Can somebody help me to understand what Continental is offering. They’re drilling a horizontal well in McClain County and they are “allocating the costs and any revenues from the sale of production based on the percentage of perforated lateral in the horizontal wellborn in each section.” The terms they are offering are confusing to me.
$700 per acre delivering 87.5% net revenue
$550 per acre delivering 81.25% net revenue
$400 per acre delivering 80% net revenue
$250 per acre delivering 75% net revenue
I’m use to seeing higher bonuses for lower royalties, but this seems to be the reverse. Also, what is the best choice here?
Here is my guess. It looks like 87.5% net revenue would correspond to a 12.5% or 1/8 royalty, 81.25% net revenue would correspond to a 18.75% or 3/16 royalty and so on. If you substitute the implied royalties, your offer would now be $700 per acre with 1/8 royalty, $550 per acre with 3/16 royalty, $400 per acre with 1/5 royalty and $250 per acre with 1/4 royalty. Which is best depends on your needs and/or guesses. If the well is drilled and successful, highest royalty is usually the best long term, but if there is a long delay and you could use more cash soon, the lower royalty offers might be attractive.
What township and ranges? That well is going to extend over three sections (the hint is in the name). So each section will have its allowance based upon the perforated feet in each section versus the total feet perforated.
You do not have to lease with Continental. You can wait for other offers. You can also wait for Force Pooling which many of us like. If you share the township and range, we can look up the other companies that have filed leases.
Thank you for this reply. My math is not very good. Seeing it expressed this way helps me to make my decision. I always go for a higher royalty than bonus.
There are several companies leasing in the area. Suggest that you ask for 1/4th because there are a lot of leases already filed with that royalty. Reef Petroleum, Summit Oil and Gas, and Criner Land Services are at least three working in there right now. More will probably pop in as pooling gets closer.
If you have not leased before, it is a really wise idea to get a good oil and gas attorney to look over any draft lease and make recommendations for edits. The draft lease you get handed is usually not in the mineral owner’s favor and can cost you a lot of money in the long run if it is not fixed. These leases can last for decades and a small fee up front can bring good royalties in the future.
If you have the time and the funds to pay a good oil and gas attorney to craft an excellent lease with no post production charges plus about ten other extra clauses and the leasing agent will take it, then leasing is a good option. The lease may cover many potential reservoirs but no guarantee that others might be drilled.
On the other hand, if the leasing agent will only go with the operator lease (which is not mineral owner friendly), then pooling is a good option. A pooling is only for the reservoir(s) of interest and is usually for a primary term of six-12 months. If they don’t drill, but are still interested, they may pool again and you get an additional bonus. Most of my poolings have been at gross values with no post production charges. You can then pool or lease at other reservoir levels if there is interest. Also, poolings are supposed to be offering the highest royalty/bonus options of the eight contiguous (touching) sections within the last year, so should be competitive to the area.
I hear this a lot but have never seen it to be true. I’ve leased for 5X the pooling amount. Ive never leased for below what the pooling ended up being.
Note the words “suppose to be” what the operator has offered. An experienced mineral owner knows that there may be other third party groups that may offer to lease for more or if cutting a multi-tract deal with the operator or third parties, they can also garner a higher than reported bonus. Networking and asking other mineral owners what they are getting will often lead to a better lease bonus than what shows up at the pooling.
Exactly. I just like to point out the common misconception of “I’ll just wait for the pooling and get the best price offered anyways”. Seen it too many times.
Pooling comes out and they had an offer from non-op group(s) much higher than the pooling. Call the groups that made said offer and they are not interested because they have leased what they want.