Financing for a working interest on a site with proven reserves

Colorado Mineral Rights Weld County, CO
1

Greetings to all members of the Weld County forum.

I have 120 acres of minerals in a 640acre unit, and the company that holds the leases for the other 80% of the minerals has offered me the "opportunity" to be a working interest partner with them in a well they have permitted to be drilled on my minerals in Weld County.

My share of the cost to drill the well is approximately $1,000,000.

My question is this, are there banks or other financial institutions that are making loans at reasonable rates to small working interest holders in Weld County? I would prefer not to be force pooled due to the financial penalty's involved with a "forced working interest".

Thank you for any info you can provide.

2

I would get legal advice about handing over $1,000,000 to be a working interest. Also have a good accountant.

Are you a qualified investor? Someone who has $1,000,000 in liquid assets and $250,000 year income? I believe that is the going qualifications for people who are approached with these deals.

Caution would be what I would do and check everyone out in the transaction, thoroughly. Good luck.

3

Hi Regina,

I actually asking about the availability of loans to finance the $1,000,000 cost of my 20% working interest. This isn't a case of "just handing over $1,000,000 to someone. It is a proposed business partnership for one well with a major operator in Weld County. I would of course seek good legal counsel before entering into a loan agreement, and of course do the same before signing the working interest contract.

Thanks for your reply.



regina redmond said:

I would get legal advice about handing over $1,000,000 to be a working interest. Also have a good accountant.

Are you a qualified investor? Someone who has $1,000,000 in liquid assets and $250,000 year income? I believe that is the going qualifications for people who are approached with these deals.

Caution would be what I would do and check everyone out in the transaction, thoroughly. Good luck.

4

If you translate 20% equals $1,000,000 therefore they value the deal at $5,000,000. Would that be correct?

5

Lance, I understand that you want to win big and to win big you have to bet large, but you want to do it with someone else's money. What's in it for them? Some paltry interest vs. the loss of their capital? They can make investments like that on their own, they don't need you for that. That brings up collateral, you need it, and not a prospective hole in the ground that may or may not produce oil and gas, possibly your acres themselves could be collateral, both mineral and surface, home structure or the like. You need collateral because the lender is not going to let you shrug and walk away if it doesn't work out. I think they would probably also want an agreement that all proceeds from the well would go towards your debt if any of it at all were unsecured. So you have everything you have, or nearly, or more than you have riding on a well, that may not pay back your investment and expenses for 5 or more years, while interest piles up. I expect the price of oil to at least average in the $80 range which means $60-$100 depending, but a swing to the low side at the wrong time might be bad for you.

Lets look at the non-consent side, ok? 100% cost + 100% penalty but no money down, even if the well is a dud you get away unscathed, you get to keep all your stuff. You also get a 12.5% royalty until the well cost and risk penalty are recovered. 12.5% is not massive but people do still lease for that amount without ever having the chance to be an owner and collect 100% less the cost of production and post production costs. if the well still has 1/3 to 1/2 of all the oil it is going to produce when the well pays out and recovers the penalty, CONGRATULATIONS!! If the well never pays out/recovers the penalty, CONGRATULATIONS, you collected some royalty .....and get to keep all your stuff!!! Here is the kicker, the penalty is just that, a penalty. The penalty is not interest, it's a fixed amount. If it takes ten years to pay the well off and recover the penalty, due to inflation... the money you pay the penalty off with will be worth significantly less that the money the operator spent to drill your part of the well.

If you still wanted to participate in the well, be my guest but I suggest you only do it for part of your acres, only the amount you can afford to do cash. You got 120 acres, you could participate in 10 to 20 acres lease 50 and non-consent 50 acres, have all bases covered, if the leased acres have a decent bonus, they may defray part of the cost of your participation acres.

Even if you find what I had to say unpalatable, I hope you find it food for thought.

6

For what it is worth, I took 3 years to settle a lease with an oil company. I refused to deal with a land man because he would not do what I wanted him to do with regards to handing over the Bonus and I did not get the percentage I was promised. This was in Weld County. I settled after a hearing with CGOC. And I was not afraid of forced pooling, but I had a very, very, small share of land. The settlement was I believe in February of this year. I got $500. per acre and 18.75% profits for a three year lease. Now, I don't know if that was good, but my relatives settled for $60 an acre and 12% profit right when they were first approached three years ago. Is there any drilling going on, don't know and don't care. I like Kennedy's explanation. I think it is a crap shoot out there. Mineral Rights Forum helped me all through this and I didn't get what I got without them. So listen and take notes.

