Valuation of working interest


#1

Continuing the discussion from Permian Basin, Loving County Texas: I have small working interest in all of Sec 28, Blk 29, PSL Loving Co. that I want to sell—any help on valuation would be appreciated.


#2

Yes and yes to both questions.


#3

We considered selling our WI at one time, and just for a ballpark figure our CPA had us give him the total amount received over the last 6 months, and the total amount spent on JIB’s over the last six months.

He then had the net for the past six months.

He then took the average net and multiplied it by 36 months or (3 years) and gave us a place to start.

I found in our case the operator was willing to pay more than an outside party who was not involved. If you can find out other WI parties they might be a good place to start with looking for a buyer.

Also our attorney had to review the JOA to make sure there was not some sort of language or clause mentioned in the JOA that says the operator has some sort of first right when purchasing the WI.

I hope this can give you a bit of a start. :slight_smile:


#4

Roy,

I’d say Alexis is more less on the right track IMO. Existing production goes for some multiple of monthly cash flow. As the existing well is flattening out a bit, I’d value it at 60 months net cash flow.

I’m assuming you are talking about selling all of your interest in Sec 28. In that case, there is a lot more value in the wells that haven’t been drilled than in the well that have been drilled. And as Alexis points out, the person most likely to pay you for undrilled locations is the operator. They control the drill bit. So give APC a shout.

COG bought RSPs undrilled acreage for something crazy like $65k/acre 10-15 miles north of there. I’d guess you could get $20-25k/acre here.

So…60xNCF + 20ksomething per acre. That’s my guess. Hope that helps.


#5

It helps a lot—thanks!


#6

@NMoilniy, where does the 20K-25K figure come from? Is that basically 1/3 of the operator’s lease sale price (if assuming a 25% royalty)?

Many news releases report operator-to-operator lease sale prices. I’ve had difficulty trying to understand how to use those $/NMA figures to come up with a value from the mineral owner’s perspective.

Thank you


#7

Kathy,

Long story short, it’s a SWAG at what a win-win price might be to lease in this area at 1/4 royalty. Very little math involved. :sunglasses: The rock in the RSP acreage looks better, and I thought I heard a good portion of it was 1/8 royalty. Sept BLM lease sale confirms that NM/TX border rock at 1/8 can go for a whole lot. This doesn’t look quite as good and I assumed 1/4 royalty, plus big chunks sell for more than small chunks on a per acre basis normally. So I mentally scaled down quite a bit. Maybe too conservative. But if you are looking to sell your small WI position, and somebody will give you 20-25k per acre for the undeveloped portion, IMO, you at least aren’t getting robbed. If Roy sold for just the value of his current well, he’d be getting robbed.

I think its a bit hard to translate lease bonus pricing to mineral pricing, assuming your minerals are leased and you are looking to sell. The lease bonus an operator will pay is non-linearly related to the well performance, as they are carrying all the costs. When you are paying $10m to drill a well, a 1MBO well may be worth $14m in NPV10. A 700kbo well, $7m in NPV10. A 500kbo well, $2m in NPV10. Operators will pay bonuses for the great stuff that are much higher than for the good stuff. For a leased mineral owner, the value of the minerals/royalty is linear with well performance (assuming everything else is equal). A 500kbo well is worth 1/2 of a 1MBO well. So there is no easy way to correlate bonus to mineral pricing across the board. Ratio of the two will change depending upon well performance.


#8

That’s a very clear explanation of something I had never understood. Thanks for that—exactly what I was looking for.


#9

Hey Kathy,

Yea the per acre prices you read in the news when an operator sells their operations to another operator is not a good way to gain insight into the value of their minerals. While they translate those prices as per acre prices, they are factoring all leases taken by the first operator, all wells drilled by the first operator, and all infrastructure and equipment as well, so a lot more is lumped into that number than just the value of the mineral rights.

I wish it was easier for mineral owners to understand fair market value of their minerals, but its not.

Cam