Oil and gas and mineral interests should be evaluated by comparing the net present value of the asset with the proceeds of a sale. While this is true of any component of a client’s portfolio, this is especially relevant given the unique nature and risks of oil and gas properties. Determining the risks and uncertainty of predicting future revenues and expenses can be quite challenging, and determination of current market value is neither cheap nor readily available.
Determining the Value of Holding the asset
However, we do know that the natural tendency is for the value of oil and gas and mineral holdings is to decline. Every oil and gas reservoir and mineral deposit is finite, and as the resource is extracted, reserves in place diminish. Even if the technology to extract every molecule existed (and it does not), the limit of economically viable production would be reached long before complete physical depletion. While technological innovations, enhanced recovery operations, and exploration might delay or temporarily reverse the trend, over time it is undeniable.
Even during the period of economic production of the resource, oil and gas and mineral interests involve many risks, some of which are unique. These include:
Increases in supply or decreases in demand can depress oil and gas prices. Conversely, shortages can make prices volatile in the opposite direction. Prices can be dramatically affected by:
- Macroeconomic trends. A booming economy can increase demand and a recession can depress it.
- Geopolitics. A war in the Middle East can increase prices in the short term, while adverse government legislation can have the opposite effect.
- Technological Advances. Horizontal drilling, fracking, and deep water technologies have all affected supply and in turn prices.
- -Weather. Warm winters can depress prices, but unexpectedly cold or long ones have the opposite effect.
Any time you are dealing with a resource that can be miles below the surface of the earth, uncertainty, and consequently risk, play a major role. When production on a property decreases, the revenue stream to the interest owner decreases as well. Production risks can include:
- Reservoir Risk. In spite of impressive advances in technology such as 3-D seismic, data reprocessing, and more sophisticated reservoir modeling, the size and shape of a reservoir is never certain.
- Price impact on recoverable reserves. Even if the specific size of a reservoir were known with certainty, the volume of physical reserves which are economically recoverable depends on price projections, thereby further complicating evaluation of reserves.
- Natural disasters. If the pipeline servicing your area is disrupted by earthquake, leaks, or flooding, your property could lose access to the market and consequently production would temporarily cease. Frost heave or hydrate formation can also disrupt pipeline operations. Lightning can destroy compression or other processing facilities, thereby causing lost production.
- Operator Risk. The operator of a producing property is expected to act in a prudent manner. This means he should operate in the best technical and financial interest of the royalty and working interest owners. Production can be compromised by ill-advised or poorly executed operating decisions, which in turn adversely affect all owners.
Working interest owners (those who share in both revenues and operating and capital expenses) are even more exposed to operator risk. These owners have to assume that the operator is charging their property only for direct and overhead expenses which benefit them, and not other operations in the area. Evaluating the operator’s proposals beforehand and determining their validity after the fact, requires engineering and accounting expertise that many interest owners might not have.
Determining Current Market Price
In order to avoid the appearance of a conflict of interest, oil and gas operators and purchasing companies are usually prohibited by company policy from quoting a value for an interest. In most instances, it would merely be an opinion of the particular employee and not necessarily representative of its actual value. To obtain a legitimate appraisal for a producing oil and gas interest, it must be done by an independent petroleum engineer who is not also potentially engaged in acquiring the interest for himself. Unfortunately, the minimum cost of an independent appraisal will be in the range of several thousand dollars. Of course, this is completely out of the question for small or marginal interests, and should only be used for more substantial properties. However, if you contact Russell T. Rudy Energy, LLC, we will be happy to write a brief non-binding letter. We will state what we believe the fair market value to be, based upon what we would likely offer to pay if we were to buy it. This can be a valuable benchmark to use in your hold/sell decision.
Unique factors associated with estate planning, settlement and trust administration might make selling a client’s oil, gas and mineral interests to Russell T. Rudy Energy, LLC even more appealing. This could be especially true if the client is considering applying for government benefits related to long term care. Further details regarding these situations can be found on our website, http://www.rudyenergy.com/blog/.
Why should I sell my oil, gas or mineral interest to Russell T. Rudy Energy, LLC?
Throughout the years of our service to energy investors, we have earned a reputation for integrity, expertise and service. We have learned that a deal is a good one only if both parties benefit. We have become synonymous with fairness and that has enabled us to prosper. In fact, many of our clients have become repeat customers and advocates within the energy investment community.
In the course of our operations we have dealt with almost every conceivable type of domestic oil gas and mineral interest. Our experience includes:
- Overriding royalties
- Producing and non-producing minerals
- Production payments
- Working interests
We have experience in dealing with practically any type, kind or size of oil and gas interests. By virtue of this experience, and our in house engineering and legal expertise, we can make a quick and fair offer. We will prepare the conveyance documents and take full responsibility for all aspects of the transfer of interests.
To get your offer, please contact us at:
5701 Woodway Drive
Houston, TX 77057
Fax: (713) 784-9735
Nationwide Toll-Free – (800) 880-0940
Houston – (713) 961-4205