Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on June 17, 2016 at 10:27

Most of the Terryville units have multiple wells reporting under the same LUW code.  A plat of the field would look like a pin cushion.  There were hundreds of vertical wells drilled prior to the first horizontal wells.  As far as what happened to the well, only MRD would know.  The OOC staff has admitted that this was a mistake to accept the severance tax abatement without first receiving a WH-1 (completion) and an Allowable report.

Permalink Reply by Gerald Mitchell Moody on June 18, 2016 at 7:14

a group from Texas are aggressively trying to buy landowner's minerals.  They are telling landowners they are only buying for 5 years. An elderly landowner knew he was leased but didn't know he had wells drilled on his property that he had not been paid on.  He did speak to his attorney for advice after the landman contacted him about selling his minerals. The price the group offered was a good offer, but what happens to all the back royalties he has not been paid on.  Does he forfeit those?

Permalink Reply by Skip Peel - Mineral Consultant on June 18, 2016 at 7:27

The agreement should state an effective date for the conveyance of royalty.  All payments for production prior to that date are the sellers and after that date the buyer.  There has been a high level of interest, and offers, for mineral rights and royalty for about three years now.  The fact that MRD, along with some associated companies, is actively seeking to acquire minerals and royalty presently probably makes other buyers more active.

Here is an excerpt from my Blog post:  Fundamentals of Leasing and Selling Minerals.  There are some potential problems with offers that you describe, Gerald. 

 A royalty interest may be sold in its entirely or as a fraction of the whole.  A mineral right owner has the right to lease their interest, receive royalty, bonus and other payments. A royalty interest owner has only the right to receive their proportional share of the royalty. As defined by the Louisiana Mineral Code, there are two classes of royalty:  a royalty created from a mineral right and a royalty created under an Oil, Gas & Mineral lease.  A royalty created from a mineral right, whether by the owner of the lands or by the owner of a mineral servitude created from the lands, is effective for a defined period of time no greater than ten years.  If there is no production during the prescriptive period the mineral right royalty expires.  If production is established the prescriptive period is suspended at that point and begins again from day one when production ceases. 

A royalty created under an Oil, Gas & Mineral Lease is effective for the term of the lease.  Whenever the lease expires, whether through failure to drill a well or through the drilling on a non-producing well, the royalty  created under that lease expires also.   If a producing well or wells are drilled then the lease remains in force, as does the royalty created from it, until such time as production ceases.   Unlike a mineral servitude created by the sale of a mineral right, the prescriptive period for a royalty created under a lease is not reset by a good faith effort to produce that fails (i.e., a dry hole).

I strongly advise mineral owners who wish to sell a royalty interest to engage the services of an experienced energy attorney.  There are various ways that a royalty may be defined in a conveyance instrument that determine how it is interpreted in law.  For the practical purposes of a willing seller the most important variance is how the proceeds of a sale are taxed.  The sale of a royalty created from a mineral right, owned for a period greater than one year under current IRS rules, is taxed as long term capital gains.  Depending on the seller's tax bracket that would be either 15% or 20%.  The proceeds of a sale of a royalty created under an Oil, Gas & Mineral Lease would be taxed as "ordinary income" and depending on the amount would be taxable up to the top effective rate, currently 39.6%.  Louisiana mineral owners would also pay the appropriate percentage of state tax in addition to their federal tax requirement.  Offers to acquire a royalty interest in producing minerals are commonly based upon a multiple of a monthly average payment.  As an example a buyer of royalty may take the average of the most recent three monthly payments and then multiply that amount by a number of months of production, commonly 60 to 120, to calculate their dollar offer.

Permalink Reply by Skip Peel - Mineral Consultant on June 18, 2016 at 7:34

I can not stress enough the need to consult an experienced O&G attorney.  Not just any old attorney will do.  Even though a royalty deed states an effective period, five years in this case, the wording of the deed is critical.  In some royalty deeds if production is established during the effective period the conveyance is effective until production ceases which could be much longer than 5 years. 

Permalink Reply by Gerald Mitchell Moody on June 18, 2016 at 7:44

how do these royalty buyers know what to offer an landowner?  and if a landowner didn't know how much he is supposed to get if he hasn't received first check? and the numbers are not posted with the State?  He is speaking to an attorney, not sure if it is oil and gas.

Permalink Reply by Skip Peel - Mineral Consultant on June 18, 2016 at 8:12

There are no hard and fast answers to those questions.  Buyers can have many different acquisition strategies.  Even if the mineral owner in question had received a first royalty check it wouldn't help them determine a fair price.  And production reported to the state while somewhat helpful is insufficient to figure a sales value.  One of the reasons for consulting an O&G attorney is they will have worked on other sales and have a more comprehensive understanding of the offers being made at a given time.  LA Oil & Gas law is quite complex and an understanding of case law is required.  Your average personal injury or family lawyer can't just read the Mineral Code and then be sufficiently informed to handle mineral related conveyances.  A lot of Haynesville Shale minerals owners discovered that the hard way.  And it cost some of them dearly.

Permalink Reply by Chris on June 21, 2016 at 7:26

I reviewed the Lincoln Parish records and located 36 active liens filed against MRD Operating starting 12/15 to present,  by numerous vendors for work done on many different wells. The total amount which is claimed by these vendors is around $1.7 million dollars.  This seems to be a small dollar amount considering, what I imagine is a relatively large drilling and completion budget. I also assume that filing liens was not these vendors first course of action. 

I can understand a dispute between an operator and a vendor over some invoices, but there are at least 6 vendors that have filed liens. The problem seems systemic. 

Permalink Reply by Skip Peel - Mineral Consultant on June 21, 2016 at 7:30

Thanks, Chris.  Those liens are a big red flag particularly taken with the failure to timely pay royalties on some wells and lessor law suits.  It may take the closing of the merger with Range to get these straightened out.

Range Resources has not as yet been issued an operator number by the state.  Until that happens there will be no official change of operator for the MRD wells.  Also currently there are no conveyance instruments in Range Resources name recorded in the public records of Lincoln Parish.

Permalink Reply by Clay Johnston on June 21, 2016 at 8:50

Skip. MRD stated earlier the merger would take place sometime in Sep. 2016.  There is some type of investigation launched by an attorney firm.

Permalink Reply by Clay Johnston on June 21, 2016 at 8:53

see below  

https://globenewswire.com/news-release/2016/06/20/849966/0/en/Barra...

Permalink Reply by Skip Peel - Mineral Consultant on June 21, 2016 at 9:04

Clay, this type of suit is common in mergers and acquisitions.  If directors or stockholders disagree with the price paid, they sue.  And some law firms specialize in and solicit disaffected stockholders for this type of litigation.  Sometimes a suit is merited, sometimes it's more like extortion.  In this case the premium paid over the current share price was considerably below the recent average for similar deals.  I've never seen a result of these suits published and I have always thought that they get settled prior to closing of the deal.

Permalink Reply by Clay Johnston on June 21, 2016 at 9:07

Thanks, Skip.  Thanks for your posts as well.  

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