How do I choose a production company to lease to?

Colorado Mineral Rights Arapahoe County, CO
1

Hello,

I am new to the group and own mineral rights to a small holding in Arapahoe County (approx 60 acres) directly to the East of an area that Anadarko has been so active. (we are in 4S-63W). My family has been recently approached with an offer from CP via a land man to lease. While I am sure the lease favors them to start, it otherwise may be close to fair in terms of bonus and royalties. I understand all the reasons to review the lease in detail with an oil and gas attorney and will do so prior to signing.

I have been studying the various blogs and other resources related to leasing and and I'm sure that I am now just knowledgable enough to be dangerous! I have questions related to the strategy involved in choosing a production partner to lease to.

I am sure that there is a lot involved related to choosing the best company with technology, reputation, proper capitalization and all - but with the reality of pooling issues and the race to exploit the Niobrara resource, how do I really know if it is in our best economic interest to partner with a larger multi-national like CP over Anadarko or to choose another smaller independent who is quicker to market? I fear that I will get my rights caught up in some type of strategic blocking activity where a large oil company picks up our rights and pools them with others simply to keep another production firm out of an adjacent section where they are producing for some period of time.

I would obviously prefer to go with the company that is hell bent on successfully producing in my pooled section. (I am just assuming that 60 acres is too small of a spacing unit to drill in independent of other pooled acreage) How do I ensure that I am going with someone that is ready to move to production in an agressive manner within the initial leasing period (3/3 was proposed) and that they will also have the technology to produce the best yield long term?

Thank you in advance for any advise you can provide!

John

2

Welcome John There is no guarantee your lease will ever be developed or who will operate your lease when that time comes. Your lease could easily be sold to another oil company just like CP purchasing Lario's leases. I would check out the Arapahoe County Clerk & Recorders Office(document search) on line to research what oil company is dominating the leases on your section. This might be an indication of who might develop your minerals, but no guarantee. You can contact some of your mineral neighbors and get a good idea what bonus rates are expected at TODAY'S rate. Contact every land mangement company doing business in your area and ask if they are interested in leasing your minerals. It is much easier to negotiate a better deal when you have several players involved. I would think 20% royalty would be expected. I would try for a 3x2 rather than 3x3 with the 2 year option of 125% of the primary, could even ask for 150%. You might want to check out the Colorado Oil & Gas Consercation Commission (permits) and track the DJ Basin activity. Remember to take your time! I am not a professional, just my opinion. Good Luck

3

John, I can appreciate the predicament you are in. I also have acreage in Arapahoe County. I was approached last year by a LandMan working for an Independent Company. He brought a lease for me to sign even before we met. I live in Colorado Springs. They offered $25 an acre bonus on signing and 14% Royalty with a 5 year lease and 3 back lease. I countered with $200 an acre bonus and 15% Royalty after making some changes to the lease and they told me I was being unreasonable and terminated discussions. So, I am still waiting for someone to contact me with a reasonable lease. My largest concern is that a company who wants to lease my acreage is doing so to drill on it and not just hold it as part of a larger operation or even worse, someone who wants to lease mine and then re-lease it to a larger operation. I too am sure that my acreage which is even smaller than yours will end up being pooled. My acreage is part of a section 160 acres. I can only pray that someone who is honest, upright and has integrity will contact me with a fair lease. Good luck on yours!!!

4

Floyd, Would you really care what oil company signed your royalty check? Anadarko checks are just as green as Conoco's or anybody else. I would only be concerned in negotiating a good lease as you will be unable to renegotate. I have spoke with several minerial owners in Arapahoe that are not happy with the low ball leases they signed. I could have been one of them, but decided to give a genuine effort to understand the process and of course increase the value of the orginal offer. Yes, it did take a lot of time. We eventually received exactly 100 X the first offer, plus 7.5% increase in royalty, plus some other perks. I am very happy with my lease even if there is no production in the future. It's all about the contract. Once that contract is signed, your just a passenger on the bus.

5

Michael, thanks for the info. However, a signing bonus without production is of very little value to the owner of the rights. The lease is only valuable if the leasee receives royalties from production. That is where the money is. Take care and know that I am always listening to what takes place in the forum. Floyd

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Floyd, All of us know the money is in production. I would trade more royalty for less or no bonus any day (above 1/5) Let's say for example: John receives 20% royalty plus $2,500.00 per acre bonus x 60 =$150K for 3 yrs. The minerals are not developed in the first 3 yrs. Oil company elects to exercise it's 2 yr option at 125% & John receives another $187.5K. The minerals have not been developed during the 2 yr option. John is now able to negotiate a new lease. These numbers are easily reachable in many areas of Arapahoe. I certainly would have a smile cashing those checks. In this horse race you may not have the win ticket but the place ticket isn't so bad.

