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Does Anyone Know How to Value a Oil Royalty Interest?

Posted by Carefreeap on 6/10/2008 at 10:31 AM | 9 answers | 6653 views
My husband and I inherited oil royalty interests in CA about 6 years ago. Three of them are paying quite well right now, as you can imagine. Yesterday we received checks totaling $4,500 for the month, the best yet.

For NW purposes, how would you calculate value? I'm a property person so my instinct would be to estimate a value based on an income stream, say 10x the annual gross.

But is anyone out there from the Oil leasing business who really knows?

Thanks

Answers

Value is going to be hard to calculate without knowing more about your royalty. Are there producing wells on all of your royalty acreage or is there some remaining possible development? How old are the wells that are currently producing and how steady is their decline? In the industry we usually value a well by fitting a forecast curve to it's production history, then calculating for net present worth of the remaining production. If it's an older well you can probably forecast it as a straight line on a logarithmic chart. If it's a newer well it's going to be pretty complicated without some sophisticated software.

Acreage without a producing well is going to be even harder to value unless you know something about the geology. A quick and dirty way would be to look on the state website. Most states have an oil and gas commission website that will list existing wells and their production. If there are any offsetting your acreage you could maybe infer the value of your acreage from that but you're going to have to subtract out the cost to actually drill and operate the well from the value.
Itchy, thanks for the answer. I was reviewing the quitclaim deed and there are 7 leases to oil companies listed. I am having a hard time matching the current payments to the leases referenced in the QC. The leases were entered into in 1936, 1948 and 1955. I am having a title company pull copies of the recorded leases but I'm sure they have been assigned many times over the years. Since we have had ownership the names writing the checks have changed twice. They are now coming from Warren E&P out of Wyoming. The wells are in the Wilmington area of LA County. I remember speaking to one of the owners at one time who explained that CA has a law which dictates that all owners of the mineral rights have to split the revenue generated from the wells in the area. If I understood it correctly, it was done to limit the number of wells in an area so that the pool wouldn't be depleted by competing wells. Does this make sense?

I have visited the CA MOG site before. I did a little research because we also have mineral interests (but no wells) 7 drilling sites and access rights over 300 acres in Ventura Co. I did pay a consultant to review the data but I think we're too far away from any known oil fields. Oddly enough the value in that mineral right is to have the fee owner pay us to remove our surface rights. They can't develop anything without clearing our interest because the granting language was so vague we could put access roads where ever we wanted.

Thanks again for responding. Do you know of a primer of some kind for this subject; a MOGs for Dummies?
Hmmm, I'm not sure how simple you're looking for. You could take an industry training course like Petroskills' basic oilfield economics, but that might be a little too expensive and a little too advance unless you're interested in developing or selling your properties. You could also check out the . They have a variety of textbooks on sale covering both technical and business aspects of the industry. I've linked to the business/industry section. I would be cheaper than a course, but some of them might be too heavy for you if you don't have a background in the subject.
Sorry, messed up my link tags. That second link takes you to the SPE bookstore.
Ichy, Thanks for the additional info. I will check them out.

I have a background in real estate and have worked with some exotic stuff over the last 25+ years (working with railroad property will do that!) but MOGs are a whole different animal.

But I going to need to educate myself because in addition to the 7 oil leases and Ventura Co MOG interest, it looks like the QC included a couple of other mineral rights which do not have leases.

This is going to be an interesting journey.
Very simple way to value: how much will somebody pay to buy them from you now?

If you do get a buyer ... sell (after all, oil is high) UNLESS this is an investment that you would buy at your selling price today.

In other words, would you buy back immediately after selling?

If you can't easily sell it, then I would not make any allowance on my Net Worth statement except what I am guaranteed to get upon forced liquidation.

BTW: that why any 'business' is difficult to value for a net Worth statement and why banks (for example) will usually either no lend on their value or discount very heavily.
The value of mineral rights depends on a lot of different variables like current energy prices, size of the acreage, quality of the production, and the wells production decline curve.

There is a great article called Mineral Rights Value at http://www.mineralweb.com/ worth reading. The site also has some other articles relating to mineral rights.

Hope this helps.
Do you still own your mineral? We would like to purchase them for cash.
Carefreeap - a little late posting here but I might be able to help you. First of all - I don't want to buy your royalties! My company, Veritas Petroleum Analysts, LLC specializes in the valuation of oil and gas royalties and interests. We do not own or seek to own properties, but act as an independent party. If you think our services might be of value to you, you can find more information about us on our website:

www.veritasanalysts.com

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