What, why and how we value your minerals and why you should care
Have you ever used Zillow to browse homes for sale? Maybe to look for design ideas or to see what a neighbor’s home sold for? You have most likely seen the Zestimate, an estimation of the value of a home based upon some general valuation guidelines.
Valuations are not easy to determine for real property – real estate, land, timber and minerals. There are several methods that provide guiding principles on what the assets could be worth, but they are only guidelines. Ultimately, your assets are worth what someone will pay for them.
No model is perfect. There will always be a discrepancy between what a buyer values an asset at and what a seller wants to pay. Both sides have to get comfortable with the middle ground of the true value of the asset. Imagine selling a house and telling a buyer, “I want the most you will pay me.” No deal would ever close because neither side has a good understanding of what the other wants; there is no established middle ground. Every seller wants the most they can get, and every buyer wants it for the cheapest they can get.
MiQ+ by Enverus provides two value estimations to give you guidelines on what your assets are worth. These valuations can be used for valuing an estate, determining the right time to sell, or merely to gain a better understanding of what your assets are worth. The two main ways minerals are valued are: revenue multiple and blow-down analysis.
Revenue multiple: The fastest way to determine the general value of your assets is to use a revenue multiple. Take your monthly income, multiply by 12 to annualize, then multiply by a scaler. The scalers help determine 3-4 years of future income. This is based on the presumption that most assets are worth about 3-4x your annual income. The pitfalls of the revenue multiple are that it doesn’t consider the assets’ location, activity around the assets, commodity prices or really any other factor about the assets at all. In essence, it is a Zestimate. When oil and gas prices and your wells production are stable, a revenue multiple is a good metric. If commodity prices are volatile, you have new wells online or any number of other factors impacting your asset, the revenue multiple can grossly overestimate or underestimate your asset’s value.
Blow-down analysis: Otherwise known as a proven developed producing analysis. This method looks at your in-pay wells, the decimals you are paid on and the prevailing commodity prices to determine the value of the production into the future. This is more like getting a home appraisal and is more accurate than a revenue multiple. This analysis creates a decline curve for every well you are in pay on, determines the monthly revenue expected and then calculates the present value of your future income in today’s money. Since a dollar is worth more today than tomorrow, it allows both buyers and sellers to see a more accurate depiction of future income and value.
When a buyer offers you a sum of money, they do a blow-down analysis, looking at what is producing today and what could be producing tomorrow, and placing a value on that in today’s money. For most owners, the resources or knowledge needed to create this analysis is a hurdle. MiQ+ provides this analysis via remaining recoverable reserves (RRR). We create the decline profile on your wells, determine your decimal ownership and look at commodity prices to determine the present value of your future cashflow every month. RRR are automatically updated to take out the guesswork and ensure you have the most updated value on your producing assets.
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