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Permalink Reply by DGS on January 30, 2014 at 5:32am

Royalties are paid monthly with a two month lag. The statements that we've received indicate the average price of gas for that period and the royalties are calculated based on that price.

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Permalink Reply by Ron Griz on January 30, 2014 at 5:41am

Thanks for the reply.

So if the average price of gas for January is  $5.00  then the check i would receive in 2-3 months for January production will be based on the $5.00 price.??

Do they calculate the royalties paid daily based on the changing market price which changes daily?

 

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Permalink Reply by DGS on January 30, 2014 at 5:52am

I only have three statements to use as a reference point but it appears that they use a monthly average.

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Permalink Reply by 0i7okn54zwbdo on January 30, 2014 at 7:27am

It has little to do with the Henry Hub price and more to do with the contract price that the operator has secured with the buyer.  The operator might have a 12 month contract to sell at $4.00/mcf but be long on nat gas contracts in the open market, hoping that if the price rises they'll be able to sell those contracts at a better rate.  While market price is an indicator of where the trend is headed it doesn't mean that the company that operates a well will be locked in at any price.  In the O&G industry having a good commodities team to get your hedges in line is more important than basically everything else.

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Permalink Reply by Tom R on January 30, 2014 at 7:12am

Trying to figure the gas price that a royalty will be based on is a lot less certain than you may expect. Check out this discussion thread

http://gomarcellusshale.com/forum/topics/vast-difference-in-gas-pri...

there are usually several companies paying royalties on the production from the same well. I've never seen them all state the same sale price for the gas and it has never been as high as what you might expect from the Natural Gas price that you see on the header here at GMS.

Would also mention that the two month lag is only true once you have started receiving royalty payments. It may well be six months or more from the time that a well goes into production until you get the first check. That one is usually large as they will include payment for the earlier months but the last month itemized will be two months before the date of the check.

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