Valuing Oil Well (Mineral Rights) Investments

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mchriton
Posts: 48
Joined: Sat Oct 24, 2015 3:26 pm

Valuing Oil Well (Mineral Rights) Investments

Post by mchriton » Sun Mar 19, 2017 4:55 pm

I'm hoping for some quick advice on how to value oil well investments being inherited by my MIL.

The only details on the investments we currently have are some stubs (sample is below) on the various investments -- the investment is potentially decades old.

What would folks recommend as next steps to value these? MIL has an offer to buy her out of one of the investments by a local LLC that specializes in buying out mineral rights - however, without an understanding of the value we can't fairly assess the offer.

Clicks on image below to see the level of details that we have.

Image
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dwickenh
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Location: Illinois

Re: Valuing Oil Well (Mineral Rights) Investments

Post by dwickenh » Sun Mar 19, 2017 5:52 pm

Mineral rights are an ownership position, not necessarily an investment. Current oil rights income is low compared to the past due to oil prices being depressed. Many oil companies are not pumping large volumes of oil due to the price. If you were to value the current value of the minoeral rights based on this income, it may be low compared to average value over a 10 or 20 year basis.

My knowledge is limited, but I also inherited mineral rights several years ago. I did not sell the rights.

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

WildBill
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Location: San Antonio, Texas

Re: Valuing Oil Well (Mineral Rights) Investments

Post by WildBill » Sun Mar 19, 2017 6:12 pm

Howdy

I was in the business for over forty years. Using the stub you showed to try and get some idea of valuation from strangers on the internet is not going to work.

It looks like there is fractional interest in producing wells. Where, how much, how many, etc? There is a paradox here. If all you know is some sketchy information from past royalty checks, how do the guys who made you an offer know what they are buying?

Place to start is rounding up the answers to those questions. Best place to start is whoever sent you the stub and attached check.

The industry is full of independent geologists and petroleum engineers who can do an appraisal for you. Any oil patch bank can recommend several. They can also recommend a broker who can find more than one buyer for you also.

Good luck and may your production rise

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

Random Poster
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Re: Valuing Oil Well (Mineral Rights) Investments

Post by Random Poster » Sun Mar 19, 2017 6:38 pm

Mail offer buyers tend to offer a purchase price that is somewhere around 36 months' worth of royalties.

Hard to know if that would be a fair price or not, but these companies aren't in business to make the sellers rich.

As an aside, think carefully about selling. Often there are family reasons not to sell, and there are some tax advantages to having mineral/royalty interests.

Katietsu
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Re: Valuing Oil Well (Mineral Rights) Investments

Post by Katietsu » Sun Mar 19, 2017 6:57 pm

Unlikely that an unsolicited non-negotiated offer is a good one.

A few questions to ask yourself/MIL: What is your MIL's financial situation? Does she need the lump sum payment? Would the monthly income be more useful? Does she have other investments or does this represent most of her net worth? Were the mineral rights valued to determine the FMV at the date of death in order to establish a basis should she wish to sell these at some time in the future?

mchriton
Posts: 48
Joined: Sat Oct 24, 2015 3:26 pm

Re: Valuing Oil Well (Mineral Rights) Investments

Post by mchriton » Sun Mar 19, 2017 7:03 pm

Thanks for the responses so far.

To be clear, I'm not looking for anyone to provide valuation #s on this thread, rather help detail potential next steps. The intent of the stub was to show the information we have as a starting point. I have had zero exposure to fractional oil well ownership / oil royalties / mineral rights until this.

I can call the companies that are mailing the checks, so far I've identified four companies. But what questions should I ask? I can ask yearly royalty totals to use in valuation multiples; anything else?

WildBill wrote:The industry is full of independent geologists and petroleum engineers who can do an appraisal for you. Any oil patch bank can recommend several. They can also recommend a broker who can find more than one buyer for you also.


Do you have a list of oil patch banks?

