Wondering how to buy mineral rights that will give you the best value? Trying to predict what the value of mineral rights will do can be a tricky business—a lot like trying to predict how well your favorite football team will do this season. There are lots of factors that affect prices, and some of these factors can change rapidly. However, if you want to properly assess and value your mineral rights, you’ll need to take some of these considerations into account. Here are some of the top things that can influence the value of your mineral rights.
Key Takeaways
- A variety of things can influence the value of mineral rights, some of which are outside the mineral rights owner’s control. Other aspects, like lease terms, can be negotiable.
- To maximize mineral rights values, it’s best to negotiate leases with an experienced attorney or professional skilled in the oil and gas industry.
- Keep in mind that physical factors, like location, geography and the size of the tract in question can impact mineral rights values.
Location
As they say in real estate, location, location, location! There’s a big difference between owning mineral rights in say, Nevada versus Texas. It pays to own mineral rights in hot areas—but what is it that makes an area hot? Geography is the biggest part of it. Sites near known hydrocarbon sources will be more valuable as will sites that feature geological characteristics that indicate hydrocarbons may exist. The types of wells drilled in these areas can also play a part in value.
Right now, some of the most popular places include the Bakken, Eagle Ford, Haynesville, Marcellus, Woodford and Permian shale plays. Using the Delaware Basin of the Permian shale play as an example, wells in this region are incredibly valuable because they generate a lot of oil and natural gas—and the geology is suited for drilling multiple stacked wells.
Producing or Non-Producing Mineral Rights?
When owning or investing in mineral rights, it’s all about “activation”. To benefit from mineral rights an oil company has to produce oil and gas minerals. This is a big factor that affects value. When minerals are being produced and monthly revenue is being generated, the mineral rights on that tract will be much higher than mineral rights ownership for non-producing tracts. When you invest in non-producing tracts, you are essentially investing in mineral rights that may pay off in the future if hydrocarbons are discovered and produced.
Producing mineral rights limits risk because you’re not betting on whether or not a tract will produce hydrocarbons.
Flow Rate and Well Production
If you have to produce mineral rights, then one factor to assess is the flow rate or production rate of the wells associated with those rights. In most cases, more production means higher revenue. But how much higher? Here are some things to think about:
- Pipeline constraints can lower the value of producing natural gas wells.
- Highly fractioned mineral rights in which hundreds of thoughsand of people are invested in the same tract of land may see lower valuations. While this doesn’t affect what the well produces, the lower valuation is often because of the complexities involved in managing a large pool of mineral rights owners.
- The age of the well. New wells tend to produce the biggest quantity within the first couple of months, with production declining as the well ages. Declines are tough to predict since production could drop to 50% or even as low as 10% in the first year—or not!
Horizontal wells are overall projected by major oil and gas companies to have life expectancies of more than 30 years. This means that while there may be a decline within the first months or year of the well, after that, most mineral owners can expect to receive consistent income for many years.
Larger Tracts are Worth More
When oil companies are leasing mineral rights, they’re trying to keep the process as efficient as possible – and it is much easier to lease large tracts of land under a single contract than lots of smaller ones. Typically, the oil company will deploy a fleet of landmen that attempt to lease an entire area. Some mineral owners may miss the opportunity to lease during this time. Nevertheless, some states have forced pooling provisions that enable the mineral owner to participate in the exploration and production of the oil and gas, which means they will still have an opportunity to collect royalties on their mineral rights. Either way, having a larger tract offers the mineral owner the benefit of a stronger negotiating position.
Oil and Gas Prices
Oil and gas prices have a large impact on mineral rights values. Values go up when commodities are high and dip when commodity prices drop. Higher prices mean more revenue for mineral rights owners from producing oil and gas wells, and the potential for oil companies to drill more wells provides additional revenue streams.
If prices dip low enough, wells may not be drilled or they may even be shut-in as it just isn’t economical to keep producing anymore. Each oil and gas shale play has different economical breakeven points due to transportation costs, location, and productivity.
