As the owner of oil and gas properties, you are familiar with all of the decisions, fees, and hassles of managing your rights. With the market currently in a state of flux, oil and gas property owners are faced with the choice to sell assets or hold out until market conditions improve. For those owners considering a sale, an oil and gas properties valuation is required to help you make the most informed decision before listing your rights on the market. But what does an oil and gas properties valuation include, and how can it help you?
Location and Property Status
First things first, your oil and gas properties valuation will begin with a look at the location and status of your rights. The location of your oil and gas property determines any laws and local jurisdiction, type of production and its characteristics, and nearby access to sales points.
Property status is fairly straightforward as well. Is the property producing? Has the property been unitized or is it subject to constraints? An oil and gas properties valuation lets buyers know if your property ready for business or if it’s a bit more complicated.
Operating Costs
Estimates for fixed, variable, per well, and overhead costs are included in any oil and gas properties valuation. This data is then used to calculate the economic limit of production for these properties. Also, any production-related taxes, such as property and severance taxes, will also be included in your valuation.
Sales Volume
It’s important to keep in mind, during the oil and gas properties valuation process, that oil sales volume is not always equal to production volume. However, these numbers balance over time when factors such as gas and/or oil used as fuel on the lease and derived products that are subject to royalties are taken into account. Usually, the best source of sales volume data is third-party purchase statement and any royalty statements available.
Product Prices
By pulling data from published sources (EIA, state agencies, commercial sources), contracts and sales records, the product prices at the date of evaluation are factored into your oil and gas properties valuation. This can include oil price ($/Bbl), gas price ($/MCF), and/or product price (NGL). Adjustments are made to product prices and sales volumes based on any taxes and additional expenses, such as dehydration, treating, and transportation costs.
Production Projections
Your oil and gas properties valuation will also examine production projections. This allows potential buyers to ascertain if the investment is worthwhile for them. For you, as the potential seller, this gives you an idea of what the future may hold for your oil and gas rights. The valuation includes estimates for the future production of oil, gas, or other products, along with “decline” curves based on historic production from the subject property and/or comparable properties.
Estimation of Future Income
This is a crucial component to your oil and gas properties valuation. To calculate the total – production, price, and revenue projections are totaled while other data, such as operating costs, expected investment, and taxes are deducted. Additionally, ownership interest, discount rate, and present value are taken into account to determine the estimation of future income.
Depending on the terms of your ownership, a wide range of additional factors may be taken into account during your oil and gas properties valuation. These additional considerations include (but are not limited to):
- selection and evaluation of comparable leases
- sales approach
- minimum value tracts
- geological risks.
Prior to your valuation, it is your responsibility to discuss with the evaluator as to what they will be including so you have all the details.
Sell or Double Down?
Now that your oil and gas properties valuation is complete, you have all the data you need to make an informed decision about how to move forward with your investment. You’ll want to enlist the services of an industry-specific accountant, at least, to fully grasp the meaning of the numbers laid out before you so you can make the best choice for your portfolio.
While the benefits of owning oil and gas properties are numerous, it’s a costly and time-consuming endeavor for any investor. With the market in a constant state of flux, determining when it’s time to cut and run is challenging, to say the least. However, with a thorough oil and gas properties valuation, rights owners are in a position to make an educated decision about whether or not to hold onto their investment.
So What Now?
Do you still have questions about an oil and gas properties valuation? Curious how to begin to the sales process of your oil and gas rights? Learn how BWAB can assist you in making the best decision for your investment portfolio on our website. Working together, we can help you with this tough decision and be ready to advise you on the best course of action.