7

Hello RW, Thank you for your reply and the various options you brought up. As I mentioned to start out, there are proven reserves on the property. The same company drilled a producing well next door that came online in Jan of this year, and it's production numbers are why I would prefer to have a working interest (without penalty) instead of signing a royalty only lease. There are producing wells on all sides of our section, so there would be little to no risk to the financing company making the loan.

r w kennedy said:

Lance, I understand that you want to win big and to win big you have to bet large, but you want to do it with someone else's money. What's in it for them? Some paltry interest vs. the loss of their capital? They can make investments like that on their own, they don't need you for that. That brings up collateral, you need it, and not a prospective hole in the ground that may or may not produce oil and gas, possibly your acres themselves could be collateral, both mineral and surface, home structure or the like. You need collateral because the lender is not going to let you shrug and walk away if it doesn't work out. I think they would probably also want an agreement that all proceeds from the well would go towards your debt if any of it at all were unsecured. So you have everything you have, or nearly, or more than you have riding on a well, that may not pay back your investment and expenses for 5 or more years, while interest piles up. I expect the price of oil to at least average in the $80 range which means $60-$100 depending, but a swing to the low side at the wrong time might be bad for you.

Lets look at the non-consent side, ok? 100% cost + 100% penalty but no money down, even if the well is a dud you get away unscathed, you get to keep all your stuff. You also get a 12.5% royalty until the well cost and risk penalty are recovered. 12.5% is not massive but people do still lease for that amount without ever having the chance to be an owner and collect 100% less the cost of production and post production costs. if the well still has 1/3 to 1/2 of all the oil it is going to produce when the well pays out and recovers the penalty, CONGRATULATIONS!! If the well never pays out/recovers the penalty, CONGRATULATIONS, you collected some royalty .....and get to keep all your stuff!!! Here is the kicker, the penalty is just that, a penalty. The penalty is not interest, it's a fixed amount. If it takes ten years to pay the well off and recover the penalty, due to inflation... the money you pay the penalty off with will be worth significantly less that the money the operator spent to drill your part of the well.

If you still wanted to participate in the well, be my guest but I suggest you only do it for part of your acres, only the amount you can afford to do cash. You got 120 acres, you could participate in 10 to 20 acres lease 50 and non-consent 50 acres, have all bases covered, if the leased acres have a decent bonus, they may defray part of the cost of your participation acres.

Even if you find what I had to say unpalatable, I hope you find it food for thought.

8

Lance, I know a little about the risk. Although I have not proved my ownership in all of them yet, I do have 12 wells proven and 3 waiting in the wings. of these 15 wells 2 have required work and at least 2 more have not been all they could hope to be. All will show a profit eventually. Roughly 1 in 3 or 1 in 4 of my wells would be bad news for you, at least for the next 10 years because you have all your eggs in one basket. I can handle it being non-consent and with my risk naturally spread. I don't even get butterflies. Yes my 50% risk penalty in ND does make it more attractive, but then your well's cost is a lot less.

If your well has a mishap and it costs 50% more to complete and it must be completed for anyone to get any of their money back out of it, where does this extra $500,000 come from? If the operator has to carry your part there could be a 200%- 300% penalty in the JOA. I wish you the best of luck.

God knows I want the mineral owner to make more off his minerals . I just want everyone to be able to make the most informed decision possible. If you have great production right next to you you might get a loan against your mineral acres for development, but I hope you have impeccable credit.

9

Lance,

Find someone who can help you assess RISK. RW has some good options that work for him. You need to equate risk of drilling a well to how much you have to loose not how much you can gain. That part, unfortunately, will not be up to you unless you are a petroleum engineer yourself. Watch the news this morning and think about having borrowed money in that well in the Gulf.

Once you have assessed risk, you can figure out how to take advantage of your opportunity. Don't limit it to lease or participate. There are ways to share the risk but you must give up some of the potential gain. The thing is, you will be doing it with soneone that knows how to risk the business. I don't know of a bank that will lend high at risk money without collateralizing all of your other assets. Put that into your risk evaluation. bank know risk.

10

Gary,

Thank you for your thoughtful reply.

Gary L. Hutchinson said:

Lance,

Find someone who can help you assess RISK. RW has some good options that work for him. You need to equate risk of drilling a well to how much you have to loose not how much you can gain. That part, unfortunately, will not be up to you unless you are a petroleum engineer yourself. Watch the news this morning and think about having borrowed money in that well in the Gulf.

Once you have assessed risk, you can figure out how to take advantage of your opportunity. Don't limit it to lease or participate. There are ways to share the risk but you must give up some of the potential gain. The thing is, you will be doing it with soneone that knows how to risk the business. I don't know of a bank that will lend high at risk money without collateralizing all of your other assets. Put that into your risk evaluation. bank know risk.

Gary L Hutchinson

Minerals Management

11

Yes, that is correct. The estimated costs of drilling the well is approximately $5 million.

regina redmond said:

If you translate 20% equals $1,000,000 therefore they value the deal at $5,000,000. Would that be correct?

12

Brittany,
You should tone down your replies before someone reports you to the moderator for being abusive.

