Replies to This Discussion

Permalink Reply by Jesse Joyner on March 18, 2020 at 5:14

Steve P., from your various posts over time, I'd say it's an easy no-brainer. Don't waste any time even thinking about selling your minerals unless you need a kidney transplant or are dying of the coronavirus and thus need 24-hour care with a hard-to-get ventilator. Indeed, this philosophy has served my family quite well for the last 100 years or so. (Of course, the main regret is that years ago, large hunks of land were, in fact, sold off in a HA sweet spot. In hindsight, these instant cash infusions were dumb moves, although the old folks back then didn't have a clue as to what was down deep since there wasn't the drilling technology to illuminate their misperceptions. Lord, the stories I could tell as to the why's and whatever's of the family intrigue involved in regards to who did what and for what motives. There are snakes in the grass when outsiders marry into such old farming families, which had big acreage from way, way back.) 

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Permalink Reply by Steve P on March 18, 2020 at 6:40

I'm not interested in selling.  I am interested in hearing from Rock Man, Skip, and Jay regarding how the current lease-holder of a unit affects the FMV of the mineral rights.

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Permalink Reply by Skip Peel - Mineral Consultant on March 18, 2020 at 7:00

CHK bad.  Aethon good.  Comstock, the best of the rest, IMO.  Post production  royalty deductions are a critical element in low price periods.  Grades to be updated in 30 to 60 days.

I think a little tutorial may be in order.  I'll use Vine as an example but the same analysis can mostly be done by mineral owners on their own utilizing SONRIS.*

If you search by operator and pull up all the Vine wells, you will find 31 listed as Status 01, live permit.  Of those 31, 12 have spud (are in some phase of being drilled).  So, 19 live permits not spud.  Of that 19, 15 are "group" wells (two or more) that largely represent infill development and the accepted development design to produce mcfs for the lowest cost.  So, 4 permitted, not spud wells that are not group wells (I'll come back to these shortly).

Of the 31 total well permits, dated 12/5/19 thru 1/22/20, 17 are six month permits, a 5 well group permitted on12/26/19 are twelve month.  Generally speaking, the six-month permits represent an aggressive drilling schedule running in a timely manner.  Although the difference between the two is only $1264 ($1264 for 6, $2528 for 12), it is a reasonable measuring stick for intent to develop.  The drilling schedule if you will.  In that business things change and nothing is guaranteed as current events attest.

The most recent 9 well permits, 1/20/20 onward, are all twelve month permits.  6 of those wells are two well HC pairs, no longer the 3, 4 and 5 well groups that immediately preceded them. The last 3 are individual HC wells, permitted 2/17/20 – 3/17/20).  Along with another single HC permitted a little earlier (1/22), these stand-alone cross unit lateral wells will HBP 8 drilling units.

*Since SONRIS reports are often late for spud dates, I use a weekly rig report subscription to help identify which Status 01 wells have actually begun drilling.

Would anyone care to take a stab at an interpretation of this data?

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Permalink Reply by Steve P on March 18, 2020 at 9:22

no interpretation from me.  Way outside my expertise. 

My minerals in Sabine are covered by 3 of those Vine 12 month permits, taken out on 2/17/20.  Vine drilled 2 others in the same sections (3 sections lined up N/S) last year.  My assumption, based on the fact that Vine has rigs and an active drilling program, is that they will drill those sometime this year.  As long as my first royalty check comes after the end of this (tax) year, I'll be happy.  We have all lamented having the bulk of our gas produced at these rock-bottom prices.  Not in our control.

I am a bit skeptical of the notion that a 6 month permit is representative of a more aggressive drilling program.  There is a group of 5 sections just E of Stanley in DeSoto, and all of those sections are HBP from a variety of old Hosston and even much older Petit wells.  The deep rights belonged to BP for many years.  A number of years ago, between 5 - 10, BP did a farm-out of the deep rights to Comstock.  Comstock did successive 6 month permits year after year without any drilling in any of the 5.  They finally did a CUL that includes 2 of the 5.  My theory was that they were worried about facing a demand from the mineral owners claiming that they old more shallow wells were not producing in paying quantities, and they wanted to either use the open 6 month permit to show intention to drill, or have the permits on standby in case they needed to get in there and drill quickly to avoid losing the leases.  Of course all of those old leases were at 1/8

Finally, I guess I either didn't know, or forgot I knew (I'm that age), that Comstock bought out Covey Park.  The 2 excellent wells I mentioned in my prior post that are contiguous to the units in which my property lies were drilled by Covey Park but are now operated by Comstock.  CHK drilled the 2 wells on our adjacent sections in 2009/2010.  No reason for me to think that CHK could drill equally excellent wells as CULs in the 2 sections to the north where they already control the leases.

