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Permalink Reply by Carla Powell on April 20, 2016 at 2:12pm

September 3, 2015
R. E. Gas Development, LLC.
Attn: Mr. Sean Rainey
366 Walker Drive
State College, PA 16801
​Ref: Owner #025750 James & Carla Powell, 44 Grace Lane, Quaker City, Ohio 43773
Property # 07420 J. Hall #2H OH Guernsey
Dear Mr. Rainey:
James and Carla Powell (“the Powells”) have engaged the firm of Finnucan & Associates, LLC to represent them. Our engagement is to analyze the deductions Rex Energy (Rex) has deducted from their royalty payments. We have compared the deduction made by Rex with the Royalty Clause in the Lease. Our conclusion is that Rex made excessive deductions. This letter explains our reasons for making this conclusion.
The definition of “Revenue realized” allows Rex to deduct costs of transportation, dehydration, treating, compression, gathering and marketing. Revenue statements from April thru August 2015 deduct charges for processing, electricity and fractionation. These expenses are not deductible from the landowner royalty according to the lease. Therefore, we are requesting an additional payment of $8,539.48 for the period April thru August 2015. See Exhibit A.
Exhibit A also compares Firm Transportation costs to third party Transportation costs. Firm Transportation costs exceed third party Transportation costs by $860.07. Transportation of gas from the well to its final destination uses third party transportation more than Firm Transportation. The Firm Transportation charge should be less than the third party Transportation charge. As a result, we believe that a related party pricing problem may exist. This issue may be harmful to our client, and we must resolve it.
As part of our analysis, we reviewed the operating announcements made by competitors of Rex. On April 28, 2015, Range Resources Corporation stated its costs for transportation, gathering and compression expense per mcfe are no more than $.77. We recognize that the definition for mcfe is different from the definition for mcf. However, this fact is an indication of reasonableness. When compared to the costs of Rex ranging from $1.01 to $1.19 per mcf, the Rex charges are questionable. See Exhibit B.
In December of 2012, Rex made a presentation. It stated that gathering, transportation and operating expenses were $1.50 per mcf. Its filing with the SEC for 2014 stated that Rex has reduced its operating cost by becoming more efficiency. Therefore, we believe that a reasonable cost for gathering, transportation and operating expenses is still $1.50 per mcf.
Exhibit B shows the costs for compression, gathering, transportation and processing range from $1.42 per mcf to $1.64 per mcf from April thru August 2015. In addition to these costs, operating costs include payroll taxes, insurance, employee payroll, repair and maintenance and other direct costs of operations. Assuming operating costs are $1.50 per mcf these charges shown on Exhibit B are unreasonable. We believe a more reasonable charge for these services is $1.00 per mcf. With that assumption, Rex has overcharges our client $4,510.66. See Exhibit B.
Our client is willing to ignore the related party pricing issue between Firm Transportation charges and third party Transportation charges. The Powells request a payment of $13,050.14 ($4,510.66 +$8,539.48) and discontinuation of these charges in the future.
If you reject their request, they will exercise the Arbitration Clause in the lease. Then the Powells will join with other royalty holders to challenge the deductions made by Rex. Please contact me with any questions you may have.
Sincerely,

John C. Finnucan, Esq.

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Permalink Reply by David Allen Lilly on April 21, 2016 at 11:55pm

Thank you for sharing, please keep us updated on any resolution. I suspect this happens many times over but too many folks simply cash the check and let the producers off the hook for inflated deductions.

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