New tactic by gas companies?

A coworker has 270 acres 25 miles west of Wheeling WV.  He's in the wet gas region of the Marcellus shale.  Anyway, his lease is going to runout in 10 months without activity.  He got a call from his lease holder, name unknown to me, offering him $14K per acre to buy his whole royalty out.  He said maybe for $30K an acre he'd think about it.  Apparently the drilling companies are taking advantage of the fact that the Marcellus region is populated with a lot of old folks who need money now rather that wait.  I don't know if this is a new tactic or not.  My coworker is only 35 years old so he is not inclined to take the deal but I bet there's plenty of folks who will.

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Permalink Reply by Finnbear on January 31, 2012 at 3:31am

On the internet, a troll is one who posts controversial things just to stir the pot.

Permalink Reply by Finnbear on January 31, 2012 at 3:34am

Absolute proof would be great, along with a phone number so I can get in on that deal.

Permalink Reply by Schnoozie on January 31, 2012 at 4:06am

I see, let me clarify.

A Corporation name with the names of responsible company officers that have legitimate background in Oil and Gas .

A legitimate, confirmable address complete with a phone number, fax number, e-mail, website information.

The name of a field contact, their office address, his/her email address and cell number. Most importantly, the actual document that contains an offer written in English, and terms.

Also the name of the U.S. Bank where the U.S. funds, (not Euros) will come from and it's responsible account manager.

Or am I asking for too much? Seems proper.

 

 

Permalink Reply by dr j on January 31, 2012 at 4:39am

I know you are a born skeptic from your previous posts Schnoozie- and that's generally a good thing but I don't know why anyone finds a flat out purchase price of 14K/acre to BUY ( not lease) all mineral rights so unbelievable. 

LEASES are being signed and paid at almost 6000/acre with 20% gross royalty in many areas of the wet gas region.   Five year term with repeat "bonus" plus 10% to hold the lease for 5 more years.   So literally landowners are potentially getting 12k/acre to hold the lease for 10 years. That makes 14k to outright BUY the oil/gas/minerals FOREVER pretty cheap I would say.

The "gotcha" in these situations is they are approaching people who are already held by previous leases and have missed out on the current "big signing bonus" frenzy.   For some this a an opportunity to get a big check now in lieu of waiting for royalties or several years to renegotiate their lease. 

Permalink Reply by Schnoozie on January 31, 2012 at 4:58am

I was indeed born with a grumpy furrow between my eyebrows from being skeptical. My parents tried to rub it out with their thumbs. But it alas it did not work.

My thing is with all the land between New Jersey, (one border) and now, basicly Columbus Ohio on the other side, the money to just keep it all in reserve just seems to big to comprehend.

Permalink Reply by Finnbear on January 31, 2012 at 6:23am

I think the reason he's skeptical about this is the original poster posted an unsubstantiated rumor and has not been back to defend it once questioned about it.

Permalink Reply by Craig on February 3, 2012 at 12:11pm

It can be done.  I have done it - at least it passed the tax attorney and CPA sniff test.  IRS has not tested it, though.  Not too difficult and it worked out well for both parties.

Permalink Reply by paleface on January 31, 2012 at 5:21am

 If that offer was in a wet gas or oil area thats not very good,lets say you have 100 acres at 14k thats 1.4 million,the marcellus was esimated to produce around 3$ million for 100 acres for a thirty year period and the gas would be depleted,so I figure thats half what that land will produce for the life time of production as long as its geology is good? 

Permalink Reply by Finnbear on January 31, 2012 at 6:15am

The time value of money comes into play here.

1.4 million today can become 2.8 million in 10 years with about a 7% annual return.

After 20 years, it can become 5.6 million assuming that same return.

After 30 years, it can become 11.2 million assuming that same return.

I'd take the 1.4 million today. It seems to me a better gamble than hoping someone else will drill at some undetermined date and pay some undetermined royalty for the next 30 years.

Permalink Reply by dr j on January 31, 2012 at 6:29am

Agreed to a point Finn but severing mineral rights from surface rights forever is the other issue.  A lot landowners are just now realizing they do not own their mineral rights.  While as little as 2 years ago most people didn't realize it was such a big deal, it is now.   I know in our area anyone currently buying acreage is paying much more attention to "what" they are buying.   I am sure the landowner we bought our farm from 20 years ago did not foresee this coming but I am certainly glad he was just paranoid enough to make sure he did have control of the minerals.  We don't know what is going to happen in the next 20 years.    Doesn't surprise me the areas which have been notable producers of natural resources in the past are the same areas in which we are not finding large deposits of other carbons.   So what's next?

  I think it might make a difference if you don't live on your land.   I know you own hunting land.  To get a big payday and still go out and enjoy your land is something to think about but for those of us who live on our land maximizing our returns while still maintaining control over our land is very important.  

 

Permalink Reply by Chartist on January 31, 2012 at 10:40am

The coworker turned down $14K per acre to BUY all his mineral rights.  And I think he did the right thing because he is in the wet gas region of the Utica shale.  I didn't ask who made the offer though I suspect it was CHK. 

 

You can do a present value on his 270 acres with some assumptions being necessary.  10 years to drill it all, estimates of $45K per acre total royalty (likely higher).  Another sign-on bonus as his property is divided into two parcels:  70 and 200 acres.  The 200 acre parcel is not under contract.  He got $6700 per acre for the 70 acres to sign plus 18% royalty.

Permalink Reply by Jim Litwinowicz on January 31, 2012 at 3:40pm

Don't assume it will be drilled in 10 years. It is possible to HBP land for decades with one or two wells and they may do so so that more leases are HBPd.  They just may wait 20 or 30 years to completely drill all the land in a unit. And since wells deplete rapidly, after five years the royalties may not be very substantial.

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