Valuation of lease rights in a limited partnership

Good morning!

 

I am a business valuator that leads my firms valuation practice. I have received numerous calls in the last few days regarding the valuation of limited partnership interests which own Marcellus shale lease rights.  The purpose of the valuation would be for estate planning. I have performed numerous similar valuations for limited partnerships owning real estate and I know the methodologies used and informational sources available to perform these types of valuations and substantiate the discounts associated with them.  While they are similar to a valuation of a limited partnership owning natural gas lease rights, there are still significant differences. I am hoping to start a discussion regarding the issues involved with a Marcellus shale lease rights valuation, because I see great need for these services in the very near future.

 

I beleive an open discussion will help with the general education of every party involved and lead to the best services being supplied to the people that would benefit most.

 

Please comment if you have performed these types of valuations or have thoughts on the process.

 

Some of the items that I hope to discuss are:

- documentation for the discounts taken in the valuation of a limited partnership interest (is there transactional guidance?)

- applicability of data (either valuation or transactional) from other shale reserves (Barnett for example) to the marcellus shale reserve

- general thoughts on the valuation process

 

I don't have definitive answers, but I do have thoughts on the issue that I will share.

 

I appreciate any comments and have a great day!

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Replies to This Discussion

Permalink Reply by Joe Baran on April 8, 2011 at 1:12am

I work for the John T Boyd Company.  We're a mining/geology engineering company.  I lead the gas side of the business.  Our work load in this area has grown substantially over the past year.  We've done work for several law firms, wealth management companies, CPA firms, and valuation firms, handling the asset valuation for Marcellus shale reserves.  We've valued assets ranging fom 60 acres to 50,000 acres, in all ranges of development.

 

I didn't really want to sound like an advertisement, but you asked if anyone had experience in this area and I wanted to provide a description of our experience.

Permalink Reply by T. Eric Blocher on April 8, 2011 at 1:24am

Thanks for the reply!  Finding a good appraiser is a critical step in the estate planning process. I have found that most people beleive that once you have the asset / lease appraised, the party is over. That truly is not the case, once you put a partnership wrapper arround those assets (assuming proper set up etc) there is more to be done when you transfer a non-controlling interest.

 

Funny story - about 20 minutes after signing up for this board and posting this, I got an e-mail reply from some non-existent tall beautiful woman who liked my profile (which I don't remember entering) and thought she knew me. She suggested we re-connect and exchange pictures!  Ha Ha Ha......unbelievable.

Permalink Reply by jb379 on April 8, 2011 at 3:11am

Probably a dude with a zz top-like beard and impressive beer gut he has been investing in for years...caveat emptor!  Sorry, that's the extent of my input, my apologies.

 

JB

Permalink Reply by T. Eric Blocher on May 23, 2011 at 9:54am

Perhaps.

 

But with the Utica issue now rising the issues I discussed in my first post will become even more prominent.  Has anyone gone through the process of having a valuation performed on a limited partnership interest that was gifted?

Permalink Reply by Bison Head on May 23, 2011 at 10:04am
Estate Planning is very important to the folks in Marcellus positioned to gain, but this site is not the place to solicit business. Its for stakeholders to share information with each other - Looks to me like you are politely pitching your firm.
Permalink Reply by T. Eric Blocher on May 23, 2011 at 2:09pm

I am sorry you arrived at that opinion. Those are not my intentions.  I made it a point to not even mention the Company I work for.

 

Before I first posted I thought to myself that attorneys post on this site and and many of them have counselled people on what may be one of the most significant transactions in their life.  I think they can give sound advice without fishing for business in "advertisement" mode. I was hoping to do the same.

 

As I said in my first post I was hoping to have a discussion on issues that will imapct people should they follow the family limited partnership advice given on this site. I think if done properly, it can be very good advice. That is a service for the attorneys to provide. I am on the "valuation side" of the gifting transaction.  I have an interest in this because it is something currently happening in my home state and I am trying to be proactive in determining how to handle the questions that I have.  Bottom line, when the time comes I want to give the best service I can. 

