The purchase and sale of petroleum assets frequently involve unproved acreage that is rank to prospective in nature. The buyer and the seller are faced with estimating a value for this acreage which cannot easily be accomplished with a heavily risked oil and gas production forecast. This paper presents alternative techniques for valuing unproved or speculative acreage, since limited discussion of this subject exists in the literature. The techniques described in this paper are based on appraisal methods developed by the real estate profession and are commonly referred to as the Market, Income and Cost Approaches.
When appraising speculative acreage, the critical first steps in valuation are defining the rights being appraised and establishing the highest and best use of the property. It is also important to characterize the oil and gas potential subject in order to establish guidelines for finding comparable sales in the market. Market data can be obtained from lease sales, county courthouse records, oil and gas auctions, and from publicly-reported corporate financial statements. In addition, exploration costs are considered.
The relevant market data are then analyzed in detail and used in the various appraisal methods. These methods provide estimates of value, which are then reconciled for the final opinion of value. Examples of the types of data obtained and analyses performed will be presented.
There is not much discussion in the literature regarding techniques for the valuation of unproved oil and gas reserves. Questions often asked are "What is it worth ?" and "How do you value it ?" when the task at hand is the Fair Market appraisal of undeveloped properties that are not considered proved reserves. This paper serves to illustrate methods for estimating value for these types of oil and gas properties where income from oil and gas production is uncertain or even speculative.
The methods shown are based on data derived from the market which include lease bonuses and rentals, and sales of mineral interests and prospects. They are presented as alternatives to the approach of projecting income from a risked, hypothetical oil and gas production stream based on statistical success ratios.
The steps necessary to prepare a credible appraisal are also presented and are based on standard practices developed by the real estate appraisal profession. Adherence to these standards are particularly important when the assignment involves estimating the just compensation from eminent domain proceedings or for estate planning.
An accurate definition of the mineral rights being valued is a critical first step to conducting an appraisal. The Appraiser should check the mineral ownership for any special considerations such as vertical depth segregation, split of executory and non-participating royalty interests along with the terms of any existing leases.
When valuing a leasehold interest, attention should be directed toward drilling commitments, eminent domain or force majeure clauses and the specific agreements in place. For a recent case involving properties in the Bakersfield area, the leases were granted in the early 1900's and were structured such that the lessee had a "preferential right to renew". This allowed the lessee to hold the leases in perpetuity if he so desired.
Once the mineral interests have been accurately described, it is then necessary to proceed with the determination of the highest and best use of the property.