Lease offer in Sheridan County

Hi, I have a lease offer to share and a couple of questions. My father recently received an offer on some mineral rights he bought back in the 80s and had completely forgtten about. He was contacted by Spectrum Land Services I beleive on behalf of RIM Operating Company. The rights are in township 32 section 15 range 56east. The offer is for 500 per acre for 4yrs with a 2 yr option to extend at 400.00 & 18% royalty. I know we want to stick to 3yrs on the term. I am wondering if anyone has dealt with Spectrum or RIM. Also, is the option to extend a good idea? the offer is for only 2 net mineral acres/640 gross mineral acres. It is in the Roubaix Prospect.

Thanks in advance for your thoughts.

Tom

Greg, Thanks for your reply. I appreciate your time & knowledge. Tom

Greg Taft said:

In my opinion it is a decent initial offer for the area. Most everyone on here is chasing or thinking Bakken, but where you are located has some red river, duperow, and other potential. The only downside is that these formations are notorious for making a lot of water, which is expensive to dispose of and generally you find small fields on structural highs (since oil floats on water) and most of the large fields have been found off of seismic already. Bakken on the MT side of things is a definite wild card with the exception of Richland county. State lease sales are somewhat comparable to your offer. I’d see how much wiggle room they have. RIM is drilling or recompleting vertical wells in the township and did a horizontal re-entry that I would deem an uneconomic venture. Very very unproven area in the Bakken. I’d be patient for sure. You will likely still be able to lease it for that amount in the next month or two or possibly longer. In general on a 3+2 you can ask for 100%-125% of original bonus for an option payment. Hope this helps. I’d see how badly they want that option as it may give you a clue as to their thought process in why they want to lease it.

http://www.reuters.com/article/2011/12/28/us-energy-giant-idUSTRE7BR0G420111228

Kevin, Thanks for your response. I am not sure what you are trying to tell me via sharing the link. I had read the article. It does not mention Spectrum Land Services or RIM. Are you telling me to be careful with leasing agents? Tom

Kevin B. Koonce said:

http://www.reuters.com/article/2011/12/28/us-energy-giant-idUSTRE7BR0G420111228

Thomas:

I have minerals in Sheridan County, specifically in Township 31;Range59 area and it is currently temp. spaced by Marathon. According to Marathon, they intend to develope this area in 2012. As Greg Taft stated earlier, there are alot of unknowns but with the drilling migration spreading into the Montana area, I believe drilling in the Sheridan County area will increase and if an outstanding well is drilled, all acreages will become more valuable. Your lease offer seems like a fair deal at the present time but I would not lease for any longer than 3 years since this increased activity could make a big difference for you.

Charles, Thanks for your reply. I am wondering about your thoughts regarding the option to extend @ 400.00?

Thanks, Tom

Thomas:

I don't agree to any extension on my lease agreements and I limit the term to 3 years. Alot can happen in an area in a three year period ( look what's occurred in ND in the past 3 years). Leases were bringing 100's of dollars less three years ago with alot less % royalty. I would consider $500/acre bonus with an 18% royalty (even though I would bargin for 20%) for a three year lease. The longer lease term, the longer it will take to drill the acreage. Again, these are my opinions through years of leasing but they are your minerals and it's you who must be satisfied in your lease agreement. Good luck in your negotiations.

Thomas Alan McLarnan said:

Charles, Thanks for your reply. I am wondering about your thoughts regarding the option to extend @ 400.00?

Thanks, Tom

Charles & Greg, Thanks again for all your help. At some point I supose I will have to give you guys a cut on any royalties I might collect in the future. One more question, well one more for now. I have heard a lot about Pugh clauses and that there are different types. I know all situations are different but, is there any language that is important to include in all pugh clauses? Tom

Thomas, when you agree to an option your are giving something for nothing. You could sign a 3 year lease at $400 per acre with a 3 year option @ $2000 per acre, and if they don't pick it up you have $0 in your pocket. If acres are going for $3000 per acre bonus, they will probably pick your option up and hold it or flip it for the $1000 per acre profit. The $1000 that might have been yours. The point is the option, you are giving for free, only if they think it's a good deal do they pick up the option. My policy is I don't give oil companies anything for free, not anymore.

Thomas:

The object of pugh clauses is to release the unexploited formations above and below the producing zone after the primary lease expires. The language in a pugh clause may vary but an example could be as follows: "At the expiration of the primary lease term, any depth xxx feet above or any depth below the producing zone will be released after the primary lease expires". I have seen various wordings used in pugh clauses but you should get the idea. I have seen pugh clauses that fail to protect the zones above the producing zone as the wording only stipulates "deeper than the producing zone".

Charles, I spoke with the guy from Spectrum on the lease offer. He was not willing to negotiate on any of the terms- length of initial term, option or royalty. I am wondering what you think about this? Thanks, tom

charles s mallory said:

Thomas:

I have minerals in Sheridan County, specifically in Township 31;Range59 area and it is currently temp. spaced by Marathon. According to Marathon, they intend to develope this area in 2012. As Greg Taft stated earlier, there are alot of unknowns but with the drilling migration spreading into the Montana area, I believe drilling in the Sheridan County area will increase and if an outstanding well is drilled, all acreages will become more valuable. Your lease offer seems like a fair deal at the present time but I would not lease for any longer than 3 years since this increased activity could make a big difference for you.

Thomas:

Reviewing what has posted, I would go for $500/acre bonus for 3 years with an 18% bonus. I would not consider the option as this prolongs their dominance over your holdings at bonuses which could be far below the market at that time down the road. Bottom line, you negotiate the terms that you're satisfied with as each individual will likely answer your situation in a different way. Good luck as I think Sheridan will be getting active over the next couple of years. Maybe we will both have luck. Lastly, don't forget to insist on a check and not a bank draft.

Tom McLarnan said:

Charles, I spoke with the guy from Spectrum on the lease offer. He was not willing to negotiate on any of the terms- length of initial term, option or royalty. I am wondering what you think about this?
Thanks, tom

charles s mallory said:

Thomas:

I have minerals in Sheridan County, specifically in Township 31;Range59 area and it is currently temp. spaced by Marathon. According to Marathon, they intend to develope this area in 2012. As Greg Taft stated earlier, there are alot of unknowns but with the drilling migration spreading into the Montana area, I believe drilling in the Sheridan County area will increase and if an outstanding well is drilled, all acreages will become more valuable. Your lease offer seems like a fair deal at the present time but I would not lease for any longer than 3 years since this increased activity could make a big difference for you.

Thomas:

I do not own land or minerals in Sheridan or Daniels County, but i have had a few discussions with people who do. I know a lot more today than yesterday. From what I was told, ask for more $$$ and a higher royalty as the drilling has been good if you know what i mean.