Mineral Rights

[Alan Magill]

I just recently did an appraisal where the mineral rights were conveyed to the buyers and the majority of my comparables retained the rights. It was an FHA appraisal and the property was located in the middle of the Barnett Shale. I made an adjustment and found comparables with similar circumstances, however this is the first time that I have not excluded mineral rights from an appraisal and made a comment in the scope of work.

I called FHA to ask them how they wanted me to handle it and they said include the mineral rights in the valuation.

I personally disagree with the inclusion of mineral rights as they can be harvested during the life of the loan or deeded separately from the surface rights after purchase.

What are your thoughts?

 

[Real Deal 4 Reel]

The mineral rights need to be clearly stated and state what they are and do you have a geo report. I did one for a land that had natural gas that pays $50,000 per year to the owner and the old geo report stated that there was 50 years of gas remaining probability. The new geo report stated that there was less than 10 years remaining of gas.

 

[Alan Magill]

The mineral rights need to be clearly stated and state what they are and do you have a geo report. I did one for a land that had natural gas that pays $50,000 per year to the owner and the old geo report stated that there was 50 years of gas remaining probability. The new geo report stated that there was less than 10 years remaining of gas.

Production rates are consistent within a given area. They are available from the texas railroad commission. The variable for value in the Barnett Shale is the cost of natural gas.

 

[Terrel L. Shields]

called FHA to ask them how they wanted me to handle it and they said include the mineral rights in the valuation.

I personally disagree with the inclusion of mineral rights as they can be harvested during the life of the loan or deeded separately from the surface rights after purchase.

What are your thoughts?

actually Barnett wells vary greatly in production. There is also production risk from mechanical problems as well as price risk. Further, there are several "spots" in the middle of the Barnett play where no production is possible due to geological conditions. The play is actually divided up into Tier I and Tier II. Google up The Pickering Report Barnett Shale... see if you don't find a report prepared by an investment - oil analyst.

You are asked to value a property as of the date of appraisal. The value of the mineral if leased and producing is the value of the landowners share of the drilling unit (which may be much larger than the subject site) and its gas reserves. You will value the reserves on the value of those reserves as of a current market price.
Without a production history, how can you know? You can't.
FHA are idiots. I would not take any of their advice. Only Farm Services is worse.

If FHA has the mortgage then they do not have the fee simple title to the property if it is already producing. They have fee in surface and a leased fee interest in the mineral right. How that value changes over the life of the loan is not your issue. Further, the sale of those mineral rights should be covered in the mortgage. It wasn't in decades gone past but most lenders smartened up.
IF you appraised a producing property, I suggest that you need an estimator's report detailing the interest in the drilling unit and the remaining reserves. From that an experienced mineral appraiser can determine a contribution for the mineral rights.
But it sounds like you have a property without production. Do you know why it isn't drilled yet? You cannot predict what the price will be, if it isn't even leased, you cannot tell what percentage nor what the reserves are. Those are engineering guesses meant as management tools by oil companies, not "proven" production potential. I would say if that is the case then the properties that sold nearest with the mineral intact are comparable and that is all you have to hang your hat on. It's not enough if push came to shove. Competency issue big time. I would spell out the limitations of your research and your knowledge in the report.

 

[Restrain]

If you have access to the Dallas/FW MLS system and run land or homes with large land, you'll find sales and listings where there are two prices, one for minerals retained, one for minerals conveyed. It'll take a lot of work and reading, but it's there. The last I saw was about $2000 per acre, but don't quote me on that. More likely to find in Cooke and Wise County searches. As a quick & dirty, if the minerals are producing, take the annual net and cap it at a safe rate. It won't be as detailed as a full mineral estimate based on projected production, price trends, etc, but it will satisfy the lender. Honestly, the lenders don't have a clue about minerals anyway. They just want a figure in their file.

 

[Terrel L. Shields]

The last I saw was about $2000 per acre, but don't quote me on that.

The offers may vary. They will vary because people get stars in their eyes. I had a fellow call because he was trying to buy mineral rights with a 26 acre place. The asking price premium to include them? $416,000....$16,000 an acre. No nearby production. OTOH, some companies are buying mineral interests at closer to market premiums - $2000-3000 in reasonably hot areas, but within recent production it has run $4000-7000/acre in the Fayetteville play.

Honestly, the lenders don't have a clue about minerals anyway.

That goes for most appraisers, too. It is not a position of strength to argue same however in light of the Competency provision of USPAP.
There is too much speculation about the value of minerals to safely (from a risk standpoint) extract values from the market place like you suggest. But the method you suggest (paired sales) is the correct and most defensible one to make.

The point is that the value of the mineral hinges as much upon your (the appraiser) credibility as it does upon the data. I certainly would try to take a mineral rights course as "proof" that you are trying to achieve competence.

Further, the bankers, the borrowers, the state boards need an education upon what the situation is. They need to understand that these values are much less stable than land values per se. This is largely due to specuation. It is like the condo market was. Anyone who recalled the collapse of the Mountain condo craze of the 1980's should have been most wary of the Florida condo craze of 2005-6.

I have seen bonus money paid, royalty rates paid, and sales of minerals sell for far more money [adjusted for inflation] than I could ever imagine sane oil men paying during the boom years of 1975-1982. There has never been a speculative craze like the Barnett and Fayetteville plays. And look out PA and WVA, the Marcellus shale is shaping up to do the same.

The risk for the appraiser isn't that you are wrong. It is that you cannot prove you are right. The risk is much less from the banker than from the borrower or a buyer/seller. Imagine using paired sales to determine that mineral rights under a 10 ac. tract in the Barnett is worth a premium of $30,000. The sale consummates and almost immediately the buyer flips the minerals as severed for $80,000? Then what? The seller thinks..I wuz robbed! Never mind that you have two side by side markets - one for land with minerals (your local buyer-farmer-resident) and one for minerals (professional mineral buyers usually). Again, you are fighting from a position of weakness. I certainly would ask a very large premium for incluiding the mineral rights if I were a res. appraiser.

 

[Alan Magill]

I used an experts article on the mineral rights as a reference for value. Production is where the value is, however there is evidence in the local market of offers from drilling companies that are a better indication of value. It is a real issue here and for the most part, we cannot find the mineral owner without hiring a land man.

I would like to see some guidance with regards to the issue.

I did an appraisal on a house near Colonial Country Club a few months ago. One of the sales seemed out of pattern so I called the agent. She said that the buyer wanted the mineral rights so they raised the price $50k for a half an acre. Obviously overpaying for the rights, but it was a reason to exclude the sale from the report.

 

[Terrel L. Shields]

She said that the buyer wanted the mineral rights so they raised the price $50k for a half an acre. Obviously overpaying for the rights, but it was a reason to exclude the sale from the report.

That is exactly the kind of speculative situation you find frequently. A sort of where two fools met scenario. One asked a crazy price and the other bought it....Lack of control is a major factor. The buyer cannot justify the expense based solely upon potential royalty payments but perhaps could figure it was worth peace of mind to be in control of the mineral. Of course an acre or half is too small to site a drilling rig. I imagine this is not too uncommon where Ft. Worth is meeting the shale play.

BTW, I will be teaching a mineral rights course in May in Arkansas. If you know a education provider that would want to sponsor a one day course in the Barnett shale play or surrounding area, have them contact me.