It's easy to get it wrong - valuing your mineral rights. What do you factor in? Where do you get the information? How do you calculate the variables? Sometimes, all you've got to base how much you might get for your minerals is indirect hearsay from your friends and neighbors. It's like when some neighbor sells their house two streets over, and they got a fantastic price! Now everyone thinks their home is worth way above true market value.
That's why BPO's come into play in Real Estate (Broker's Price Opinion). A professional Realtor, with deep experience and knowledge of the market does the research. They look for things such as:
Comparable sales over the last 90 to 180 days
Square footage within a couple of hundred feet
Same number of bedrooms/bathrooms
Similar amenities, school district, pool, garage, updated kitchens, and bathrooms, etc.
The independent professional Realtor then comes up with their recommendation of the value of your home. It's all based on the actual market, research, and a certain number of key factors.
Valuing your mineral rights is much the same. However, there is no Trulia or Zillow or Redfin for your mineral rights. One of the main reasons for this is most states don't require the sale price of mineral rights to be recorded publicly. So, you need to know what professionals look for when valuing your mineral rights. Well, you're in luck!
Phoenix Capital Group offers services to help mineral rights owners understand their opportunities in both retaining and cashing out of their ownership positions. Here, Phoenix Capital Group outlines the seven factors that go into determining the value of your mineral rights.
1. Producing Versus Non-Producing Mineral Rights
The first consideration is whether your mineral rights are producing or not. Simply put, is there already a well drilled, and is it producing? If it is, the valuation becomes much easier as a number of "what if" factors have already been eliminated.
If you have a producing mineral rights situation, then you have a lease with an Operator, you have a track record of royalty payments, and you have exact yields that can be referenced. A main consideration is going to be, where is the well in its life cycle? Newer wells will be worth more, older wells worth less.
Non-producing mineral rights are still yet to be proven, so a number of other factors come more into focus in determining value. As a general rule-of-thumb, non-producing mineral rights are worth far less. The reason is obvious; someone has to sink a lot of money and take the risk of drilling - with the hope they are successful.
2. Are Nearby Properties Being Explored/Drilled?
Any Operator considering drilling for oil and gas is going to take a hard look at the closest properties around your minerals. They are looking for producing wells and their yields if any. To find this information, you need the legal description of your property. Once you have that, then search online for "(your state) oil and gas GIS." This should bring up your state's Graphical Information System, which is a detailed map recording all of the oil and gas wells in your county. Hover over any of the icons near your property, and you'll get quite a bit of detail on what's going on around your minerals, including:
- Dry holes
- Plugged wells
- Oil wells
- Gas wells
- Permitted locations
- Canceled/abandoned locations
- Names of Operators
3. Oil and Gas Prices
This is one of the reasons why getting super-specific on how much your mineral rights might be worth is tricky. So much of it depends on when the oil or gas is to be extracted and what the price of oil and gas will be at the time. Prices fluctuate greatly, and that affects the amount your minerals are worth.
Mineral rights owners tend to think oil prices will continue to rise, but that may not be the case. Look what fracing has done to the global oil market. In 2018, just a few short years ago, the USA passed both Russia and Saudi Arabia to become the largest oil producer. Additionally, renewable energy is moving more and more into the mainstream reducing dependence on oil and gas.
4. Location and Production Forecasts
How much oil and gas are in the ground where you own mineral rights? Yeah, you don't know the answer. In fact, nobody does. It's just a guess. If your minerals are surrounded by horizontal wells, producing 25,000 barrels of oil a day, they'll be worth a lot more than if there are a few sporadic, old wells producing 3 barrels a day, and have been for 40 years. Like everything in real estate, it's all about location.
5. Lease Terms
If you are selling your lease, then the buyer is going to take a careful look at the leasing agreement. Did you take what was offered by the landman and sign it without first submitting it to an industry professional? If so, then you might have cost yourself some serious money. Not all leases are equal, and it's not uncommon for a landman to stuff the contract with clauses that are heavily weighted in the Operator's interest. This is why having a professional review any offers or leases you receive is important.
6. Who is the Operator?
While most Operators are solid, ethical, and solvent, not all are. If you wind up with a bad Operator, then that lowers the value of your mineral rights.
How do you know a bad Operator? Do they:
- Send you incorrect statements
- Pay sporadically or incorrect amount
- Use the gas from your well to fuel their fleets without compensating you
- Over-promise and under-deliver
- Make things hard; are difficult to work with
- Neglect safety considerations and best practices, possibly resulting in environment contamination
- Do the very minimum to keep your site "active," but really, they are waiting for a better time for them to drill
7. Life Cycle of the Well
When your friends and neighbors brag about the huge royalty checks they are receiving from selling their mineral rights, note they are probably talking about the first year of their lease. Oil wells (especially horizontal wells involving fracing) produce a TON of oil in their first year, and then it begins to taper off, usually dramatically - by half or more. Thus, the checks, in the beginning, are big. After that...yeah, not so much.
Your best bet for determining your mineral rights' fair market value is to invite an independent professional to take a look and give you their researched opinion. They have the tools, the experience, and the pulse of the market. With a professional, you'll take the guesswork and potential over-valuation out of the equation and position yourself to get the best and fairest price for your mineral rights.
About Phoenix Capital Group Holdings, LLC:
Phoenix Capital Group offers services to help mineral rights owners understand their opportunities in both retaining and cashing out of their ownership positions. Phoenix Capital Group also provides opportunities for people to partner with and invest alongside the Company. Their focus is on educating, serving, and guiding their clients with integrity and humility.
If you would like to better understand your options from a friendly industry professional, give them a call at (213) 316-8720.