Is this a reasonable lease offer?

Seeking forum input. My siblings and I each have about one NMA in section 4, T25S, R35E in Lea County that we inherited from our grandmother. Quiet title has been filed (with considerable lawyer fees) but not finalized. ConocoPhillips is offering a $10,000/ acre bonus and 25% royalty with 3 year lease but not willing to entertain a no deduction clause or Pugh clause because we are such small owners. They say no forced pooling unless we can’t make a deal. What are our options? Without these clauses, will we see a paycheck after the bonus? They have two wells permitted as we understand in the area. We declined to participate as the costs they presented were too high for us. Any advice is greatly appreciated.

Considering you own 1 nma I’d take the deal. 10K for one acre and 25% is a good deal.

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IMO that is a reasonable offer.

Will your two clauses keep you from getting any revenue?

Pugh Clause: Keep them from earning depths below what they are willing to develop. So maybe you can re-lease the deeper rights later. This will not do too much for you as they will drill the Wolfcamp first.

No deductions Clause:

In my experience in Lea/Eddy the deductions will take away maybe 25% of your overall natural gas revenue (residue and NGLS). Looking at the Fez wells in the W/2 of Sec 4, maybe over the lifetime of the well it makes let’s say 2 mcf for every barrel of oil. Lets say that oil sells for $65/bo and an mcf sells for $3/mcf (over the life). For each barrel of oil you would get $65 + 2*$3 = $71 with no deductions. With deductions you are getting $65 + 2*$3*.75= $69. Yeah, that lost $2 per barrel is real money. It’s always better to get more money. But in terms of “will we still see a paycheck?” you are still getting 97% of the revenue. Those numbers may be a gross simplification, but on oil wells the deductions won’t screw you. If you have a Barnett Shale gas well, totally different story.

Others may have different advice. In my current semi-professional life I deal a lot with the royalty side of the revenue stream, which in places where you are, is WAY more valuable than the lease bonus revenues. So I usually tend to think folks should sign a lease at the best royalty rate possible, particularly in NM where you can get hosed on forced pooling.

Sign a 25% lease. Hope they drill wells. When they do, you’ll probably cash flow $100k/NMA over the next 30 years. Something like that. Don’t get me wrong, it’s always good to try to get yourself the best deal possible, but you really don’t have a ton of leverage.

Good luck.

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Thanks very much. Appreciate your input.

Thanks for your view and detailed reply. It really helps me because I know so little about these things.

NMoilboy is correct. Focus on getting your 25% royalty rate. No deductions would be really great, but you really don’t have leverage for that.

Pugh clauses are a nice addition, but are somewhat overrated. We have had a ton of trouble with actually getting partial releases for various depths.

It is super important to keep in mind that New Mexico allows forced pooling. If you don’t sign a lease, they can force pool you and then you aren’t getting paid until 3x or 5x payout (this realistically means never getting paid on most wells).

Its a solid offer. Maybe have a lawyer review the lease for dirty tricks, but otherwise I would take the deal.

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Thank you Armadillo! Appreciate your help!

Believe I may own some in the same section. Have a copy of original Us land office deed to John D Crowley. Don’t know if I can ask but would you consider sharing the attorney you used?

Reese S. Maybe we are distantly related. I believe Crowley was my grandmother’s grandfather. We are using Elizabeth Courtney from Lynch, Chappell &/Alsup out of Midland TX. She is also on NM bar. Very thorough but the hours do add up. The firm was recommended to us. We had a lot of old documents but they did confirming research.

Hi Reese there is a directory that advertises attorneys up above. We use Patrick John Flueckiger out of Austin.

Grandmother’s grandfather here as well. Was contacted over two years ago before the great covid crash by a land man who confirmed I had an interest. I think we’re in the unit that is east half of section 4 and 9 which had several 2 mile laterals planned at the time. NM oil and gas hearings confirm activity all around to reactivate those permits. Was wondering the value of filing a quiet title as opposed to waiting for the land man to contact us.

Hi Reese. Small world! Wonder if your grandmother was Beulah? Ours was Ola and they were sisters in OK. We were only contacted about section 4 interests. Don’t have any documentation about section 9. Others would be much more knowledgeable about pros and cons of quiet title versus waiting for offer from landman. Because my sister, brother a I each have such a small piece of section 4, we hope our lease deal bonus at least covers our attorney fees. I am told Section 9 is where the well will be drilled so surface rights may come into play for you.

May grandmother’s father, Thomas Reece Buntin was married to Myrtle Arbama Crowley who was a daughter of John David and Margaret Overcash. (This can get confusing fast). Rather than call a section a unit they will unitize two half sections running north and south so that they can drill nearly 2 mile horizontals and much more effectively drain the oil and gas. Surface will only come into play where the well pad is. In my case the east half of sec 4 and east half of sec 9 will be my unit of approx 640 acres as far as oil and gas production is concerned. I have a few questions about multiple laterals and total well costs but I guess I’ll wait till they offer a lease.

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