Mineral Rights Appraisal Service
Are you looking for a mineral rights appraisal and valuation service? If so, this article is going to help explain why you should avoid mineral rights appraisal and valuation services. It’s common for mineral owners to want to know the value of mineral rights. However, a mineral rights appraisal is rarely going to be the right option for you.
A lot of mineral owners think that a mineral rights appraisal will be similar to a home appraisal. Unfortunately it doesn’t work like that. When looking at homes, it’s typically pretty easy to determine an approximate market value. With mineral rights, there are a large number of factors that determine the market value of mineral rights. While plenty of mineral rights appraisal services exist, they simply don’t provide an accurate picture of the market value for mineral rights.
Cash Flow Value vs Future Value
When a mineral rights appraisal service gives you an estimated value, they are looking at two different factors:
Cash Flow: The amount of royalty income your property currently generates.
Future Value: The amount of royalty income your mineral interest is expected to generate over the lifetime of the well and the future value of additional wells being drilled on your acreage.
The cash flow value is relatively straight forward and easier to estimate. We can look at the current royalty income being generated, and estimate how much that royalty income will be over the next few years. This is where the estimate of 4 years to 6 years times your average royalty income comes from. We can look at the most recent data and have a reasonable picture of what we expect the wells to do in the near future.
For each well, a mineral rights appraiser will pull a decline curve that looks like the image below. This decline curve will model how much oil and gas is expected to be produced, assume a price for oil and gas, and model how much money is expected to be generated.
Depending on how long the well has been producing and a number of other assumptions, we can estimate with some degree of accuracy what will happen in the near future.
The hard part is modeling what will happen further in the future. What will the price of oil be in 5 or 10 years? How long will it take before a new well is drilled? What happens if they shut in a well? There are a lot of factors that can dramatically change the value over 5+ years making a long term forecast a shot in the dark.
This is where things get tricky when it comes to a mineral rights appraisal. Below we are going to look further into how mineral rights appraisal services come up with that future estimate, any why it’s typically wrong.
Mineral Rights Appraisals – Estimating Future Value
A mineral rights appraisal service is designed to tell you the overall value of your mineral rights. This assumes that every drop of oil is extracted immediately. Most mineral rights appraisal services look at the estimated ultimate recovery (EUR’s). The estimated ultimate recovery is an estimate of how much oil and gas is actually below ground that you own. There are three major problems with a mineral rights appraisals based upon estimated ultimate recovery.
1. The estimated ultimate recovery is just that, an estimate. Even publicly traded oil and gas companies incorrectly estimate ultimate recovery. As the Wall Street Journal points out, some areas don’t produce the kind of oil that was previously estimated. When you get a mineral rights appraisal, the base number they are using to determine the value is simply going to be wrong. It is just an estimate and one that is subject to change.
2. Another major variable is the price of oil and gas. We hear a lot of mineral owners state that the price of oil and gas will certainty be higher in the future. However, that is not the case. It could be higher or it could be a lot lower. Renewable energy is slowly becoming a viable alternative to oil and gas. While it will take years for the transition to renewable energy to take place, this shift creates less demand for oil and gas. As the price of oil and gas shifts up and down, the ultimate value that can be recovered also shifts. Even if we knew for a fact how much oil and gas could be recovered, the price you get when you extract the oil and gas is unknown and can swing dramatically.
3. The time value of money plays a major role. Let’s use a simple example. Let’s say the price of oil is $50/barrel and we know for a fact (impossible) that your mineral rights are equal to 1,000 barrels of oil. This would mean that today, the value of the oil you own is $50,000 ($50 X 1,000). However, you will not be able to collect all of that money today because it takes decades to extract all of the available oil. In addition, it may take multiple wells to fully extract all of the oil.
If the known value is $50,000 today, but it will take 20+ years to get $50,000 out of the ground, what would a mineral buyer be willing to pay today? Significantly less than $50,000!
A mineral buyer will not spend $50,000 to recover (hopefully) $50,000 over the next 20+ years. There is a very steep discount applied to the current value because it will take years to fully recover the $50,000 that is below ground.
