How to Tell If a Mineral Rights Offer Is Fair

How to Tell If a Mineral Rights Offer Is Fair

You can tell if a mineral rights offer is fair by checking how the price was built, how it lines up with what your minerals produce and what the terms say besides the price. There is no price list for mineral rights, because no two tracts have the same geology and drilling activity around them.

Below we walk through how to look at an offer on producing and non-producing rights, why a second offer helps and what a good offer includes beyond the number.

What is a fair offer for mineral rights?

A fair offer for mineral rights is a price that reflects what your specific interest can realistically produce, based on the information available today. The inputs behind that price are the same ones that decide how much mineral rights are worth: public records, well permits, production from the wells around you and commodity prices.

A careful valuation uses long-term averages of oil and gas prices, not the price on the day the offer goes out. That way a short rise or dip in the market does not decide what your minerals are worth. Because every tract has its own geology and drilling activity around it, a fair offer is a range rather than one exact figure. Two serious buyers can look at the same interest, land on different numbers and both be fair.

How do you judge an offer on producing mineral rights?

You judge an offer on producing mineral rights by holding it against your royalty income and the direction that income is heading. Producing rights are typically valued as a multiple of your average monthly royalty check, so your own revenue statements are the starting point.

Look at your statements for the last year or more. Most operators let you download them online, for example through EnergyLink. Check the average monthly amount and whether the checks are steady or getting smaller.

The age of the wells moves the value in a significant way. Modern horizontal wells have very steep decline curves, so the newer the wells, the lower the multiple a buyer can pay on today's check. An offer that looks low next to a large first-year check may simply reflect that decline.

How do you judge an offer on non-producing mineral rights?

You judge an offer on non-producing mineral rights by what the wells around your acreage are doing, because there is no royalty income to measure yet. Buyers typically value these rights with a discounted cash flow model, which estimates the income nearby wells point to and converts it into a value today. The status of your rights also moves the value in a significant way. Non-producing rights fall into one of three situations:

Leased: an operator holds a lease on your minerals, and you have a royalty rate if a well is drilled.

Permitted: a well permit has been issued that covers your acreage.

Neither: there is no lease and no permit on your minerals yet.

Because the value of non-producing mineral rights rests on this status and on nearby production, ask the buyer which of the three applies to you and how it shaped the offer.

How was your mineral rights offer built?

Your mineral rights offer was built from four inputs: public records, well permits, current production in the area and commodity prices. A good way to understand the number is to ask the buyer for the details about your acreage, so you can make an informed decision.

Useful questions are did you give any value to undeveloped locations on my acreage? Are there any permits or DUC's on my property, what commodity prices did you assume when underwriting.

Keep in mind that a valuation is an estimate based on the information available at that moment, and it can change. There is usually no separate valuation report. A serious offer comes in writing as a purchase and sale agreement.

Should you get a second offer for your mineral rights?

Getting a second offer for your mineral rights is a reasonable way to see where your interest falls within the range of fair prices. Buyers weigh the same information in their own way, so two offers side by side tell you more than one offer on its own.

Compare the offers on the same basis: the exact interest each buyer wants to purchase, the price and the terms in the agreement. A price that is a little lower can still be the better deal when the terms are clearer.

Offers are also negotiable, and you can make a counteroffer. Knowing who buys mineral rights helps you decide where to ask for that second offer.

What makes a good offer on your mineral rights beyond the price?

A good offer on your mineral rights is more than a good price, because the terms decide what you sell, who carries the costs and when you get paid. Those terms are in the written agreement you receive from the buyer, so it pays to read it line by line.

What does the purchase and sale agreement include?

The purchase and sale agreement, or PSA, typically includes the purchase price, the lands being conveyed and a due diligence period. During that period the buyer researches the title, which also checks for judgments and liens on the interest.

The buyer does the title research and any curative work, and pays for it. You may be asked to help with documents you already have, such as deeds, leases or revenue statements. For a larger deal or an unclear title, it is wise to have an attorney look over the PSA before you sign.

Can you sell part of your mineral rights?

You can sell part of your mineral rights instead of the whole interest. A sale is permanent, but selling a percentage lets you keep the rest of your rights and any income that comes with them. Check that the lands and the share described in the agreement match what you intend to sell. If you inherited the rights, the buyer may need probate paperwork or an affidavit of heirship to confirm ownership.

When do you get paid after accepting an offer?

You get paid after accepting an offer once the buyer has proof of the signed deed and the shipping confirmation of the signed, notarized deed on its way back. Payment does not wait for the deed to be recorded at the county.

From an accepted offer to a funded closing typically takes 30 to 45 days. Complications in the title can add multiple weeks.

Why should pressure to accept a mineral rights offer slow you down?

Pressure to accept a mineral rights offer should raise a red flag, because a fair offer leaves you time to understand it. Selling is permanent, and you deserve room to read the agreement, ask questions and talk it over with your family.

Be careful with an offer that comes with a short deadline or repeated calls to sign quickly. Take the time you need to read the PSA and get your questions answered before you sign anything.

It is true that your rights may be worth more now than later, since production from existing wells declines over time. That is a reason to look at an offer closely, not a reason to sign in a hurry. When does keeping your mineral rights make more sense?

Keeping your mineral rights makes more sense when you have no need for a lump sum and the royalty income works for you as it is. Selling is permanent, so the choice should come from your own situation and not from the fact that an offer arrived.

Holding on carries its own uncertainty as well, because existing wells decline and future drilling is never certain. Weighing whether to sell your mineral rights comes down to your plans for the money, your family and how much uncertainty you are comfortable with.

How Longhorn Minerals looks at a mineral rights offer

Longhorn Minerals looks at a mineral rights offer the same way this article describes. We pull the public records, check what the wells around you are doing and look at commodity prices, free and with no obligation.

If your rights are interesting to us, we put an offer together that you can hold against any other offer you have. You talk directly with the owner of the company, not a call center, and if selling does not make sense for you, we will tell you that honestly.