Replies to This Discussion

Permalink Reply by Henry on November 18, 2011 at 13:28

mc,

Unleased mineral owners (UMOs) are not entitled to royalty checks.  One must have a lease to get a royalty.

There have been a few UMOs whose wells have reached payout, and are beginning to receive payments.  But not many.  The successful UMOs have very good wells (IPs of over 15 mmcfe/day) and an operator who pays a fair price for the gas. 

And no, a UMO does not have to pay a penny toward the cost of the well.

Finally, with regard to your request of whether it is better to remain leased or not.... That is a personal decision.  Most people do not recommend it.  Maybe some of the UMOs on this site will weigh in. 

Permalink Reply by mc on November 19, 2011 at 14:40

 

Thanks  Henry, I appreciate your correction  regarding the Royalty Checks.  Do you have any idea as to why most people do not recommend it,  and  how long it normally takes to receive payout after a well starts producing?

Permalink Reply by Pam on December 2, 2011 at 8:24

mc,

I have unleased property in a Sabine Parish unit with a well that went into production in April 2010.  It's a good well and Encana is paying fair prices but we are still waiting on payout.  It cost over $11 million to drill, and with operating costs along the way there was still a $1.4 million balance as of a couple of months ago.  Hopefully it'll reach payout within the next few months, but it's still undetermined if going unleased is the best bet or not.

Pam

Permalink Reply by VSC DeSoto South on December 3, 2011 at 17:06

thank you for sharing this information. I was wondering how long it takes a well to payout I know yours is not at payout yet but I now know at least a year and a half. I also realize the economics of each well and operational costs will be unique but I have some kind of duration.

Permalink Reply by Robert Griffin R on December 3, 2011 at 17:17

Pam,

Thanks for your information.  Would you please share your well number with us? 

Permalink Reply by Pam on December 3, 2011 at 17:48

Robert there are 2 wells being reported on SONRIS now under 240294, the JRB 1 and 2.

Permalink Reply by Henry on December 4, 2011 at 1:21

mc,

Another way to think about it is to simply do the math.  You can estimate what your well will cost -- probably a best case might be $8-9M, and a worst case might be $12M (or a lot more if they really screw it up).  You can also estimate what price you think you'll receive for your gas -- $3 if gas stays very low, and higher if gas were to go up.  Also, make an estimate (look at the wells in your area to see h ow good they might be) as to EUR (Estimated Unit Recovery, i.e., how much gas the well will produce over its lifetime).  I will assume the following:

- Gas price:  $4

-  Well cost $10M

-  EUR: 6 Bcfe

In this case, payout will be reached at $2.5 Bcfe of production ( 2.5 Bcfe X $4 per mcfe = $10M)  Your payout will be your prorated share of the remaining 3.5 Bcfe of gas.

Had you leased at 25%, then you would receive your prorated share of .25 X 6 = 1.5 Bcfe of gas.

This simple calculation makes it sound like a no-brainer to go UMO.  BUT...  don't forget that a lease gives you a bonus, up front, that you would not get otherwise.  Also, if you used $3 gas, an EUR of 5 Bcfe and a well price of $12M (all of which are reasonable), you would have been better leasing.  Royalties begin paying immediately, while a UMO (see Pam's comment below) must wait a couple off years.  Remember, if you go UMO, you risk getting nothing -- if the operator screws up drilling the well, and it is compromised, you get nothing.  On the other hand.... if gas prices go up in the future, you might do very well.

Lastly, realize that as a UMO you are at the mercy of your operator.  You probably only own under 20 acres, so if your operator screws you, you don't have enough money involved to make it worth going to court to rectify the situation.  And some operators will charge you for things you would never expect.  Based on what I hear from people in my gas price survey, I will advise you never to go UMO with Chesapeake.

So, having made a short story long, I advise you to do your own calculations, and see how much tolerance for risk you may have.

Permalink Reply by Pam on December 4, 2011 at 2:34

Thanks Henry, good explanation!

