6 Factors that Determine the Value of Your Mineral Rights

Estimating the value of mineral rights is not an easy project. Of the many factors that determine the value of mineral rights, few are standard and the others are changing often, making the process very complex.

If you choose to sell your mineral rights, usually the company that you sell to has taken all of these factors into consideration. Educating yourself about these aspects will help you understand the process better in order for you to get the best price for your property.

Listed below are 6 factors that determine the value of mineral rights:

1. Geographical location of your rights
Location of your mineral rights plays a key role in estimating its value. For instance, mineral rights in Shale Play regions like Eagle Ford Shale, Haynesville Shale, Niobrara Shale, Marcellus Shale, etc., are found to have significant and untapped oil and/or gas reserves. In many cases higher values will be quoted for the rights in these regions.

Sometimes, active development (drilling) of the land surrounding your property can also impact the value of your mineral rights. The closer your property is to the hydrocarbon accumulations, the higher the value will be on your rights. However, if drilling results are not positive, it can adversely affect the value of your minerals.

2. Net ownership
The amount of acres you own (actual ownership amount) as well as any income you may get influences the value of your property. The Net Mineral Acres (NMA) owned by you determines the value of your rights. The NMA is the size of the tract in acres multiplied by ownership interest. For example, full ownership rights of a 20-acre tract of land equals 20 NMA, while half ownership of the same tract equals 10 NMA. The calculation of NMA affects the value of rights in terms of a sale; whereas, in terms of a lease, it affects the lease bonus payments, royalty checks, etc.

3. Decline rate of production
A well cannot yield the same amount of oil and/or gas or minerals all through its production life. As the extraction continues, the production rates of the mineral wells decrease (in some cases drastically). As an example, Shale wells (like Haynesville wells) the decline rate would be around 82% over the first year. So, the future production of all the wells will be less than the initial production. This impacts the future revenues and hence predictions of the future performance. Therefore, the decline rate of the well impacts the value of your rights or royalty interest.

4. Depth restrictions
In some cases ownership has depth restrictions due to prior owners’ reservations. The depth of the mineral rights you own also affects the valuation process. If you are the sole owner of your rights you will get full value. If you are not the sole owner, then your value will be adjusted based on your ownership. Determining ownership is usually handled by an abstract firm who fully researches deed records and compiles a report as to the ownership details. In some cases, if the rights are jointly owned by two different people (i.e., one owner owns depths from the ground to a specific sub-surface depth while the other owns the remaining greater depth) then only the depths which are owned by the seller will be considered for valuation.

5. Price of the commodities
The price of oil and gas, mechanical risks and drilling costs are the major issues which determine the value of your rights. Since oil and gas prices often fluctuate, an appropriate discount rate will be used. Moreover, if the market value of these commodities is predicted to face a significant risk in the future, then your rights value will vary based on events and projections into the future. There is much risk to these values and they impact the value of your rights greatly. Rather than speculate on prices going one way or the other, many owners prefer to have cash in hand vs. a wildly fluctuating value of property ownership.

6. Time value of money
All the oil and gas contained in your property cannot be extracted and liquidated in a single day. The cash inflows are also spread over many years. Further, the production rates will decrease which directly impacts the future incomes. All these considerations make it worth having liquid assets (cash in hand) rather than having diminishing assets like mineral rights.

Many of the above factors are constantly fluctuating. It’s never known when they will go up or down. Therefore, if you do choose to sell them now you can eliminate the risk of holding or owning them by selling all or a portion of your ownership for a lump sum.