RW,
I was just making a point so I used the most common numbers 1/6th LOR (that we see) and 500EUR (that operators tout to shareholders). You reiterated my point in that there are too many moving parts to determine if $6500 is a fair offer.
I think the Dunn Co example above is where it's all eventually going in the Bakken proper.
rw, not sure if I got your deal info correct but I get the gist of it maybe, did the person take the $2mm + 3% or the joint venture? I think they had costs of about $1.7mm to participate in 3 wells, I supposed being drilled off one pad (why not more)? Didn't wanna lease, but would have gone into penalty of $3.4mm, that's bad.
(I used $7.55mm Drill/Complete costs and about 2 million barrels recoverable on this one).
The lease would have paid them ~$3mm over the years at a fifth r.i. But they'd net $11.7 mm by paying their costs, but since they didn't have the cash - they could have gone JV, and maybe pocketed $4.5mm (the sponsor would have cleaned up as well.)
rw hit's them where they live (Houston probably) and operator comes back with 3% orri and $2mm for that interest, that's very shrewd.
Present value of lease - $1.18mm
PV of JV - $1.77mm
PV of rw kennedy negotiated 'deal' - $4.07mm
(That's $40k an acre.)
Evidently got it all in by a whisker too. Am I close?
Martha,
You are combining Oklahoma regs, North Dakota regs , and Operating Agreement terms in your question. The situations are almost never stacked or combined. For decisions in ND, read RW Kennedy's posts, he is doing it an has it down pat. I prefer to find a method that increases net income at a reasonable risk case by case. For Oklahoma, the choices and terms, as stated in the force pooling orders, are usually clearly stated, although complex and cleverly stated to direct you towards a decision to benefit the operator's maximum protection. The worst thing you can do in OK is make no decision. Sometime the best decision in ND is to do nothing until the well is producing and revenue is to be distributed. Leases and Operating Agreements stand on their own terms. When larger acreages are controlled, and geological situations permit, I prefer Farm Out agreements that help everyones situation.
M Barnes said:
Gary, correct me if I am wrong, but if you are leased and went non consent, you pay 200% of your portion of the drilling costs according to your acreage and if you are not leased and non-consent you pay 50% of your portion of the drilling costs. If you are working interest, then you pay 100% of your portion.
So for 1 acre, leased and non-consent: 1/1280x10,000,000 (well cost Drill & Complete example) x2= $15624 per well. Someone check my thought process and correct please. Don't they take your share out of your royalty checks until your penalty is paid off? What about additional wells?
great explanation!! Makes it clear why I prefer farm outs when appropriate. There is not substitute for knowledge and experience.
r w kennedy said:
If you hold the right to exploit the oil and gas by having leased it from someone and do not participate, yes the penalty is 200% and you are correct that you would receive nothing until the well payed out and recovered the penalty.
I helped someone who was in that position, they inherited the lease, not the minerals themselves but the lease of them, on just under 100 acres and had not the cash to participate. Three very good wells were drilled and the operator was laughing and offering to buy them out for what they paid and 5% royalty. There were three more wells being drilled and I informed this person that you have to farm out your lease to someone else who could participate or, as good as the wells were, it would be a long time before you ever saw anything from them. He did take my advice and did find someone interested in a joint venture and the operator stopped laughing and raised their offer from $115,000 and 5% to $2,000,000 and 3% on all wells from first production. Sometimes you have to hit them where they live.
M Barnes said:Gary, correct me if I am wrong, but if you are leased and went non consent, you pay 200% of your portion of the drilling costs according to your acreage and if you are not leased and non-consent you pay 50% of your portion of the drilling costs. If you are working interest, then you pay 100% of your portion.
So for 1 acre, leased and non-consent: 1/1280x10,000,000 (well cost Drill & Complete example) x2= $15624 per well. Someone check my thought process and correct please. Don't they take your share out of your royalty checks until your penalty is paid off? What about additional wells?
Very close Bart, yes they took the money. They inherited the lease on the acres and had no knowledge of the business and the operator had been letting them twist in the wind for 2 years, offering them 5% royalty and their original purchase cost back. The operator was NOT smiling when he actually found someone for a JV for one of the three first wells that they never sent the afe for, a fourth drilled, producing and on the confidential list, one currently drilling and the sixth well had already been drilled to a depth of 2,000 feet and waiting for a more capable rig to finish the drilling.
Bart Barton said:
I think the Dunn Co example above is where it's all eventually going in the Bakken proper.
rw, not sure if I got your deal info correct but I get the gist of it maybe, did the person take the $2mm + 3% or the joint venture? I think they had costs of about $1.7mm to participate in 3 wells, I supposed being drilled off one pad (why not more)? Didn't wanna lease, but would have gone into penalty of $3.4mm, that's bad.
(I used $7.55mm Drill/Complete costs and about 2 million barrels recoverable on this one).
The lease would have paid them ~$3mm over the years at a fifth r.i. But they'd net $11.7 mm by paying their costs, but since they didn't have the cash - they could have gone JV, and maybe pocketed $4.5mm (the sponsor would have cleaned up as well.)
rw hit's them where they live (Houston probably) and operator comes back with 3% orri and $2mm for that interest, that's very shrewd.
Present value of lease - $1.18mm
PV of JV - $1.77mm
PV of rw kennedy negotiated 'deal' - $4.07mm
(That's $40k an acre.)
Evidently got it all in by a whisker too. Am I close?
Andrew and RW,
I hope all unleased mineral owners take the time to read, understand, and reflect on your succinct comments before they casually sign a "standard" lease in exchange for a bonus payment. Your explanations provide great gravity to my often stated advice to "Select the operator" and that "the next lease you sign may very well be the last lease you ever sign". Any lessee that "promises to pay a royalty, maybe, someday" also takes on new meaning when the lessee goes non-consent. Personally, I think the errant lessee may have violated the intent of the lease to explore and development but that won't put a dime in any landowner's pocket.
The greatest pity of all is that it will be the small acreage owner that gets hit the worst. Their expectation for a little extra money may be delayed for 8 years on an average well and indefinitely on a marginal well. It is very expensive to break a bad lease with a lessee that selfishly takes advantage of the innocent mineral owner in order to negotiate a large payday for himself. It's the "new" oil business folks.
Hunter Burdick of Overland Minerals & Royalties, I would like to be able to thank you for your offer I received today of $16,808 per net mineral acre in T-149 R-96 section 4 McKenzie county.
I would like to be able to thank you for trying to buy me out with my own money, but my heart is not THAT big.
Considering my brother and I have just succeeded in retrieving our mineral acres from the hands of land companies and oil companies and have 8 years of royalty / production in suspense to collect, and the 4 wells to be drilled in the spacing this year with the rig on site drilling the first one. Call me silly but I will just hang on to my mineral acres.
I'm also going to attach the first page of your mineral deed so everyone can see where if I had EVER received a lease bonus, royalties, oil payments, gas payments, production payments, pooling payments attributable to these "Lands before, on or after the effective date of sale, including all revenues from the date of first production" that I would have to reach into my pocket and pay them to you. Not going to happen. Sadly, you will find someone, probably some elderly person who will agree to such an offer out of ignorance.
2096-IMG.pdf (814 KB)nice, rw.
Hunter Burdick, any reply? So, you would like to buy an interest today for its current price and additionally reach back and capture all prior revenue? If so (and it’s also clear to me you are) you should be prepared to lose it because the courts will rule in favor of what is customarily accepted, this is how things actually work.
Reeks of malpractice.
Bart