Rice Energy gives us a gas price below the hedge price they get themselves. But in their latest investor's report, they list both their hedge price and the unhedged price. This report says that the unhedged price was $2.32/mcf for the 3rd Q of 2015. So, I looked up what they paid us for July, August and September of 2015. The 3 months prices were $2.21, $2.05, and $2.02 for an average quarterly price of $2.09. Has anyone else seen this type of discrepancy in their payments? We are in Belmont County Ohio.
To make matters worse, they then adjust our payments by "post production costs" which reduces our effective price even more.
Donna let me know what you find out Thanks
OK I will....
Actually hedging is the opposite of rolling the dice; hedging provides price certainty for the duration of the hedge - typically months to years at a time. Obviously, if you hedge you will not participate in the market (higher or lower than your hedged price0 for that period of time.
It was my impression that royalties are based on the price the producer gets at the point of sale, typically at the wellhead-pipeline interconnect. In other words, hedging arrangements done by the producer have no role in determining the royalty. I'll check this out with Matt Warnock of Bricker and Eckler and get back with you.
I take it then that, in your experience, the producer's buyer is the entity that sells at the 'hedge' price and that the producer is basically a 'middleman' / 'first wholesaler' ? ?
I'm not so sure about that, Joseph. I'm trying to follow up for clarification with Matt Warnock as well as with EIA's Katie Teller, Michael Mobilia and Christopher Peterson. It'll be a while before I get some more reliable information.
For the moment, here are some thoughts that might be relevant.
If I have a well leased to Rice in Belmont county Ohio or Greene county Pennsylvania, the output will likely be sold to MarkWest for the spot price at the Clarington Ohio or Houston Pennsylvania hub which is quite a bit lower than the Henry hub price. Note that this spread has been steadily narrowing as pipeline capacity in our region gets built out and comes on line. That gives us something nice to look forward to doesn't it?
I thought the producer would receive the hedge price rather than the producer's buyer. If the producer is only going to receive the $1 or $1.5 spot price, they would not produce and would shut-int. But instead, since they are receiving a hedged, long term contract, at $3.25 or $3.5, the producer is willing to produce. This long term contract, as I stated before, should be in my opinion, that value at the well head, not the spot price. The producer is not in effect selling at the spot price, but rather, is selling at its long term hedged contract.
Here's the response from Bricker and Ecklar's Matt Warnock:
Tom, Thanks for the email and Happy New Year. Royalty payments are generally entirely dependent on the lease language. Without seeing the documents, the lease could use the phrase "market price" as the key for determining the royalty, or the royalty statement might be confusing so that the landowner doesn't understand exactly what the priced is based on (market vs. hedged). Generally you are correct that the point of sale is what typically drives the royalty payment, and then the issue is whether post-production costs are able to be deducted prior to the payment of royalties. Basing the royalty on a market price (e.g. a pricing point in Appalachia) would be unusual. Let me know if you have any follow up questions. Matt
Here's the response from Bricker and Ecklar's Matt Warnock:
Thanks for the email and Happy New Year.
Royalty payments are generally entirely dependent on the lease language. Without seeing the documents, the lease could use the phrase "market price" as the key for determining the royalty, or the royalty statement might be confusing so that the landowner doesn't understand exactly what the priced is based on (market vs. hedged). Generally you are correct that the point of sale is what typically drives the royalty payment, and then the issue is whether post-production costs are able to be deducted prior to the payment of royalties. Basing the royalty on a market price (e.g. a pricing point in Appalachia) would be unusual. Let me know if you have any follow up questions.
So, the key take-away for answering such "simple" questions is that we really need to read the entire lease agreement before trying to answer the question!
Here's a little more color on Rice Energy I thought you'd appreciate.
By Bill Powers
Winter started late, destroying demand for natural gas in America.
Natural gas storage touched record levels at the end of the refill season.
NYMEX Henry Hub futures briefly traded below $2 per MMBTU and have staged only a modest rebound with the onset of colder weather.
Dozens of North American energy companies are under severe stress and many will not be able to hang on for the inevitable rebound in prices from today’s unsustainable levels.
