There’s no perfect way to value producing mineral rights. One quick and dirty approach is the “rule of thumb.” Those following the rule of thumb say that mineral rights are worth a multiple of three to five times the yearly income produced. For example, a mineral right that produces $1,000 a year in royalties would be worth between $3,000 and $5,000 under the rule of thumb.

Professional valuations are available for a price. For most mineral owners evaluating an offer to sell, the cost of the professional valuations are prohibitively expensive. A rough professional opinion from a geologist will cost upwards of $500. In my experience, most geologists follow some version of the rule of thumb.

As a lawyer, I am a fan of factor tests. This is type of legal analysis where a Court takes numerous factors into account to render an opinion. I think a factor test is a solid way to value mineral rights. How might a factor test look for a mineral right? Let’s try!

Factors influencing the value of a mineral right:

1. What are mineral is being produced? Oil, gas, or both? Is the gas dry or wet? Dry gas is the least valuable, Oil more valuable, wet gas the most valuable.
2. How much oil or gas is being produced over the most recent six months? How does that compare to the previous year? This a way to know whether the commodity produced is trending down, stable or trending up.
3. Overall, how long has the interest been in production? Anything that has been in production for more than 6 years has had 80% of its oil and gas produced. Wells in production for more than 20 years are in danger of being shut in or plugged. That is the death of income stream! In some cases, a well drilled only 10 years ago can wind up plugged when the operating costs are too high.
4. How much income is being produced? Interests that produce $1,000+ per month in income sell for a premium. Interests that produce a yearly check of $100 or less sell for a discount, if at all. Is the income going up, going down, or stable?
5. What are the trends for the oil or gas price paid by the producer? Observing the data for the past six months, then the previous year gives a good idea of where the commodity price is headed.
6. How long has it been since a well was drilled or reworked on the mineral interest? This is a good indicator of whether the well operator is serious about production or just riding the assets into the ground.
7. Is there any potential to drill more wells? Most states have spacing regulations that dictate the maximum number of wells that can be drilled in a unit. Find out how many wells are in your interest’s unit. Can more wells be fit into the unit under existing rules?
8. Any new activity in the area? Nearby drilling means there is potential for more income. This can cause the mineral interest to attain a speculative value that sells by the acre rather than based upon the income stream.
9. What is the state tax environment? Some states do not levy an income tax. Others levy an income tax, property tax, and a severance tax. Mineral interests in states with a more favorable tax environment are more desirable.

So let’s say we have an interest making $200 per year in income that has been producing for 10 years. The trend in income is down for the past three or so years. The interest produces only dry gas. The production volumes are down 15% from three years back. The price of natural gas has been trending higher. There are no new wells or drilling in the area and there is no room for more wells in the unit. The State where the interest is has income tax, property tax, and a severance tax. What’s it worth?

Weighing the factors, the income stream is probably degrading (lower production volumes, no new wells, no room for more wells) but temporarily being buoyed by higher gas prices. It is a smaller, older interest in a unfavorable tax environment. Being older, there is a chance of shut-in or plugging. Based on this factor analysis, the valuation of the mineral interest would be on the lower end of the rule of thumb–maybe a bit less. Fair value could be $500 to $700.

If the same interest was in a State with no income tax, the interest might be worth an $100 or more. If there was room for more drilling and a strong upward trend in gas prices, then perhaps another $200-$500 more is justifiable. This is the beauty of taking a factor approach! We can assign some tangible value (negative or positive) to each factor.

What about mineral rights prices when there is new discovery? In my experience, that is a situation where all bets are off! When the first wells of a new discovery start coming in positive, minerals are typically sold at a per acre price rather than as an income stream. With new discoveries, I’ve seen prices in excess of $10,000 per acre for minerals that have never produced a drop of oil.

Disclaimer: I am not an appraiser, geologist, or reservoir engineer. The information provided is just a generalization I’ve formulated from years of buying and selling oil, gas and brine royalties.

Today, I am stuck frozen in place (literally) in my home. We got an uncharacteristic 8 inches of snow in Little Rock, Arkansas. My files are just a mile away in my office, but the roads are so slick and it’s so cold that there is no hope of getting there. Out of boredom and the general need to feel I accomplished something, I decided to stress test an idea. I am no financial advisor. I’m a lawyer. I don’t give financial advice. I do have, however, an inquisitive mind that does not automatically accept and repeat information disseminated for mass consumption. I like to think about critically about the information fed to me rather than swallow it whole.

The financial press has, since I was a stripling, trumpeted the success of the stock market. One of the claims made is that regularly placing money in a mutual fund that tracks the S&P 500 will generate sufficient returns for a comfortable retirement. My mother used to tell me this. My brother-in-law stock broker used to tell me this. I tried. I made no money. The returns were pathetic. Talking to my friends revealed that some were big fans of the stock market, others were tepid at best.

