Net Mineral Acres
Owning mineral property brings its own set of challenges. One of them is to understand the value of your net mineral acres. Knowing how to calculate net mineral acres of your mineral property helps with the accurate estimation of mineral value.
What is Net Mineral Acres?
Net mineral acres refer to the amount of real estate owned by an oil or gas company. The total leased area comes under the company’s ownership, which they may use for the extraction or further sale of the land.
How to Calculate Net Acres
Generally, net mineral acres may be calculated separately for every new lease. When calculating net acres, some critical parameters are evaluated, such as:
- The total gross acres of land covered under the lease
- The undivided oil and gas or mineral interest for these lands
- The working interest of the seller in a specific lease
To calculate net mineral acres, the gross acres of a project are multiplied by the leased ownership percentage for each project. So, it determines parameters like extraction depth.
For example, a 25% interest on 500 gross acres of land will give 125 acres of net mineral acres. When you know how to calculate your net mineral acres, it helps you figure out your royalty acres. Therefore, it’s a pivotal element to evaluate your assets for resales.
Difference Between Net Acres and Gross Acres
Generally, net and gross acres may be confused, but they are two different things. Net acres are a percentage of the total gross acres of a company. This percentage is directly mapped with the ownership percentage agreed at the lease.
For instance, if a company shares 50% in a lease of 20,000 acres with another company, the latter will increase 10,000 acres in its net acres. However, the gross acres will be 20,000. But if the company holds all the shares in a working project, its net and gross acreage will be the same simply because the entire project belongs to that specific company.
Net Mineral Acres and Depth Rights
With a clearer understanding of net mineral acres, it becomes easier to understand, predict and analyze the productivity and viability of the net acres. Therefore, oil and gas operators emphasize accurate calculations of net acres to build a successful portfolio.
For instance, net mineral acres directly contribute to a company’s monthly cash flow. Interestingly, this amount is only a fraction of the gross mineral valuation for the property of the mineral acres. Moreover, net mineral acres also direct how deep an operator can go for extraction before they are legally the owners of extracted minerals.
Why Net Acres are Important for Investors?
Net Mineral Acres is strictly an industry-specific metric. It’s not a general investment parameter which makes it slightly complex to understand. However, it tells some critical details about a company, valuable for potential investors.
So, as an investor, when you analyze the net mineral acres, it first tells you about the company size. Then, the net acreage says a lot about a company’s potential to buy real estate for mineral extraction.
Therefore, the top oil and gas companies worldwide have millions of net acres. At the same time, when a company increases or decreases its net acres, it directly indicates its progress. So, it’s easier for investors to figure out how a company is performing during certain stages. Therefore, they can make more calculated decisions about investing in any oil and gas company.
Also, investors consider a critical parameter where they analyze a company by its net acre types. They sort net acres by type to understand the exploration and development of oil and gas resources, helping themselves make better investment decisions in the oil and gas sector.
Are Royalty Acres Different from Net Mineral Acres?
While learning about net mineral acres, it’s also helpful to learn how royalty acres work. Firstly, remember that royalty acres are pretty different from net acres. Royalty acres refer to the amount you are eligible to receive royalties for per acre.
It’s a common term used in the oil and gas investment sector. Royalty buyers commonly evaluate property value through royalty acres before making a transaction. It gives a clear idea of the potential value of any oil and gas property.
Why is Net Mineral Acres Critical for Royalty Acre Calculation?
Even though net mineral acres and royalty acres are different, they are interdependent in many ways. You will need the net mineral acres to calculate royalty acres for a more accurate result. Otherwise, you can under- or overestimate the amount you might be eligible for.
Using Net Mineral Acres to Calculate Royalty Acres
There are a couple of ways to calculate royalty acres. Each method involves net mineral acres as a variable in the calculation formula. The oil industry uses two calculation methods. Here is how they are used:
Method One- The Old Method
In the 1950s, royalty had a fixed standard rate of one-eighth. However, it was changed to an equal value for both after a conclusion from a Mississippi court. It happened because the standard lease rate was no longer one-eighth.
As a result, the industry adopted the new rates to standardize and ensure higher royalty than one-eighth.
So, according to the one-eighth rule, 100 net mineral acres at 20% lease and a purchase offer of $100,000 will result in 160 net royalty acres. As a result, the price per net royalty acre would be $625 per net royalty acre.
But this approach is no longer used in the industry, so it’s important to know because it can save you from inaccurate evaluation.
Method Two – The Modern Method
In the modern method, the one-eighth is omitted, which means that the investor can expect a much higher value per net royalty acre.
For instance, if we consider the same example, the owner is liable for 20 NRA. It means that the price per net royalty acre would be $5000.
Net mineral acres are crucial parameters for investors and oil and gas operators. It helps them understand the eligibility for the mineral acres and helps investors analyze the investment potential. So, it’s an important concept to learn and have expertise in.