 

I have called many attorneys, estate planners and other valuators in the industry trying to expand my knowledge on the subject.  I found that most do not have answers to my questions but have expressed interest in knowing the answers as well.  My hope in coming to a site called "GoMarcellusshale.com" would be that there would be other people with the same questions I have.  By saying that I have thoughts but not definitive answers I thought it would be clear that I wasn't trying to solicit.

 

My interest hasn't changed and I still have thoughts on important issues, but hopefully my motives are clearer

Permalink Reply by bill h on May 23, 2011 at 3:03pm
They are.
Permalink Reply by FXEF on May 23, 2011 at 3:19pm
If you have LLC O&G related questions, just ask them.
Permalink Reply by T. Eric Blocher on May 24, 2011 at 1:55pm

Sorry for the delayed reply.  I was on a field trip in Philly with my 10 year olds class.  Loooooong day.

 

The questions that I have are valuation related. 

1)  Has anyone had a valuation prepared for the gifting of a limited partnership interest?

2) Does anyone have opinions on which methodologies should be used in the situation above? In my opinion, a combination of the income approach and market approach should be used and ideally the two methodologies will reconcile. There may be issues that need to be addressed depending upon if the leases have producing wells or not.

The concern I have with the market approach side is where to find the transactional data to make the comparison. There is data I beleive from Barnett shale but would it be considered stale or comparable given the differences between the two formations.

 

Those are two of the questions at the top of my list.  As I indicated I have spoken to many people about these issues but the few valuators who indicated that they are getting into the niche are actually focussing on the valuation of the leases ie) asset appraisal.  That I am not even considering doing.  I wonder how many of the appraisals that were performed would now be considered obselete because of Utica shale?  I would think that the value of the mineral rights just went up.

Permalink Reply by ARRE on May 25, 2011 at 5:21am

I am a real property appraiser, and we are currently looking into the valuation of properties within the Marcellus Shale Formation in Central PA.  We do not separate the limited interest as part of our valuations, however, I think you are speaking more from a tax implication rather than the valuation of the rights associated with the shale gas and extraction.  That, I cannot speak to.  As for the valuation methods, I think it depends on the phase of production the property in question or available sales are in.  It seems to me, it would be unwise to use the income approach to estimate if you do not have any production reports or reserve estimates.  If you do have them, then the income would definitely be a viable method for valuation of the rights.  If you are not in a production phase, you may be able to extract a potential income, but there will be several extraordinary assumptions you will be making to come up with a valuation opinion (IE- what the expectations are for the play, specific to your property, what is the overall health of the play, how long and what type of decline curves for production are you using to estimate future returns, etc.)  I think it may be applicable, if you are in a speculation phase, to look at sales, and attempt to extract a consideration for the contribution of value through a pairing of sales for the GOM rights.  This appears to be the appropriate method from others who value these interests, and have been for other resource plays in a state of speculation, but not production. 

 

This is definitly changing the state of our real property market.  It is really opening the general public's eyes on property and the rights associated with the property they thought they owned. 

Permalink Reply by T. Eric Blocher on May 25, 2011 at 7:58am

ARRE - My perspective is solely from the perspective of a valuation of a non-controlling interest in a partnership owning the lease / mineral rights.  The valuation methods are also specifically for that scenario. When I have valued similar LP ownership interests whose sole assets are real property, the income approach is still used.  Even if there are not distributions annually, this approach considers the likley time horizon when the assets would be sold resulting in a return of the investment to the investor.

 

The biggest issue, assuming you have a quality appraisal of the lease rights, is the impact on the overall value of the discounts for lack of marketability and lack of control that are present with a non-controlling limited partnership interest.

 

If we take your thinking on the producing / non producing scenario you described, we may factor the potential income (probability weighted for the current risk / likelyhood factors) and then consider a sale of the interest down the road as a terminal transaction.  Much weight / reliance would be placed on the inital appraisal of the GOM rights and it would have to be critically reviewed if any of the cash flow scenarios in it would be relied on.

 

I would love to see an older redacted valuation from the Barnett shale to see how issues were handled.

 

Thanks for the thoughts and input!

Permalink Reply by Joe Baran on May 25, 2011 at 8:05am
So what you're saying is when in an area of speculation, utilize a methodology that is based on looking at arms length agreements as a basis for value as compared to utilizing a methodology based on geologic research to extrapolate a value is better?

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