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 February 1, 2012 at 4:07am

Something doesn't make sense here.

You said "his lease is going to runout in 10 months without activity". 10 months from now is November 2012. Back up 5 years (the standard term on most shale leases) and you are at late 2007.

Is this lease that is going to expire on the 70 acres where "He got $6700 per acre for the 70 acres to sign plus 18% royalty"? Are we to believe that someone paid him $6700/acre and 18% way back in 2007?

Permalink Reply by Chartist on February 1, 2012 at 1:20pm

I signed a contract for 3 years with an option to renew.....Don't assume anything.

Permalink Reply by Finnbear on February 1, 2012 at 6:47pm

So, are we to believe he was paid $6700 and 18% in 2009?

Permalink Reply by Dan on February 1, 2012 at 6:12pm

Finnbear,  Thats only if you don't take any money out, but if you leave the money in you could lose in a market crash.  Everything tends to double every ten years so even with decreasing production, royalties should increase over the years, but investments we now know thanks to Mit are taxed at a lower rate.  If this area is wet than your forgetting new technologies in the future.  What if in 15 years they can extract 16% of the oil.  I would not sell the rights. 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on January 31, 2012 at 7:50pm

wow...these figures are refreshing.   for a dry gas area owner whose family received less than 3k per acre (early time of the gas rush) ...and then reading all this talk with this discussion....should some of us feel a little left out?  (Over 4102 views also since Jan.27th...so a very interesting topic?)

My question to you Jim....has the co-worker thought of selling just a part of the royalties (some of the acreage) for that amount and keep the rest for himself?   I mean it is 2012...and many wonder if that is it so I guess it wouldn't matter anyway ...depends if the oil company is one of those that pays promptly.

Hey, can anyone give an estimate using the same acreage (and all of it) if it was in the dry gas area of the Marcellus (a per acre amount estimate)?  still very new at this royalty stuff since I haven't seen any yet.

 

Actually I am surprised that the oil companies just didn't come in the area and purchase the land at high prices per acre while most of the natives didn't even know what they had.

btw...that is a good point about the taxes being under the Bush tax cuts at present also.

 

You know those of you that have your acreage in seperate parcels...pls remember to negotiate your leases seperately per parcel...for just these types of occasions...where it could benefit to work the lease with just some of the acreage.  I didn't know that was possible and it is too late to do that with the present lease.

Permalink Reply by Chartist on February 1, 2012 at 1:06am

The $45K per acre was a number I found off the internet.  It assumed 12.5% royalty and was for the dry gas region as far as I can tell.

Shell is looking to complete its ethane cracker within 5 or 6 years once construction starts.  That's why I used 10 years for his property to get drilled....When you use the present value approach to valuing cash flows, you must use some assumptions.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on February 2, 2012 at 6:51am

Hi Jim...  are you saying '$45k' per acre if one is selling their royalty interests in a 'dry' gas area compared to the offer you stated in the discussion of '$14K' per acre of the 'wet' gas area?

is there a mistake in your figure there or are we not on the same page in what I asked in my above post?  i mean that sounds great! can you still find that link off the internet so I can read it?  I was just wondering what difference there may be in pricing royalty interest for sale in a dry gas vs. wet gas area....as many have yet to see production in the marcellus for various reasons (mostly because of pipeline transport) yet many are receiving offers for their royalty interests and have no idea of what they really have yet.

Permalink Reply by Chartist on February 2, 2012 at 10:46am

No mistake.  $45K figure came from royalty estimates if the land was fully fracked out.  I read the internet for hours looking for information but I don't have a link for you.  The $14K number came from someone being asked to SELL their royalty right now.  Information is power so don't expect the drillers to give any of it away.  Right now, everything is a guess.  The best one can do is look to shale gas projects that have been underway for longer periods in other parts of the country.  In the end, do what's right for you and don't worry about getting top dollar.  You can't do that in the stock market and you can't do it with O&G drilling. 

Permalink Reply by Chartist on February 2, 2012 at 12:15pm

Here's a link to $45K royalty per acre:

 

www.energytribune.com/articles.cfm/6635/Marcellus-Shale-Facts

 

 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on February 2, 2012 at 7:08pm

thanks Jim...I just read the article..very interesting.  Of course they are using a $5.mcf amount for their projections and right now it is still under $3.

Permalink Reply by Chartist on February 3, 2012 at 12:52am

It looks to me, on a long term price chart, that nat gas has put in a double bottom of lasting duration.  I think we'll see it trend toward $5 over the next year or so.  Once a LNG terminal is built on the east coast, gas prices should firm up well.

Permalink Reply by Craig on February 3, 2012 at 12:23pm

You know T Boone Pickens says that if we export our NG then we are the dumbest generation to come along in this country.  This coming form a man that has amassed multiple forthunes in the energy business and is now in the water business.

 

It would be better to look into converting our commuter cars to CNG, and putting the infrastruture in to accomodate it, and keep the gas here, whichh would also drive the price back up and drive the industry to drill more, whether it was wet or dry, thereby creating more jos in the O&G industry as well as the infrastruture construction, automobile industry, and others.  It would also lower the emissions and make the engines last longer due to the lesser amounts of carbon buildup due to cleaner running fuel.

 

ALso, look at GGE (Gasoline Gallon Equivilancy) and see what it would cost you to run your vehicle if it were in CNG.  It might surprise you.

 

How many cubic feet in ONE mcf?  126 cu ft of NG equals one gallon of gas.  Meaning one mcf equals about 8 gals of gas.  There is some loss in efficiency of the vehicles we use, but not much, since the BTU's in 126 cu ft of gas equals the approximate BTU's in one Gallon of gas.

 

If we only had a leader that was willing to put together some common sense with strength and come up with a comprehensive energy PLAN, not just a REACTION.

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