Series 3: When Are Your Mineral Rights Most Valuable?
Howdy folks! Welcome back to the Minerals Guy Blog. For those of you new to the blog, Minerals Guy provides tailored content and resources to owners of oil and gas minerals and royalties with the goal of educating and empowering them to understand more about minerals as an asset class and the potential value of their mineral rights. If you haven't already, check out our social links below and give us a follow!
Introduction
In our Third Series, we're talking about when your mineral rights are most valuable, and how timing can impact their value. So whether you're thinking about selling, you're on the fence, or you just want to understand more about the value of your mineral rights, timing is a critical consideration.
And here's what I want you to think about:
HIGH PRICES + HIGH ACTIVITY = HIGH VALUE.
PRICE and ACTIVITY are by far the two most important components to mineral valuation. If you have both high prices and high activity at the same time, then your minerals are most likely at or near their maximal value.
In Episode One of this series, we're going to talk about what it means for PRICES to be high. In Episode Two, we'll talk about high ACTIVITY, and the types of activity to look for. In Episode Three, we're going to talk about the interdependence of PRICE and ACTIVITY and how timing drives value.
Let's dive in...
We also have a YouTube video on this topic. If you don't feel like reading, you can check out the video here:
Part 1: Why Does Price Impact Value?
It's simple, if you own producing minerals, you own is a stream of cash flows—similar to an annuity, but much more volatile. As your wells produce oil and gas through time, you are entitled to a share of the revenue generated from them as a royalty, and one of the critical elements for calculating the value of that stream is the underlying price at which the oil and gas is sold.
So, when prices are low the value of your income stream is low. And, when prices are high, the value of your income stream is high.
This is true for any type of oil and gas asset.
It doesn't matter whether we’re talking about operated and non-operated assets, or mineral and royalty interests, or whether we're talking about the assets of Fortune 500 producers, or a five acre mineral interest in Weld County, Colorado.
This concept is core to the nature of oil and gas assets.
This is why oil and gas companies go bankrupt when prices are low, and it's also why they outperform every other sector on the S&P 500 when prices are high. And, this really gets to the volatility of the oil and gas business: when prices are high, revenues are high, checks are high, and many folks fall prey to the illusion that it will stay that way forever. What happens? Prices drop, checks go down, and folks who are unprepared find themselves in a difficult position.
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Part 2: How Are Prices for Oil and Gas Determined?
The price for anything in a market economy is determined by supply and demand. It doesn't matter whether we're talking about Ford F-150’s, football tickets, or crawfish.
This is Economics 101: as prices rise, supply rises and demand constricts, and as prices fall, supply falls and demand increases.
But there are three (3) key things that I want you to remember about the market for oil and natural gas:
It's GLOBAL;
It's DYNAMIC; and
It's CYCLICAL.
The market for oil and natural gas is GLOBAL because both products are produced, refined, traded and consumed all over the planet.
Hydrocarbons are the backbone of the global economy. Now, there's a caveat there for natural gas. Natural gas has historically been priced at a regional level due to the fact that you can't put natural gas on a truck. It is more difficult to transport than crude oil. But, with the emergence of the liquefied natural gas (LNG) trade and the ability to super cool natural gas, load it on tankers, and ship it across the world, the market for natural gas is becoming a global one.
The market for oil and natural gas is also DYNAMIC, meaning that it is constantly changing based on a variety of market factors.
Think economic expansion, recession, inflation, pandemics, geopolitics, wars and other conflicts between nations...
All of these factors, and more, impact either the supply of crude or the demand for it, and each factor, in its own right, can have a massive impact on prices.
The market for oil and natural gas is also CYCLICAL in nature.
Similar to the housing market, which we're all familiar with, but much more volatile. The cyclical nature of the market means that we go through periods of BOOM, where the market is under supplied and prices are higher, and we also go through periods of BUST where the market is over supplied and prices are lower.
And the balancing act of supply and demand for crude oil and natural gas class goes on, forever and ever amen...
So what does this mean for you as a mineral and royalty owner?
It means that the value of your minerals can change overnight... Which can be good or bad...
It means that if you're going to hold minerals for the long haul, then you just sit back and enjoy the ride. And we're not talking about a Sunday drive through the countryside, we're talking about a roller coaster ride...
It also means that if you're thinking about selling, you need to be strategic about when you exit if you want to obtain maximum value.
Part 2: Where Are Prices Right Now? (June 2023)
As of mid-June 2023, WTI crude oil, the US benchmark, is trading in a range of between $70-80 per barrel, and has been in this range for all of 2023. Now, we're coming off of a banner year in 2022, where we saw prices that were much higher than what we've seen over the past decade. So, while crude oil has given up some of the gains that it made last year, prices are still high from a historical perspective. But, where do we go from here? Many large investment banks remain bullish on prices over the medium term, but expect softness in the near term in the face of continued interest rate hikes by the Fed and uncertainty over the strength of the global economy.
Natural gas has been trading in a range of between $2.25-2.75 per mmbtu, following a build in supply and a warmer than expected winter. Natural gas is also coming off of a banner 2022, where we saw prices that were much higher than what we've seen over the past decade (with prices averaging over $6 per mmbtu in 2022). Now, the fact that natural gas has given up all of its 2022 gains shows you how volatile prices can be. But, where do we go from here? The natural gas rig count is down almost 14% year-over-year, showing that producers are responding to lower prices. The EIA is also forecasting a rise in natural gas use in the electric power sector, which combined with flattening production growth (due to the drop in rigs) should lead to higher prices through the balance of 2023.
Part 3: Is Now a Good Time to Consider Selling?
We're coming off of a screaming hot seller's market in 2022 with the elevated prices we've discussed. So, for those of you that elected to sell last year, great job timing the market...
But, what about 2023? Oil prices are still 15-20% above the 10-year average, so if you own an oil weighted property now is still a good time to sell and lock-in a good value.
What about for natural gas? With the recent crash we've seen (which you are now feeling in your monthly royalty income), is now a good time to consider selling a natural gas weighted property? I would say that it can be for a couple of reasons.
The first is that the NYMEX futures strip, which most sophisticated buyers are going to use to model acquisitions, is currently in contango, meaning that the market believes that natural gas prices are going to be higher in the future (so think 2024, 2025 and 2026). This means that the recent pullback in the near month contracts are not going to impact the overall value of your property as much as you might think.
The second reason, which is related, is that buyers are still largely bullish on natural gas over the long term (as global market for natural gas continues to mature), which means that you're going to continue to see strong offers from buyers.
Let us be your second opinion...
The BEST way to ensure you are getting market value for your minerals is to get a SECOND OPINION. If we can be of service to you or someone you know, click the link below to schedule a consultation.
Wrap Up
In this post, we've been talking about when your mineral rights are most valuable and that timing is absolutely critical when it comes to mineral valuation. As a mineral and royalty owner, you have zero control over PRICES. You also have zero control over ACTIVITY (which we'll cover in our next post). The one thing that you do have control over is WHEN you elect to exit. So, be strategic... If you're a long-term holder of minerals, then just sit back and enjoy the ride!
Until next time…
Steven Hatcher