We receive royalties from two wells: Hensen Haven and Smedley, both located in McClain County. We’ve leased our mineral rights with Charter Oak since about 2007 approx.
Our monthly royalties have dramatically dropped. The last year, and in the last 6 months it is significant. We’ve called CO and asked what’s going on, but there’s essentially minimal to no communication with us. Any help with concrete info or guidance as what to do to understand this drop would mean a lot to us.
Is there a chance that a member on this forum has some inside info? Anyone else receiving royalties from these two wells?
As a side note: BP has contacted us regarding a horizontal well in the area of one of these wells-we have written about BP before in this forum. That scenario is ongoing. Today’s question though focuses on the lack of production at HH and Smedley 6 - 6N - 2W & 31 -7N - 2W
The knowledge and insight amongst all of you is incredible and for those of us who are relatively new to this venture find it immensely helpful and generous that you share your skills and knowledge.
The Henson Haven 1-6 looks like it was in a pretty predictable decline over the years. The oil sales have a see saw sales history. High one month, low the next, Been that way for years. I don’t see much gas sales recently, so that may be part of your difference.
BP’s Henson 6N 2W 6 1HX horizontal well was spud on March 26, 2018. It will end in 31-7N-2W
Smedley Estate 1-7 is in 7-6N-2W. That one has decreased quite a bit in late 2017. Could have been mechanical trouble, or it could have been shut in while nearby horizontal wells are frac’d or it just could be near its natural end. Charter Oak sold quite a bit of their acreage to BP, so the transition time has been long. I don’t see that the well was sold yet, but the paperwork could be delayed.
The OCC frequently has exhibits that go with the pending wells. If you know the case numbers that go with your section for a horizontal well, you can track down the exhibits.
Mr Rick Howell, who often responds to questions on this forum, shared a number of maps with us when I requested assistance in understanding where our mineral rights were in relationship to the Woodford basin. Mr Howell posted this along with several other maps. Just look around and you’ll find them. We found his resources, comments and guidance along with Ms. Barnes to be exceptionally helpful and generous.
Although they are not labeled, it appears the graphs you’ve posted here represent the two wells we spoke of in our original post today. If so, it seems as though they’re pretty much close to being exhausted (or whatever the term is for the end/completion). Are we interpreting this correctly? The decline appears so significant and steep. If this the case, how does it all end? Does Charter Oak send us some type of closure statement? We have zero understanding of what is the next chapter
They will not send you anything.
I’d advise you to start compliing data on your wells. The Name, location, API number, Production Unit Number PUN.
Then you can search to see what is going on. The data will lag, but will eventually be there.
Here is an example of some horizontal wells of mine. I tracked their production sales amounts over quite a few years and made a graph in Excel. These are from the Woodford in Canadian county, just the gas. I had three different wells come on line in 2008 and 2009 in three sections very close to each other with small acreage. You can see how similar the production was after the first few months. In late 2012, I had all sorts of offers to buy my “declining production to help me out”. Made me suspicious. Well, each of those sections ended up having eight more wells each. Look at the difference in the 24 more wells coming online made. The first ones were low on production for a while as they shut them in while they frac’d those other wells and there was some interference. They did come back up a bit over time. This was in the early days of testing spacing, but look how much more was coming out of the sections from my “poor declining production they wanted to take off my hands”. Newer technology also made a difference. Some wells came on higher, some came on lower. Overall, the sections were drained much more effectively. I need to update the graph since I have another five years of production now and I suspect that they all pretty much flatten out at a lower level now. My engineer ran the decline curves on these wells and they are going to last another 25-30 more years. I like 30 years of low production. This was even before the Mississippian shales were discovered, so additional reservoirs can be important later in the life of your minerals.
The left side of the graph is mcf/month. The bottom are the dates and each different well is posted on here. We call the shape of high time in the first two years and then the lower rates of the later years a “hockey stick”. We tithed 10% of our revenue since we were blessed to have it in the first place and then invested the rest and used it to put our kids through college (which is an investment in itself). This was on small acreage, not big fancy acres. I am not promising that everyone’s acreage will be this way, but want to use it to illustrate the concept that you need to think past one well and about three or four decades in the future. And oil and gas prices weren’t all that high when this was happening. You need to get good financial planning and a good accountant to guide you.
Nice post. I agree, you have to take the money you make and invest it wisely. A kid’s college, stocks, buy some land, a house or whatever. You can parlay your success into other successes. I would advise against blowing it , or developing crazy spending habits! And a lot of people do that. If you have poor spending habits to start with, they will not get better with the inflow of new capital!
