Instead, we want to focus and highlight what factors influence the price of mineral rights, so that we have a guide in evaluating minerals on a tract-by-tract basis.
There is an indefinite number of factors that influence the price per acre of mineral rights.
Activation is key to generating cash flow from your mineral rights.
The price of oil plays and the volumes of oil and gas produced from your mineral rights speed up or slow down the timeframe in which you see your returns.
Factors Influencing Mineral Rights Prices
When evaluating mineral rights, multiple factors decide the price per acre for mineral rights. It is similar to a home appraisal value:
Age and design of the home
The current real estate market
Each investor may have a slightly different approach and goal in mind, but overall will at least look at various aspects before buying.
Let’s address some important factors when considering a price per acre for mineral rights:
Just like in real estate, location is the starting point. When evaluating mineral rights, we start looking at state rules and regulations. States that are not in favor of oil and gas exploration and production can significantly slow down drilling activity and overall put your investment dollars at risk.
States like Colorado have had ups and downs with oil and gas and make it less favorable to own mineral rights. Nevertheless, states like Oklahoma are proactively encouraging oil and gas production, making it the clear winner in this comparison.
As an investor, you want to stay within known shale plays across the United States. Some shale plays tend to pop up in news more than others, for example, the Permian basin located in Northwest Texas and Southeast of New Mexico. The Anadarko basin in Oklahoma is less mentioned in the news, but other basins are favored by Operators.
A bird’s eye view of what is happening on and around the location can provide us with the necessary information to assess how sought-after the area is now. Keep in mind, a surrounding area stretches for miles. A lot of new wells that are drilled are 2-miles vertical below the surface and 2-miles horizontal. To get a better understanding, it is best to capture details on a two-, five-, and ten-mile radius.
If there’s activity on the mineral rights being pursued, see what “status” they are in. We look at a timeline status from initial filings to a producing well as this will impact the price per acre.
Drilled uncompleted (DUC)
Activity means we are looking at producing wells in the area, any new wells coming online, drilling rig locations, and regulatory filings. We want to identify how “hot” the area is.
Let’s be real, we can have all the ingredients for a perfect meal, but if the chef cook can’t cook then we lose a lot of value. In the case of mineral rights, we want to ensure we have a reputable company overseeing the drilling operations and are more than capable to execute drilling a successful and productive oil and gas well.
A lot of minerals come with lease agreements already in place. Lease agreements are held in place by commercially productive oil and gas wells. There are specific terms in the lease agreement, such as the operator having the right to explore minerals from the sub-surface all the way to the core of the earth. Alternatively, the previous mineral owner may have only issued rights to a certain depth.
The one factor that tells us how big our slice of the pie will be is the royalty interest (RI) negotiated with the operator. Since the operator assumes all risk, liability, and expenses, they end up with the bigger slice. Royalty interest typically ranges between 12.5% and 25%.
Being able to see a bunch of activity on the surface, having reputable oil companies in the area, and favorable terms in place are great. Nevertheless, the bottom line is whether there is or isn’t oil and gas in place. Often it isn’t the question about whether there is. Rather, how much is in place, and how much an operator can extract.
Some locations at the surface may look completely tapped. Maybe there’s an older well, with no additional activity in years. It would look like the value is depleted. On the contrary, it may be a very lucrative opportunity.
Commodity Price and Market
The cash flow of producing oil and gas wells goes up and down according to commodity prices. It’s not instantly and directly associated with the check you receive from producing wells. There’s about a two-month lag time.
Oil companies need to capture the oil, then sell the oil on the market. Nevertheless, it is tied to your revenue stream.
Having low prices during the purchase of minerals, and high prices during ownership would be the best scenario.
Mineral Rights Value Rule of Thumb
As a rule of thumb, producing mineral rights are typically valued as a multiple of revenue, which is usually three to five years. For example, a royalty interest generating monthly revenue of $100 would be valued somewhere between $3,000 to $5,000 depending on where the land is located, what’s its current production status, lease terms, current commodity price, and operator.
However, since already stated in this article, the value of mineral rights is still a subjective matter and each company may value the same property in a slightly different way.
Whether you’re looking for mineral rights in a specific area or are location-agnostic and care more about the return on your investment, the best way to determine the value is to connect with a reputable source that can assist in the evaluation of the mineral rights.
What Does This Mean for Your Money?
Each factor is a piece of the puzzle that provides insight into how much the mineral rights may cost, and what they will return over a certain time. When purchasing minerals, it is important to understand more about the future value they can provide. The other component is how much time you allow to fulfill your expected results.
It’s expensive to set up proper operations to identify, evaluate, and secure mineral rights at scale. Investors often seek companies like Eckard Enterprises, which already has an established team and operations.
Eckard Enterprises, LLC, is a family-owned and operated energy asset management firm, focused on the U.S. energy industry. Eckard believes that owning tangible energy assets is one of the safest, long-term investment strategies available in today’s investment climate.
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This website is not intended to and does not constitute an offer to sell or the solicitation of an offer to purchase to any person in any jurisdiction. The contents of this website shall not be construed as legal, business or tax advice.