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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Permalink Reply by Joe C. on December 17, 2019 at 8:03am

Lori, 

  Did you sign a lease with a post production cost? 

Permalink Reply by Lori Huber on December 17, 2019 at 8:18am
Our lease is pretty good. I've seen some better but not many. No deductions. Not sure what you mean by post production but our lease guarantees us our decimal percentage of all gas produced in our unit, which is over 1000 ac. We added a lot of addendums and we're pretty happy with it. The unit sz is about 400 acs bigger than we expected for just 5 laterals, though.
Permalink Reply by Joe C. on December 17, 2019 at 8:35am

Ok, Just checking to make sure you did a cost fee or non post production. That can be a big decrease in royalty checks.

Permalink Reply by RGB on December 21, 2019 at 3:35am

you're kind. 

Permalink Reply by william Allen. Ladd on December 18, 2019 at 4:45am

The lease we have, Lori, is only a small slice of  only about 15 acres. The size  of the entire unit is about ( 3000 acres.)  However, there are many very small hunting camps  of only a couple acres each that apparently  are in the unit.

Our lease does not allow any deductions. It would be nice if the rest of our property would be leased,  But we are thankful to receive such a small percentage of this unit.

Granddad Ladd

Permalink Reply by Lori Huber on December 19, 2019 at 10:29am

Have no doubt, we are extremely grateful for the discovery and technology to extract the Marcellus Gas under our acreage. After many years struggling to hang on to the land, it finally paid off and gave back for being good caretakers, at least as we  look at it. 68 of our 100 acres are leased for our royalties; 28 acres we didn't own the mineral rights on. All are within the unit, though. I thought 1049 acres was a large unit. 3000 acres is huge. Hard to imagine. When we leased, units were averaging around 600 acres so ours was one of the larger ones at the time. Most of the acreage actually drilled is owned by just a few; the rest receiving royalties because our lease is unitized pooling of all shares in the unit. There are only 5 laterals drilled and 4 of them go under us directly. The majority of the unit landowners have nothing going under them but it's the way the lease works so some are luckier than others. I GUESS it's what they refer to as forced pooling, though everyone signed the lease and agreed to the terms. No ill will here and I'm happy for my neighbors however do feel that in not drilling additional laterals a lot is going to waste. None the less, we will always be thankful for what we have.

Permalink Reply by Dennis M on December 19, 2019 at 7:43am

Hi, I see multiple issues being discussed: production, new wells and price received.

Price received:

I noticed the drop, and I believe it has to do with Rice changes. I have gotten no adequate reply from EQT's Landowner Relations department. Simply "you are not having deductions taken out."  I am still trying to get the actual sales price calculation method they are using. The way they define deductions does not mean that the price is not being decreased related to accounting for getting the gas to the sales point.  I believe that I saw similar declines leading up to Rice going public, and continuing afterward. My understanding is that actual Audits are complicated, and expensive. That does not mean that somebody with enough knowledge of Accounting, Finance or a simple strong motivation can not complete one.

SAMPLE ONLY OF RICE CLAUSE:

"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, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to transform the product into marketable form."

Permalink Reply by Lori Huber on December 19, 2019 at 10:07am

Hi Dennis. Before I go on I just want to say this is the 2nd time I'm replying because I made the mistake of replying on my phone and managed to delete my entire comment before posting so the fact that I'm RE-typing it (on computer this time) should say plenty about how interested I am in your comment.

I believe that you are on to something that I actually haven't thought about and have had some past experience that may play into the lead you are on that perhaps we should all pay better attention to. First, I have the very same clause, word for word, in our lease regarding Gross Royalties and we verified before agreeing to sign that all royalties will be paid with no deductions from the well head... period. We've had some interesting discussions with other landowners regarding what determines "at the wellhead" for the purpose of sales and how it can't be not at the well, where they pump it out, however, beyond that, your point seems to be more in the right direction. How DO they calculate a single sale price for gas sold over a 30 +/- day period when natural gas prices fluctuate several cents up and down daily? Furthermore, how do they calculate WHAT gas is sold when and to who at what price?  I remember back when we were still under Rice we used to get revised royalty statements every couple of months where they would re-calculate previous month's royalties at a different sale price and then take the difference and deduct IT from the current month's royalty. When I asked what these statements were about I was told that it was just an accounting thing; that they had to make adjustments by a few cents in order to make the accounting balance because of the different sales prices throughout the month. Does that make sense? I didn't think so, either. I also spoke with a sales dept mgr to get an explanation of how the gas was sold and why it was paid at a single price when market price fluctuated so much throughout a given month - which I follow regularly and made sure she knew that. She said that OUR gas was mostly sold by orders from customers in bulk and only a small portion was sold via the market on market sales prices. She actually seemed to be saying that they PRE-sold the largest portion of gas to bigger customers. My question was how they came to a sale price and I could never actually get a straight answer. How can they pre-sell if they don't know what the market selling price was at when the gas was pumped from the wellhead? Or where is was pumped from, for that matter? But to return to your point, which I definitely think you are on to something with; are they actually deducting an administrative fee from the SALE PRICE for marketing the gas, which is charged against royalties to the landowners? If so, that is 100% in violation of the lease contract clause you copied as it stipulates that NO deductions were to be taken from royalties for ANY reason, including marketing - directly or indirectly. So, what were those adjustments to "make the accounting work"? And how are they coming to that final sale price they show us on our royalty statements? Why is there such a big difference in sale prices from unit to unit and gas co to gas co? I follow that, as well, and it definitely varies. I also noticed that royalty owners WITH deductions seem to sell at higher prices than those with no deductions. Why should that make a difference if we are being paid gross royalties? Are deductions being taken from the sale price, where it isn't easily revealed without an audit? I am simply curious and have absolutely no information or accusations other than the questions you rose and I followed up on with additional questions. Our lease allows for periodic audit by request of landowner. Not sure how that works but it might be worth all our whiles to check on it. I, like many on here, am grateful and feel blessed by the Marcellus Gas discovery and ability to extract it from under our land. As caretakers of our land for generations, it is a blessing that it continues to provide and pay us back for its care over the years, and I am grateful for the knowledge and technology of the drilling companies to take the chance on the commodity to come in and invest in our stakes to get it out of the ground, which we could never do without them. HOWEVER, I do NOT want to be taken advantage of, lied to, or misled by savvy corporate accountants and financial manipulators finding a way around an iron clad contract to take more from us than agreed upon when we gave them the opportunity to extract our gas at a much higher profit than we would ever see. Many have sour opinions of how much the gas companies make in comparison to what the landowner does but I am reticent on that note because without their investment, equipment, and technology, it would just stay where it is and slowly dissipate through the ground with nothing to us. But, that's not the same as being screwed over on a contractual agreement. I'd be curious to hear other's ideas on this topic. This is actually the first time that I've read this aspect and think it is worth pursuing.

