Our clients request Oil and Gas Mineral Appraisals, also known as Fair Market Value Reports, for numerous reasons. Usually, it is for the purpose of settling the estate of someone who owned interest in an oil & gas property at the time of their death. The appraised value at the time of death is a component of determining the amount of capital gains tax attributable to the property. Other clients request an appraisal because they are interested in selling their oil and gas minerals and want a third-party report to assist them in negotiations with potential buyers.
Appraising oil and gas properties is much more complicated than appraising other types of real property (e.g. residential real estate) and should be left to experts in this specific discipline. The International Institute of Mineral Appraisers (IIMA) issues the designation of “Certified Minerals Appraiser” to those who have the education, experience, and other qualifications to meet their standards. Certified Minerals Appraisers know how to dissect the intricacies of a mineral property and what method or methods to use for the evaluation.
Some of the details particular to each property are ownership type, ownership percentage, lease status, lease terms, unitization status, development status, development potential and likelihood, etc. Within a single parcel, completely different evaluation methods can be required if it is partially unitized and developed while the other part is leased but undeveloped.
In general, the producing acreage is appraised using a discounted cash flow (DCF) analysis where cash flow to the ownership of the mineral owner is forecast into the future and discounted appropriately. The information necessary to do this analysis comes from a combination of royalty statements provided by the client (often the executor of the estate) and public data. Because this requires special software and an understanding of decline curve analysis, commodity prices, post-production costs, and other factors, we reiterate that this should be conducted by a Certified Minerals Appraiser.
The non-producing or undeveloped acreage can be appraised in one of two ways. First, if the acreage is unitized and drilling and ensuing production are imminent, it may be appropriate to perform a DCF analysis using a type curve to represent the future oil and gas production stream. In most cases, the non-producing acreage is appraised using comparable sales analysis. This is similar to the practice used in residential real estate, but with many more factors particular to the oil and gas industry that must be considered. Comparable sales analysis involves gleaning mineral transaction data from the area and normalizing it to a $/net acre value. These comparable sales values are filtered and adjusted to account for date, proximity, lease status and terms, and other factors. Then the resulting $/net acre value is applied to the non-producing portion of the Subject Property.
Once all the acreage has been evaluated, the individual values are reconciled to calculate the total Fair Market Value of the Subject Property. The assumptions, methods, and results are clearly documented in the Appraisal Report which is delivered to the client and their legal or financial representatives.
If you are in need of a Mineral Appraisal, please contact us at wes@castope.com and we will be happy to help you through the process.