My personal experience and the varying successes of my friends led me to believe that must be some rational explanation for why the trite and maybe true “invest in index” works for some, but not others.

To test the idea, I downloaded a table that had the yearly return of the S&P 500 from 1992 to 2020. In addition, I downloaded a table with the rate of inflation for the same time period. I deducted the rate of inflation from the rate of return to arrive at an inflation-adjusted return. It is far better information when inflation is figured into the rate. It will show how much of the return was real growth–that is, not due to the general expansion of the size of the economy.

I took the inflation-adjusted return and applied it to a single, equivalent, annual investment over each year since 1992. My goal was to answer the question: If I invested X dollars in the S&P 500 every year since Y year, how much would I have in 2020? For example, if I put $10,000 a year in the S&P 500 since 1992, how much would I now have? The goal is to see if the year that one commences investing has any significant impact on total return.

My hypothesis is that the variation in adjusted inflation rates of return from year to year is large enough that if you began your investment on a bad year or a run of bad years, the losses to the investment principle would be great enough that you’d see significantly lower overall returns than someone who started on a good year and had a nice run of good years at the outset of their investment.

Here is what I found:

Start Year	Ending Total Return	Avg. Ann. Return
1992	467.84%	13.14%
1993	454.83%	13.14%
1994	476.46%	14.48%
1995	363.41%	10.54%
1996	308.86%	8.70%
1997	240.90%	6.13%
1998	194.80%	4.31%
1999	166.17%	3.15%
2000	188.27%	4.41%
2001	222.12%	6.43%
2002	303.32%	11.30%
2003	245.44%	8.56%
2004	228.55%	8.03%
2005	226.74%	8.45%
2006	205.71%	7.55%
2007	204.22%	8.02%
2008	340.88%	20.07%
2009	281.37%	16.49%
2010	255.61%	15.56%
2011	264.60%	18.29%
2012	240.09%	17.51%
2013	188.31%	12.62%
2014	171.36%	11.89%
2015	175.45%	15.09%
2016	160.31%	15.08%
2017	135.72%	11.91%
2018	148.07%	24.03%
2019	117.07%	17.07%

This was eye-opening to say the least!!! I hit the workforce in 1998. My investing started then. I always wondered why my S&P 500 index fund never did much of anything for me. The reason, as it turns out, was pretty simple. In 1998 and 1999, there was 23.67% and 17.23% growth, respectively. The years 2000, 2001, and 2002, saw negative rates of -11.64%, -15.34% and -26.77%. If we look at a plugged-in investment value of $10,000 per year, the tally for the first five years looks like this:

	Year
Rate	1998	1999	2000	2001	2002
	$10,000.00
1.2367	$12,367.00	$10,000.00
1.1723	$14,497.83	$11,723.00	$10,000.00
0.8826	$12,795.79	$8,826.00	$8,826.00	$10,000.00
0.8476	$10,845.71	$7,480.92	$7,480.92	$8,476.00	$10,000.00	Total:
0.7323	$7,942.31	$5,478.28	$5,478.28	$6,206.97	$7,323.00	$32,428.84

By following the “set it and forget it” advice of automatic, period investing in an index fund starting in 1998, the principle value of the investment was greatly diminished in the first five years. A person who started investing $10,000 of his salary in 1998 until 2020 would have an inflation-adjusted $466,417.50 today. That is a paltry 4.3% rate of return over 22 years! If you started in 1998, there was run of bad luck in the first five years: The dot com bubble burst, the Y2K scare happened, the 9/11 attacks occurred, and then the 2nd Gulf War started.

I had a friend bragging about how great he did in the stock market after he retired from the military. He was collecting his military pension, then went to work for the VA as a civilian. He invested in the federal thrift savings plan to the maximum. The figure he threw out was kind of shocking considering how little time it seemed compared to my beginnings in investments 22 years ago in 1998. He started his VA job in 2008. Based on $10,000 a year, the figure he cited was probably correct. A person who started investing in 2008 with $10,000 a year in an index type fund like the federal TSP would expect to return about 340% over the time period for annual rate of 20% (inflation-adjusted) over 12 years. In absolute dollars, my friend said he had $230,000. That is about what one would predict ($247,884 is the predicted for $10,000 a year in the S&P since 2008).

The difference between my friend and I was timing–dumb luck! Had I started working and investing in 2002 rather than 1998, I would have had an annual rate of 11.3%. That is still not his blistering 20% rate of return, but I’d be in a much better position than I am.

My conclusion is that consistent and steady investing in an index fund over many years is not an automatic path to financial independence. Much of it is just plain luck. How things go for the first few years or so makes all the difference in the final outcome.

