Interest Rates and Your Minerals

This first nine days of February, 2018, have been, financially speaking, absolutely WILD. The stock market has reacted with historic price swings in response to Fed announcements of interest rate increases, plus concerns over national debt. Interest rates not only affect the stock market, they also affect the values of your minerals and royalty.

With oil prices now in the lower $60’s, the mood of the industry has been buoyed, although a very tempered response. It seems that most of the oil and gas industry believes that oil prices will go down within a year or so due to the industries ability to turn up the production. Overall, Caple Royalty Services has seen mineral and royalty values move up in the active basins; however, if interest rates were to continue upward, your mineral and royalty values will be negatively impacted.

If you don’t have any cost basis in your minerals, and don’t plan to sell them, rising interest rates won’t matter that much. But, for those who financed the acquisition of mineral rights, or who need to raise cash by selling some portion of your minerals, the interest rate increases will have a subtle negative impact. Obviously, your cost for carrying debt may increase, but if you decide you want to sell some minerals, the rise in interest rates will impact the present value that buyers calculate on your minerals’ future production. Buyers will have to discount the future cash flow to offset their increase in borrowing costs. So, if all other variables are stable, buyers will not be able to pay you as high of prices than before this uptick in interest rates.

There are many variables that affect the market value of your mineral and royalty holdings. Right now, interest rates are a relatively small variable, but should rates continue to rise, those rate increases could impact us. When you are trying to understand how others are valuing your minerals and royalty, commodity prices and drilling activity make the greatest impacts, but interest rates may become a significant factor. Let’s hope not.