Permalink Reply by Ed on June 1, 2012 at 5:05

With the price of Gas so low at this point, a the decline in production seen with ALL of these shale wells in the Haynesville, I would say that those who did not lease, missed out on a once in a lifetime opportunity. In many cases, they will never make much of anything, and what they do make will be strung out over many many years. After about 2 years, 90% of the gas is gone. When new wells are drilled, the exact same thing will happen again.

Sad that people got it in their heads not to lease. It really only worked out for those who had hundreds of acres or more. The small land owners will never get much at all.

Permalink Reply by Tim on June 21, 2012 at 4:21

I am a landowner/mineral right owner in section 7 12n 15w in Desoto.  I have a well in the next section pulling gas out of my section with horizontal drilling.  In contacting Chesapeake (well owner) they said I would be payed when the well drilling was paid for.  With the price of gas the well pay out is 1.5 to 2 years.  The problem is that we were never approaced with a lease prior to drilling.  So your guess is as good as mine.

 

Permalink Reply by Spring Branch,mineral owner on June 21, 2012 at 8:16

Get an attorney!

Permalink Reply by DrWAVeSport Cd1 on June 22, 2012 at 5:10

mc,

I am UMO with Chesapeake Energy.  Our well paid out end of Sept. 2011, LA Well Serial #240427.   I too was never approached by Chesapeake or JPD Energy (who was leasing for CHK) to sign a lease.  I too did not take a very good bonus offer back in Summer 2008 (from another O&G Company).   So, I had to wait approx. 18 months before "well payout" status was reached.  Remember, those first 12 months of production, nat gas prices were well higher than today's.  At today's prices, it would take much longer for most wells to reach payout.

However, that was the "simple" part of this UMO stuff.   The hard part is collecting your moneys after the well has paid out.  You see...the O&G Producer (CHK) stonwalled me for an additional 6 months and came up with everything in the book to keep from paying me.  It took three months of sending "demand" letters and other legal documents...sent in duplicate after duplicate...before CHK would pay up.   But, CHK finally did pay up.

If you go UMO, please read all GHS information per same.   Right now, bonus moneys are nill and nat gas prices are even worse...  So, all things considered, leasing gets you mineral moneys immediately...UMO does not.

UMOs have to pay their mineral acreage ownership percentage per "section unit" per well.  The UMO's "percentage" of the well's costs are deducted from UMO's mineral revenues...which are held by the O&G Company selling YOUR minerals.  When the well reaches payout status and UMO's "portion" is paid from the sale of UMO's minerals...  UMO gets first check. 

Often "first" check includes several months of revenue.  I have been receiving monthly checks regularly since March 2012.    Remember, UMO pays monthly well expenses per UMO's percentage of ownership in the well.  So deductions are taken out each month.   UMOs get a monthly "summary netting expense" report with each check showing UMO itemized monthly costs of well and those costs per UMO's "share" of those costs. ( UMO also gets "Quarterly Reports" on same well each Company Financial Quarter reporting period.)

UMO receives 100% of their mineral estate revenues in each well...less expenses.  In my case, I believe CHK isn't "padding" expenses to me any more than they are doing to their leased mineral owners... per my neighbors who signed leases in October 2011 with CHK.  Their royalty checks are microscopic at today's nat gas prices and their expense deducts are outrageous too.

Also, UMOs can ammortize tangible and intangible well costs at the end of the year of each year's production. However, at today's nat gas prices,  there will be a net "loss" for UMOs even with these deducts...until UMO's initial "well cost" percentage is recouped...  

There is also a depletion allowance.   Royalty owners get the depletion allowance.

I agree with GHShalers that in today's nat gas environment...Going UMO...is not productive for the small mineral estate owner.

Please note that my comments are strictly for Louisiana mineral owners.  IMO, LA is more equitable concerning going unleased.  TX and AR are not so equitable...Again, IMO.

Read GHS's Caliente's "UMO Basics."   It is a great reference, especially for beginner Shalers.

It is always up to each mineral owner to decide what is best for them. 

 

...Then get some good O&G legal advice before you sign that mineral lease. 

 

Good Luck to you and yours.

DrWAVeSport Cd1 6/22/2012  

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