Understanding Mineral Rights Value
Understanding Mineral Rights Value
Having spoken with mineral owners over a number of years, there are some things about understanding mineral rights value that need special attention. Many mineral owners feel that they have a good idea of the value for their mineral rights. We’re going to help you understand all the things that affect the value of mineral rights in this article. Along the way, we’ll point out those things that mineral owners need to pay special attention to.
Absolute Value of Mineral Rights
The most common questions we receive from mineral owners is about the value. They want to know how much their mineral rights are worth. The short answer is that it’s impossible to give you an exact value for your mineral rights. If you have producing mineral rights and you’re receiving a royalty check, our post about the value of royalties can give you range, but even that is just a rough estimate of the value. When it comes to non-producing mineral rights, the value is even harder to determine.
While we can’t tell you an absolute value for your mineral rights, we can explain why there is no way to determine an exact value. This list does not include all the reasons, but it covers the major reasons:
- Market Pricing Information: Unlike the housing and stock markets where there is considerable amount of information about pricing, the mineral rights market simply doesn’t work this way. There are two reasons behind this:
- Hidden Information: In the mineral rights market, competitors (buyers/operators) don’t want their competition to know how much they are paying. In addition, they don’t want mineral owners knowing how much they are paying. If a company is paying your neighbor more than you, they don’t want you to know so you can’t use that to negotiate against them.
- Low Transaction Volume: Many stocks like Apple (aapl) trade over 1 million times in a single day. In the United State, there are over 4 million homes sold in a given month. When there are a large number of transactions, it’s easier to determine what the current value of something is. With mineral rights, the numbers of sales and leases isn’t high enough to gather enough data and put together a clear picture of the value.
- Oil and Gas Prices: The value of mineral rights is heavily dependent on oil and gas prices. We recently covered how lower oil prices affect mineral owners, and it’s important to note how big of an impact prices can have. When price are high, operators/buyers are willing to pay more but things can quickly change course of prices decline.
- Production Information: One thing that can quickly and severely change prices is surrounding production. If a dry hole or extremely low producing well is drilled near your acreage, this can quickly implode the price of mineral rights. On the flip side, if a huge well is discovered near your property it would increase the value.
- Market Participants: One important factor in mineral rights pricing is the actual buyers/operators themselves. We’ve seen many situations where 9 of 10 buyers won’t pay over $X and then 1 buyer believes the area to be substantially more value and pay a large premium for the acreage. In short, every buyer takes a different level of risk and even professional mineral rights buyers value mineral rights differently.
If it’s so hard to determine the value, how do you actually determine the value of your mineral rights? The only true way to value your mineral rights is to put them on the market for sale. If you list your mineral rights for sale at a place like US Mineral Exchange, you will get your property in front of a large number of buyers. You can then let the market tell you how much your mineral rights are worth in today’s market.
Sources of Information
While you can’t determine value without putting your property online and letting the market determine value, we know you’ll keep searching anyways! That’s ok! As a mineral owner you need to educate yourself about the value of your property as much as possible. With that in mind, here are some additional ways you can research the value of mineral rights:
US Mineral Exchange: www.usmineralexchange.com
If you want to get a true value for your mineral rights, list them for sale/lease at US Mineral Exchange. They will get your property in front of a large audience of buyers who will compete against each other to pay you the highest price. This will allow you to determine a true market value for your mineral rights.
Mineral Owner Inquiry Form: (See bottom of this page)
If you have questions about what your mineral rights could be worth, fill out the form at the bottom of this page. While we can’t give you any exact numbers, we can help you at least get a rough idea of the value your mineral rights are worth.
Mineral Rights Forum: www.mineralrightsforum.com
The mineral rights forum is a great place to network with owner mineral owners. They have an excellent community and can help provide some insight about your specific area. With that said, take everything you read with a grain of salt. The prices you read and information you get is sometime accurate and sometimes completely false. Use this as another resource to gather information and make your own informed decision.
Go Marcellus Shale: www.gomarcellusshale.com
The same advice applies to Go Marcellus as does the Mineral Rights Forum. Take what you read with a grain of salt, but gather the information you can find and use it to form your own opinion.
Marcellus Drilling News: www.marcellusdrilling.com
If you want information specific to the Marcellus and what’s happening, we highly recommend Marcellus Drilling News. Frequent updates and helpful information make this a great resource to learn about what’s going on in the Marcellus.
This list could go on and on, but these are some of the major places to check for information related to the Marcellus and in general. As with everything you read on the internet, form your own opinion based on all the information at your disposal.
Legitimate Offers vs Flippers:
While this section could easily fall under common mineral owner mistakes, this one is such a big problem for mineral owners understanding mineral rights value that we had to create a whole section for it! As a mineral owner, one of the best pieces of information you can receive is an offer. An offer is important because it gives you a specific number about what the value of your mineral rights could be worth. When you get an offer to sell mineral rights or an offer to sell royalties, consider the following:
Legitimate Buyer Offer: A legitimate offer to buy mineral rights will have all of the elements listed below. A legitimate buyer offer is excellent because it gives you at least one point of reference for the value of your mineral rights. All future offers you receive can be compared to this offer to determine if it’s a fair price. However, keep in mind that a single buyer who has made you an offer is highly unlikely to be making the best possible offer you can get. If you want to get the best possible value, you need to get your property in front of a large audience of buyers and let them compete against one another. A legitimate buyer will give you an offer that meets the following criteria:
- Offer in Writing: If you request a copy of the offer in writing, a buyer should be able to put the offer in writing without a problem. If the offer is legitimate, they will have no problem putting the offering in writing.
