Replies to This Discussion

Permalink Reply by Max on November 14, 2013 at 3:50

Hi Katie, you've opened the door that many folks are faced with today and like them, you will have to make one of the most important decisions of your life.

All of us would like an "expert" to help us with decisions that come to fruit years after all the papers are signed, the only problem, there are no "experts" with working crystal balls.  Experts perform best in real time, any decisions made in the future are "predictions" based on a limited amount of knowledge.  The expert will know most of the possibilities, but picking the one that will mature is the problem.  

With that said, we'll explore your questions and make those questions multiply with new questions.  Number one:  Does the company know something you don't know?  Oil Production?

Yes.  They have gambling $'s today to gamble with to make $$$$ in the future with the odds in their favor.  A rise in NG prices and those odds get a lot better.  Oil production from the Haynesville Shale has been discussed many times on this site and from what I can gather, the geology of the area is not favorable for oil.

Number two:  I don't know, but I would guess they crunch numbers and and if the projected return is to their liking, they offer you what they can stand.  A company with enough cash flow can buy your minerals, invest the income each month from the producing well and gain a return and/or tax incentive over the years.  You can add many other ways they can make $$ on their investment, but you must also state that they could lose $$ just as well.

Number three:  One person's success is another person's disaster.  Example;  John Doe sold his minerals and used the $$ to start his dream business.  Today, John is doing very well, his company has expanded and his children have joined the business to carry it into the future.  (2) John Doe sold his minerals and used the $$ to start his dream business.  The business failed and John is in bankruptcy, his children no longer speak with him because he practically "gave away"  their inheritance.

Number four:  Take a sheet of paper and divide it.  On one side write everything good about the sell, on the other, everything bad.  After you've written all you can think of, start crossing out the things you can live with.  If you find you have a lot of things that you can't live with, you can address them and see why the sell resulted in something unfavorable. 

Last but least, a sell to pay for heath reasons trumps new cars, collage, children's inheritance, etc. 

Try doing this also, re-figure the numbers using increased prices for NG.  A few years ago NG was $13 compared to today's $3.  If the prices go back up, will your 33 years drop to half or even lower?  

Katie, you're the only one who knows all the in's and out's of your needs, an expert could direct you to the best decision of your life, or the worst decision.

Max

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Permalink Reply by Thomas C. McKowen, IV on November 14, 2013 at 4:44

When natural gas was just under the $13 referenced, my wife received an offer we thought was very good.  We contemplated selling a portion.  (I would never recommend selling all.)  We hired an expert to advise us.  He advised the offer was too low.  We didn't sell any rights.  In retrospect, we should have sold some.  But how does one predict future prices?  Our expert could not.

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Permalink Reply by Katie Waterson on November 14, 2013 at 5:37

Thanks, Thomas.  

I think selling a portion makes sense.  From what I can see and read, prices might inch toward $5, but not for a few years and I'm not sure we'll ever see $13 again with the flood of supply in the US that doesn't seem to be going away anytime soon (although we'll hope demand continues to increase, but even that is suspect).  It just seems the combination of a depleting well (anyone know the well lifetime predicted for a Haynesville well?) and prices at $5 still makes this offer worth contemplating.  

Max, thanks for the info about oil.  I might feel differently if there was discussion about an oil reserve, but if we're still talking NG, it provides me good information in continuing to negotiate.

I wish I had a valuation equation and will just ask this company how they formulate offers.

I'm super appreciative of the discussion here.

Katie

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Permalink Reply by Thomas C. McKowen, IV on November 14, 2013 at 6:15

You should also keep in mind that the operators intended to drill up to 8 wells per unit before the price of gas dropped.  There are Haynesville units in which additional wells are being drilled now.  Are any being drilled in your area?

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Permalink Reply by Katie Waterson on November 14, 2013 at 8:32

It's a good question.  I remember being told 5 years ago the plan was 4 total wells on our 80 acres (is that even possible?) but from what I can tell, operators that AREN'T Chesapeake seem to be drilling more wells, but because we are leased through them, I don't anticipate we'll get any additional wells on our land, in particular.  In the total 640 acre platte, maybe....but wouldn't additional wells deplete the area more quickly and if they aren't on my land, that strengthens the argument to sell some portion of our mineral rights?

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Permalink Reply by Thomas C. McKowen, IV on November 14, 2013 at 8:42

Everyone in a unit shares on a proportionate basis.  It does not matter where the wells are located.  The idea of 8 wells per unit was that each well could drain 80 acres.  This may not be correct now with cross-unit laterals.  But the general idea of more wells remains.  Also, I heard that Chesapeake sold most of its Haynesville.  Does it still own your acreage?

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Permalink Reply by Katie Waterson on November 14, 2013 at 8:48

I wondered about that, too.  As far as I can tell, Chesepeake still owns our unit -- I never received any info on a sale, I log in to the chesapeake website to look at my revenue check and their name is on it, etc.So I assume they still are.  Is that odd?

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Permalink Reply by olddog573 on November 14, 2013 at 9:45

CHK sold some Haynesville to EXCO but that's all that I have heard of.  They still have majority of my properties.

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Permalink Reply by Katie Waterson on November 14, 2013 at 10:02

For those interested, I just got off the phone with the buying organization -- fascinating.  They are amazingly transparent.  The valuation model looks at Proven Undeveloped Production (the risk) and Proven Developed Production (the known).  According to him, our valuation was 80% based on the Undeveloped (ie, we know something you don't know) and 20% on the known (ie, yes, you have about 5 years left on an 8-year decline curve where your payment will basically go to zero).

His perspective is there is that their geologists believe there is a lot of undeveloped Haynesville potential, and they are willing to pay for it, structure it into a fund and allow pension/endowment funds to invest into these assets (which are clearly risky).

So the net to me is the future development of our parcel which I have no insight into at all, but wish I did, because Chesapeake never "knows anything."

Anyway....I guess this helped me understand a little bit more, and hoping for all of you out there in similar situations.

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Permalink Reply by Frank on November 15, 2013 at 14:38

And just when did you get a check paying $5?

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Permalink Reply by Zydeco on November 16, 2013 at 10:59

beautifully stated Max. Katie, while this has brought up very interesting questions and options, I was wondering if you have thought about the Taxation of the bulk lump sum, if you took this offer. Say it was high enough, you would "give" 48% back in taxes. Is this something to also consider ???  just a thought.  Grateful to all contributing and Katie with your valid questions.

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Permalink Reply by Skip Peel - Mineral Consultant on November 16, 2013 at 11:07

Unlike a lease bonus or royalty payments which are taxed as regular income, the sale of minerals is taxed as capital gains.  Mineral interests owned for two years or longer would be taxed as long term capital  gains.  Long term capital gains may be as low as 15%.

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