I just read the above article about what happens when your oil company seeks bankruptcy protection due to low oil prices -- while they continue to produce and sell your minerals -- and use the proceeds to pay off their other creditors.
It seems you may only get a fraction of the promised royalties -- while your minerals in the ground continue to be depleted.
With all of the undrilled leases coming up for renewal, I'm wondering whether it might be a good idea to just let them expire -- and wait for oil prices to stabilize.
Of course, the big O&G's are probably safe -- but does a company like CWEI fit into that category?
What are the pros and cons of leasing now versus waiting?
I guess we all just have to make our decisions and take our chances.
CWEI has pretty high debt. On the other hand, they have lots of leased acreage and have said if things get too bad, they may be willing to sell some of that off. Market analysts don't seem too worried about the company at this point.
Here's an interesting story in the WSJ today. This will have some impact on companies.
Generally, royalty owners continue to get paid during a chapter 11, especially if your lease allows you to terminate it for non-payment.
The biggest pro to leasing during low prices is, in my opinion, it increases the likelihood you will not get drilled and will be able to collect another bonus. The con is it increases downward pressure on bonus prices (this has been pretty muted in Reeves) and operators are tougher on lease language negotiations.
If a person leased 160 acres at $3000 per acre to a company like Cimarex would you imagine that they will walk away from the lease extension considering prices and their financial situation? When they talk to stockholders they footstomp how their conservative practices are working so that they are not being knocked off their feet. My interpretation.