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Permalink Reply by Skip Peel - Mineral Consultant on March 18, 2020 at 9:30

Steve, those recurring Comstock permits which expire annually is an outlier.  The effective length of permits is one of the best insights into the drilling intentions of an operator.  Not perfect because things happen.  And when those things happen, plans change. 

The change for Vine is evident.  Transitioning from infill development with multiple well groups to drilling the fewest wells required to HBP leasehold.   After the fact, well permit cost is not a great factor, it is merely a leading indicator. In late January Vine ceased to take six month permits. A wise move for the foreseeable future. 

Permalink Reply by Jesse Joyner on March 18, 2020 at 7:25

Yeah, I get it Steve. Me, I used to invest time in attempting to figure such stuff out. But what I eventually discovered -- after gobs of wells and numerous operators coming and going -- is that a land/mineral owner simply has to have oodles of patience (go long, as Warren Buffet would say) and thus wait to see what happens. In other words, it's quite a complex Calculus equation (which can be jimmied via endless future unknown variables, and no one actually knows what the heck will happen, even the operators.) That said -- Skip, RM, and Jay do, indeed, offer solid advice. Plus, I fully agree with Skip on Aethon, since I'm in their pay deck and have been from get-go ever since they jumped feet first into the HA. Interesting company, that Aethon. 

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Permalink Reply by Rock Man on March 18, 2020 at 8:31

FMV always starts with the subsurface - how good is the rock / reservoir in question associated with your minerals. And the reservoir quality can change quickly in both a positive and negative manner.

Operator quality also varies - sometimes for the same company over time. The people on staff and their managers will change. And this staff may pull in different technologies via alliances with contractors and / or consultants to optimize horizontal well efficiencies and EUR's.

EOG has consistently been a top notch operator - they married engineering and geo technical aspects to get the best results in their play areas. Pioneer was also a top notch operator in following the same approach.

And companies change - several years ago, CHK was as good as anyone on bringing the best people and technologies to the table to optimize unconventional drilling and monetization.

But then key staff left (or were forced out) - and this staff created new companies (e.g. Felix) who then crushed it in different play areas.

There is no simple formula for determining the prospectivity and value of ones minerals. The factors that come into play are numerous.

Any mineral owner can do a lot of work (or pay to have a lot of work done) to better understand their position and value. Or they can sit back and see what happens.

The purpose of my initiating this discussion was to get mineral owners thinking more about understanding their positions. 

Hopefully I have succeeded in doing this.

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Permalink Reply by Skip Peel - Mineral Consultant on March 18, 2020 at 9:15

FMV (fair market value) of minerals is based on existing production, remaining slots in a drilling unit and the perception of potential near term development based on publicly available data.   And in rare cases intel from an operator.  If you don't own a large acreage position, forget it.  All of the HA/BO buyers with whom I am familiar don't use the services of geologists as there are very, very few well logs to review.  Early in the play companies stopped running them.  Currently there appears to be no real preference for operator other than not Chesapeake.

Aethon has been leading the pack as far as running the most rigs/drilling the most wells.  The company has average about 25% of rigs across the play, E TX and LA.  I guess if anyone thinks that will continue then hope for Aethon to acquire your unit.  I think the only companies that are in a position to acquire "bolt on" acreage are BPX and Comstock.  Comstock seems to have some interest currently.  BPX does not.

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Permalink Reply by Rock Man on March 18, 2020 at 8:16

A wild card factor is "how many times will the acreage turn to another operator". And how good those operators are.

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Permalink Reply by Skip Peel - Mineral Consultant on March 18, 2020 at 8:24

You can only analyze what you can measure.  And that only provides a modicum of actionable options.  For those playing the long game and expect all their Haynesville/Bossier recoverable reserves to be produced, most will see multiple operators of their wells.  As many have already.  Unlike the early days of the Haynesville Shale Play, most operating companies are "good" at drilling and completing wells.  It's the post production deductions that are a bone of contention with royalty interests.  For example, the most disliked, to put it mildly, Haynesville operator is Chesapeake but their field personnel and contractors drill some very good wells.

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