I'm a commercial appraiser and have valued hundreds of office buildings, apartments, retail centers, warehouses, hotels, and a few others kinds of properties based on their income streams. When I signed my leased two years ago for gas drilling on my land in southeast DeSoto Parish, I whipped out Excel and began setting up a cash flow analysis spreadsheet.
Over the months, as I learned more and more about the drilling process from some wonderfully helpful and patient people here like Les B. and Skip Peel, I would refine and refine my spreadsheet, reviewing variables, estimates, and projections on everything from gas prices to decline rates.
A couple of months ago, I gave up.
Unlike almost all other commercial real estate, I finally realized there's absolutely nothing predictable about mineral land income. Some commercial properties have long-term leases locked in place, making income forecasts about as challenging as turning on a light switch. And even with empty building, a competent appraiser can make reasonable projections of future lease rates and occupancy levels.
But no one, not even the operators, know the pace at which gas will be extracted from the ground. The choke on the first well and drilling of all subsequent wells are set according to the operator's internal financial needs and the state of the national energy macro-economy. A full-throttle well may be forecast to decline, say, by 85% in it's second year, but there seems to be little likelihood that most wells will be full throttle.
So, if one can't make a valuation based on income, how else can mineral rights be valued? Just like homes or raw land, neither of which produce income. You do your best to find out what comparable properties (or comparable mineral rights) have recently sold for, and make an average.....
Tags: Income, Leases, Mineral, Rights, Valuation
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