Lease Renewal Questions

We signed a lease back in June 2013 for 3 years, renewed for the optional 2 years, but it will be up in June. We have been contacted by Esquisto Resources and offered 20% royalty and $650/acre, a whole $50 increase over the original. We have about 8 net acres south of Lone Oak Church between Snook and Lyons. There has been drilling activity within 1.5 miles of us in two directions. They told us we were not on the drilling schedule yet, however. My questions:

- I know I should try for 25% royalties, how does the $650 look?

- What happens if they start to drill before our lease is up in June?

- What happens if they drill after the lease expires, but we haven't reached an agreement on the lease terms?

Thanks!

First off, if your acreage is in a drilling unit and "operations" (as defined by your lease agreement) commence prior to the expiration, your lease is still valid and active. Then once operations stop, you lease will still be active for "x" period as per your lease agreement. Ideally in this scenario, your lease would be maintained as active thru the entire drilling and completion process - then (if productive), your acreage will then be HBP (Held By Production).

You are in an active area for drilling - Wildhorse is the primary player in your area. I have not heard of Equisto Resources.

Who are you presently leased to?

20% is way too low in my opinion - 25% should be the going royalty in this area. But you have to get a "cost free" lease so you don't get your payments dinged by various production charges.

I cannot comment on the lease bonus - others in your area need to post on what the going rates are. But $650 per net mineral acre seems low.

If you are in a drilling unit and not leased when drilling commences (i.e. operations start after lease expiration), a whole series of other issues kick in. Others on this discussion can comment on these options better than I can.

My bet is the closer your lease gets to expiration, the more interest you will get and the offers will get higher.

I would even put an ad in local paper advertising that you have 8 net acres open in the area you noted and that it expires in June. That should raise some interest.

Thanks for your great reply Rock Man. If I've kept up with everything, we are leased to Wildhorse, via Comstock, via Ursa originally. Or maybe it's with Esquisto, now.

All I can find on Esquisto is a lot of legal stuff I probably wouldn't fully understand if I plowed through it. Best I can decipher is that they are some kind of holding company set up to own pieces of Wildhorse stock. Maybe they serve as the "land men", too.

Thanks again.

According to Bloomberg, Esquisto Resources ll, LLC is a subsidiary of Wildhorse Development Corp.

BC

Assuming that Equisto is leasing for Wildhorse, I would expect them to continue talking to you as the expiration date approaches - with better offers as date gets closer. The "game of chicken" has begun as the negotiation continues.

The two big issues for me IMO are the 25% royalty and the "cost free" lease. I would personally sacrifice a little bonus money for the two aforementioned items. Based on what is happening in your area, your acreage will "get drilled" - but remember that your 8 net mineral acres will be a small part of a much larger unit (e.g. 320 acres). If you cannot come to an agreement on new lease terms (assuming that your lease expires prior to drilling), they can still go ahead and drill without having you leased.

I hope someone else will comment on the options if this were to happen - I don't feel comfortable discussing those options with my background.

I recall reading sometime, somewhere that if a lease is not signed and the acreage is drilled, the royalty money goes into an escrow account until there is an agreement. But we need an expert opinion on that one, for sure. You're quite right that it is a game of chicken!

Wildhorse is the "big dog" out here right now in this part of the trend. They will not want to have other companies pick up leases in their blocks but won't overpay (in their minds) to tie acreage.

The question I have (rhetorically) is - How do you find other companies that may be wanting to lease small chunks of minerals in this trend?

This is why I posted the idea of putting an ad in local newspaper describing a "minerals expiring soon / open to offers" .