CMM Mineral Valuation & Appraisal 3 — Questions and Answers
Question 1: Which valuation method is most appropriate for early-stage exploration properties with no established production history?
- Discounted cash flow (DCF) analysis
- Direct capitalization of income
- Cost approach based on exploration expenditures (Correct answer)
- Gross revenue multiplier method
Correct answer: Cost approach based on exploration expenditures
Without production history to project cash flows, the cost approach using accumulated exploration expenditures provides the most defensible value basis.
Question 2: In mineral appraisal, what does the term 'wellhead price' represent?
- Posted field price before deductions for gathering and transportation (Correct answer)
- Futures contract settlement price
- Royalty-free value at the lease boundary
- Refinery gate price after processing
Correct answer: Posted field price before deductions for gathering and transportation
Wellhead price is the value of oil or gas at the point of production before deducting gathering, transportation, or processing costs.
Question 3: A natural gas lease specifies 'no deduction' language for post-production costs. How does this affect royalty calculation?
- Royalties are calculated on gross proceeds without cost deductions (Correct answer)
- Royalties are reduced by gathering and compression costs
- The operator may deduct severance taxes before computing royalties
- Post-production costs are borne equally by lessor and lessee
Correct answer: Royalties are calculated on gross proceeds without cost deductions
'No deduction' clauses require royalties to be paid on gross proceeds, preventing operators from reducing the royalty base by post-production costs.
Question 4: Which sensitivity analysis variable typically has the greatest impact on the NPV of an oil and gas property?
- Operating cost per barrel
- Commodity price (Correct answer)
- Discount rate selection
- Abandonment cost estimate
Correct answer: Commodity price
Commodity price is typically the most sensitive variable because small changes in price multiply across all projected production volumes throughout the reserve life.
Question 5: What is the primary purpose of a minerals title opinion in the context of appraisal?
- To establish current market value of the mineral estate
- To confirm ownership, encumbrances, and the fractional interest being appraised (Correct answer)
- To certify the environmental condition of the subsurface
- To determine applicable ad valorem tax rates
Correct answer: To confirm ownership, encumbrances, and the fractional interest being appraised
A minerals title opinion establishes who owns what fractional interest and identifies liens, leases, or encumbrances that affect the interest being appraised.
Question 6: When using the sales comparison approach for mineral rights, a positive adjustment is made to a comparable sale when the comparable is:
- Superior in reserve quality to the subject
- Inferior in reserve quality to the subject (Correct answer)
- Located closer to existing infrastructure
- More recently transacted than the subject
Correct answer: Inferior in reserve quality to the subject
A positive adjustment is added to the comparable's sale price when the comparable is inferior, bringing it up to the subject's value level.
Question 7: Which type of royalty interest survives the expiration or termination of an oil and gas lease?
- Overriding royalty interest (ORRI)
- Non-participating royalty interest (NPRI) (Correct answer)
- Production payment (PP)
- Working interest royalty
Correct answer: Non-participating royalty interest (NPRI)
A non-participating royalty interest is carved out of the mineral estate itself and persists regardless of lease status, whereas an ORRI exists only during the lease term.
CMM Mineral Valuation & Appraisal 3
Which valuation method is most appropriate for early-stage exploration properties with no established production history?