7

Michael, I would like to know where they are paying $2500 an acre bonus in Arapahoe County or anywhere in Colorado????

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Michael, I didn't get the chance to finish my comment - brother called from Maine and we got to discussing spirituality. I wanted to also say that of what benefit is 20% royalty on a lease if the company doesn't drill and bring forth oil on which to receive the royalties?? If I am right, it seems that you are saying that don't worry about the royalties when you receive a large amount of bonus per acre and then get 125% bonus for the 2yr option. That is what I would call being thrown crumbs when you should be receiving that 20% of every barrel of oil that is brought out of your ground. At $20 a barrel and just supposedly they are extracting 400 barrels of oil a day X's 7 X's 365, then you are looking at $2,000,000. each year the well puts forth. Now, the other leg of this journey is when we get a saturation of oil (much like we currently have in Natural Gas) and the price goes down to $45-50 dollars a barrel. Now you can see where I am coming from.

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Floyd, I know from fact that 5S 63W Section 7, 5S 64W Section 2 & 12. bonus was 2.5K per acre last April. These minerals are more valuable in todays market. I think 65W is more valuable than 64W or the western part of 63W. As you move east the value decreases (as of last April) In proven areas of Weld the bonus could triple. The development of this area is just starting and it's possible were looking at another Bakken some day.

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This is an interesting thread. I have wondering during a leasing boom, how I could get the gascos attention. What would it take for the drill to be on my property? I remember writing up a list of all the things that might make my parcel attractive.

Of course you are right the money is in the long-term royalty income stream. Absolutely. However, as Michael is stating, specifying the drill site isn't really something that can be controlled. But why not consider it and try...

Michael, too, is saying that might as well get some nice bonus money over that 5 year period while you wait and cross your fingers. If no drilling, you'll be able to lease again. But like you are saying, forget waiting - let's drill baby!

So here are some thoughts to that end:

1. I think Michael alludes to this - you could offer your MO with no sign bonus - of course under a conditional agreement that they drill or include you in a DU (drill unit). you are right, 80 acres too small to be the entire drill unit. For unconventional shale exploration 640 and even 1280 acres are common (keep in mind they drill over a mile horizontally!).

2. Since you want drilling withing some finite period, you don't need to include an option. However, they aren't going to sign and drive to your property the next day so realistically you must give them a 1 year lease. But no option. Anyway, you don't want an option EVER. Options are simply things the gascos use for their advantage; if the market is dead, then they won't exercise the option or if the lease is worth 5X then of course they will exercise the lease. so options aren't helpful as they appear.

3. Now let's get to strategy. You need to study your area to learn the geology and historical exploration results. If you are in area of oil or wet gas then you have improved odds. oil is worth a lot and goes without saying, wet gas is worth 2X dry and gascos will drill for it, but dry gas - forget it at the moment. So research all wells in your area to find out what the results have been.

4. Infrastructure - are you near a pipeline. If so, use that fact to your advantage. If it requires millions of dollars to get your hydrocarbons to market then you won't get a drill first. So study hard to find out where the pipeline is.

5. How about other resources - do you have source of water on your 60 acres. Do you care if they use your property for an injection well. Would you mind having storage operations on your property. People can make some money from this, but you could offer your property "for free" including all access etc. under the condition of being in a DU within agreed period (<= 12 months).

6. Location - this applies to a couple things - first geology which I touched on are your in the "heart of the play". well it is likely too early to tell. Also, where is your property, is it easily accessible - imagine the best scenario would be in the country, but on a paved road capable of handling the extreme traffic of a drilling operation. If you have this, then you can include it in your "presentation/proposal".

7. Land Type - is your land flat, treeless, dry (not swampy) - you know, ideal and easy to place a well.

So if you have a long list of positives as too why they should drill your location then you could assemble a proposition. But you should try to get a group of landowners together so that the gasco could get an entire drill unit together (all with the same terms as you are outlining). You are basically presenting them a place to get started with no expenses to mineral owners unless the well is successful and there are royalty payments. So you'd want good royalty terms and no production costs, and....

