Hilcorp updates??

Ok I did the HUGE leasing event in Lawrence Co. back in September with Hilcorp.  We actually got a letter in the mail from Co-Exprise stating that once our bank info was faxed our lease check would be wired.  Now what??  Yah, we have a nice sum in the bank now, but do we get notified somehow if Hilcorp is going to drill on our land? How do we know what's going on?  I google "News updates on Hilcorp" and get nothing recent.   View points please!

 

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Permalink Reply by Dale Ross on November 29, 2011 at 2:31am

A contact person from Hilcorp that is....Jim L.  you seem to have a lot of contacts, could you PM me someone I could contact to see about splitting this up?

Permalink Reply by Jim Litwinowicz on November 29, 2011 at 3:28am

Just to be clear, I have no contacts with Hilcorp.  I do work with Co-eXprise and learn some things through them.  Much of what I post is what I learned from a wide variety of sources, including this website.

Don't know if splitting payments has any tax benefits. From Tim's post below, it would appear it doesn't.  I would suggest that people talk to a CPA or a tax attorney first to see what their options are.

Permalink Reply by Tim R on November 29, 2011 at 2:49am

A lot of people who are not in business and have had minimal if any contact with the IRS are about to get "schooled".  I'm no accountant and would advise anyone to get one familiar with oil and gas IRS issues.

This right from the IRS manual:

4.41.1.2.2.1  (07-31-2002)
Installment Bonus Payments

  1. When examining the lease record for properties acquired during the year, pay particular attention to the amount of rent per acre per year. You may find something to indicate payments other than normal delay rental. In most areas, delay rentals are relatively small compared to lease bonuses. The period covered by the lease should be noted, as well as any provisions with respect to terms and expiration. The purpose is to be sure an installment bonus is not recorded as a delay rental.

    1. If it is found that the annual payments are for a fixed number of years regardless of production and if the lessee is unable to avoid such payments by terminating the lease, such annual payments are installment bonus payments and should be capitalized by the lessee as part of the cost of the lease. These payments would be found in the lease rental expense account, but the nature of the payments would be determinable by examination of the provisions of the lease itself.

    2. However, a cash-method taxpayer who receives an installment bonus contract as consideration for an oil or gas lease must include its value in gross income for the year in which the lease is executed if the obligation is transferable and readily saleable. See Rev. Rul. 68–606, 1968–2 C.B. 42

I may be wrong but it looks like if you are on a "cash basis", which most people are, you have to report all the income the year the lease is signed, whether or not your paid up that year.  Your also probably going to have to make quarterly estimated tax payments if the royalties amount to much.  All of this is going to make Republicans out of a lot of people.   If you can understand all of this your all set.

http://www.irs.gov/irm/part4/irm_04-041-001.html

Permalink Reply by KML on November 29, 2011 at 4:14am

I specifically asked if you can do a split payment and the answer was no.  You can defer until next year though.  They said the payment would be in January.  Contact Co-exprise at the # listed on one of your e-mails.  When I sent in the bank info I clearly wrote on the fax to "defer until January 2012" and also called and told our contact at Co-exprise that.

 

Hope that helps.....and I guess I am assuming that you are signed with Hilcorp through Co-exprise.

Permalink Reply by Chris Crawley on November 29, 2011 at 1:43am

Just wait and deposit the check in January..I'm not an accountant but it seems that would make it income in FY 2012..

Permalink Reply by Mike h on November 29, 2011 at 2:26am

Chris,

What you suggest is absolutely incorrect. I am not an accountant but I do know that the IRS considers you to have constructively received the money when you have the check in hand. You must have an agreement in place specifying when you should receive the money OR you need to show that you didn't actually receive the money until 2012.

 

Check with an accountant.

 

Permalink Reply by Dale Ross on November 29, 2011 at 2:28am

Income is applied to your earnings according to the date the check is cut, not the date you make the deposit.  If they cut the check in December of 2011, you must report it as income in the year 2011 regardless of when you make the deposit.

Permalink Reply by Sonja on November 28, 2011 at 4:45am

Now, would Hilcorp be interested in an ALOV members shallow rights that they maintained? They left a card to contact them on my door, but as an ALOV member, I am confused why they would want to speak to me? Or do you think they are randomly going door to door without even checking with the recorders office that we were all previously leased?

Permalink Reply by Jim Litwinowicz on November 28, 2011 at 5:21am

Sonja; They are approaching all landowners. If you are already under a lease, there is little they can do. But if you are a member of the ALOV that does not mean you are leased but just a member of the group (unless the ALOV has members sign a lease which I certainly hope nobody would do). Do members of the ALOV have the right to leave the group and sign a lease outside of the group? I don't know what their agreement says.

Permalink Reply by Sonja on November 30, 2011 at 12:37pm

Jim, we were part of the large group that signed in April. :(

But we maintained our shallow rights from the surface to the queenston (i think).  So I wasn't sure if that is what they might be after. Those shallow rights.  The only thing is, I think the way the lease was written was that CHK has first right of refusal.  Maybe not such a good scenario?

 

Permalink Reply by Jim Litwinowicz on December 1, 2011 at 3:01am

I don't believe that Hilcorp will be interested in the shallow rights. They are a deep driller and want only the wet gas/oil areas as that is what they do best. They don't even want parts of the Utica that they deem as dry gas areas.

The letter you received probably went out to all landowners. Best advice would be to call and see if they want the shallow rights but I seriously doubt it.

Permalink Reply by Jim Litwinowicz on December 1, 2011 at 3:54am

Got a chance to review the lease being offered by Western Land for Hilcorp and it is very different than the one negotiated for the Mt Jackson group and still being offered through Co-eXprise.

1. We got a 500' setback from all buildings, surface water, septic, water wells and out buildings. They offer only 500 ' from a home but only 200' from everything else.

2. They can extend the lease by virtually any activity on the site like cutting brush, ours requires continuous activity resulting in drilling.

3. They have no Pugh Clause, we do.  That means they can tie up an entire parcel by HBP but pay roaylties only on what is in a unit. So they can ties up a 50 acre parcel for decades while paying royalties on only five acres.

4. We have a depth severance clause, they don't. If new technology allows drilling to 15,000' or deeper in the future, the landowner can lease deeper strata at current prices.

5. Our lease states a 17% royalty with no deductions, theirs allows costs to be deducted, greatly reducing royalty payments.

6. We have an audit clause and they don't don't so you cannot verify correct royalty payments, really big since they can claim all sorts of cost deductions.

When all these are added up, there is a dramatic difference in the two leases and a huge potential difference in monies paid out to the landowner.

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