It is based on the spot price the oil actually sells for, WTI is the standard, but their are several different market prices depending on where the oil is coming from. The oil company may have a hedge price of $75, for example, but the royalties are based on the spot price at the time of sale, which may be lower or higher. This may seem unfair, but the royalty owner can also, theoretically, hedge their future production based on what they think their wells will produce. This is a lot of guess work and often there is not enough to justify the size of the hedging contract. This actually benefits the landowner when the oil company thinks the price is going to go down, so they hedge at, say $50, but it actually goes up. The royalty owner is paid based off the higher price and the oil company is stuck swallowing the difference.
I’ve been tinkering with some market strategies over the past few years to protect the income from my mineral and ORRI holdings. Rolling put options on USO is the simplest form. If a big move looks impending, I’ve developed a strangle technique that can capture the move either way. Sounds fancy, but when juxtaposed to ones expected cash flow it can be a simple way to protect yourself from this volatile market. If that is of interest to anybody, PM me and I will explain further.
I’m interested in the simplest version
Hedging is difficult and requires a sense of timing. I know a lot of mineral owners are frustrated that they do not participate in any given operators hedging strategy but these are financial risks that a company pays for. They get it wrong too- more often than not.
That said, If oil gets to a certain price range and looks toppy or if you are just satisfied with that price range:
Estimate your monthly cash flow from your production for the prompt month. Let’s assume you expect $10,000 for October’s payment. I do not try to hedge more than 50% of my expected production. I’m ok with leaving some in the spot market but it’s really an individual choice.
USO (United States Oil Fund) is my preferred vehicle. It is a highly liquid ETF that tracks WTI oil price. You can trade it on etrade, fidelity etc. These types of ETF’s are flawed long term investments because the fund managers must roll the contracts every month thus causing a decay in equity value. I’ll try not to get to deep in the woods on options trading strategies because it can get tough. Simply put, the stock goes down easier than it does up.
As an example, WTI was roughly $75 october first. I like that price, plus the chart was suggesting a reversal. USO was $16 per share. 3 one month put options contracts might cost me $60 each or $180 total and allow me the option to control 300 shares @ 16(300) = $4800 implied leverage or about half my expected cash flow. If the price of oil drops, I capture the move in the financial market from my gains on the put options. If the price stays high or goes up, I just let the options expire worthless and lose $180 for my effort.
This kind of thing isn’t for everybody and it certainly doesn’t always work. But there are some measures that people can take to protect their cash flow. I realize the differentials in the Permian make this even more difficult so make of it what you will. You can practice by taking small position (like 1 contract at a time.) The financial loss is minimal if you get it wrong. USO is pretty liquid as well. You can outright short it if you don’t like options.
I own minerals in section 26 block 55 - 7. If the other owners of minerals in that section will contact me I can give you some information about our lease
Hello, I just received a lease contract for Reeves County, I have never entered into one before and I am trying to figure out if the offer is competitive or not. I cannot figure it out. Can you direct me to a resource that will make this clearer to me? Thank you!!
Thank you very much, I appreciate your help.
We’re newbies - just leased to Apache in 2014. Just received our first Division Order. I was surprised that the well already has a name (State Desert Gold Unit 101AH), and the effective date was last August. Wondered if that was normal? Also, the Division Order has two sections from Block C15. But only one of the sections is ours (as far as I know - only one of them was leased to Apache by us.) Apache lists both sections under our owner number. Could this be an error, or are two sections from two different owners joining in a well? Should Division orders be reviewed by an attorney? Thanks for your insight. I have enjoyed learning what I can by following the forum.
Update on bills of note in Texas-
HB 3838 – ROYALTY LEASE SCAM
This bill is set for hearing this Monday, March 25 at 2:00 p.m. in Energy Resources. We need help with:
Calling committee members and express support for the bill – link is Texas Legislature Online - Committee Membership
Please especially call if you or a relative got taken in by this scam.
HB 3226, to amend MIPA (the forced pooling statute) to allow drilling permits to be good for 2 years instead of one, had a hearing. Due to potential for mischief here, we are keeping a close eye, but the sponsor and committee members have pledged not to allow any floors amendments that would open up the door for broader forced pooling.
SB 817, to require BTU values to be added to royalty stubs. We will support also. Hearing was yesterday. Have not heard yet how it went.
HB 3372 is a very dangerous bill. Craddick is the sponsor, which is puzzling, but it prohibits breach of contract actions against payors when money is withheld due to a title dispute. Apparently they think they are protecting Sunoco and the other gatherers who are payors but not the operator from being drug into a suit, but very concerned it will be interpreted to give carte blanche to withhold money for flimsy title dispute reasons and be insulated from getting the lease terminated.
SB 1156 increases setbacks to 1500’ around private schools and child care facilities. No movement yet.
Hi Loree In my experience, It usually takes the division order dept. about 6 months to send out division orders to royalty owners. So if the well started producing in August then I wouldn’t worry about the length of time it took for you to receive your division order. You were probably pooled and that is why there is a section not owned by you. It’s common in Texas and elsewhere. Review your lease and look at the pooling provisions in it. Also contact apaches division order dept and ask how they ascertained your interest. It always is helpful for a land man or a lawyer to review your division order’s language and verify decimal interest.
Thank you Rick! I did so and understand it very clearly now.
Mr. DuBose -
I was reading elsewhere about the E.ON West of Pecos solar project which recently broke ground in Reeves County. Nowhere could I find a map or details about its location, only that it would cover over 670 surface acre.
Projects of this scale would appear to have potential impact on surrounding properties. Do you have any information about this project? Also, would you consider creating a topic on large solar and wind farm projects in the oil patch, and their potential impact on future nearby leasing, pipeline ROWs, water and electrical easements. etc?
Anyone with PRI Operating? I need another copy of 1099-Misc form and have not receive royalty checks in past 2 months. I’ve called and phone rolls to voicemail and haven’t received call back on several messages left. Just wondering.
Wanted to update: I guess I’m old school and thought calling would be best, but email seemed to be way to go. I received email reply yesterday with answers to my inquiries.
Does natural gas production delay mean, shutting down existing production or just new production. Apache (NYSE:APA) says it will delay natural gas production from its Alpine High play in the Permian Basin because of “extremely low prices” at the Waha hub; current deferrals represent ~250M cf/day of gross gas production.