Replies to This Discussion

Permalink Reply by Philip Thackray on January 28, 2014 at 3:10pm

FMV,

Most of the Rex deductions are now just pass throughs from Markwest.  An audit would not have much meaning for the deductions.  Sale prices might be audited however.

LewPA,

Congratulations on the no deduction lease!

Phil

Permalink Reply by GM on January 28, 2014 at 3:25pm

Just off the top of my head. Can't we claim the deductions as a business expense on our leases?

Permalink Reply by Philip Thackray on January 28, 2014 at 3:39pm

GM,

If they gave you the gross and you had to pay the deductions then they would be deductible.  Now they subtract the deductions from the gross and give you net.  Either scenario works out the same for you.

Phil

Permalink Reply by GM on January 28, 2014 at 3:49pm

I was thinking so after I hit send. Thanks

I believe we are getting taken and they are hoping we do nothing about because we got a "check".

Permalink Reply by LewPa on January 29, 2014 at 5:14am

GM

Rex reports the gross income that you got for your part of the unit to the IRS. When you do your taxes at the end of the year, you can deduct all the costs that they took out. LewPa

Permalink Reply by Philip Thackray on January 29, 2014 at 5:33am

Lew,

I have not seen a 1099 from XTO.  I would have thought that the 1099 would reflect the sum of all royalty checks which is a net amount after deductions.  If that is the case then you could not deduct the deductions again.

Do you know if the reporting is handled differently?

Even if they report the gross and you deduct the deductions the two scenarios yield the same tax result.

Phil

 

Permalink Reply by Outback on January 29, 2014 at 5:53am

All 1099's are reported at Gross. Some companies reflect the deductions on either the front or the back of same 1099. Some companies do not report deductions at all , for example, Statoil and Mitsui. It would be wise for a landowner to retain all of their monthly statements so that they can be tied in with the 1099. Additionally reporting the Gross permits proper calculation of the depletion allowance.

Permalink Reply by Philip Thackray on January 29, 2014 at 5:58am

Outback2,

That is what Lew said as well.  That makes sense especially in light of the depletion allowance.

Thanks for the information.

Phil

Permalink Reply by FairMktValue on January 29, 2014 at 1:59pm

Phil,

Most of the Rex deductions are now just pass throughs from Markwest.

Believe it or not that potential problem even with a no deductions lease has entered my tiny brain. lol

Determining the actual sale price may prove to be a bit more complicated . The lawyer says:

Royalty clause should have no deductions for expenses, should be based on the higher of the market value or gross proceeds at point of sale (not wellhead) and all sales must be arms-length transactions with independent third parties.

Quite a mouthful...

Who determines "point of sale" ?

Market value  (Henry Hub ?) or gross proceeds ?

MarkWest - arms length independent third party ?

Hedging ? Who benefits or loses?  Co taking a risk with your gas or a prudent business decision ?  Hedging gains or losses spread over "all" wells or what ?

Lotta questions there, I don't know that there are any standard practices that can be pointed to, or do you gotta fight them out line by line?

Hate to be so cynical... but just looking for a "fair" deal ... what ever that may be, and that is the question "What is fair?"

Cheers

 

Permalink Reply by LewPa on January 29, 2014 at 3:00pm

FMV

My take on Rex in PA is that they are a drilling company. Markwest owns the gas and the marketing. Rex charges no deductions for itself and just forwards the fees from Markwest to you (taken out of your royalty). What happens or doesn't happen behind closed doors between them, you will never get to know. The big picture is, the money flowing to the landowner from the gas underneath us is a unexpected blessing! Who knew 10 years ago! Sign a lease you are comfortable with (or don't) and kick back and enjoy it! Another point on the above talk on tax returns, any lawyer fees that involved the OG process are also deductable.  LewPa

Permalink Reply by RB on February 24, 2014 at 1:45pm

LewPA,

I hope not, but have wondered if they would make the landowner take that hit.  Seems awfully steep at 20-50% deductions. Can't imagine any CEO not taking a look at that and saying we had better do better with the margins.

Permalink Reply by Philip Thackray on January 30, 2014 at 2:27am

FMV,

As Lew said, I think that the Markwest charges are pass throughs and auditing Rex deductions would only get you to see the Markwest bills.

Your sales questions are quite valid and should be auditable.  I have always wondered how the hedging is handled relative to the landowner.  It costs money to hedge.  Do they deduct that and give you the benefit (or the loss!) of the hedge or do they just show you the current market value of the gas and keep the benefits of the hedge to themselves?  I don’t know, but all of this can be discovered.  If gas prices stay up, hedges will prove to be a negative.

Right at the moment I’m with XTO and I have been told that XTO is so big that they do very little hedging.  But I have a lease with Rex and so how they do things is of great interest to me.

Some large corporate landowners are involved in leases up this way.  Spang & Company and Brownsdale Corp (American Roller Bearing) and if they became interested in auditing Rex they would have some clout.  Spang is now the lessor to XTO on their Hicks Road (cryogenic plant) property as well.

As you have said, when the checks start flowing ears will perk up.

Phil

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