I have a current offer to buy my RI in several properties in Karnes County (all under the management of Marathon Oil), which have experienced a 60% decline over the past 12 months. The offer is 34% higher than the 60 x the most recent three month average payout formula. Considering the extremely unstable political/economic situation in the world, I am seriously considering accepting it, but would covet your opinion.
I can’t really speak to Karnes County. This is the McClain County, OK forum category.
The questions I would ask are: is there potential for other horizons? Is there other drilling planned? Don’t think of just one well, think more. Do you know what your capital gains tax might be?
Anyone offering to buy is pretty sure they are going to make a profit off of you. You need to try to find out what they know. Do you have a need to sell? You can sell part and keep part if you want to split the risk.
Thank you for your response. Apologize for unknowingly posting this in the OK forum, but the question(s) raised about this issue would seem to me to be universal, since just about every royalty owner, anywhere in the U.S. will get offers like this, sooner or later.
Of course, all the considerations you listed in making a decision to sell or not are important. but there are a couple that I don’t seem to be able to get a clear answer on from professionals; 1. What will be the capital gains tax, if any, due the IRS if one decides to sell, and 2. Is their any drilling planned?
I have consulted with two CPAs, both of whom said you have to know what the fair market value (FMV) of the properties was when you acquired them to determine what the LTC liability will be, but niether of them was able to tell me how to derive that figure. How do you determine what that is with something like this? It’s easy with a stock market or real estate investment, where all you need to know is the price you initially bought them at. But this is, to me, more complicated, because none of the seven properties on the sales block started paying royalties at the same time, and since I inherited them, there is no initial purchase price. In the offer from buyer, they offer to show how they valuated these properties, so I am going to take them up on that offer. Perhaps that will provide the means to determine the value of them when they first started paying royalties.
Planned future drilling. Most of the properties in the offer are under the management of Marathon Oil, who won’t divulge their drilling plans to Royalty owners. In my seven year experience with them, the only way I’ve known about any new drilling or production is when they send out a new division order to be signed. It’s been suggested that I go to the court house in the county where the properties are located and search for any new drilling permits. But does obtaining a permit always mean the company will carry through with it?
The IRS will want a value of each property as of the date of death of the ancestor. Not so easy to ascertain in a lookback mode. You have to get sales of properties nearby close to the same date. May need a landman. If the purchaser gives a value, you will have to live with an IRS penalty if they don’t agree. The capital gains is usually based upon the difference in the value at the date of death and the sale price. The amount of capital gains tax is based upon your income. Check with an accountant.
Operators do not generally tell royalty owners their plans as they are confidential. Depending upon your state, many of the courthouse documents are online. You can check with the Texas Railroad commission or in OK, the Oklahoma Corporation Commission for permits and intended drilling. A permit does not always indicate they will follow through, but it is an indication. Check the quarterly reports of Operators and they will be bragging on areas of activity.
On every site I’ve searched, the rule on LTC liability is it is zero if gross taxable income is less than $39375. If GTI exceeds that, but is less than $400K somthing, the tax is 15%. The question is this: Is the increase from the capital gain going to be added to your other income and thus counted in the GTI figure? If that is the case, unless one is living on a welfare check, and the net CG is $20K or more, this will push most people’s taxable income over the $39K figure.
I inherited these royalty interests from my father, who has been deceased for 23 years. Frankly, I don’t see how anyone could come up with a true FMV on something like this since there were no royalties being produced at all on these properties 23 years ago. Under this circumstance, my guess is that the IRS will view the entire amount of the sale as a CG. It would be helpful if someone on this forum who has gone through this process could relate their experience with the tax issue.
In the inheriting of my mineral rights the probate done in Oklahoma had a value for the unproducing and unleased mineral rights. Assume my Attorney somehow came up with that value, but not sure how. Ridiculously low value ,but a value I’d have to use if I ever sold those rights. I know something about Capital Gains and w/o checking your numbers…that is about how Capital Gains taxes work. Most people will end up paying them if they sell unless ones income, at the time, is very minimal.
Rick B.
If you cannot come up with a defensible fair market value as of date of death, the IRS will count the whole sale as profit/capital gains. It is much better for heirs if the executor of an estate gets a professional engineering or appraiser’s opinion so they will have a documented statement for the IRS. Having just gone through three estate appraisals we did that and had the estate pay for the evaluation, it sure saved the heirs a bunch of taxes if they ever sell. Not every estate will have the funds to do that.
