If you own mineral rights, the most important question you need an answer to is “What are my minerals worth?” While several variables influence mineral rights value, the most important are location, activity and commodity pricing.
Where your mineral rights are located will have a profound impact on value. Mineral rights in states like Wyoming, Colorado and North Dakota that have large oil and gas reserves, and allow for the development of such, are understandably much more valuable than mineral rights in other states, where there is either no known oil and gas reserves or development is not allowed by law.
If you do own minerals rights in an oil-rich area, there is still a wide range of possible values based on exactly where your acreage is. This is because of the way oil is ‘assigned’ to wells, also known as pooling. When an operator applies for a permit to drill a well, it has to denote from which acreage the oil is being extracted from. Different states use different pooling methodologies, but no matter which is used, there are boundaries created that dictate whose minerals are being included in a well and whose are not. This is why it is difficult to assign a value to your mineral rights based on what someone who lives nearby sold for or received an offer to sell for as the owner whose oil is getting pooled minerals will be worth considerably more than the owner who is not. This leads to the second main function of value: Activity.
In order for mineral rights to have ANY value, there has to be the possibility of extracting oil and gas out of the ground. You could be sitting on the largest oil reserve in the world, but if there is no way to get that oil above ground and into a refinery, it is worthless. Mineral rights located in areas where there is a lot of drilling activity will be more valuable than those were there is not activity. This is because until a well is drilled and oil and gas are extracted, the mineral rights only represent potential value, not actual value. As we learned above, just because you see a drilling rig close to your property, that doesn’t necessarily mean your minerals are going to be pooled in a well. The more nearby activity, the better, but again, just because your friend that lives a few miles down the road received a substantial offer for his mineral rights, does not mean your mineral rights are worth the same.
As this report and the section below demonstrate, oil prices are a significant driver of drilling activity. Another major influencer of activity is the political or legislative environment. For example, Colorado’s oil and gas industry has had several legislative measures come to vote in recent years and the recently passed SB181 has created uncertainty about the viability of drilling in certain areas. This, in turn, has a negative impact on drilling activity.
One of the primary drivers of activity is the third major prong of mineral rights value: Commodity Pricing.
Oil is the most volatile commodity in the world. Prices can swing 20% in just a matter of days, and 50-75% over several months. When prices are stable or rising, there is generally an uptick in drilling activity (as evidenced by this article) and conversely, when prices are falling, drilling activity will decline. Wells have to be economical for an operator to want to invest the capital to drill a well. Technology continually pushes down the break-even point for oil and gas wells, but there are prices of oil where operators will cease operations as it costs more to produce the oil than they can sell it for. This will obviously have a dramatic impact on the value of your mineral rights. If it costs more to extract your oil than the oil can be sold for, it means your mineral rights will never be extracted and are thus worthless.
The volatility of oil prices also means that the value of your mineral rights today will likely be significantly different than they were last year and will be next year. It is for this reason a lot of mineral rights owners ultimately decide to sell; so they can invest in a more stable asset class that generates predictable cash flow.
The only way to truly know what your minerals are worth is to solicit a qualified offer from a reputable mineral rights company. If you would like to receive an offer from The Petram Group for your mineral rights, please contact us at contact(at)thepetramgroup.com.
Image: John R Perry