Ownership of mineral rights

If you are a mineral owner, you’ve probably wondered what your minerals are worth. Perhaps you have received an unsolicited offer to buy your minerals or you need to determine an estimate of value for another reason.

In any event, “What are my minerals worth?” is indeed probably one of the most frequently asked questions by mineral owners.

In short, the answer is your mineral interest is worth whatever someone would pay you today to buy it. Otherwise, there is no exact means of determining the value of a mineral interest.

The most important thing you need to understand is that the value of a mineral interest changes, rising and falling over time. Think of your mineral interest as an investment, such as common stock in a company.

Just as the value of a share of common stock will rise and fall over time, the same goes for minerals. What your minerals are worth today is probably not what they’re going to be worth years down the road.

oil well and blue skyRemember that oil and gas minerals are a depletable asset. This means that minerals don’t re-generate, so as they are produced, the value of what is still in the ground declines.

As a rule of thumb, the value of a mineral interest that has produced will decline over time unless new opportunities are found and new wells are drilled.

There are a number of factors that can influence what a mineral interest is worth and what would be a fair price at the present time. The most significant of these factors, not ranked by importance, are as follows:

The location of your mineral interest. What county is your mineral interest located in and in what part of the county?

As they say in real estate, “location, location, location.” This adage is true for minerals as well. Everything starts with location. Minerals located in areas that are receiving interest from oil and gas producers will fetch a higher price.

The status of your mineral interest. Is your mineral interest unleased; leased, but not yet producing; or leased and producing, where you receive royalty payments?

Leased and producing mineral interests usually will fetch a higher price since the production and the royalty income provide an indication of the current value of the acreage. By contrast, a mineral interest that has never produced is very difficult to value, with assumptions and expectations playing a role.

If the minerals are unleased, is any leasing activity going on in the area?

If your minerals are unleased and there isn’t any leasing in the area, then it should be obvious that your area is not of interest from oil and gas producers and earning leasing income is not imminent. Interest from oil and gas companies creates value. See #1.

If your minerals are leased, the terms of the lease, especially the royalty, impacts the value of your minerals.

Simply put, the higher the royalty percentage in your lease, the more your minerals will be worth. In other words, all other things being equal, a higher royalty percentage such as a quarter (25%) will result in your minerals being worth more than someone else’s if their royalty is less.

For example, let’s say you and your neighbor both are leased to the same operator and are receiving royalty payments for production from the same well. However, if your acreage is leased at a quarter (25%) royalty and your neighbor’s is leased at a one-fifth (20%) royalty, your minerals will be worth more and thus command a higher price because of the larger royalty.

If your acreage is leased and producing, is any additional drilling planned for the near future?

If additional drilling is planned for your acreage, then the value of your minerals stands to grow as additional wells increase the production and boost your royalty income.

The prices of crude oil and/or natural gas.

The higher the price of the product that is produced – crude oil and/or natural gas – the higher your royalty payments will be. In addition, low prices for oil and natural gas cause companies to curtail their drilling and production activity, which reduces your leasing income potential.

If the minerals are producing, the productivity of the wells and how fast the wells’ production is declining over time.

It should be obvious that the more productive the wells are, the bigger your royalty payments will be and the more your minerals will be worth. How fast the wells decline over time is important as well. Wells are most productive in their first few months, then can decline sharply before settling into a slower decline over the rest of their productive life. Rapid declines mean additional wells need to be drilled to maintain production and a higher level of royalty income.

If the minerals are producing, how much in royalties, on average, are you receiving per month?

The more royalties you receive per month, the more your minerals are worth. However, as noted previously, royalty income will decline due to falling production and/or lower prices for oil and natural gas. On the other hand, of course your monthly royalty income can also increase – at least temporarily – as a result of new wells being drilled and/or an increase in oil and natural gas prices.

How big is your mineral interest, in terms of net mineral acres?

The bigger the mineral interest in terms of acreage, the more interest it will draw from oil and gas companies, increasing its value.

How fractionalized are the mineral interests in your area?

More fractionalization (divided into very small pieces) of the mineral interests in an area turns off oil and gas companies, and thus negatively impacts the value of mineral interests in the vicinity.

Is there competition to purchase your minerals?

The more competition there is to buy your minerals, the higher the price you should receive as suitors bid against one another. The same goes for leasing, with more competition likely to mean more lucrative lease terms.

In the end, if you really want to get an idea of the value of your minerals and can afford the cost, you can hire a professional, such as a petroleum engineer, to assess your mineral interest and provide you with an estimate of your minerals’ worth.

Just keep in mind that the value of your minerals will change over time and that as oil and/or natural gas is extracted, the value of your minerals will eventually permanently decline.

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