WOW! talk about cherry picking. Broken hearts and broken dreams.

I was looking on the Butler County web site to see if there were any leases being recorded around me as I have been waiting on a lease from Shell for two months that now I don't think is going to materialize anytime soon. Well I did see a pattern of leases being recorded in grouped areas. Having the same road address and such. Some within a mile or two of my property but none or very few close by.

Now for the kicker. All of the leases being surrendered back to the O&G rights owners I saw being recorded. What's up with that? Well think about it. We all know now they target areas to put together units right? OK now for today s lesson let us draw a big circle or square if you like what ever your preference. Now let's sign everyone in that area to a lease. The engineers go to work forming a unit. Everyone here knows what a unit looks like. Now the knife cuts its deepest, surrender the leases for everyone that's not in that unit. People that may have been signed with a land group for a year waiting. Signing the lease (we're in the money now!) Waiting 90 business days (AKA 120 real calendar days). Now getting a letter surrender of lease. WOW! what a let down.

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Permalink Reply by Mike Knapp on March 10, 2012 at 4:28am

The real money is in the royalties. 

For simplicity's sake, let's assume one owns a 640 acre tract:

8 wells drilled, 3BCF EUR

15% royalty

$3.00 gas

Dry gas (no liquids)

The above are all VERY conservative estimates. 

3 BCF x 8 wells = 24BCF

24BCF = 24 million MCF

24 million MCF x $3.00 = $72,000,000

$72,000,000 x 15% royalty = $10.8 million dollars

$10.8M / 640 acres = $16,875 per acre

That's with a bargain basement gas price, no liquids, and a conservative EUR estimate.  Any one of those variables could easily swing up and double that per acre payout... Or all of them could double.  Royalties can be a long term game though.  It might take 10 years to get a well drilled.  But then again, there are folks sitting on fully drilled units already.  Up front money is here, now, which obviously counts for a heck of a lot to most folks. 

A bird in the hand may well be worth whats in the bush to many folks, but there's a lot more than two in the bush.  There's a whole flock hiding out in there. 

-Mike

Permalink Reply by Billy Park Whyde on March 10, 2012 at 4:52am

 Right now I would say the biggest problem is drilling rigs. How many drilling rigs are there in Ohio, not many. Are they moving not untill the load limits come off ( here April 15) If I had some money to invest I would think about investing in a company that builds drilling rigs. I would care to bet under the radar that there will be a plant set up somewhere in Ohio to custom build the rigs for the Utica in Ohio. 

  They know they can't keep the leases forever in some cases and renewal ups the cost.  Two areas I can think of right off the top of my head that could build the rigs are in Gallion Ohio and the former tank plant in Lima. 

Permalink Reply by p umpjack on March 10, 2012 at 3:29pm

with what is going in in ohio the lawsuits the broken promises the extensions wishguard ,des , deals promised?

how can the masses still flock to landgroups?

Permalink Reply by Billy Park Whyde on March 10, 2012 at 4:46pm

  Probably because in the more western areas they are unaware of whats going on. Just west of me a ways a driller is sinking Clinton wells and not even fracking them.

   The law suits from what I have seen are for the most part to seek higher bonuses and royalties.

   I feel if the western area of Ohio that has not fallen for cheap leases over the last two years will be into a higher stakes ball game if they sit tight. I see one Land Owners Group trying to shut off membership 1 April 2012 but the lease they are using could easily be a 10 year lease for $7000/per acre! 

  But unless we see drilling rigs start popping like mushrooms it's going to get sticky but nothing like those over in Pa that are in the dark with low gas prices.  

Permalink Reply by Billy Park Whyde on March 12, 2012 at 4:53am

 The bottom was $3500 for a 5 year lease with option of renewal based upon the $3,500 the same as the original. 

 The $7,000 for a ten year lease I think would be a bad deal when we have seen leases jump over $5000 in less than a year , What will it be at in ten years? 

Permalink Reply by Chartist on March 11, 2012 at 12:42am

Well Mike, here's the problem with your numbers:  They completely ignore the time value of money which brings the net present value (NPV) of those "conservative" estimates down a lot further.....

Permalink Reply by Mike Knapp on March 12, 2012 at 6:55am

Chartist,

No problem with my numbers, especially when viewed in the given context.  I'm not trying to pinpoint value on a lease.  There are myriad ways the numbers could be spun, hundreds of variables that could be added in any number of combinations, but those are solid, VERY CONSERVATIVE, base numbers.

Thanks for your $.02 though.  Perhaps, since you brought it up, you'd like to do your own synopsis which takes your additional variables into account?

2s72s0k9mm8gdPermalink Reply by 2s72s0k9mm8gd on March 11, 2012 at 6:31am

Mike,

Thanks , I couldn't agree more. Looking so forward to that flock in the bush!

Glenn

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on March 12, 2012 at 5:01pm

Hi Mike, been busy or I would have put this reply in since you posted this example on Saturday.

First of all is that a monthly figure?  and what if there are enhancement expenses or is that without any enhancement?   also what are the chances of getting 8 wells in one unit?   

My land is in an 1120 acre unit with one drill pad done (don't know how many wells they plan)...most people do not own the entire 640 acres as in your example...and some only have about 30 acres in the unit with many units not limited to 640 as many leases were done in 2006-2009 before that many got wise about it....   so with that being what it is...isn't the bonus upfront still perhaps higher?

the more I think about it....I think the land agent should have to give the landowner estimate and examples so they can figure royalties better....rather than saying that the real money is in the royalties which for some it surely could be.

Permalink Reply by Tom McConnell on March 11, 2012 at 1:55am

I cant speak for all the leases released that you viewed, but I do know with 100% certainty that one of the new leases that was signed was released prior to payment of the signing bonus as there was an old 10 year lease that still had a year until expiratrion that shell already owned under the East Resources purchase.  Shell leased him again with a new lease, figuring they couldnt drill soon enough.  Well Shell pulled it off and collected enough acreage adjacent to this parcel and that parcel is now unitized and permitted under the old lease so they canned  the new one saving the signing money and around 6% royalty interest. 

 

My bet, the real reason they file Memorandums prior to payment is to shoo the other E&P companies away "showing" as they already have it.  When in reality, they dont have a signed deal yet.  Addendum #1 of the lease in this case should have been "pay me before filing the memorandum or any public records."  And not that shell (swepi) is crooked, all the E&P companies want to do things this way.  It is just a matter if they can get away with it.

Permalink Reply by Chartist on March 11, 2012 at 9:37am

hey you lawyer wannabees.....The reason you file a lease memorandum is to keep the details of the lease quiet.....I have two leases with fortune 500 companies and the only thing you'll see is a memorandum, the details are quiet.

Jim ShoosPermalink Reply by Jim Shoos on March 12, 2012 at 9:49am

No, I don't think that is what Mike implied.  Under your two lease signing scenario, which by the way would likely subject you to fraud allegations if money changed hands, if Driller B took the lease from you and had no "actual notice" of the fact that you had already signed with Driller A, then if B got his lease filed of record first he would be a good faith purchaser without notice and would prevail as to Driller A.  You, on the other hand, double signing would be in deep do-do and Driller A could sue you for breach of contract since you granted him an exclusive right to drill on your property.  The fact that you signed a second lease by no means invalidates the first lease you signed. 

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