Weld County has seen better days. Although residents and land owners are by now used to seeing the “ups and downs” of the oil and gas industry over the past few decades, this bust is a little too close for comfort. Here is what has happened in the past few months: Encana has completely left Weld County; Baker Hughes, one of the biggest oil companies in the world, has laid off almost all of its Colorado workforce; Goldman Sachs is projecting oil prices to hit $20/barrel in the short-term and then stay at $50 until 2020; and several towns and municipalities, like Greeley, are bracing for a massive blow to revenues for 2016 and 2017. That is a lot to digest.
Now, if we take a step back and look at the oil and gas industry overall, not everything is as dark and gloomy as busts of yesteryear. Weld County now accounts for 85% of all oil and gas produced in Colorado; Anadarko and Synergy have filed over 100 drilling permits for the area and have healthy balance sheets, according to their investor presentations (with other companies investor presentations due to come out at the end of this week); and oil and gas prices seem to have started to settle from their 33% drop since the end of the 2nd quarter. One thing is for sure though, the dust has yet to settle completely and 2016 still looks a bit hazy. The main question to ask is, as a mineral owner, what should I pay attention to? The answer is simply: prices.
If you take a quick trip around Weld County, you can see drilling rigs on your neighbors’ land. This provides a false sense of security that, “If I own minerals, and I have a lease, it won’t be too long before I open my mailbox and have my royalty checks shooting out!” Unfortunately, this is not the case. Anadarko, Synergy, Noble and PDC still find drilling and producing wells in Weld County to be economical at current prices, but if prices start to fall lower it will no longer be profitable and those rigs will be sidelined. Another concept to keep in mind is drilling is just the first step of many in a well’s journey to becoming productive and profitable for the operator as well as the mineral owner. Drilling, fracking and flowback all used to happen within months of leases being signed. That process is now stretched out over multiple years. Basically, if prices stay where they are currently, and a production company started drilling where you own minerals today, it would be 2 to 3 years more before the first check comes in… at the earliest. As mentioned before, Goldman Sachs reports that the market is drastically over-supplied and US reserves are pushing maximum capacity. With every barrel produced—not just out of Weld County but across the nation—it only pushes those royalty checks further away from the mailbox.
You might say, “That’s okay. I already have wells producing on my property AND I am already receiving royalties!” As wonderful as that is, we cannot forget that oil is a finite resource. Once it flows out of the earth and sold into the market, it’s gone. In Weld County, well data shows an exponential decrease in production after the 2nd and 3rd year that the well is active. Your royalty checks that you enjoyed this time last year will never be the same.
This is not to say that Weld County is headed for hopeless times. A better description would be “uncertain.”
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