There are two methods to value mineral rights. The first is to use a multiple on the royalty revenue. This is typically 3-5 years. Based on many factors, the value can be adjusted up or down.
The second method, which is complex and uses a variety of assumptions to estimate future royalty income, is complex. The second method was popularized during the shale revolution but is now in decline as buyers realize that they might never see a return on their investment.
1. Mineral Rights Value
Rule of Thumb
Producing mineral rights are usually valued at a multiple of the revenue, which is typically 3-5 years. A royalty interest that generates $100 per month would, for example, be worth between $3,000 to $5,000 depending on its type, location, production, lease terms, and commodity price. The typical value of non-producing minerals is the number of net mineral acres you have multiplied with the lease bonus rate. There may be a market rate for mineral non-producing rights.
Production Minerals: 3-5 years of revenue. Non-producing minerals: Net mineral acres * Lease bonus rate
Mineral rights are subjective in value and every company will value the property differently. While some buyers may be looking for specific minerals in a particular area, others will not care as much about where they are located and are more concerned with the return on their investment. Requesting a quote is the best way to find out how much your mineral rights are worth. You are not required to request a quote.
The location is the most important factor that will affect the value of mineral rights.
The Delaware Basin, the deepest part of the Permian, is home to some of the most important mineral rights. Because there are many layers of shale, these wells can produce a lot of oil and natural gases. Additionally, horizontal wells can be drilled on a given parcel of land.
These wells are prolific but also have steeper declines and longer economic lives than conventional (vertical).
Both are valuable but there is a huge difference between the mineral rights in the Delaware Basin and the Panhandle of Texas. Permian valuations are typically much higher than those in conventional oil fields.
Companies engaged in exploration and production (E&P), rushed to Oklahoma to lease land and drill horizontal wells. The complex geology led to disappointing wells. Many companies are now looking for ways to enter the Permian’s Midland and Delaware Basins.
The royalty percentage is also determined by the location. The Texas standard royalty is 25%, but it’s not uncommon to see royalties in other areas, especially older leases, which can range from 12.5% up to around 16%.
2. Producing vs. Non-Producing Mineral Rights
1. Production of Mineral Rights Value
Producing minerals is a mineral right that has an active well producing economically viable amounts of oil or natural gas. Producers of minerals receive periodic or monthly royalty checks from their owners. The monthly royalty payments are usually multiplied by the value of producing minerals, which is typically between 30 and 60 months. Although the Permian Basin, and other shale plays, have seen higher valuations in recent years, there is now less hype.
Because they have shorter lifespans and steeper decline curves, horizontal wells are more expensive.
2. Non-Producing Mineral Rights Valuation
Non-producing minerals are usually referred to as interest in mineral rights in land parcels that do not have to produce oil or gas wells. There will not be any royalty payments because there aren’t wells. Non-producing mineral rights do not have any value.
Location is key. The best shale plays have a higher value than those in older fields and areas with no proven reserves. Non-producing minerals are typically valued on the basis of a multiple of the expected lease bonus.
If the county’s going lease bonus is $100-$500, then you can expect to sell mineral rights for that lease bonus multiplied by the number of mineral acres (NMA).
The price per acre is the most common way to determine the value of the non-producing minerals. Price per acre can vary from one state to another, within one county, or even between counties.
3. Rule of thumb for Non-Producing Minerals: Lease Bonus x NMA
How much does your lease bonus amount? Is it $100, $500, or some other value? It all depends on the location of your minerals relative to drilling activity in the county. Your lease bonus will increase the closer you are to active drilling zones. It is fairly easy to see a few maps to help you determine this. Here’s how to determine if your minerals are located in a hot region.
The recent slowdown in oil and gas production has had a significant impact on non-producing minerals. This is particularly true after the global shutdown of COVID-19 in March 2020 and the fall of oil prices in April 2020. The majority of the best prospects already have at least one well drilled.
Requesting an offer is the best way to find out the value of mineral rights.
3. Oil & Gas Prices
Your mineral rights’ value can be affected by the price of oil or gas. Both the mineral owners and the operators benefit from high commodity prices.
Lower commodity prices translate into lower revenue. It can be difficult to continue drilling wells or drill new ones if there are significant and lasting drops in oil and gas prices.
Before the fracking boom oil was $164/barrel and gas prices were $18/MCF. A lot was made of the notion that we had reached peak oil. All that changed when the fracking boom happened, and the pendulum swung the other way. The incredible amount of oil and gas recovered from horizontal wells in massive quantities saturated the market, leading to a drop in prices.
The economy has benefited from low energy prices. Natural gas is considered less harmful to the environment and acts as a bridge between renewable energy sources for a more sustainable future.
There is a downside to this. The downside is that wells were drilled in larger shale play areas faster than the infrastructure could be built. Although oil can be transported to refineries by truck, pipelines are the only way to transport natural gases. Operators began flaring natural gas when there weren’t enough pipelines.
Despite the fact that pipelines are being built, operators selling gas at as low as fifty cents per MFC (provided they aren’t flaring it) still have a lot of gas. Mineral owners are not happy with this. If the price of natural gas was higher, the same well would produce far more revenue. This problem may be alleviated by exporting natural gas. Time will tell.
The low price of oil and natural gas means lower royalty checks, and eventually, a lower value to your mineral rights.