Comment

Comment by Dan on August 1, 2012 at 6:57am

Peter and KLB,

I agree with your assessment of force-pooled vs. leased-minerals.  Remember though, that no one with significant acreage is going to get force-pooled in, so it's not like you can choose it.  Only the small acreage owners are going to get force-pooled, so even though it's 100%, it won't make anyone rich.  I was just trying to point out that if I didn't mind drilling taking place under my property, being force-pooled in isn't bad at all.  If I was anti-drilling (which I would guess almost all of the holdouts are) then even 100% royalty wouldn't matter to me.

Comment by Peter Schueler on August 1, 2012 at 5:36am

KLB, your example is a good one and the numbers you used I believe are in the ballpark for Utica wells. Thanks for posting this. If you go further and include tax benefits for the participation option the the numbers look even better

Comment by Al Cramblett on August 1, 2012 at 4:38am

Peter, your memory serves you well! The strategy that I shared with others on this board approximately a year ago is exactly the strategy I have implemented. The lease I signed for one of my farms in eastern Ohio enjoys a slightly higher royalty percentage than any other I have heard of for eastern Ohio. I signed with Atlas Energy who plans on drilling three wells on my property later this calendar year. There is currently  a private offering out on the street (Atlas series 32). I have purchased a subscription in this offering, so I will be both a royalty owner and a partner in the drilling program. This will permit me to quickly learn  the best way to invest in oil and gas wells. From your comments, I assume that you are a qualified investor. I would suggest that you or any other qualified investor investigate the merits of becoming an investor in the Atlas series 32 drilling program. The best way to do this would be to call Atlas Energy and have them identify the brokers that are selling this investment. At this point, the numbers that are being bantered around matter not to me as I am vested and will know the actual numbers within the next nine months; my main concern is that prices for our hydrocarbons are pathetically  low now.

Comment by KLB on August 1, 2012 at 2:36am

I am also trying to figure this out, so I hope you don't mind my jumping in here...   So, taking the example of the 2.5 acres and the $18,000 investment, I tried to run some sample numbers.  Does this look reasonable for a comparison?  If you had 2.5 acres with a lease that gave you a $5000 per acre signing bonus and 20 % royalties and assuming these royalties are $200 per acre per month.  (choosing something here!)

5000 per acre signing bonus --  $12,500

20% gives you  $200 per month per acre =  $500 per month = $6000 per year

after one year,    $18, 500
after two years     $24,500

_____

Force pooled and participating --

No bonus, and initial investment of $18,000

100% gives you $1000 per month per acre = 2500 per month or $30,000 per year

after one year,  $30,000 - 18,000 = !2,000 net

after two years, $42,000

So, assuming the well is fairly good and goes on for several years, the force pooled and participating option might be more lucrative?  Would there be costs deducted from your $100 percent interest?

Comment by Peter Schueler on August 1, 2012 at 1:41am

Nate, My apologies for the apparent confusion about royalties. Let me try one more time to explain. 

A forced pooled property owner who invests in the drilling cost for his portion of the unit will receive 100% of the revenue associated with his portion of the unit and not the typical 15 to 20% royalty that a lease would offer.

Maybe someone else can make it clearer.

I seem to remember that Al discussed the strategy where he would accept a smaller bonus in return for a larger royalty percentage. This is the same concept taken all the way to a 100% working interest.

 

Comment by Nate on August 1, 2012 at 12:26am

Your logic doesn't make sense as to why this is a better option. Instead of being granted royalties you would rather "invest," as you put it, for half or a significantly lower portion after being force pooled.

Comment by Peter Schueler on August 1, 2012 at 12:06am

Here's another way to look at the decision how to participate in a pooled unit. Most of us (including me) have signed a lease, get a bonus and will receive a percentage royalty, typically 15 to 20%. A holdout landowner who elected not to sign and is force pooled now has two additional options, participating and non-participating. A landowner choosing the participating avenue will give up his bonus and will need to invest in the drilling cost meaning a double hit on cash flow. However, when the production begins he will receive a full 100% of the value from his share of the unit size. This will be five or six times as much as the lease royalty would have been. Yes, he will leave money on the table at the start but that money is an investment in future revenue. The decision depends on your risk/reward assessment and your ability to make the initial investment.

The non participating avenue doesn't look so good because it gives up royalties worth twice the original drilling cost, in other words you're losing $2 for every $1 you choose not to invest.

Comment by Al Cramblett on July 31, 2012 at 1:08pm

Nate, exactly!

Comment by Nate on July 31, 2012 at 12:50pm

Why not just sign for the better terms offered instead of leave money on the table

Comment by Peter Schueler on July 31, 2012 at 12:19pm

Al, My experience with general partnering in several Knox formation wells here in Ohio is that only a small fraction reach "payout". Shale, being a source formation, is much more predictable based upon the results to date. If I were a small property owner I'd go with the forced pooling and well participation option.

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