More importantly, what will the future look like for the companies that can weather the storm and who will make it?
In this article I will detail the many smart steps taken by Rice Energy (RICE-NYSE) over the past nine years that have put it in an excellent position to profit mightily from the inevitable rebound in prices.
In a follow-up article I will detail the missteps of a former Wall Street darling, Ultra Petroleum (UPL-NYSE), that is facing a far more difficult future due to its debt-laden balance sheet and forays into unprofitable project areas.
After founding of its predecessor company, Rice Energy, LLC in 2007 by longtime Blackrock and State Street energy analyst Dan Rice III, the Canonsburg, PA-based company began the acquisition of Marcellus shale acreage.
Through a series of farm-ins and acreage acquisitions prior to the start of the huge ramp up activity in the Marcellus in 2012, Rice was able to establish a meaningful foothold into the highly prospective Marcellus shale of southwestern Pennsylvania.
Today Rice holds 91,000 net acres of Marcellus acreage in Washington and Greene counties in Pennsylvania as well as 56,000 net acres of highly prospective Utica acreage in Belmont County, OH. Additionally, Rice Energy is the operator and 50% owner of a gas gathering and water handling company, Rice Midstream Partners (NYSE:RMP) that services its areas of operation.
While there are numerous companies with more acreage than Rice in both the Utica and the Marcellus, there is virtually no company operating in either of the those two plays that has higher quality acreage, a history of drilling more prolific wells and, most importantly these days, the balance sheet to exploit its existing asset base in a higher price environment.
As with any unconventional resource play, the financial success of any driller is directly linked to its acreage being located in the core of the play where virtually all of the economic wells are located.
By comparison, Ultra Petroleum’s acreage in the Marcellus lies well outside the most prolific part of the play and has yielded poor drilling results to date. As you can see from the below graphic, in both the Utica and the Marcellus, Rice’s concentrated acreage position is located in the core of the core:
Rice’s acreage position in both the Marcellus and the Utica has yielded some spectacular production results to date. For example, the average initial production (IP) rate for the 114 Marcellus wells put into to production since 2010 was 10.1 million cubic feet per day (MMcf/d).
Source: Company Presentation
Additionally, the strong performance of the company’s wells over the early portion of their lifetime allowed Rice to produce an average of 410 mmcf/d, or 3.6 mmcf/d per well, in Q3 2014 from its 114 Marcellus wells. The company has also been able to achieve substantial cost reductions per drilled and completed (D&C) foot. The 14 Marcellus wells put into production in Q3 2015 had an average cost of approximately $7 million each, down 16% from the 2014 average well cost.
Though nearly all of Rice’s Marcellus wells have been on production for less than three years, we still have enough production history to make reasonably informed predictions for estimated ultimate recovery (EUR) per well.
The below graphic taken from a recent company presentation shows Rice’s Marcellus wells have outstanding performance across both the 1-year and 2-year timeframes:
Source: Company presentation
Due to the lack of the Rice-operated Marcellus wells older than three years and given that, according to the company, less than 10% of its Marcellus acreage has been developed, it is reasonable to expect the company’s average well to produce 8 bcf over its lifetime. I will further discuss the company’s Marcellus assets in the Valuation section.
In the underlying Utica, Rice’s drilling effort is off to an excellent start. As you can see in the below table, the company has had consistently good results in the 16 wells it has drilled through the end of Q3 2015:
Source: Company Presentation
Despite only 19 net Utica wells producing during Q3 2015 Rice had average production of 199 mmcf/d, or 10.5 mmcf/d per well. Though the company has drilled a very small portion of its 56,000 net Utica acres, its outstanding production history indicates it is reasonable to see Rice’saverage Utica well produce 10 bcf over its lifetime.
Valuing a rapidly growing company like Rice Energy at a time of 14-year low natural gas prices is quite difficult, due to:
With Rice’s outstanding acreage position, history of drilling top performing wells, strong financial position and ability to further reduce costs, there should be little doubt that the company is well positioned to participate in a turn in the natural gas market once brighter days arrive.
def need differentials to shrink throughout Appalachia.