Let’s say the company that leased your minerals has an option right to extend the lease on your property for two years. And they choose not to exercise this option because they no longer are focused on your area.
Why wouldn’t they sell/assign the option right to another company and make some money in the process? Or alternatively exercise the option themselves and then sell/assign the extended lease? Wouldn’t it be win-win for both companies? The current company would get cash they otherwise would not receive if they simply let the lease expire, and the new company would get a two year lease at presumably below today’s lease rates? (Assuming the option price per acre is market rate from a few years back).
Does this sort of thing happen? If not, what prevents it?
Thanks Charles. From what I heard they are simply refocusing their capital elsewhere.
What I was trying to get an answer to is why doesn’t an operator that’s not going to renew just sell its option right to another company, or renew the lease and then sell the extended lease?
I would think in this case, they would extend the lease at the lower bonus, then assign the lease to a new party that was interested in the area. This would eliminate some red tape. The risk you would run is contacting the company that holds the right to extension. They will either agree to extend and assign you the lease, or they will learn that someone has interest in the area, and may re-visit their plans with the area.
On an annualized basis, the cost of the 2-yr extension is higher than the 3-yr primary term of the lease. For example, a $3000 per nma lease is $1000 per nma per year of the primary. If extended for 2 years, the cost is $1500 per nma per year. It makes sense to exercise the extension option when lease bonus prices have gone up. Of course, if prices have dropped, the Lessee won't exercise the option. If prices are flat, a new company would choose to pay for a new 3-yr term rather than the remaining 2 years.
When possible, one should avoid including the extension in a lease. The option has no value to the owner of the minerals, just to the Lessee. We have signed leases with the extension, but we demand a much higher lease bonus up front than we would for a lease with no option.
Randall,
I have seen many situations where a low option price didn’t get sold and the lease expired. Mostly I chalk it up to the company was asking too much to flip the lease, or they were trying to sell the lease as part of a package and the buyers were not interested in buying a bunch of expiring leases they would have to drill quickly to hold. Also, I think there is an element of not wanting to help a competitor salvage something out of an area they have decided to abandon.