What are my mineral rights worth?

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.

Long term stock market returns–why it’s all about timing. (A MUSING FROM THE GREAT BLIZZARD OF 2021!)

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 YearEnding Total ReturnAvg. Ann. Return
Total and average annual rate of return for a constant, annual investment in the S&P 500 by starting year–data ends in 2020.

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:

Starting in 1998, the $50,000 in principle investment would be worth only $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?

YearPrice/ounceYearly StakeOunces Purchased
Total Ounces382.1
Total Value$628,235.52
Return from Gold-not adjusted for inflation

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

The Lithium Royalty Conundrum: The Challenge of Pricing Lithium in Arkansas’s Brine

In the heart of South Arkansas, amidst the many pine plantations and oil fields, a groundbreaking discovery has been made – Lithium containing brine. This find isn’t just a stroke of geological luck; it’s a potential game-changer in the global push towards renewable energy. However, this exciting prospect brings a significant challenge: fitting this new discovery into the framework of Arkansas’s brine royalty statute, a legislation born of a different era. Let’s dive into how this statute might be applied to the burgeoning Lithium market.

Unpacking the Brine Royalty Statute: A Glimpse into Arkansas’s Legal Framework

Arkansas’s statute 15-76-315, originally designed for traditional brine elements like bromine, now faces the task of encompassing Lithium. This statute sets forth how brine value is determined, mandating a minimum royalty payment and placing the burden of proof for fair market value on the operator. It’s a robust framework, but Lithium, with its high market demand and lack of historical data in Arkansas, poses unique challenges.

Lithium’s Legal Labyrinth: Charting Unfamiliar Territory

Traditionally extracted substances such as bromine are covered under the per-acre formula provided by the statute. This formula sets a fixed price for all substances contained in brine as of 1979. For new substances such as Lithium, the statute relies on actual sales data to establish brine value. However, without existing commercial Lithium production in Arkansas, there’s no local sales data to lean on. This gap necessitates a novel approach to valuation, possibly looking towards global Lithium market prices or cost-based estimates. With Lithium’s fluctuating global prices, setting a ‘fair and reasonable’ market value, as required by the statute, is a daunting task. This will likely be a focal point of the ongoing administrative process before the Arkansas Oil and Gas Commission (AOGC) involving intricate proceedings involving operators and landowners.

Potential Scenarios and Their Implications

If the AOGC leans towards global market prices for valuation, it could result in lucrative royalties. However, this might also lead to volatility in payments due to market fluctuations. There’s potential for Arkansas to pioneer a new model that factors in extraction costs, global demand, and environmental impacts. Such a model could be a blueprint for other regions.

As Arkansas stands on the cusp of a Lithium revolution, the path forward is as exciting as it is complex. The state’s administrative process is not just about setting a price tag on a new resource; it’s about envisioning a sustainable and equitable future in resource management. Arkansas’s approach to this unique challenge could become a model for other states and countries with untapped Lithium reserves.

Mark Robinette to Speak at 2018 Ark La Tex Association of Professional Landmen Education Seminar

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 to Present National Association of Division Order Analysts Webinar on Arkansas Probate

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.

Heir Property and Mineral Rights in Arkansas: Practically Unsolvable v. Solvable Scenarios

I get a call a couple times a month from someone who believes they own mineral rights in Arkansas.  Many calls imply that somebody, somewhere cheated they caller out of their birthright.  I sympathize, I really do.  Mineral rights law is very complicated.  Many actions that seem opaque and shady to a normal person are actually standard operating procedure for oil and gas companies.  There’s a good reason why these actions that appear callous are the standard operating procedure.  It is not personal–believe me.   Folks at oil and gas companies are sympathetic human beings.  The thing is that there are only so many of them, but there are 1000x more of you the royalty owner.  For that reason, the company has to prioritize some requests and outright turn down others.

A simple 640 acre gas unit out in the country may have 100 owners.  In towns, the number will be in the 100’s.   If a company has 64,000 acres in a gas play, it may deal with 64,000 royalty owners.  That company may only have 10 division order analysts.   This is why the oil and gas companies sometimes seem callous.  They are outnumbered and outgunned.  If they hired enough people to answer everyone’s calls and letters the same day, they could not afford to drill and produce.

Because of this asymmetry between owners and company employees, the companies lobbied States to have laws and regulations to pass the responsibility of keeping up with unclaimed royalty money to the State government.  This is how royalty money disappears.  There are exactly zero State employees actively looking to reunite you with your money because frankly if they don’t find you, they get to keep your money.

This is why you call me.   I appreciate the calls, but there are some fact scenarios that are solvable and others that are not.  Here are some common but practically unsolvable situations:

  1. You have no clue whatsoever where the land was and who originally owned it.
  2. You know that one or your parents or grandparents owned the land, but you don’t know or understand how much.
  3. You know that your great grandfather owned the land.  He had 12 children.  They had 8 children each.  Your parents had five children  (or some variation of these numbers where there are 50 plus descendants).

The first one does not help me help you.  I don’t have the time to hunt down your ancestor’s names on deeds in the courthouse.  The second is usually someone who actually is in the third situation but just doesn’t know it yet.  If you are in the third situation, you have such a small interest in the property, it would cost you many times more in your share of any possible royalty money to hire me.  I say “practically insolvable” because the cost/benefit on my fee to your recovery makes recovery impractical.

Solvable scenarios:

  1. Some person or company approached you to buy/lease/integrate your mineral rights.
  2. You’ve seen your name or your parents’ names on a State unclaimed property list.
  3. You know you have fewer than 20 owners in the whole tract of land and there is an oil or gas well on the land.

The first is a big tell that you have something valuable.  You are sitting on a full house and they are bluffing.  The person who approached you did the homework. You need me to figure out what he/she knows, clear your title, and claim your money.  The second is also a good sign and provides plenty of information that will allow me to find your money and mineral rights.  The third is also acceptable because you will likely have enough interest to make it worth your while to hire me.

So there it is.  I hope you found this, read it, and understand what I can and can’t do for you if you think you own Arkansas Mineral Rights and haven’t been paid.