As you can see, with just three variables the value of mineral rights can shift dramatically. A mineral rights appraisal is basically a complete shot in the dark at the value. It is our opinion that a mineral rights appraisal is basically worthless. The estimated mineral rights value provided in a mineral rights appraisal never matches the real current market value. Even if your mineral rights appraisal did happen to be remotely correct, the appraisal would be worthless within months based on market factors such as the price of oil changing.
Our Experience with Mineral Rights Appraisals
At US Mineral Exchange our goal has always been to help mineral owners sell mineral rights for the highest price available. We have reached out to a number of mineral rights appraisal services. We have asked them to appraise properties that we sold on an open market in front of thousands of buyers. Every single service we contacted quoted a value that was:
1. Way higher than true market value
2. Not remotely close to the real value of what the property actually sold for
If a mineral rights appraisal service could accurately tell you the market value, those services could make a fortune by simply modeling the value, offering mineral owners slightly less and making a huge amount of money selling at fair market value. The reality is that these mineral rights appraisals do not accurately or consistently estimate true market value.
Our hope was that mineral rights appraisals and mineral rights valuations could be a tool we would use to assist mineral owners in getting the best price. Unfortunately we have not found a mineral rights appraisal service that could create value for mineral owners.
How to Appraise Mineral Rights
The purpose of a mineral rights appraisal or mineral rights valuation is to estimate value. In most cases, a mineral owner wishes to estimate value so they know what it’s worth because they want to sell. Many mineral owners are looking for a mineral rights appraisal to help them understand what it’s worth so they don’t sell below market value.
The only accurate way to get a mineral rights appraisal is through legitimate offers. When a mineral rights buyer makes you a legitimate offer that is a true mineral rights appraisal. A legitimate offer to sell mineral rights is at least a ball park estimate of the true market value.
At US Mineral Exchange we can nearly always help you sell mineral rights for a higher price. An offer is a good estimate of value, but to get the best price possible you need to get the mineral rights in front of thousands of mineral buyers and let them compete. This is the only way to truly get an accurate mineral rights appraisal of the highest market price available.
If you want to sell mineral rights, US Mineral Exchange can help. Simply fill out the form at the bottom of this page to get started.
Mineral Rights Appraisal for Medicaid Qualification
If you are looking for a mineral rights appraisal or mineral rights valuation so that you can qualify for Medicaid, please check out our article about mineral rights and Medicaid.
If you have questions about mineral rights appraisal services, what the value of your mineral rights may be, or any other questions about mineral rights, we can help. Simply fill out the contact form below and we will quickly be in touch to answer your questions.
The more information you can provide about your property the better! We can give you a better idea about the value of selling mineral rights if you provide more information. The most important thing we need is for you to answer the questions and provide your state and county.
If you have the required documents to list, providing those is extremely helpful!
Absolutely not! When you inquire at US Mineral Exchange we will not be putting any pressure on you to sell. We will help answer any questions you have whether you are interested in selling or not.
At US Mineral Exchange, we take privacy very seriously. We will NEVER sell your information or use it without your consent. When you send us documentation or tell us about your property, that information does not go outside our company without your consent. Even when you list a property for sale on our website, we strictly control who has access to the information about your listing so that only legitimate buyers will be able to see property details.
Many mineral owners make the mistake of getting an offer and quickly selling. They then accept an offer far below market value because they felt pressure to sell. There is nearly always a better price available.
Imagine you were selling a home. Would you get the best price from a random person who walks up and makes you an offer? No way! Now imagine you list the home on the MLS where thousands of potential buyers know your house is for sale. The key to getting the best price is competition. Our guide to selling mineral rights explains everything.
The reason that so many mineral owners decide to sell mineral rights at US Mineral Exchange is access to our large network of mineral rights buyers. Our goal is to help you get top dollar for selling mineral rights by getting your property in front of a huge audience of buyers. This allows buyers to compete against one another which ensures you get fair market value for selling mineral rights.
There are absolutely no cost to list your property. When you locate a buyer by listing your property with us, we are paid a commission directly by the buyers closing agent. This means you never have any out of pocket expenses ever. We only get paid if we can get you a better price than the current offer you have in hand.
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