Extremely high prices can signal potential volatility in the market. It can be an accordion effect. The more oil and gas that is produced, the faster refineries fill up. As they fill, they’ll keep accepting oil and gas — but at higher prices because they are running out of storage room. This poses operator expenses higher, which forces them to reduce production.
Several years ago, the exportation of oil and gas was an option that drove increased production even when refineries here were filling up. Prices didn’t significantly increase or decrease this time, but they did serve as an outlet for surplus oil and gas.
Right now, oil prices are predicted to exceed $100 in the next 12 to 24 months–and it all has to do with supply and demand as well as a shortage of capital infusions from Wall Street into the oil and gas industry. Production hasn’t increased, but demand is continuing–currently almost back to pre-COVID levels. This will drive prices higher because the amount of oil and gas in storage is dropping, and it isn’t being replaced through production quickly enough, particularly since it takes quite a bit of time to ratchet up production levels.
Operators
It may come as a surprise, but operators- in other words, the company drilling wells on a tract- can impact the value of mineral rights. That’s because certain operators have a reputation for being better at drilling, with more successful wells under their belts than others.
For the mineral owner, complexity can be a drawback that makes the mineral rights less valuable when working with a particular operator. This is sometimes apparent with deductions and the itemized statements that come with revenue checks. Depending on the lease, some operators will pass operating expenses on to the mineral owner, or there could be other deductions and items on the statement as per the lease agreement. It is the operator’s responsibility to make sure all of this information is correct and that the mineral owner is paid exactly what is owed, but errors do happen, so it is important to verify that what you receive aligns with your lease agreement. When working with operators handling thousands of wells, errors can become more common—and it can also be more difficult to work with a busy operator to correct those issues.
If your mineral rights are currently produced or leased by an operator for future exploration and production, this can affect the value of your minerals. Mineral buyers value the operator producing the minerals as much as the location those minerals are located. This has to do with the operator’s exploration efficiencies, financial strength to fulfill drilling operations, and drilling strategies. Remember, minerals must be “activated” (producing) to generate revenue.
Lease Terms
Lease terms can have a huge impact on the value of mineral rights—and that can be unfortunate in the case of new mineral owners, who are often unfamiliar with the types of leases available or the particulars within the terms. It’s always advisable to hire a professional to negotiate lease terms, but many new owners are inexperienced enough to think they can negotiate terms on their own. This is where mineral rights owners can run into trouble. Some examples include:
- Royalties: The royalty reservation (how much owners will receive from the revenue generated by their mineral rights) is the top influencer where value is concerned. Royalties differ by region—Texas sees a standard 25%, for instance—but many areas will see between 12.5% and 20% royalties. Negotiate too low, and your potential future revenue stream will be less, reducing the overall value of your mineral rights.
- The Mother Hubbard Clause: This is a common provision in oil and gas leases. While specific terms may vary, a Mother Hubbard clause is essentially a catch-all that can allow a mineral rights lease to cover not only the land described in the lease, but also adjoining lands that the lessor owns. It can result in a situation where a leaseholder keeps a poorly performing well on the tract of land simply to hold production rights to the entire tract—including those made eligible by the Mother Hubbard clause. Naturally, this can devalue mineral rights.
- The No-Deduct Lease Clause:These are worth more than cost-included leases. The typical royalty structure, with the majority of the revenue generated going to the operator, is set up as such because it is the operator who takes on risks, pays operating costs, and covers expenses. No deductions are made from the lessor’s share for the costs of production, storage, processing and so on. A cost-included lease stipulates that the mineral owner must also pay a portion of operating expenses and is less valuable than cost-free leases.
What This Means For Your Money
As you can see, there are quite a lot of factors that can influence the value of mineral rights. Some of these things, like current oil and gas prices, are outside your control, but others, such as lease terms, are negotiable. To get the most bang for your investment buck, pay close attention to factors like location and geography, and work with the professionals at Eckard Enterprises to help you understand more about the value of mineral rights.
