Valuing Your Mineral Rights
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.....
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
Views: 187
Replies to This Discussion
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Permalink Reply by Henry on
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DS,
See my response to JNP below. Some companies are drilling alternate unit wells, as I write this. Others have made it clear that this is not their priority right now.
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Permalink Reply by JeffNParis on
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Henry...just wondering why you think Chesapeake will likely drill one well to HBP and then potentially wait to do 2-7 so long afterwards? Why would they invest so much money in the Haynesville field only to let it sit? Are market conditions (low prices, gas glut) going to be that bad? Might they sell their interests to a different company if they are moving to greener pastures (oil exploration?)
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Permalink Reply by j garrett on
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The term is "Held by production", HBP, not held by "spudding". But drilling one producing well to HBP acreage is likely. Proper provisions in a lease can prevent that. And it is not just Chesapeake, they all do it. And, if you were the Operator, you'd do it too in the current market climate.
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Permalink Reply by JeffNParis on
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Thank Henry. :(
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Permalink Reply by Les Bamburg on -
Henry, I do not believe Chesapeake has announced what their specific rig count would be in the Haynesville/Bossier Shale once all the sections are HBP. Also, Chesapeake will continue to drill a certain amount of wells in natural gas plays as oil plays alone would not be sufficient to produce the required earnings growth. Their efforts in "oilier" plays will simply allow them to attain a little more balance but their portfolio will always be natural gas dominated.
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Permalink Reply by Spring Branch,mineral owner on
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Henry, when and where did Chesapeake specifically say that they planned to reduce their Haynesville rigs to 12 after they HBP their acreage. A link would be nice, because I was not aware that they were very specific about the reduction.
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Permalink Reply by Henry on
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SB,
I read it somewhere. I'll try to dig up the link, but I'm not optimistic. This was a month or two ago when I read it.
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Permalink Reply by Mac Davis on
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30 years from now, take all the production records from your minerals, do some calculations and then you'll know what your mineral rights were worth in 2010 from a Time Value of Money standpoint. Unfortunately, that's not a lot of value to you right now.
Like any investment, you have to make a lot of assumptions, maybe run some simulations and place your bets.
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Permalink Reply by Bobi Carr ("parker") on
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David,
You post has a lot of insight that many have failed to recognize when it comes to valuing minerals.
The whole oil and gas industry is volatile and fluctuates wildly.
It is speculative, pure and simple. This wonderful thing called the Haynesville Shale may be relegated to the likes of red headed step child if a new "golden child" is born. Just the nature of the business.
You post reminds me to make a reality check.
It's all "lagniappe" so treat it as such.
I have read that 3 times the bonus offer is a way to establish value. I think the caveat to this would be 3 times what the present offers are not 3 times what the highest offer was.
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Permalink Reply by Spring Branch,mineral owner on
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Parker, do you know of any minerals that have sold for three times the lease bonus? For the sake of argument let's say three times $5,000- $8,000 per acre...........I sure don't.
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