There are several situations when you may want to consider getting a mineral appraisal. Matt performs mineral rights valuation services for clients and in this episode, we walk through the list of documents that he uses with his clients. There are many good mineral appraisers out there but if you would like to find out more about out mineral valuation services Matt offers at Silverheels Investments, you can email him directly at info@silverheelsinvestments.com.
Click here for our FREE IRS Mineral Rights Valuation and Tax Resource Guide.
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What We Cover:
The key points that help inform an accurate mineral appraisal include documents related to what is owned. In other words, where is the property located, what type of property, and how much you own.
We talk in general about important documents you should have on hand for your mineral rights and royalties in Episode 34. Today we talk about WHY you need some of these specifically for a mineral appraisal and why having them available will save you time and money.
What You Own:
- Mineral Deed – like we talked about in the document management episode, Episode 34, there are different types of deeds – all fall in generic category of “conveyance documents”. For example, if you inherit property then may be in personal representative’s deed or mineral deed. The important piece of information with respect to the mineral deed is the legal description. The legal description tells where the tract of land is on the surface of the earth and the gross acreage included. This is the first step.
- Oil and Gas Lease – if your minerals are currently leased, then a copy of the current oil and gas lease is important so that the right royalty rate is used in calculating your net revenue interest, especially important if your minerals are non-producing (e.g. you arent receiving royalties).
- Lease will also tell you the term / expiration
- Any deductions that are allowed
- Also, if you received any correspondence from the operator that outlines the number of net mineral acres you own that is helpful in determining the total value of your property.
- If you have never leased the property and have no idea on the % ownership in the minerals, not the end of the world as value can still be determined on a $/nma basis (assume NMA, calculate value based on that) – that is the value on a unit cost basis. Would need to know your interest in that tract in order to come up with Total value but you can still use unit value to assist with negotiating the sale of a property on a $/nma basis. Buyer will confirm title and determine exact number of NMA owned.
How Much You Own:
- Check Stubs / Revenue Statements
- For producing minerals (e.g. you are getting royalties)
- Will outline the owner name, owner number, date, lease name, county/state, production date, product code, price, gross production revenue, decimal interest, owner gross royalty, any deductions, and the net royalty for that well/month/product
- Key things to note about revenue statement is the decimal interest (aka Net Revenue Interest) and wells where you are currently receiving royalties. This is important when having a valuation done since the value of your property will include value associated with future royalties from existing wells.
- Specifically, the appraiser will want to confirm the decimal interest that you own in each well or lease and should make sure product details are known (e.g. BTU factor for gas, actual price received vs. market price for determining any deducts for your local market price for oil and gas)
- Division Orders – We talk about this in detail in Episode 14, “What is a Division Order?”
- Division orders are important for mineral valuations because it outlines your Net Revenue Interest aka Decimal Interest in a specific wells and leases.
- If you know some basic information like the size of the spacing unit, the royalty rate, the NRI, you can calculate the number of net mineral acres from this. A caveat with doing this is that it may not tell you the full story if your property is not 100% within the spacing unit, need to look at the spacing unit location vs. your property location.
Other Documents:
Also, it is helpful to provide any documents that you might have gotten as a result of hiring an attorney (e.g. estate documents), landman (mineral ownership report, runsheet), or engineer (valuation report, reserves report). These additional documents can help answer the question of what you own, where it is located, how much you own, and anything that can help inform value estimates. This could include such things any offer letters to purchase your minerals that you might have received recently. As we talked about in episode 4, how mineral rights are valued, any information on comparable sales is useful in validating the value determined by looking at future cash flows.
What if You Don’t Have These Documents? (Hint: Don’t Panic!)
- If you don’t have the documents we mentioned, then you will need to search for documents.
- There are several ways to do this – we talk about how to perform a title search in Episode 10 of The Mineral Rights Podcast. But the first place is the county clerk if you need to find a copy of a mineral deed or oil and gas lease.
- The operator is often the best source of information if you don’t have copies of documents. Division orders, operating agreements, assignments, partnership agreements, and if you have a non-operated WI that is to be appraised, then any Joint interest billing statements to understand lease operating expenses
- State oil and gas commission records are the next place you can go to find out more information about well records (location, historical production), also spacing unit information (size of the unit, what formations are included, location of unit)
How Mineral Rights are Valued
As far as the process goes, the appraiser will typically perform a valuation using two methods which we cover in more detail in Episode 4 like I mentioned earlier. First is the income approach which uses a forecast of future production over time for any existing wells or wells drilled in the future applies price forecasts, taxes, deductions, and subtracts any other costs (e.g. operating costs for non-op working interest), to come with gross sales over time, multiplied by NRI to calculate the owner’s net interest. Then these future cash flows are discounted back to the effective date of the valuation to come up with the present value at a certain discount rate.
The second method is the market approach which uses comparable sales to come up with a value.
These two methods are used in conjunction with each other to come up with the fair market value in most cases. For a historical valuation – example look back appraisal for minerals inherited and then later sold, might rely more on comparable sales data.
To summarize the Key Documents You Should have for a Mineral Rights Appraisal:
- Mineral Deeds
- Oil and Gas Leases
- Division orders
- Check stubs/revenue statements
- State oil and gas commission filings (e.g. pooling orders, spacing orders)
- Other documents (estate or probate documents – attorney, mineral ownership reports/runsheets – landmen, letters for leasing or purchase offers, etc.)
The more information you can provide will save you time and money when it comes time to get an appraisal of your minerals or royalties.
Click here for our FREE IRS Mineral Rights Valuation and Tax Resource Guide.
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