Hi Skyline,
I would like to visit with you privately, as it seems we have a lot in common. First in response to your questions:
1. Does the offer seem low. Indeed it does. First, I don't know anyone in Texas, NM or Louisiana who's accepting less than a 25% royalty these days. The bonus seems low compared to what Sandridge negotiated last year. In my own circumstance, about 6 miles SE from you in PSL Block A33, Sandridge started out a $300/25% for a 3 year + 2 yr option and six months later, when I was ready to sign, we were at $650/25% for 3 years + 2 yr option . . . Then Sandridge announced their plan to divest from the Permian Basin, and nothing was consummated. Now, if Ring is only interested in 3 years and no option, then that would be a valid reason to accept a lesser bonus.
2. I'm not aware of a requirement to have 50% of the minerals leased in order to drill. From a practical sense, an operator is going to want 90%-95% leased, because the unleased portion becomes like a carried working interest, once the working interest owners have recouped their initial investment. I don't think any responsible operator is going to drill with only 65% leased -- it would be financially too risky.
3. The unleased mineral owners would receive significantly more than the leased mineral owners, once the operator recoups their drilling and completion costs. For example, after pay-out has been acheived, a party that owns 10% of the minerals and is unleased, would receive 10% of the total well revenue. This is compared to another 10% mineral interest owner who is leased, with a 25% royalty. The latter would receive 2.5% of the value of the production (i.e., 10% of minerals times 25% royalty = 2.5% of 8/8ths).
4. So that in and of its self is not the incentive to lowball. Lowballing is simply the result of trying to make a smart business decision. Companies, particularly risk taking companies, like new oil and gas concerns, try to acquire leaseholds at the lowest cost -- both in terms of bonus and royalty. The bonus is about carefully conserving cash on the front-end; and minimizing the royalty improves the bottomline, if the property produces. In addition, by keeping the royalty sub-normal, it gives the lessee an opportunity to carve-out overriding royalties, either to key employees, or if the lease is ever assigned to another company, there's room to retain an overridge.
5. I agree with the Landman that Sandridge has left Andrews for Oklahoma (and Kansas). I don't know if Ring can afford to pay the going price for leases in Andrews, but you have another option -- Sheridan, in Houston, the company that acquired Sandridge' Permian Basin assets. Also, Forge Energy was interested in my minerals in A-33 at the same time as Sandridge. So that's someone else you may try. I do like Ring, because of the experience of their team in this area, when they were previously with Arena.
6. Also, your your part of A-26 is largely un-drilled and un proven. However, this is not unlike University Lands Blocks 13 and 14, just north of Shafter Lake (to the south of you). I've attached a screen shot from the Texas RRC, showing this area. Sandridge and Forge have been permitting and drilling new wells in this previously barren area.
I hope this helps, and as I said, I would like to visit off line, if that's possible. I'll send you a friend request, which is necessary in order to have direct contact.
2645-Andrewsnewactivity.JPG (105 KB)