So that is my thinking on the only way to even attempt to convince a gasco to select your parcel for a early drill site. However, I don't think without all of these components you'd convince them, but if you had ALL of these; location, acreage, accessibility, water, no cost to lease, then you'd have reason to have a heck of a conversation. Just make sure your audience has the money, a little local probably can't handle the 8 million it costs to put in a horizontal well.

Wilson

11

Wilson, Thank You! Without a doubt this is the best presentation and outline of what a mineral rights owner should know. And, it is ideal for an owner who lives within the general confines of his rights location. However, when one lives 2 1/2 hours away and is 80 years old, then the ability to give check to these factors is not quite as accessible. Nevertheless, the information is extremely valuable and I will pass it on to my children and grandchildren. I was in the hopes of personally being able to tie up these ends and have a viable signed lease in hand. Thus, I think it more feasible to pass what information I receive on to them and let them research and scout out the situations as they develop (such as when drilling commences in the vicinity of the property). Again, many thanks for taking the time to outline the innumerable facets of what its going to take to bring someone onto the site. Take care and God Bless You! Floyd

12

Dear Mr. Holmes,

In many Niobara areas of Arapahoe are north of 2500 per acre and north of 3/16ths royalty with favorable lease terms.

floyd holmes said:

Michael, I would like to know where they are paying $2500 an acre bonus in Arapahoe County or anywhere in Colorado????

13

I have a great contact at Anadarko if you haven't leased yet and could help you get a great offer if they are still leasing in the area. I am a board member for The National Association of Royalty owners and have over 34 years experience in the business.

Michelle

14

John,

Were you able to secure a lease? I have over 34 years experience in the industry and am a board member for the National Association of Royalty Owners and I might be able to help you!

15

Michele, I am not part of ur discussion with John, however, I also have small acreage (13 acres w/o surface rights)) in Arapahoe County, and for all I know someone may already be drilling on it. I was offered a very sub-standard lease about a year ago from a Landman, representing Mason Dixon Energy which I modified with enhancments (from pouring over the Internet) and they refused, thus I terminated disucussions and am now waiting for some "prince charming" to make me a decent offer. I don't relish the idea of pooling, however, I am smart enough to know that with my meager holdings that it more than likely will come to that. The location of these rights are:

Township 4 South; Range 60 West; 6th Principal Meridian, Section 22: SW1/4SE1/4, E1/2SE1/4, SE1/4NE1/4. I took this from the Deed. Any suggestions as to the course of action that I should take? Floyd

16

Thank you for your kind offer Michelle but yes, we have completed a favorable lease and are now moving forward with CP. Hopefully they will "get frackin" as they say.

I must give the credit to Mr. Buddy Cotten who helped us negotiate through the maze of options here. He did a great job and was easy to communicate with. Thanks again Buddy!

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I will look at the acreage and get back to you!

Michelle

floyd holmes said:

Michele, I am not part of ur discussion with John, however, I also have small acreage (13 acres w/o surface rights)) in Arapahoe County, and for all I know someone may already be drilling on it. I was offered a very sub-standard lease about a year ago from a Landman, representing Mason Dixon Energy which I modified with enhancments (from pouring over the Internet) and they refused, thus I terminated disucussions and am now waiting for some "prince charming" to make me a decent offer. I don't relish the idea of pooling, however, I am smart enough to know that with my meager holdings that it more than likely will come to that. The location of these rights are:

Township 4 South; Range 60 West; 6th Principal Meridian, Section 22: SW1/4SE1/4, E1/2SE1/4, SE1/4NE1/4. I took this from the Deed. Any suggestions as to the course of action that I should take? Floyd

18

Great! Hope it's a very profitable venture for your family!

John Swain said:

Thank you for your kind offer Michelle but yes, we have completed a favorable lease and are now moving forward with CP. Hopefully they will "get frackin" as they say.

I must give the credit to Mr. Buddy Cotten who helped us negotiate through the maze of options here. He did a great job and was easy to communicate with. Thanks again Buddy!

19

Hi Michelle. I thought that Anadarko sold all of its acreage in the Arapahoe Niobrara to Conoco? Am I right? I am interested in leasing, provided of course I receive a decent lease with appropriate bonus and royalty and the usual safeguards.

michelle Smith said:

I have a great contact at Anadarko if you haven't leased yet and could help you get a great offer if they are still leasing in the area. I am a board member for The National Association of Royalty owners and have over 34 years experience in the business.

Michelle