I don't consider asking for information a "delusional" activity, nor do I consider it the activity of a "fool". But let me ask you this, do you think a "joe shmoe" could get a loan if there were 14+ decent offsetting wells? Just asking.


Brittany Bynum said:

WOW. Lance, are you serious or delusional?? You are going to risk 1 million into 1 well??!!!! So you definitely don't adhere to the advice of "do not put all your eggs into a single basket."-- meaning do not be a fool and take a loan for 1 MILLION dollars to participate in 1 measly well. Big deal if there is a decent well offsetting the acreage. Are you a geologist? Do you have seismic? There are so many things that could go wrong and before you know it, you're bankrupt like the city of Detroit. No bank will give some joe schmo a loan for a mil, just because "there is a good offsetting well." Best advice your gonna hear: Sign the lease and don't quit your day job.

13

Lance, I just got a notice from Nobel Oil that our lease is going to start paying interested parties. My portion is tiny, one of my cousins stated that he will be getting $2500. that has accumulated since May. There is a 2 month lag for payments. Since I negotiated a higher royalty percentage, my portion will be greater. I was willing to be forced pooled because I liked the idea of being a part owner, but oil companies do not like to force pool. So it depends on how much of a risk you are willing to take with borrowed money to get a great return. Or you can sit back and collect royalties on a well that you did not have to put a dime into. Thank about that. By the way I got $500 per acre and 18.75 royalty, and that was in February this year. A benchmark sort of speak. Again good luck to you whatever you decide to do.

14

Lance:

In summary, there is a consensus that you are prepared to assume risk that is beyond reasonable, so allow me to expand.

1. As for borrowing, banks will only lend against existing production--not against proved reserves. Since you do not have production, and thus no assets to use a collateral, the odds of getting financing does not exist. Even the operating companies have limits on how much they can borrow against existing production--usually about 40% maximum. Therefore, even if you have production, you are looking at $400K loan maximum--so you still need $600K of your own money.

2. Have you seen the third-party engineering report that "proves" the reserves? Do not take any operator's word for it. Only a third party report should be used.

3. I do not think you completely understand the risks you are willing to take. Putting up $1.0 million is a lot of risk versus zero risk as a mineral (royalty) owner. Do you have the capital or ability to purchase insurance for well control or pollution? There is a long term contingent liability you will be assuming if you are a working interest owner, that is not assumed by a minerals owner.

4. There are a lot of wells in Weld County that, although economic, have never produced to forecast, and not all Hz wells are the same in spite of their "proved status". In some areas of Weld County they are drilling 14 Hz wells per section (6 Codell, 8 Niobrara). If you are buying only a "well bore interest", you interest is in one well bore in one formation. The operator can drill parallel wells that you would have no interest in unless you keep investing. What if a new well fracs into your well bore drainage area and decreases your production?

%. Can you afford to pay to re-drill the well if they lose the well bore? You do understand that you are responsible for your prorated share of the costs should their be a problem. (e.g. we had a tank battery hit by lightning. Our share of the costs to rebuild--$200,000. If the operator loses the well bore during drilling, what happens to your $1.0 million? Typically you lose it unless the re-drill is insured. )

5. Have you reviewed the JOA? Did you have an "oil and gas" attorney review it? This is complicated, and only an experienced O&G attorney should be used. Figure $400/hour if you can find one, as the good ones are not taking new clients.

Should you answer "I don't know" or "I'm not sure" then you have your answer.

Recommendation: negotiate your 3/16th's royalty interest and acreage bonus and just observe.

Wyo.

15

Lance, this discussion has probably terminated but I thought I would make an observation. My Oil Interests are mostly Working Interests where I invest with a local group under a producer and buy in anywhere from a 1/32nd to 1/8th interest in wells that run about $350,000 - $400,000 to drill and from $500,000 to $600,000 to complete. Also, I am paid directly via the Division Order and not via the Producer....a vitial point.

This does allow me to limit my risk on any one well. If I was receiving 20% Royalty on any well drilled where I own the mineral rights, I would not invest as a working interest owner, that is, unless it would enable me to participate in other projects that the producer may offer to me outside of where my royalty interests may be located. WI can be profitable if you are with a successful producer with proven record and you are in an area that isn't all Wildcat type exploration. A wildcat well can be great but there is always greater risk with them. However, if one comes in and subsequent finds indicate a Field is discovered, whereby future prospects are more likely to be successful.

There are always risks with drilling wells that may produce an unprofitable venture.

16

I would seek legal counsel. As far as I know my oil investment $ has always gone into an escrow account

17

You would need to prove up reserves by offset production and reserve reports. If Your a mineral owner why don’t you just lease with the Operator and get paid a negotiated royalty.? Depending on area it might make more sense to stay a royalty interest receiver them a Working parter.