Why would the ownership percentage and the payment decimal on our royalty check stubs frequently differ?
Don’t know where you are located but in Texas what you are calling the payment decimal, which is the amount shown on the division order for the well, can involve the royalty owners share in a pooled unit or, the amount determined by the allocation formula in the case of an allocation well.
If you don’t understand how the decimal amount shown on your division order was calculated you should get an explanation from the operator’s royalty accounting group.
Actually both the ownership percentage and the payment decimal appear on our royalty check stubs. The ownership percentage matches current division orders, but payment decimals are all over the place. I’ve asked various people employed by the producer. To paraphrase their answers, they know there is a reason for this but they don’t know how to explain it. Certainly someone in the company must know why but I cannot seem to find this person.
Dear Mr. Newman,
Your post is slightly interpretative.
One way that I am looking at is such as this example:
You have a 50% mineral interest (Ownership percentage) that you leased for 25% royalty. Multiplying the two means that if the well was drilled on your property, you should get 50% of 25%, or .1250000 of the well.
However, lets say that your land comprises 10% of the pooled unit. Multiplying it out, your payment decimal would be 10% of .125000, or .012500.
Is this the answer to your question?
Buddy Cotten
1 Like
There are a couple of common reasons why the two decimals/percentages don’t match. There could be others, but these are the top two that I’ve encountered as a division order analyst.
First, the settlement decimal is the owner’s share of 100% of the money received only by that payer, from sale of oil or gas from the well that month. Example: ABC Oil Company is issuing the payment. ABC owns leases in the pooled unit (or assigned share of the single lease, if it’s a lease well) that make up 50% of the leasehold in the unit or well. ABC sells its 50% share of oil or gas to its own purchaser contract. The purchaser pays ABC 100% of the proceeds from the sale of that 50% share of what was produced from the well. If you have a 25% royalty in all of the 50% acreage, then you are entitled to 25% x 100% of all of the money received by ABC that month (settlement decimal). But your ownership decimal will still be 25% x 50%, or 12.5%.
The second common reason is a bit more complicated and applies only to gas sales, but this is the reason why every month you might see a different settlement decimal on the check detail. It has to do with a contractual obligation between the payer and outside third parties to sell their share of gas using an “entitlement” method instead of the usual and customary “takes” method. Measuring gas as it flows in a pipeline (through a meter) is an effort in approximation. The purchaser knows that the Seller is allowed to sell (for instance) 50% of the total production to the purchaser, but allocating exactly 50% of the physical volume is impossible. One month the Seller will have sold 51.2% of the total gas to this purchaser, and everyone must divvy up the remaining 48.8%. The following month, the purchaser might take only 49.1% of the gas to this Seller’s contract. Under a “takes” scenario, all of the owners in the well receive their proportionate share of whatever was sold–51.2% or 49.1%–and the final settling up is done later (often it’s at the end of life of the well). But under an “entitlements” settlement scenario, burden owner in the well receives from this payer their proportionate share of exactly 50% of the total production from the well, regardless of actual physical volumes sold. Under this scenario, the volume is shown as exactly 50% of total well volume, but then the settlement decimal is manipulated to make certain the payee (royalty owner and others) get only their proportionate share of what was sold.
Like I said, this second situation is very complicated, but if an owner knows what exact decimal of working interest the payee owns in the well, they can verify they are being paid correctly by calculating payment based on volumes, not based on true entitlement decimal.
Knowing about this second scenario will help an owner be able to talk to someone in Revenue Accounting at the payer’s office and determine if the oil company did, or did not, make a mistake.
6 Likes
I follow your your reasoning for why we are seeing these discrepancies on our checks. But these wandering payment decimals apply to all components sold from our wells, in our case oil, drip,gas, and NGL’s), and also to tax deductions. Usually, but not always, there are 2 different sales for each component for each well for each month. Usually but not always the tax deductions are at a rate higher than our owner percent, and seldom are the payments at a rate higher than our owner percent. Each component sale will list both the owner percent and the payment decimal in the detail for that sale, and each sale will have variations that don’t always match from component to component and from sale to sale.
What you describe sounds like it could be what are called “prior period adjustments” or PPAs. Monthly adjustments for price and volume are done every month in a leap-frog fashion, because initial production sales proceeds typically are “raw” in order to get money distributed as quickly as possible. Let me explain, using an example. In this example, the owner always has more than $100 (or $25, depending on the state) credited to his account each month, so checks are issued monthly. Less than $100, then checks are not issued until the account reaches $100–or annually, regardless of amount in the account. But that delayed payment must list every month of production (and adjustments, explained below) represented in that payment.