Katietsu wrote:A few questions to ask yourself/MIL: What is your MIL's financial situation? Does she need the lump sum payment? Would the monthly income be more useful? Does she have other investments or does this represent most of her net worth? Were the mineral rights valued to determine the FMV at the date of death in order to establish a basis should she wish to sell these at some time in the future?


This would be a small part of my MIL net worth. She doesn't need the money in lump sum and would be fine keeping these. However, she has two siblings that don't have many assets and would need the money as lump sum (MIL is the executor of the trust of my wife's grandma).

Gill
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Location: Florida

Re: Valuing Oil Well (Mineral Rights) Investments

Post by Gill » Sun Mar 19, 2017 7:41 pm

In valuing these interests for estate tax purposes I was usually advised by our special investments department to value them at twice annual cash flow. This was generally accepted by the IRS.
Gill

WildBill
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Location: San Antonio, Texas

Re: Valuing Oil Well (Mineral Rights) Investments

Post by WildBill » Sun Mar 19, 2017 7:50 pm

Howdy

Things are slightly clearer now. I still don't get how people made you an offer, where they apparently know what they are buying and you don't know what it is you might be selling, but I will let that continue to be a mystery.

It appears that several interests in producing wells were inherited. The thing to do, and what you seem to be doing, is backtracking from the royalty checks to the well operators to identify the assets.

Another point - Whoever previously owned these interests would have been filing the royalty payments on their taxes, and the partnership statements they file with their taxes will have all of the information you need.

So far so good. It will probably take a while to get all of the information.

The wells will be identified by unique identities and you may only have royalty rights from some of the producing zones. Additional complication, but that is for an appraiser to worry about.

Once you have all of the well information put it in a spreadsheet. To get an idea of the potential value, sum up production information and royalty payments over several years. If you come up with big numbers, say 50k per year or more it is worth getting an appraisal.

Figure out where the wells are and in what county and call the biggest bank in the county, or the largest town in the area. Oil and gas properties have very specific local characteristics and you want someone with local knowledge. Ask to speak to an oil and gas guy and ask him to recommend a couple of appraisers.

Another idea is to discuss it and potentially solicit a bid from the current well operators - the guy's sending the checks - and compare it with the offer you already have.

In general I would hang on to the production, for a number of reasons, unless you have an immediate need for cash.

Good luck

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

srmach05
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Joined: Tue Jan 10, 2017 10:40 am

Re: Valuing Oil Well (Mineral Rights) Investments

Post by srmach05 » Mon Mar 20, 2017 10:25 am

I currently work in O&G investment/financing, and have done many mineral rights buying/selling deals.

How these companies are finding your MIL and determining her interest is by going through the public county records of the county her minerals are located in and tying together title records to figure out who owns what. IF your MIL is actually interested in selling, then the easiest way to get a good offer is to do the following:

1) Google "[oil basin/play name] mineral rights for sale" -- if you are unsure of the basin her minerals are located in (Permian, DJ, Eagleford, etc) then just the name of the state they are located in will do as well.

2) Contact 3 or 4 of the companies listed who purchase mineral rights and ask for their best offer. If she's in a good area, they will do all the legwork in determining what she owns - you'd likely just need to submit the last couple of paystubs, and answer a few questions regarding title.

3) Evaluate offers and pick the best two and contact them again, let them know you've received multiple offers and ask for their best, final offer.



If you want to spend a few hours becoming more knowledgeable about the potential value of her minerals, then I'd advise looking at the most recent 1 or 2 corporate presentations of the companies she's currently receiving checks from and seeing what they have to say. Would give you a good picture of how "hot" the area she is in currently.


Overall though, for an uninformed seller the best way to get a fair offer is to seek out multiple offers and then make them compete against each other.

Ethelred
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Re: Valuing Oil Well (Mineral Rights) Investments

Post by Ethelred » Mon Mar 20, 2017 10:40 am

I wonder how well some of the suggestions here will work.

It would be easy for anyone who knows even the basics of the oil business in the onshore US to see the state and county listed, and get an idea of which basin it's located in. Unfortunately, there are empty spaces on the form in the photo where the location info should be listed, which is pretty poor record-keeping. To the OP - you need to find this information.

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