I'm just curious how much the recent decline in oil prices affects the royalties owners receive from wells in Grady County. The stock markets seem to think this is a big deal. What sort of impact will it have on actual royalties from wells in Grady County?
I am just guessing but i would think if a well is producing good ..it would have a better chance to be kept producing. The lower prices might keep the companies from drilling new wells but again i am just guessing.
George, energy prices are a moving target, they change on a daily, even hourly basis. There is probably a scientific method of predicting royalties but I just come up with an average each month and compare it with the average from the month before. If oil and or gas is down 10% from the previous month then your royalty check will be down roughly 10%. If you you are getting paid for oil and gas or gas liquids then each need to be figured separately. You also need to figure in a percentage change in the amount of production from month to month. The more detailed your math the closer you can come. I'm usually pretty close if I just figure production was up or down a certain % and prices were up or down a certain %. It is a big deal because your royalty check is directly affected by the market prices.
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Sounds like the effect is pretty direct and straightforward. If prices go down five percent on the open market, royalties will take a five percent hit. Is there some point at which the companies just stop producing and wait for prices to go up?
We had a drastic price slump between 2014 & 2016 and yes some companies did quit producing particularly with wells that may have been marginal already. The biggest cut back was probably in new production. Many drilling projects were cancelled or put on hold. Lots of wells that were being drilled were shut down before completion creating a large inventory of DUCs (drilled-uncompleted). Now that prices have recovered somewhat many of those wells are being completed. New drilling is also resuming but probably with more caution for now.
George,
Actual net royalties from horizontal wells over 4 years old will be stably decline year to year regardless of minor price fluctuations because the major operators will hedge against variation in spot market prices.
In the first three years of a well pressure difference declines between the formation and the well bore and conversions from flowing to pumping wells will have more effect on royalty amount over a year than unit price fluctuations. Absent wars in the middle east.
Increases in unit prices due to global supply and demand demand will have a material effect on royalty received from producing units (not wells) because the well financed operators will drill more horizontal wells to meet hedging demands and under financed operators will drill more wells in established units to raise their stock price.
Conversely, lower unit prices will not attract financing capital for expensive wells. Places to put new capital is what the stock market thrives on.
The best answer to your question is found in the operational strength and financial strength of your operator. Those that are in business to perpetuate the company by producing oil will show steady growth over time. Those that are in the business for the financial rewards in the short term, will show more volatility in royalty payments. Some will go into bankruptcy and royalty payments will be interrupted.
Operator management efficiency is directly related to royalty payment consistency and growth. Project your royalty income on the strength of the operator.
Gary L Hutchinson
Recently my acreage has been taken over by SCOOP / Gulfport. I have no idea whether or not they are better or worse than Vitruvian Woodford, which was the last place I received checks from. Is SCOOP / Gulfport a good outfit?
I don't have any wells with them nor do I have recent experience. Google and judge for yourself if you can get some financials. Another option, if you become satisfied with performance, is to evaluate and sell to a large operator and forget the risk of counting on income month to month.
My recommendations to clients tis to save 4 years income after taxes and then take out 50-75% of the year end balance annually. That way you know what you can count on at the end of each year and will never run out of royalty.
Gary Hutchinson