Can an operator, who is seeking a bank loan, use leased mineral rights as part of their collateral ? I recently read an article whereas an individual stated that this practice was discovered but did not state if the operator had drilled a well on the mineral acreage.
Charles -
I first ran into that sort of thing about 25 years ago and couldn't understand it then any more than I can understand it now.
What is considered acceptable collateral is up to the individual lending institution, but in my way of thinking leases have no real measurable value until they are developed, with production established and perhaps proven / undeveloped reserves behind pipe. And any lending institution using solely leases as collateral won't be around very long.
If they were to include the leases as additional collateral, however, along with a company's producing properties, royalties and real property (equipment, pump jacks, trucks, etc.), that might make sense.
But leases alone? The stockholders should be lining up to hold the rope.
Hope this helps -
Charles
Charles Emery Tooke III
Certified Professional Landman
Charles:
Thanks for the information. I had read about this situation last week and really never thought about using mineral rights as collateral. I totally agree with you in that it will take something additional to warrent a trustworthy collateral.
Charles Emery Tooke III said:
Charles -
I first ran into that sort of thing about 25 years ago and couldn't understand it then any more than I can understand it now.
What is considered acceptable collateral is up to the individual lending institution, but in my way of thinking leases have no real measurable value until they are developed, with production established and perhaps proven / undeveloped reserves behind pipe. And any lending institution using solely leases as collateral won't be around very long.
If they were to include the leases as additional collateral, however, along with a company's producing properties, royalties and real property (equipment, pump jacks, trucks, etc.), that might make sense.
But leases alone? The stockholders should be lining up to hold the rope.
Hope this helps -
Charles
Charles Emery Tooke III
Certified Professional Landman
You will find sometimes in the Financing Statements or even "Deeds of trust" issued from lending institutions to Operators, the leases will be included because of some sort of letter agreement or other un-recorded instrument including the leases as a speculative prospect to drill... meaning that they can use it even if it's not drilled upon. I don't know many GOOD banks any more that will do this, however, it's not an impossibility. You'll also see "lines of credit" extended to companies that generally will be open to a certain dollar amount, and will sometimes have amendments to include new leases that are in prospective/speculative areas. It's all about leverage and cash flow for the companies.
However, I have seen over time though, some companies you can tell whom you want to stay away from as a result of this practice.
Brandon Sneed
Landman