Replies to This Discussion

Permalink Reply by kittycatmama on November 21, 2009 at 13:42

If you want to sell them, I have heard 30 times your first royalty check for value. Don't know how accurate that would be

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Permalink Reply by Susie Brown on November 23, 2009 at 5:08

thanks Kitty. Yes, we do plan to sell some minerals and are researching the value. We have small parcels scattered in Desoto and Caddo Parishes. We have some minerals where we have 50% of minerals.

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Permalink Reply by Mac Davis on November 24, 2009 at 14:33

Do you mean a "monthy" royalty payment? Aren't a lot of checks for multiple months?

I'd be very careful about selling based on the first royalty check. The first check will be a single well. In theory, a lot of sections will get 8 wells drilled eventually. Also, production tends to decline rapidly, making it difficult to calculate.

Plus, the first month's production is often a partial month and they may still be tinkering with the well.

There may be people who will offer you 30x the first check, though.

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Permalink Reply by Mac Davis on November 23, 2009 at 8:51

There's no real "market" for a mineral lease. i.e. There's no good way to determine its "fair" value. Or to put it another way, it's worth what someone will pay.

This is different from "liquid" markets, where there are "commodity" goods and multiple buyers and sellers for the item. Each mineral lease has different conditions, in terms of production capability, accessibility, proximity to pipelines, etc.

There's no open marketplace like a stock market where multiple buyers compete to buy minerals. There's no openness on the prices payed, and there's a limited number of buyers.

Throw in the fact that there are a lot of scam buyers who try (and often succeed) to get people to sell their mineral rights for a pittance.

You don't know in advance how good the wells will be in your section, or even worse, what the gas price or drilling costs will be in the future. We're still figuring out what the production curve rates will be for Haynesville shale wells, how to most efficiently operate the wells, when and whether multiple wells will get drilled on a section. What will government policies, regulation and taxes be over the lifetime of the production?

i.e. You may be able to get someone to offer you some money, but it's going to be real hard to tell what a "fair" price is. Try to figure out what you think the royalty payments are likely to be over time, and use "standard" financial calculations for what the rights are worth.

I doubt that anyone will be willing to pay anything like what you calculate the mineral rights are worth.

It's really hard to estimate the lifetime payout on a lease. The inputs are so uncertain that you could easily come up with a 10 to 1 variation in what it's worth.

Here's a thread trying to calculate the value of a lease.

http://www.gohaynesvilleshale.com/forum/topics/is-81250-total-retur...

It comes up with $80,000 for one acre for the total payout over the life of production.
It was based on 1/4 royalty, divide by 2. $40,000
You have 50% $20,000
It pays out over a number of years. How long is a wild guess. Let's just say present value is 1/2 total value. $10,000 per acre.
Further uncertainties:
Will production actually happen?
Will your section produce more or less gas than this estimate?
What happens to inflation, gas prices, taxes, etc.?
Take a wild guess, the "fair" value is +/- a factor of 2. i.e. $5000 to $20,000 per acre.

However, I'm not planning to buy your mineral rights, so my guess isn't really worth the paper it's not printed on.

Hopefully, this gives you an idea why it's so hard to figure out a "fair" market price.

Consider what lease bonuses were in 2008. They ranged from under $300/acre to over $30,000 per acre. That's a factor of 100. These were offers made by the professionals in the O&G business. That should also give you an idea of how hard it is to estimate "fair" value.

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Permalink Reply by Checkmateking on November 23, 2009 at 13:38

There are companies that facilitate auctions of mineral rights with multiple competing buyers.

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Permalink Reply by Jon Williamson on November 23, 2009 at 20:11

Mac can you slide me some of what you are smokin? good gawd...you are blowin smoke up their arse. Have you purchased minerals? Thought not. If you get $100 a month on royalty go ask your bank what they will loan you on it. Based on on experience they will say maybe $1000.

Now if it's unleased minearals in the HA thats different. I'm still laughing at Mac. Ok lets's say unleased minerals are still worth $5000 an acre. If you are in the sweet spot and unleased, you could probably sell today for $10,000 an acre, a pretty penny. People on this site are so greedy, cracks me up. Consider what leases were in 2008? Wake up my brutha.

In all honesty we need to try and promote drilling as best we can. Get your best deal but don't be a horses butt. If you have an acre don't expect to get the best terms. If you have 100 acres expect premium terms.

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Permalink Reply by Jon Williamson on November 23, 2009 at 20:43

Regarding Checkmateking's comment that's true. There are auction sites where you can get maybe 60-80 times your average monthly income as a purchase price. That's an average monthly income and not the first month. As a matter of fact new production generally gets a much smaller multiple than established production. Note you have to pay a commision and post all the data, provide the conveyance documents, and generally warrant the title.