Permalink Reply by frank speaker on December 30, 2019 at 12:31pm

If your lease said no deductions at the well head, then any expenses they have after the well head they can deduct despite what you thought your lease was clear about. The only clearly written lease would be one that stated the price paid to you would be the price published on a named exchange regardless of what price it was eventually sold at or not sold but stored. My last statement for Oct. 1st sale was $2.13/mcf. From that, deductions of about 90% were taken.

If you have audit rights I would suggest you combine your audit with other landowners in the unit and share expenses. Try to find an auditor who has already audited your company and negotiate the audit price. Any audit should include a complete reading of all the contracts your operator and lessor have, and all invoices and rebates.

Permalink Reply by Lori Huber on January 3, 2020 at 3:45am

Well head isn't mentioned in the lease. We more or less just assume it. What it does say is no deduction from gas for any reason, directly or indirectly, of gas or oil taken from the ground in the lease hold (paraphrased). It lists a litany of types of deductions from transportation and processing to marketing and then adds or anything making the gas taken from the ground marketable form. In essence absolutely no deductions from the gas taken from the ground. Your deductions are terrible and I'm sorry. It is very unfair, given the small percentage the landowner is paid in comparison to what the drilling company takes. Our decimal is so many places after the decimal point that I don't know how to say it, though it is calculated based on our portion of land contributed to the unit times 18%. None the less, the drilling company is taking 82+% on the entire 1040+ acres. Agree that they should get a higher % since they invest the money, time, equipment and technology to get the gas out of the ground that we couldn't do, but it is still a huge portion particularly when they turn around and take deductions which, I believe, they are already compensated for in their larger percentages. They are, beyond a doubt, taking advantage of the landowners who provide the gas in the 1st place. I've heard of landowners actually OWING their drilling company when deductions exceeded sales of gas and royalty amount. That's ridiculous. Having signed with 3 other gas companies over previous years before the unit was being developed and we went with Rice and helped recruit neighboring landowners, we were VERY diligent on the terms of our lease. I wouldn't have signed a lease with deductions nor less than 15% but managed to negotiate 18. We have a no storage clause and many other addendums that mostly dealt with delaying drilling after leasing (which was a big problem at the time we leased). As I've mentioned, the one thing I missed was determining HOW they calculated selling price over a month of production when the market varied in price day to day. And that was a big one to miss. I still believe knowledge is power and discussion among as many landowners as possible gains it. Audits are expensive and its been mentioned that a single audit would only show a particular acct (the landowner auditing) so we couldn't confirm if some units were selling at higher prices than others or why. In any case, inaction on the part of the landowners will just allow any unfair business practices to go unchecked. These forums allow us to compare notes and at least have something to work with. Best of luck to you and Happy New Year!

Permalink Reply by Dennis M on December 20, 2019 at 7:56am

As far as EQT going back to existing units, that will be a multi-year process. All will have to be patient.

My best suggestion is to use the PaDep's eNOTICE service. That will allow one to get notified of new permit applications by area such as the specific Municipality.. This will give you the heads up when changes to your pad, or new well permits come through. Also keep an eye on Landex for document filings. (Sorry explanation of how to use the sites is beyond my ability)

eNOTICE:   https://www.ahs.dep.pa.gov/eNOTICEWeb/Default.aspx

Landex:     https://www.landex.com/webstore/jsp/cart/DocumentSearch.jsp

It looks like pricing mentioned in this thread is around $1.40 plus or minus. Without expectation of detail,

Does anybody know of prices for EQT Royalties being well above those numbers for October? (Other companies do not really give useful information, unless it is from an EQT unit, and paid by the other company.)

Lori, and others, thanks for all the information.

Permalink Reply by farmgas on December 20, 2019 at 8:14am

How do hedged prices gas companies negotiate with gas users impact what they pay for royalties?   I believe hedged prices are much higher then what has been quoted here.   

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