How are mineral rights valued?
The value of your specific mineral rights depends on both the market value in your area and the status of the mineral rights you own. If you are interested in valuing or selling mineral rights, it’s important that you understand the status of your mineral rights as seen through the eyes of a potential buyer. Just like with any other asset, the market sets the price, so your minerals are “worth” what a buyer is willing to pay for them at that point in time.
There are three main stages or statuses of your mineral rights
My mineral rights are producing and I’m receiving checks
My mineral rights are not producing but they’re leased to an oil company
My mineral rights are not producing and are not leased
My mineral rights are producing and I’m receiving Checks
Producing mineral rights have current production, or cash flow, associated with them. Area market value being equal, producing mineral rights typically demand the highest market value because they are de-risked to the point that they are producing cash. It’s also easier for a mineral buyer to create an offer for an owner looking at selling mineral rights. For example, you may receive an offer of 50 times the amount of the average cash flow for the last 6 months. If you have wells that are producing on your property lease, MineralAnswers has an easy way for you to track your production and stay informed when new production is reported by your operator on your well.
Beyond the current production, there are many additional factors unique to plays and basins that can create considerable upside and effect the market price when selling mineral rights. An example of this would be multiple producing formations or “stacked” pay in your lease.
If you have producing mineral rights, a potential buyer will usually request copies of your last few check stubs. This accomplishes three key things:
It proves the oil company agrees you own the property
It states the exact ownership percentage in your well or group of wells
It allows the potential buyer to project future revenue which is helpful and often mandatory when creating an offer
My mineral rights are not producing but they’re leased to an oil company
Leased mineral rights refer to mineral rights that are not yet producing but are under a lease agreement. Area market value being equal leased mineral rights would be less valuable than mineral rights that are already producing, but more valuable than non-producing, non-leased mineral rights. Leased mineral rights at least show that an oil and gas company has evaluated the area and determined that the area has enough potential for development in the next few years. A potential buyer will usually request a few key types of land records:
A copy of your deed. Understanding exactly how many net mineral acres you have is necessary for an offer.
A copy of your lease. Understanding the royalty percentage is important. A higher fraction of royalties will increase the value. Usually the potential buyer will break down your ownership into net royalty acres which are the net mineral acres you own normalized to a 12.5% royalty. Also understanding the terms of the lease including when the lease expires and if there is an option to extend the lease can affect the value.
Net Royalty Acres Example: Let’s say you own 10 net mineral acres and they are leased to Noble Energy . On the lease agreement, you will receive a 1/4 royalty. This means that for the minerals extracted from your property by Noble Energy, you receive 25% of the production revenue and Noble receives 75%. Now let’s assume a potential buyer comes along and wants to buy your mineral rights. Since you already have a lease in place, the potential buyer often will normalize your acreage to a 1/8, or a 12.5% royalty to estimate future payments. When normalized to a 1/8 royalty you would own 20 net royalty acres since the royalty percentage terms in your lease are so favorable. You would still only own 10 net mineral acres, but in the eyes of a potentially buyer it will pay out more based on the lease terms. This is one reason why good lease terms can create a lot of value in the future for either selling leased mineral rights or for your own future cash flow from the royalties.
My mineral rights are not producing and are not leased
This refers to mineral rights that are not producing and are not under a lease agreement. Area market value being equal, these would be the least valuable mineral rights. However, if these mineral rights are in an emerging area, they can skyrocket in value. It’s important to break these down into a few more subcategories:
Non-Producing/Non-Leased Mineral Rights Near Current Drilling
If your mineral rights are not producing and are not leased, it’s important to know if there is current activity nearby. This is even more important if your mineral rights are located in a shale play. Tracking permits for new planned wells can help you understand if it’s likely that your area will be leased soon. MineralAnswers allows you to set notifications when a new well is planned near your property. If new wells are trending in your area, your property has more upside than areas that are farther away from current development. If this is your scenario, you can reach out to nearby oil companies about leasing mineral rights which is usually coordinated through a landman. MineralAnswers can help you find some nearby oil companies (also known as operators or producers) who might be interested in leasing mineral rights in your area.
Non-Producing/Non-Leased Mineral Rights Near Historical Drilling
If your mineral rights are not producing, not leased, and are not located near current activity, it’s important to know if there is historical production nearby. Usually you can tell by the landscape around your property. If you see a lot of pumpjacks nearby this is a good sign. Although the value of these minerals may not be as valuable as areas with current activity, keep in mind that old plays can always be revived. Historical production means that your area is part of a petroleum system. Remember that the hottest plays such as the Permian started out with conventional vertical drilling a long time ago before they blew up into unconventional plays with horizontal wells.
Non-Producing Mineral Rights in an Area Without Current Activity or Historical Production
For these mineral rights, it’s very unlikely that you would receive offers. It doesn’t mean that it will never happen, but it will probably require a geological analysis that leads someone to believe there are commercial quantities of hydrocarbons in the area. Then an exploratory well, known as a wildcat, would be drilled in hopes of discovering a new field. A successful nearby wildcat can cause the value of mineral rights to skyrocket in value. Conversely, a non-successful well, or dry hole, can keep other potential exploration companies away for a long time.
The image below shows how the relative value of mineral rights changes as you start in the bottom left with minerals that are not leased and not near current or historical activity. Then the value increases for the different scenarios and are highest in value when they start producing cash.
When your mineral rights change status then the value of those minerals can change considerably. It’s important that you are aware of activity in your area that leads to these changes. MineralAnswers has spent a lot of effort to consolidate, clean and simplify the data so that once you join, you can track activity easily and efficiently.