- Reasonable Deadline: If a buyer pressures you to sign quickly or gives you a very short time frame (less than 15 days), run away immediately. You do NOT want to make a bad decision. A legitimate buyer will give you time consider the offer and evaluate alternative offers.
- Due Diligence Period: When a written offer is made, it should indicate the amount of time the buyer will need to complete due diligence. If this period is longer than 60 days, run away immediately! A legitimate buyer should be able to complete due diligence inside of 30 days, and occasionally up to 60 days in certain counties. If the due diligence period is between 30 and 60 days, proceed with caution.
- Option Agreements: If the agreement in question mentions anything about it being an option, you are likely working with a flipper. Flippers will lock you into a contract for a long period of time at a certain price, then find someone willing to pay more. They take money out of your pocket and put it into theirs and you gain nothing.
Flippers: When you get an offer from a flipper, you’re getting bad information about the value of your mineral rights. A flipper is someone who will try and get you to sign an option contract or have an extremely long due diligence period to lock you into a bad deal. Their goal is to find someone willing to pay more. This is bad for you because they will typically do one of two things:
- Offer too much: The flipper has no idea how much your property is worth 9 times out of 10. They will do anything simply to get you to sign so they’ll push for a low price but they’ll eventually sign with you at any price because they hope to find someone willing to pay more. The problem as a mineral owner is that these offers do not represent true market value.
- Offer too little: A flipper will try and get you to agree to the lowest possible price. If you accept, they can now take this out to the market and get a much larger value. Unfortunately for you, you’ll get way less than your property was actually worth and they’ll pocket the difference.
Common Mineral Owner Mistakes:
If you dedicated to understanding mineral rights value, these are the most common mistakes mineral owners make. If we had a nickle for every time a mineral owner falls into one of the traps below, we’d be writing this on a beach somewhere. The reason these mistakes below are so critical is because it changes the expectation you have about the value of your mineral rights. When a mineral owner fails to sell or lease their mineral rights, it’s almost always related to one of the reasons below.
“My neighbor”: One of our favorite lines talking to mineral owners is “Well my neighbor got $5,000/acre so my property is worth at least that”. This stumps most mineral owners because they view their mineral rights like they do their home. When your neighbor sells their home, it has a very direct impact on the value of your mineral rights. However, with mineral rights that’s not always the case. Remember all those factors we discussed above that affect value? All of these play a role. Timing is critical, your lease is critical, your royalties are critical, oil pricing is critical. What your neighbor got is simply a data point that could give some indication of value. However, it’s not indicative of the value of your property.
Rumors: Similar to the “My neighbor” stories, we also continually get the “well someone recently sold for $5,000/acre and they’re in the same county as me”. Once again, every property is different and being in the county is about as relevant as being in the same country when it comes to mineral rights. Even within a county prices can vary a significant amount.
Landowner Groups: A perpetual favorite on our list of mineral owner mistakes, landowner groups rarely accomplish what they set out to do. The idea is that as a group you can all negotiate a better price for your rights as whole since you have more negotiating power and more knowledge. Sounds great in theory! The reality is that most groups are worthless and we’ve seen mineral owners wait for literally decades to sign a lease or sell because they are always “holding out for more”. Even worse, there is typically as much bureaucracy in these groups as you’ll find in Washington D.C.. Good luck! It’s worth noting that there are SOME landowner groups that can be helpful. Proceed with caution and expect leadership to have a hidden agenda (i.e. a piece of the deals they are working out).
Bad Production Numbers: Nothing will change the value of your mineral rights faster than a dry hole or very low production well. We’ve seen prices go from thousand per acre to just a few hundred or even $0 based on production numbers from surrounding wells turning out to be less than expected.
Attorneys: Attorney’s are really great at reviewing a contract to ensure there is nothing that could legally hurt you. What are they not good at? Having a clue what the actual price of your mineral rights is. Attorney’s will typically review a lease or sale agreement and then quote the highest price they saw to everyone. In addition, if you’re considering having your attorney review that lease/sales agreement, proceed with caution.
Fake Offers: There is a lot of misinformation in the market place. From mineral rights flippers, to misinformation in forums, to local attorneys, to brokers, everyone thinks they know what the price should be and it’s easy to hear a number (the highest one) and believe that’s the value of what you have. The value of your mineral rights is what a legitimate buyer is willing to pay TODAY for your property. Getting multiple offers from legitimate buyers is your best bet for understanding mineral rights value.
Present Value: We almost had to create a whole section for this one as well. Mineral owners commonly say “well the value of this property is going to be significantly higher when it starts producing” or “the value of mineral rights in this area keeps going up” so I don’t want to sell at that price. The value of your property is what a buyer is willing to pay TODAY for your property. If your home was worth $250K, would you expect a buyer to pay $500K because in 15 to 20 years it will easily be worth that? That would be completely unreasonable, but we’ve talked to so many mineral owners who want the future value of their property and not today’s value that we’ve lost count.
Timing: Out of all the things that affect value, timing is one of the most significant. What your property was worth 6 months ago is likely completely different than what it’s worth today. It could be a lot more, or it could be a lot less.
Questions about Understanding Mineral Rights Value?
If you still have some questions about understanding mineral rights value, fill out the form below. Our goal is to help you make sense of your mineral rights and we’re here to help!