Calculating future royalties

does anyone know how to figure out royalties? i went on the sites that have the royalty calculators but im not sure if they are accurate or not.

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Permalink Reply by frank speaker on January 1, 2018 at 1:50pm

David Allen Lilly, how could you ever attempt to verify your royalties  if you are not told what price Chesapeake Energy gets for its O&G, what its expenses are, and which market it sells to?

Permalink Reply by David Allen Lilly on November 13, 2017 at 2:39am

As for these calculators and royalty predictions spread out over the lifetime of a well, I would be very skeptical of anyone trying to make predictions without firm knowledge of lease terms and the highly unpredictable nature of the industry itself.

Permalink Reply by Bullfrex on November 13, 2017 at 5:17am

I agree about predicting future royalties....predicting well production is a crap shoot at best. Then, you have the price of NG, which renders any future predictions of income from royalties subject to the whims of the commodities market.

My Dad had good advice......don't spend your royalties until they are in your bank account. You would do well to factor in the decline of the well and therefore, royalty amounts, when considering how you might spend the money. Keep some aside for those rainy days.

Permalink Reply by bo boboski on November 13, 2017 at 9:46am

Plus you gotta factor in the possibility of producers deducting post production costs from your royalties, even if you have a "no deductions" lease!  Their take on the subject?  "sue me".

Permalink Reply by David Allen Lilly on November 14, 2017 at 9:05am

My royalty statement shows unit production, price for oil, NGL and natural gas for the entire unit and then the same things for my percentage of the acreage we have in the unit. There are no deductions listed on my statement, which is about one page long, page and a half counting the attached check.

Permalink Reply by Dott on December 1, 2017 at 9:17am

David,

Can we talk a bit about your no deduction lease with a market enhancement clause because I am doing a lease revision with an O& G company now.  My lease is similar to yours with no deductions but my market enhancement clause reads:

Such royalty to be calculated without deduction for the production, gathering, storing, separating, treatment, dehydrating, compressing, processing, transportation and marketing of Oil and gas and other products, provided however any such costs which result in enhancing the value of marketable oil and gas or other products to receive a better price that is less than or more than the price received by Lessee.

The O & G company is willing to delete the market enhancement clause for an all  transportation deduction statement.  In other words they can charge me for all transportation costs and that is it.

Some Lawyers I spoke to told me things like:

1. There is no such thing as a no deduction lease and O & G will still charge you

2. The Market Enhancement Clause is a backdoor way to allow the O & G companies to deduct anything they want because they can say all enhancement including transportation was used to get a better price

3. Take their offer and delete the Market Enhancement Clause and let them charge you only for Transportation costs because those costs will be limited to transportation and be cheaper than all the things they can claim to deduct under the market enhancement.

So I do not know what to do. Should I just take a chance with what I have with the No Deduction lease but with the Market Enhancement Clause or Drop the Market Enhancement Clause and get charge for Transportation costs?

You have said that Chesapeake has not taken deductions but other may. And is your market Enhancement clause written the same as mine?

Can anyone shed any light on this subject.

Permalink Reply by David Allen Lilly on December 6, 2017 at 5:59am

Sorry I took so long to respond, I didn't see your response to my comment.

I was assured by many attorneys that Chesapeake would abuse me up and down regardless of what my lease terms are.

They were wrong, 100%.

I have a market enhancement clause and I have zero deduction on my royalty statement. My market enhancement clause specifically states, if I recall correctly, that in no circumstance is my royalty payment to be less post market enhancement than it would otherwise have been without it.

I have heard people say many times that the market enhancement clause is a "backdoor" to deductions on a gross lease but that has not been my experience.

I would not take any offer that allows a producer to legally deduct from my royalty for anything. Again, if the market enhancement clause is worded properly I don't see how you can be abused by it.

If you friend request me we can set something up to speak on the phone or in person.

Permalink Reply by frank speaker on January 1, 2018 at 2:06pm

David, many royalty statements show no expense deductions because expenses have been deducted from the price Chesapeake Energy pays Chesapeake Operating.

Permalink Reply by Ed on December 4, 2017 at 5:18pm

See page 35 of Antero company presentation at:

http://s1.q4cdn.com/057781830/files/doc_presentations/2017/11/Compa...

Per that page a 9000 ft lateral generates 19.8 Bcfe.  Average lateral spacing in the Utica is 700 ft, so a 9000 ft lateral includes 145 acres (700x9000/43560). As such each mineral acre contains 135,551 Mcfe (19,800,000,000/1000/145).  Using a 20% royalty, each acre you own should generate 27,310 Mcfe.  Using $3/Mcfe, each acre you own contains $81,930 in royalties under a gross proceeds lease (i.e. no deductions). Note Antero states transportation costs are $0.63/Mcfe, which would reduce the per acre royalty to $64,275 ($81,930 - 27,310 Mcfe x $0.63).

Permalink Reply by Dott on December 5, 2017 at 11:27am

Ed,

So are you saying that the Royalty owner(20%) should get $64,275 per acre after transportation costs? This of course must mean over the life of the well correct?

Permalink Reply by Bullfrex on December 5, 2017 at 12:13pm

I will chime in here, uninvited.

This calculation scenario comes from an E&P Company's presentation designed to shock and awe the reader. Things may be presented here to show everything in the best possible light to the observer. Be a bit skeptical....or maybe a LOT skeptical!

With that being said.....

The initial decline curve can be quite steep in the Shale plays, with some wells spewing out 40-60% or more of their lifetime production in the first 1-2 years. That is GREAT for those two years, but 'sticker shock' will set in as the years progress and the production settles in at a ~10% of IP for many, many years.

Be prepared and plan wisely.....and save ALOT!! My two cents.

Permalink Reply by Ed on December 5, 2017 at 1:57pm

Assuming your 20% is sold at $3/Mcfe, Antero is projecting you will get $64,275 per acre from a dry gas well after deducting its projected $0.63/Mcfe for transportation costs. That is over the life of the well.

When a mineral buyer sees this post, they will start arguing otherwise because they offer less that 12 months of royalties to buy you out. Believe it or not, many times that mineral buyer is purchasing the rights  for the driller holding your lease. 

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