ballpark values! Thanks a lot!

2

Have you called the county courthouse to ask for advice?

3

I’m not sure what sort of help or advice the county courthouse could offer. I’m not filing something with the Court. Am I missing something?

I have talked to the County Assessor before, and while they can give me assessed values for surface interests and producing mineral interests, they don’t keep track of non-producing mineral or non-producing royalty interests because those aren’t taxed (not until they produce, anyway)

4

David: First you should be able to get good advice from a CPA or Estate Attorney. I am currently involved in an Estate Administration here in Texas. From this perspective mineral interests have no value unless they are producing. How does one determine if a mineral property is commercially viable without drilling? The appraisal districts only assess taxes on the value of producing properties. At least that has been my experience.

5

Mike,

Yeah, my experience has been the same as yours (most people seem to tell me they have no value until they produce), except that I looked at the probate records for my great-grandfather’s estate in the 70’s and they do actually assign value to non-producing mineral interests. However, at that time my great-grandfather’s children were still alive; They grew up on the family ranch and most of them stayed their whole lives. They were the executors and were quite knowledgeable about how much mineral interests in the area were selling for and could determine the value of non-producing mineral interests. (Too bad none of them are still around!)

By the way, the interests I’m dealing with now aren’t in probate because my recently deceased relative put all her interests into a trust.

I actually work for an Estate Attorney, but we’re not in Texas and the only mineral interests we’ve had to deal with were producing interests. I also know a few CPAs but they don’t have experience with oil/gas or minerals. I did get in touch with a Texas CPA regarding TX taxes so i will follow up with him and find out what he thinks I should do about trying to calculate the value of non-producing mineral and royalty interests. I’ll just have to cross my fingers that he has good advice.

I wish I had the money to just pay some kind of appraiser to determine the value of all these interests!

6

David: Thank goodness we are not required to place a value on non producing properties. We have a few properties where we had wells drilled and were “dry holes” Now what value would you place on these mineral properties? I put zero. Otherwise it is pure speculation and arbitrary. However, I have heard discussions of folks wanting to sell the surface estate and may convey an interest in the minerals, in part or whole, who may increase the asking price. This might work in an area of shale plays that are broadly consistent as to production potential. My position on conveying minerals is that I don’t. We retain 100% of our minerals when we sell any properties.

7

You also might try and I recommend trying a certified mineral appraiser or petroleum engineer. Most have to at least have a state license or certification.

8

Jake and Dana,

I appreciate your suggestions. Jake, maybe I'll try your idea at some point. For the moment I think the family decided not to worry too much about the valuations so I'm hopefully off the hook (although for future reference, everyone's suggestions may be invaluable). Dana, that sounds like a good idea, but I'm guessing it won't be free. I'm pleased to have that as an option if the need arises, but at this point I don't think the family has the money to pay someone like that.

9

http://www.proxibid.com/asp/Catalog.asp?aid=41552

This is a link to 1500 mineral acres+ that recently sold in NW OK. They were not contiguous and as a rule were small acreages. $3.9 million!

10

i’m comfortable speaking w/ cwe (clayton williams) regarding something like this. i think you’ll get straight answers, because they are the big players in the area and wouldn’t want to alienate their base. they are fair and reasonable. they have around 85 landmen working for them to ascertain what folks like you have and i believe that is a pretty safe way to approach it. whatever results you get, you would still have the opportunity to get a second opinion, even if it is to go here and report what you find from cwe. right?