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Permalink Reply by Mac Davis on January 16, 2011 at 23:50

The mineral rights market is what's known as "illiquid," meaning there's not really a good way to determine a "fair" or "fair market" price like you can for something that's easily bought and sold like oil, gold, stocks, bonds, etc.

 

You might be able to figure out a "market" price, i.e. "what price can I get someone to pay me for the property?"  Even that is difficult to come up with a good estimate. 

 

It's more difficult to figure out an "economic value" price.  i.e. "how much money will this property pay out over the years, and how much cash in my pocket today is worth what I'll be paid over the years?" 

 

Don't make the mistake of thinking market price equals economic value.  If, for instance, the best price you can get for your minerals is $100,000, that doesn't mean your best choice isn't to keep the mineral rights and get royalty payments over the years.

 

If you're selling the mineral rights on your land, you might get one price and your neighbor will get three times your price for "identical" mineral rights.  Lots of people get "fleeced" by someone who buys for a really low price because the property owner doesn't know how to find the right buyer themselves.  Even a "good" fair market price may vary enormously from one month to the next. 

 

In terms of an economic value, there's a lot of uncertainty in the amount of gas any property will produce, how willing someone will be to drill, government regulations, market prices, etc.  You have to do some estimates, guess at the probabilities, do the financial math, consider how much you need the money now vs. over the years, etc.

 

Many of us will tell you to never sell your mineral rights unless you must.  It's much better to get a good lease and get royalties over the years.  You'll probably get much more money over the years, but it's uncertain.  The people buying mineral rights usually know what they're doing and plan on making a BIG profit versus what they paid.  They can almost always buy mineral rights at "fire sale" prices, so they're not likely to pay a "fair" price.

 

What's your situation?  Do you want to sell the minerals under land you own?  How much acreage, roughly where is it, etc.?  Has someone approached you?  Are you considering selling minerals outright, or does someone want you to sign a lease?

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Permalink Reply by Mike Jackson on January 17, 2011 at 6:59

Well we are leased out on about 40ac. in desoto parish, but some of the other tracts of land we own isn't. We have been approached but we don't know is it a good deal are not. The landman who  did our  lease suggest not to sell all but 50% there also is a completed well in this unit so we are waiting on the division order in houston...

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Permalink Reply by Mac Davis on January 18, 2011 at 20:51

GoshDarn's pawn shop analogy is a good one. 

 

Even an honest and professional mineral buyer is not going to give you a "good" price.  He can probably find someone else dumb enough or desperate enough to sell him similar mineral rights for a "bargain basement" price. 

 

It's like a pawn shop.  You sell to a pawn shop because you're desperate, not because you expect to get a "good" value.  In the case of minerals, it's an even worse deal because the minerals will probably eventually produce revenue if you hang on to them. 

 

To me, selling 50% or something similar is even worse.  Something about this smells of "scam" to me.  It sounds to me like, "OK, he's not dumb enough to sell to me outright, maybe I can confuse him and convince him that selling half is somehow different."  Apart from the straight out loss of half of future revenue, what sort of legal complications are there?  Do you have to consult with your "partner?"  Can they interfere with your future actions?  Does it complicate your finances in the future?

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Permalink Reply by Bacon on January 17, 2011 at 4:15

If your wondering for tax reasons, get it valued before a well comes in.

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Permalink Reply by adubu on January 18, 2011 at 9:13

Mike---also you can not compare your mineral value like the county or state does on tax apprasil for a single well for property taxes. The apprasil value is only for that well-- in that formation-- and calculated as a depletion value based on EUR at that years NG or Oil price. It does not include future value on addition wells in the unit or other formations. This is way alot of buyers fool you in thinking they are giving to a fair value at 3X last 12 month royalty income. Remember if value is on 1 well only at time of offer  in unit that will drilled out could have 8-32 wells on tight sands vertical 20 acres spacing plus mutiformation possibilty you as seller could be  leaving 98% on value on the table.

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Permalink Reply by benny688 on January 18, 2011 at 14:42

If you had production in the old Cotton Valley the typical evaluation would be about 10X annual earnings.

 

Nowadays, it's a complete crapshoot.  (It would be really difficult to try to take out a mortgage on this)

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