Qestions re: Selling Mineral Rights

I am sure many current lease holders have gotten offers from third-party companies offering to buy all or a percentage of your lease out. Selling points often are taxation as a Capital Gain at 15% now versus as "Income" (28%-36%) for lease payments, money now versus potential money in the future, uncertainty of future drilling, etc. However, a close friend of mine who is in a production unit in Guernsey County told me that these companies are looking to get a ten-fold ROI (return on their investment) over twenty years when they buy people out. Granted the depletion rates average 65% over the first five quarters, declining thereafter, the current tech is only recovering 30% of recoverable energy, with the tech expected to improve in the coming years, plus other formations i.e. Marcellus, Trenton-Black River, etc. So, outside of a desperate current financial situation, it would be wise to hold. My question are: Does anyone have any info on the ten-fold ROI they seek? Even if it was double, that could be a significant amount of money. Also, I got a call from my lease holder Thursday making me an offer, and they just commenced drilling in my unit, so uncertainty is not an issue. I also have concerns regarding the uncertainty in our country right now, dollar/economy collapsing, geopolitical situations in the world, etc.

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Permalink Reply by Philip Thackray on November 23, 2014 at 1:26am

RJ,

All that info is from ODNR. 

Porterfield A and B appear to be Marcellus wells.  One is listed as "shut in" the other is listed as "producing" but ODNR shows no production through 2Q2014.

Phil

Permalink Reply by RJ Morgan on November 23, 2014 at 1:52am

Thank you Phil. You have been very helpful.

Permalink Reply by RJ Morgan on November 22, 2014 at 3:23pm

Phil-

Here is the source of my original info based on the Hess earnings call- not sure why the disparity.

http://marcellusdrilling.com/2013/10/hess-officials-talks-about-the...

Permalink Reply by V Miller on November 22, 2014 at 4:22pm
I too, for the first time, am taking a serious look at selling a portion of my minerals. Drilling has just begun in my unit and I have also been contacted by AEU, and a significantly better offer than stated above.
We all, by default, have "invested" with the OG companies (who no one seems to trust) because of what's been discovered under our lands. Why would we put all our "oil nest eggs" in one basket? Selling a portion is diversifying. I would not sell more than 25%, but I am giving it serious thought. Steep decline curve, general distrust, corruption in royalty payments (at least that's all I hear on this site)lower tax rates, debt freedom are all factoring into my decision. If the royalties really are "that good" then I would be just fine with my remaining 75%.
Someone convince me otherwise!!!
Permalink Reply by RJ Morgan on November 22, 2014 at 5:07pm

Thank you for your input. I am all about diversification as well historically, yet the question in the back of my mind is how much will I ultimately give up in say selling a percentage? I too have been discouraged in reading about some of the issues you mention. AEP did tell me the offer could go down based on market price, yet up as production approaches, and I also have to assume the initial offer is on the low end. Even selling 10% would enable me to pay off my land and remaining credit card debt, which is a huge relief in itself! I still would like to know, say in our case since we are a) in an developing production unit, and b) dealing with the drilling company itself, what their goal on return is i.e. double, triple, etc. what they offer us.

Permalink Reply by Robert Allingham on November 23, 2014 at 5:50am

Hate to throw another iron in the fire, BUT, is it possible that by selling some of your minerals the buyer could legally file suit to do something(?) with their % that would cost you loss of money/ control/piece of mind on your majority ownership? Because I plan on staying put on my land, I'm personally uncomfortable selling "rights" underneath the ground I walk on. It's a tough choice to make and it has to be done on a personal level based upon the individuals personal circumstances and comfort level.  Good luck to all and may your decisions be the best ones possible for your situation.

Permalink Reply by evan on November 23, 2014 at 7:07am
In ohio it's absolutely possible that if you sell any amount they can file a Partition and get whatever you didn't sell. I don't know all the particulars but it's defiantly possible. Also Ohio law won't allow you to put a phrase in the documents saying that the company can never so this. You can put a short time length on it but it can't be forever
Permalink Reply by RJ Morgan on November 23, 2014 at 8:21am

Thank you Evan- I would certainly consult an OG attorney before I seriously considered selling a portion, and after all the reading I have been doing, including all the wonderful people here, I am much more inclined to be patient and wait. At least in my experience, patience has always brought better outcomes versus when I get anxious and impatient!

Permalink Reply by RJ Morgan on November 23, 2014 at 8:16am

Thank you Mr. Allingham. I am here for the long haul- Lord willing of course- for the indefinite future. I have three teenagers which I plan to pass this place onto, and I am hoping their love of this place and the memories we have made here since 2003 will give them desire to keep it- but as we know, life can take unforeseen turns. As it stands, they are drilling now, so uncertainty regarding that is not an issue. I can certainly wait the months it will be before the checks begin. My biggest and only concern was the political, economic, fiscal, etc. climate we are in and it's subsequent "potential" impacts on this industry and outcomes. Good luck to you as well.

Permalink Reply by Philip Thackray on November 23, 2014 at 1:45am

RJ,

The Hess guy is probably converting the gas equivalents to oil equivalents.  The Initial Production of the well was 17.2 million cubic feet per day with some natural gas liquids (21%) present.  3421 barrels of oil equivalent is about 20 million cubic feet of gas equivalent.  The 21% liquids is what boosts the 17.2 to 20.  I knew that the Porterfield well was basically dry so I didn't think about converting it to oil equivalents.  The Hess people are oil guys and I guess they think that way.  I had never seen that done before with a dry well.  Anyway you look at it, it is a good well.

However, it looks as if the Marcellus in your area is not so good.

According to this report http://extension.psu.edu/natural-resources/natural-gas/webinars/uti...  you look to be at the border between the dry and lean condensate regions of the Utica shale.  Since the well has shown no "oil" production I'd assume that the "liquid" portion of the production is mostly ethane with some propane and a little butane.  21% is not very wet.

Based on the Porterfield Gas Unit C 1H-17 early production, lateral length (5000') and unit size (154 acres), and using a generic decline curve it is possible to estimate the future production of this well per acre and by extension the per acreage production in your unit.

Phil

Permalink Reply by RJ Morgan on November 23, 2014 at 2:06am

I think that is why Hess divested 74,000 acres last year to McClendon, which was the dry acreage. Of course the dry gas got very low for some time- I think around $2.00 Mcf which really reduced producers margins. In your last paragraph, where do you obtain that kind of detail? I would be interested in such estimates and the general extrapolations someone can make. Three of the five laterals on this new pad go under me based on the ODNR map showing the laterals- one bottoms here, two pass under.

Permalink Reply by Philip Thackray on November 23, 2014 at 2:50am

RJ,

You are in a 506 acre unit with three horizontals whose average length is 7100'.  It does not mater which or if any wells are underneath you, all production proceeds are spread to the members of the unit according to their percent acreage of the total. Here is a link to your unit:

http://apps.ohiodnr.gov/mineral/oil/MRMImages/17/7/319150.pdf

To make a future income calculation you will need to start with the attached spreadsheet.  Ping me back if you can download and view the spreadsheet.

Phil

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