Royalties Plummeting at a More Rapid Rate - EQT Improvement under Rice Mgt?

Hello. It's been a while since I've been on here but I have a question for everyone I'm really curious about. Has anyone else noticed a sudden increase in plummeting royalty payments and market prices? I'm obviously not oblivious to the fact that the market has been steadily dropping for a variety of reasons and a lot of gas companies are dialing back production due to falling prices BUT the most recent market price seems to be twice the drop - at least  in my area. We are with EQT; former Rice Energy landowners, and bought stock and fought to vote the Rice team back into management positions at EQT after abysmal performance and poor relations over the course of EQT ownership of former Rice leaseholds. We had - and still have - confidence in the Rice contingent to turn things around for EQT but are currently questioning if it will be advantageous for their existing landowners and producing units. This months' ridiculously low sales accompanied by apparent lack of interest in advancing existing producing units have brought questions to mind. We attended the EQT Land Owner meetings with Toby Rice and a lot of emphasis was placed on returning to existing pads and drilling additional laterals, thereby saving prep costs, increasing production, and lowering drilling costs. They cannot - of course - affect falling market prices, however we haven't seen any attention being paid to existing units, which seem to be being let to slowly (and lately NOT so slowly) fizzle out. Wondering if this is something others are noticing. It would seem to me - logically - that the most financially profitable would be to get the most out of existing units, thereby reducing drilling costs, during this slump in market prices, rather than going to the expense of developing new units and starting from scratch. Just not understanding what is currently happening and wondering if anyone out there has any insight or ideas. Our unit is only 3 yrs old and has had an accumulative 30% drop in royalties over the past 12 mos and a full 30% drop between just last month and this month, which was a complete shock. Curious what others are thinking, though I'm sure it's nothing good.

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Your not dumb! 

Nope, nothing is dumb when trying to wade through the confusion between all of the different natural gas products, types, layers, methods of extraction, etc. A they say, there are no stupid questions. In fact, not enough questions, in this instance. Took me a long time to decipher dry gas from NGL's since when we signed they mentioned we'd be paid for any liquids extracted in the drilling process that we never have been so not sure if that's included (?) in the royalty calculation (doubtful) or they ignored that part or there aren't ANY liquids which I am told is next impossible since some oil does come up with the natural gas, dry or not. Problem is, the gas companies came in, gave us nice presentations and prospective, and then left with no further information or explanation. And that remains the case today. Land/royalty owners remain completely in the dark, expected to just accept what is shown on out monthly royalty statements. So, ask, ask, ask. NOTHING is dumb, believe me. Knowledge is power and the more we know and learn, the better off we will be in the end.

I should have been clear. What I was reffering to is specifying only Marcellus generally. (Specifically how to write it is beyond me)

The standard depth clause above would give the Upper Devonian, and the Utica rights. The Upper Devonian is deeper than 4,500 feet in Washington, and Greene Counties.

Right. We only reserved shallow rights, leasing all deep well as we knew there was a possibility of drilling in the other layers. More layers=more gas=more royalty value. I don't believe "Marcellus" is specifically mentioned in our lease, everything referred to as depths and forms. We specifically reserved all above 4500 ft as not part of the lease but did lease all below that, and did not want a coal bed methane well on our property.

Your lease is very much open to interpretation. Where it says you will be given an amount equal to x% of the product removed, there is no mention at all of money. My lease from 1982 says I can come and pick up the product. If I want it separated, cleaned compressed and transported to a point of sale that is my responsibility to pay for.

It does state royalty. I didn't want to type out the entire legal lingo of the lease however for the sake of clarification, under the heading:

"PAYMENT TO LESSOR" Lessee covenants to pay Lessor, proportionate to Lessor's percentage of ownership as follows:

(A.) DELAY RENTAL: ....... (not typing it out but they pay a sum for delay rental)

(B.) ROYALTY: To pay Lessor as Royalty

       1. OIL: To pay Lessor an amount equal to one eighth (1/8) OR 12.5% of the gas recovered by Lessee for all oil and constituents thereof removed from the Leasehold during the preceding month.

        2. GAS: To pay Lessor an amount equal to one eighth (1/8) OR 12.5% of the gas recovered by Lessee for all gas and constituents thereof removed from the Leasehold during the preceding month.

        GROSS ROYALTY: It is agreed between the Lessor and Lessee that, the percentage of all oil, gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction, directly or indirectly, for the cost of producing, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to transform the product into marketable form.

Our addendums state the negotiated percentage that we signed for and supersedes the stated minimum of 12.5% however the language is very clear. Also, the legal definition of "royalty" is: A royalty is a payment made by one party (the licensee or franchisee) to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation. Therefore "ROYALTY" is obviously "MONEY".