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Permalink Reply by Mac Davis on November 24, 2009 at 14:28

Mac can you slide me some of what you are smokin?

Actually, I've been drinking the DHMO lately.


Jon, try actually reading what I wrote. Follow the link in question.

Struggle to see if you can understand what I wrote, and the link in question.

Anyone who owns mineral rights should try to estimate what their revenue stream is likely to be. Calculate what this revenue stream is worth to you. Realize that there will be a large degree of uncertainty in what the revenue stream is worth.

The financial formulas to estimate present value of a revenue stream are well known. The "fair" value of an asset is NOT what you can sell it for. The "proper" value is usually calculated based on a "time value of money" or "discounted cash flow" analysis. The trick is to estimate what the revenue stream is likely to be.

If someone offers you more than your best guess of what it's worth to you, sell. If not, don't sell, unless you have to.

However, I agree that nobody is likely to pay you what that kind of money that kind financial analysis says it's "worth." I'm definitely NOT planning to sell my mineral interests for what people seem to be paying. If I was into that kind of investing, I'd probably be out trying to buy mineral rights.

I don't think mineral rights owners are likely to get a "good" price these days. I'd probably advise any friend who asks me not to sell.


By the way, I'll be glad to loan $1000 to anyone who will pay me $100 per month for the next several years.

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Permalink Reply by Checkmateking on November 24, 2009 at 14:55

This doesn't change the fact that there are numerous auction houses for mineral rights.
Your definition of proper value is false, somthing is only worth what anyone will pay for it. Why would anyone buy minerals if they didn't think they would come out ahead in the long run?

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Permalink Reply by Mac Davis on November 24, 2009 at 17:06

There are numerous economic theories of what a "proper" value of something is.

Two of them are

1) Market "value"

2) Time value of money (TVM) "value".


If you've got to have the cash now, "market value" is what matters.

If you're investing for the long term, most economists will tell you that a TVM analysis is what matters.

For instance, suppose you've loaned money to someone. They will pay you $10,000 one year from now. Assume you have sufficient collateral that there's no risk of default.

If you assume that interest rates are 3%, this loan is worth $9,700 right now by a TVM analysis.

Suppose you try to sell the $10,000 loan and nobody will offer you more than $2000 because it's such a piddling amount and they don't want to do the work to investigate the details and collateral.

Checkmateking, would you say that $2000 is the "proper" value? Would you sell the loan for $2000 just because nobody would offer you more?

You can debate what's the "proper" value as a question of semantics, I guess, but I think the relevant question is "how much money should a mineral interest owner be willing to sell for."

If you're an investor, use a TVM analysis.

If you don't have the time to wait, go for a market value.

In reality, most people will use something somewhere between TVM and market value based on their current needs. If your bookie is going to break your legs unless you pay him the $1500 on Monday, you may be more willing to sell out for what you can get.

The actual calculations for selling mineral rights are much more complicated. There's uncertainty on gas rates, production rates, interest rates, inflation rates, etc. You can still use a TMV analysis. What's your best guess as to the payments you'll get over time? What's the present value to you of $x paid "y" years from now? Add up the amounts and make your best estimate and decide what you'll sell for.

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Permalink Reply by The_Baron on November 25, 2009 at 8:20

Mineral rightss are like baseball cards.

They are worth nothing, unless someone is willing to pay for them AND you are willing to sell.

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Permalink Reply by Mac Davis on December 1, 2009 at 8:14

Sorry, but you guys just aren't getting it.

There are multiple things you can call the "value" or "worth" of a piece of anything you own.

1) What you can sell it for.

This is the most obvious "value".

2) The "present value" to you of the revenue stream or other benefits it provides you.

This one is more difficult to calculate or estimate.

The distinction is important because it's not always the right financial decision to sell for what the market will pay. Sometimes, it makes sense to hold on to the property and take the revenue stream or hope for a higher price later.

If you're considering selling something, you need to calculate both of these values when you decide whether or not to sell.

In particular when considering selling mineral rights, you need to consider the value to you of any revenue they will provide you in the future when evaluating whether or not to sell the mineral rights. The "free market" will not necessarily pay you a high enough price that it makes financial sense for you to accept.

The key questions are:

1) What price can I sell it for?
2) What price should I be willing to sell for vs. keeping ownership?

If you have difficulty with the term "worth" or "value", ask instead, "What price can I sell it for?" and "What price should I be willing to sell it for?"

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