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“What is my property worth?” “How did you come up with your offer?”

These are common questions we get when talking to owners of oil and gas minerals and royalties. Many companies use the “cash-flow multiple” method of valuation (i.e. multiply your average monthly income by 36 months, or multiply your lease signing bonus by 3x). This method is straightforward and easy to understand, but it does not capture the value of future income from your property.

Unlike most mineral and royalty acquisition companies, we have a full-time staff of petroleum engineers, geologists, and landmen that work together to accurately understand the value of your interests. Our team is made up of technical experts — we’ve deployed over $650M for exploration and production into Wyoming alone. Our operational experience enables us to incorporate income from both existing wells AND income from future wells in our mineral and royalty valuations. Here’s what that looks like:

§ Existing Wells: The income stream(s) from existing well(s) are valued based on the volume of hydrocarbons a well produces over its lifespan. After a well has been online for at least 6 months, Flat River Minerals is able to predict the monthly production volumes for its remaining life span. Existing and forecasted commodity pricing are then tied to production months to calculate future revenues.

§ Future Wells: Your future income will be driven by four things: 1) price, 2) geology, 3) engineering, and 4) drill timing. Geology and engineering drive the development plans of every operator, which is why Flat River Minerals has its own technical team to determine if your interests fall within one of these development plans, and when. If Flat River Minerals believes new wells will be drilled on your land at some point in the future, it will apply forecasted commodity pricing to a well’s monthly flow streams, beginning at the anticipated date of first production (which may be more than 10 years away).

Like most assets, the fair market value for minerals and royalties is typically the value of your resources as determined by the open market. Valuations for minerals and royalties are elastic, as they are tied to a commodity price that changes every day.

If you have existing production (see Existing Wells above), your valuation will be based on the remaining reserves of that existing production. Producing interests are typically much simpler to value since we are generally able to forecast the remaining monthly production of a well up until the point that it is plugged and abandoned. However, it should be noted that the market value of your producing interests is highly sensitive to near-term oil and gas prices and that the overall market value will decrease each month due to passing production. Every well only has so much oil to produce, so each month’s passing production will decrease the remaining market value. This is why even when oil price might stay the same for a period of 3-months, your market value will still decrease each month as oil/gas is pulled out of the ground.

If you have non-producing minerals and royalties or if you’re lucky enough to have remaining drilling inventory on your lands, the undeveloped value (see Future Wells above) will not move as drastically month-to-month as producing interests, but it is tied to commodity price forecasts and perceived as a higher risk for investors/buyers of minerals and royalties. After all, the only way to get back the money invested in acquiring mineral rights is through the ground — if those resources are never developed, the money invested is lost. At Flat River Minerals, we do our best to predict when new wells will be drilled on undeveloped or still-to-be-developed lands and actively adjust our forecasts to align with the micro and macroeconomic environment. Like the oil price downturn catalyzed by COVID-19, and the massive surge and price cap brought on by the Ukraine war, market shocks can delay new drilling plans by years or erase them altogether. For these reasons, it is common for undeveloped values to move month-to-month as well.

In the case of minerals, the offer you receive for your rights will be in the form of a per net mineral acre (“NMA”). In the case of overriding royalties (“ORRI”) or non-participating royalties (“NPRI”), your offer will be in the form of a price per net royalty acre (“NRA”). This is a simple way of spreading your total asset value over the number of NMA or NRA you own. If you own interests under multiple lands, some may be valued higher than others due to factors like existing production, quality of the geology, and the operator controlling the lands. Keep in mind you may always elect to sell certain lands and retain others.

Learn more about the difference between NMA and NRA on our blog.

The most important consideration when evaluating an offer is the experience and credibility of the prospective buyer. KNOW YOUR BUYER, KNOW YOUR WORTH! Don’t get fooled by a middleman, broker, or flipper that will lure you into signing a 45+ day contract while they try to sell your minerals to a larger company like Flat River Minerals before even paying you.

Here are some questions you can ask to gauge whether or not your “buyer” is truly the end buyer and not just an individual or company looking for a flip:

1. Where does your money come from?
2. Who will be the Grantee(s) on the deed?
3. How long do you plan on owning these assets?
4. Where are you headquartered and how many people do you employ?
5. What is your website address?

If your buyer struggles to answer any of these questions, you’re likely dealing with an outfit trying to make a profit on a flip. Remember, there is no reason to sign a long-term purchase and sale agreement (“PSA”)! Due diligence should take about a week per section of land you own under (below surface), so if you only own under one section of land in the Rockies, your PSA should be no longer than 7-10 days. If you only own under one parcel of land in Appalachia, your PSA should be no longer than 30 days. Excessively long-term contracts (45+ days) are a sure sign you’re dealing with an intermediary.