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 22, 2014 at 8:41am

Have you looked at the production for wells around you?  Where are you?

On the face of it, buy-outs would seem to be a bad deal for the landowners but not always.  Many times the people who put these deals together are lawyers who have raised money from wealthy individuals like doctors and profession athletes.  These groups may well overpay for an income stream as all they care about is taking a percentage of the deal and then they disappear.  I have seen it happen.

If you are talking to a straight-up group who are investing for themselves then, yes, they would be underpaying - probably by a lot as your friend suggested.

 "I also have concerns regarding the uncertainty in our country right now, dollar/economy collapsing, geopolitical situations in the world, etc."  When was that ever not true?

Phil

 

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on November 22, 2014 at 9:01am

Phil,

    That reminds me of the time I was in a shared waiting room for drs and psycologists when a man came in and said "I must be going crazy!".

I looked up and told him "You've come to the right place".

With this oil and gas business, everyone could use a good psychologist, priest, or Ombudsman, as well as an accountant, lawyer, and maybe a fortune teller, to make them well rounded so they can make good decisions.

What if the sun fails to come up tomorrow?

Well my son, the priest said, it's going to be awfully dark in the morning and those fears about your electric bill going up will come true.

Permalink Reply by Philip Thackray on November 22, 2014 at 9:17am

Ron - My psychiatrist joke:

Two psychiatrists meet in the hallway, One says to the other "your fine, how am I?"

It's a crazy world!

Phil

Permalink Reply by RJ Morgan on November 22, 2014 at 9:52am

Haha. Or like I joke with people... "My THREE psychiatrists tell me I need to get out more"...that IS a joke btw.

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on November 25, 2014 at 9:44am

Phil,

    NICE!

Permalink Reply by RJ Morgan on November 22, 2014 at 9:51am

Thank you Mr. Thackray. I am in Richland Twp, and have acreage in the new Porterfield Pad they just began drilling on Vineyard Rd the last couple weeks or so, AEP, five laterals. The called came Thursday from AEP offering $11K/acre. I had gotten letters from third-party type companies in recent years, but AEP actually called me which I found odd. Re: the uncertainty in the world- you are correct- always a concern.

Permalink Reply by RJ Morgan on November 22, 2014 at 10:03am

Porterfield's have an existing pad Hess drilled some time ago, which was one of their biggest producers per their 3Q13 earnings call:

On our 100% owned acreage, the Porterfield C 1H-17 well in Belmont County tested at a 24-hour rate of 3,421 barrels of oil equivalent per day, including 21% liquids.*

Permalink Reply by Barry D on November 22, 2014 at 9:49am

The decision to sell or not to sell your rights is a complicated issue; there is no "one size fits all" answer.

I suppose the main factor is if you can afford to wait. In other words do you need the money now ?

Another issue is that much of the development is exploratory. Your property may never be included in a unit and if it is then there is no guarantee that it will be productive.So you could wait and never be included in a unit because or be included in a bad ubit. There is a risk factor.

The investors who buy the rights are willing to take that risk, and why they pay "low" amounts for the rights. Not all of the chances they take pay off so they must average out their retuen over the winners and losers.

In making your decision you have to look at as the investors do. Then decide if you are willing to take the risk.

I for one am not a big proponent of selling right now. There are still to many unknowns. If you don't need the cash right away I would be inclined to wait a bit longer.

Just my two cents.

Permalink Reply by RJ Morgan on November 22, 2014 at 3:42pm

Hi Barry- Thank you for the info and insight. My production unit just started drilling recently, with five laterals, three of which run on my side of SR9. They had done seismic testing back in the Summer of 2013, so I am assuming they have a pretty good idea what they are getting into. The guy at AEP estimated it would be 6-8 months before I would see the first check.

Permalink Reply by Philip Thackray on November 22, 2014 at 10:45am

RJ,

Here is the production report for Belmont County, OH for all of 2013 from ODNR.  ???

The ODNR reports for the first six months of this year are not loading.  ODNR looks to be having some problems this afternoon.  I'll keep looking.

Phil

Permalink Reply by Philip Thackray on November 22, 2014 at 11:34am

RJ,

The information you listed about the Porterfield C 1H-17 is not correct.  Porterfield C 1H-17 did not go on line until 2014.  (It was not completed until Aug of 2013).  In the first quarter of 2014 with 44 production days the well produced 396 million cubic feet of gas and no oil.  In the second quarter of 2014 with 91 production days the well produced 918 million cubic feet and no oil.

Those are good production numbers.  Depending on your royalty and how badly Aubrey screws the landowners this time, $11,000.00 seems like a low offer - which is to be expected.

Phil

Permalink Reply by RJ Morgan on November 22, 2014 at 3:20pm

Mr. Thackray-

Thank you for the information- it is very helpful. Was that info available on the ODNR website? Also, I noticed that pad has three laterals- is the considered "the well", or is each hole/lateral a "well"? The individual I spoke with from AEP estimated royalty checks beginning sometime in the Summer, so I am definitely inclined to wait. I know there are a lot of "deductions" from such checks, but I have to imagine the ultimate payoff will still be better staying the course versus cashing out, especially so close to production.

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