I hope that clears up any confusion in interpretation.

Lori,

You were so lucky that the addendum did not contain a "Market Enhancement Clause" which we thought was even better than the "Payment to Lessor" language above.  Turns out just another scam.

How do the other major gas companies match-up to EQT such as Range Resources & CNX Gas?  Do landowners have these similar problems working with them?  

 A problem still resides within the definition of 'royalty' you quoted, namely, "but there are also  other modes or metrics of compensation." In this case it could be interpreted as a percentage payment in kind, though the language "thereof removed  from the leasehold during the previous month" does imply that the lessor will be selling all the product.

 The issue of them selling at a discount to a market price because the buyer assumes some or all of the post production costs is still open to debate. Fortunately, you do have one word in the language; "indirectly", which would leave that option closed to most reasonable people. However, courts are not always made of reasonable people.

If you do get an auditor, make sure they agree to examine all contracts, rebates and invoices.

Frank - you are correct and we did think of all of that before signing a lease. It wasn't our first. And as I'd mentioned, I did my homework and a LOT of research before agreeing to the final lease. Gross Royalties was one of the biggest selling points to signing with Rice, and wording was absolutely a factor, encompassing all manner of deduction from getting it out of the ground to marketing and selling and all in between - directly and indirectly, as you said. By contract, they owe us our percentage (or decimal) of the proceeds of the gas "taken from the ground of the leasehold". In other words, not after its processed or at some other point of location but when it's taken from the ground. We went over each and every line with the company rep before signing the lease. We actually have  2 pgs of additional addendums we had added that they accepted. The fact that Rice Energy was a very young company and trying to develop units made getting fair lease terms a lot easier at the time. Those leases changed a LOT when they went public. There were several items we'd intended as addendum that were actually already written in their standard contract (a surprise). All that considered, it doesn't really matter if they aren't following terms of original, oldest lease contracts unless we challenge them and as its been pointed out, an audit is an expensive endeavor, despite our lease allowing for one annually to examine all records, etc, pertaining to extraction and payment of royalty. With the extreme decrease in selling price and royalty pymts it is a large expense to possibly find nothing but an inefficient sales dept that isn't getting the best prices from customers. I do have confidence in our lease and its terms with only one regret; that we didn't specify how selling price would be established for the purpose of royalty pymt. That was a mistake that we didn't anticipate being necessary and could be the fly in the ointment in an otherwise great agreement. I agree - the courts can interpret things in their own way but the language is pretty clear unless - as you say - they are offering discounts to buyers for their part in production. Of course, we still are contracted to receive payment for gas taken from the ground of the leasehold during the previous month with no deductions, directly or indirectly, for any reason including processing, transportation, marketing, etc. So we should be paid for gas prior to any discounts by the buyer - if that is the case and reason for decreased selling price. Of course, their own wording in sales agreement could make a difference. Contract language is touchy. None the less, we do have dry gas which requires little or no processing so short of transportation costs - which would be blatantly specified in the lease - I have no idea what they could be discounting a price on our gas production for. But, something is certainly going on. Thanks for all of the things to think about. Appreciate it.

I'm not sure how other gas companies stack up or if any of these questions and issues are across the board. We didn't have so many issues with Rice Energy because there was so much transparency. If you had a question, they answered it and explained. You may not necessarily LIKE an answer or explanation but they didn't hide things or behave like everything was a secret. When EQT took over it was like switching to the CIA. Owner Relatikns was mostly a joke. IF you could get through, you could never get a straight answer or only got a flat out "we don't have that information". One dept didn't have any information about any other dept and often not much about their own. This also extended to their midstream co. and former Rice employees left had a hard time working virtually blindfolded. The entire operation has been top secret hush hush not only from landowners but with their own employees who were on a need to know situation. The stark difference from working with open and transparent Rice Energy was disconcerting. Then royalties began to drop drastically, inconsistent with other companies and market avgs for county and state, and far from Hub prices and trade projections. We promoted and looked fwd with confidence to the Rice mgt team taking over at EQT, in the hope's that we would return to at least some of the Rice Energy business practices but so far, we are actually seeing worse results. I don't have an answer.

Lori I never got close to the henry hub prices in my royalty checks. my unit has been in production for 8 yrs and they never added any wells to the pad, Franklin Denny well pad all the leases are expired all the work put in to it now its left stagnant. Its a sign to me get out   I am selling ONE OF MY PROP. rights tired of all the lies the BS Take the money and run  Looks like Toby turned in to the CEO who we are all complaining about. I don't have the time or money to fight this battle. Moving on 

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