Just for yucks, how would I have done had I bought gold all these years like some sort of doomsday prepper?

Year	Price/ounce	Yearly Stake	Ounces Purchased
1998	294.24	10000	34.0
1999	278.98	10000	35.8
2000	279.11	10000	35.8
2001	271.04	10000	36.9
2002	309.73	10000	32.3
2003	363.38	10000	27.5
2004	409.72	10000	24.4
2005	444.74	10000	22.5
2006	603.46	10000	16.6
2007	695.39	10000	14.4
2008	871.96	10000	11.5
2009	972.35	10000	10.3
2010	1224.53	10000	8.2
2011	1571.52	10000	6.4
2012	1668.98	10000	6.0
2013	1411.23	10000	7.1
2014	1266.4	10000	7.9
2015	1160.6	10000	8.6
2016	1250.74	10000	8.0
2017	1346	10000	7.4
2018	1387.64	10000	7.2
2019	1371	10000	7.3
2020	1644.24	10000	6.1
		Total Ounces	382.1
		Total Value	$628,235.52

For accuracy’s sake, I must show the non-inflation rate of return for my stock market stake. Removing inflation and investing $10,000 a year since 1998 in the S&P would be a total return of $602,864.92. Gold did better! I note, however, that gold suffers a 28% capital gains tax rate, so I don’t think that would be a viable option for investing. One must liquidate the gold into cash to eat it! One could sell a lot purchased some time ago to dodge capital gains, but eventually, the government will get their money. In this case, $175,905.94 in capital gains would due on the gold. Only $90,429.69 (15%) would be due on the stocks. Of course, if you invested in the stocks within a 401k, you’d pay ordinary income on it which may be less than 15%, depending on the person.

Hoping that the roads are clear enough to get back to my files tomorrow!

My Best,

Mark Robinette

On Saturday, February 23, 2019, J. Mark Robinette will speak at the annual Ark La Tex Association of Professional Landmen (ALTAPL) Educational Seminar to be held at the Petroleum Club in Shreveport, Louisiana. The talk will be about recent developments in Arkansas Oil and Gas Laws. Register via the ALTAPL web site at https://altapl.org/.

Are you practicing law in Arkansas?  Need to know what to do in order to take a deposition in another state?  I found this handy guide published by the ABA whilst googling on the subject:  https://www.paulhastings.com/docs/default-source/PDFs/deposing-nonparties-in-states-other-than-where-your-case-is-pending.pdf

Enjoy!

Mark

The written materials for this webinar are available here.

On Saturday February 17, 2018, Mark Robinette will deliver an annual update on Arkansas Oil and Gas Law. The event will be at the Petroleum Club of Shreveport located at the 15th floor of the Mid South Tower at 416 Travis St., Shreveport, Louisiana 71101. Registration may be had at https://altapl.org/events/2018/2/16/altapl-educational-seminar. The cost is $200.00 for members of ALTAPL and $275.00 for non-members.

Mark Robinette will present an education seminar on Arkansas Probate for the National Association of Division Order Analysts on February 27, 2018. The Webinar, titled “Haunting the Title from the Beyond: When is a Probate Required in Arkansas?” Mark will present a guided tour of the Arkansas Probate Code with practical examples and explanations. First, participants will learn about the royalty payor’s duties in Arkansas. This is the foundation for governing how much scrutiny to give when transferring title from a deceased person to his or her heirs and devisees. Next, Mark will cover Arkansas intestate succession and examples of valid means of transferring titles from intestate heirs. Finally, participants will learn about Arkansas’s laws governing wills and types of will probates along with the often misunderstood and misapplied Affidavit for Collection of Small Estates. Finally, Mark will cover common alternatives to probate succession including Trusts and the Arkansas Beneficiary Deed Statute. For more information, contact NADOA at administrator@nadoa.org.

Very sad to hear about the passing of my colleague David Butler of Magnolia, Arkansas.  I met David 10 years ago in Hot Springs.  He was representing Chesapeake Exploration at the time, and I remember he introduced his talk as “I’m purely for entertainment.”  Boy was he!  He had the audience laughing from start to finish.  David was witty, charming and not afraid to mix it up in the hearing room.  David could spin a yarn like no other.  I can’t get over how many hilarious stories the had from his job as prosecuting attorney.  I never saw him in a bad mood or with a bad attitude.  He will be sorely missed at the annual oil and gas convention in Hot Springs.   A link to his obituary is below.   No mention of his work as an oil and gas lawyer, but he was one of the best in Arkansas.

http://www.eldoradonews.com/news/2017/aug/13/david-butler-prosecuting-attorney-13th-judicial-di/