Here’s the example. Sometime before December 31, 2019, owners in any given producing well will receive a remittance payment for (usually) October, 2019 gas (and gas products) sales for gas wells, or November, 2019 oil (and oil products) sales for oil wells. Remember: once a producing well is classified by the state’s regulatory agency as a “gas well” then all that well can produce are gas products: G, C (condensate), LG (liquid gas) and PP (plant products) and any by-products such as sulfur, etc. A well classified as an oil well can produce O, CG (casinghead gas), and PP for any processed casinghead gas.
Let’s say your payer remits only one check per month. If you look at the check and see two or more entries for the same month of production for all production types from your well, we’ll say it’s a gas well–and perhaps even see multiple months set out on the detail–it’s likely you are seeing adjustments for every entry that has a negative sign in front of it. Adjustments on the December check will be some variation of this.
First, you should see current month data. That will be 10/2019 gas (most companies lag 2 months behind on distributing gas proceeds), the 8/8ths (total) well data: volume sold from the well, price paid to Seller by Buyer, post-production total costs (if applicable to this owner, otherwise you shouldn’t see them because they shouldn’t be deducted), total dollar amount of severance tax deducted and paid to the appropriate government agency. Then continuing across the table in the check stub will be the same set of information, except calculated using the “settlement” decimal given. The owner’s true decimal should also be given, but is required by only some of the producing states, not all.
Second, you might see two or more entries for previous months. The first line of entries for a previous month will have a negative sign in from of each piece of data, meaning that number has been reversed. That number was credited to the account as a positive number in a past accounting month and in this scenario, paid out on that month’s remittance check.
Next, you will see another positive line of entries for that same previous month, listing a different price amount or volume amount. The two lines combined make a PPA “pair”. The negative-followed-by-positive pair of lines can be repeated in the same check detail two or more times. Repeats are usually caused by the database system used by the payer that shows every PPA done for any reason during that month–such as a PPA done to reverse payment from a deceased owner and pay it over to the heir(s) or a host of other title adjustments done to the master Division of Interest (DOI) record affecting that month’s data. Every owner listed in the DOI will see a negative followed by positive entry, even though their numbers don’t change except maybe in the very last decimal place.
Why would price and volume numbers change after they were first posted? Often, for volume it is due to a more accurate measurement of actual volumes delivered to the final Buyer, which lowers the original volume by the shrinkage or increases it due to more precise measuring devices used. In the case of price, it is lowered if the BTU value (or other benchmark quality) of the delivery falls below the limit allowed for the original agreed price, or is increased if the BTU value exceeds the base quality-to-price values agreed in the contract. Another reason why the price can change and cause a PPA is if the contract calls for a spot price each month instead of a set market price agreed to be paid during the life of the contract (usually not more than a few months at a time).
3 Likes
You mentioned that there can be more reasons for the wandering payment decimals and I am beginning to think that our issue might be one of them. We have those payment adjustments regularly. But they show up as applying to the date that is being adjusted, even though they are adjusted in a later check. What we are seeing is varying payment decimals for payments that are current. For example, we just received the November 2019 check. The check is for mostly September production/sales. There are wandering payment decimals throughout this check for these September sales. Our wells are classified as oil, but they do produce quantities of drip, gas, and NGL’s in addition to oil. So I don’t think the “gas well only” example fits us.
Several companies break the royalty decimal up into smaller components based on the number of working interests and their relative interests. For example, your DOI is 0.010 and there are 3 working interests - operator with 50%; B with 40% and C with 10%. The revenues are calculated on the three interests - your DOI is treated as 0.005 X sales; plus 0.004 X sales; plus 0.001 X sales.
These interests may all have value based on September gross sales, and you will be paid on 100% of the DOI on your check. If the adjustment is very small then the 0.001 X $5.00 is less than $0.01 and that decimal will be left off the check. You will only see the other decimals, as either separate or a combined decimal. If you identify the operator and the well, you can get responses from others paid by that operator.
You need to ask the accounting department at the company. If it is a small company, the accounting may be done by a consulting company. Ask what accounting program they are using. You need to ask by email or by letter, not just a phone call. Explain your question in detail and attach a sample page from the check stub with highlighted varying decimals.
2 Likes