New Calculators to Assist Mineral Owners and Landmen

All,

Berlin wanted to advise you that we have recently added two calculators to our website that will be useful to Oklahoma oil and gas mineral owners and petroleum landmen. They can be found by clicking here.

Did anyone else’s grandfather utilize one of these bad boys? Berlin’s new calculators are not this cool.

-The first tool allows a user to determine net mineral acreage using a net revenue interest decimal from a check stub. This calculator is useful to both mineral owners and mineral buyers for a quick, back of the envelope calculation of net acreage owned (at least in the wellbore).

-The second tool allows a user to determine a working interest decimal in a multi-unit well. This calculator is useful to landmen who need to calculate both operated and non-operated working interest decimals when an allocation factor will need to be applied. Completed for production costs will also be automatically calculated if an AFE figure is entered. Please be careful as there is nothing in this calculator to prevent a user from entering a total allocation greater than 100%.

Berlin is currently working on a document stamps back-in to purchase price calculator among others.

Please contact Berlin if there are any other calculators you would like to see added to the site. We hate opening up excel and typing the same formulas over and over again and we are certain that is the case for some of y’all as well.

More to follow,

Berlin

The Seller's Dilemma

Oklahoma Oil and Gas Mineral Owners:

It is a weird feeling to get an unsolicited offer to purchase an asset from another party. Berlin's initial thought is something like "well, if Shortline Minerals thinks these are worth $5000/ac, they must know something I don't as I would be happy to sell for half of that." Berlin could sell for the $5000/ac price and turn around and deploy those funds elsewhere. However, it will always be in the back of her mind how and why Shortline is able to pay that much for her fringy STACK properties. Maybe they have a company landman on the take and Shortline knows that the section is scheduled for a density test. Maybe there was a seismic shoot in the area that Berlin didn't know about and the interpretations look promising. But it's also possible that Shortline has a low cost of capital, their sponsor has a low hurdle rate or that they are paid a commission on an acreage basis. Just because someone is throwing around a lot of money, doesn't make them right or that their project will ultimately succeed.

Should they sell their Oklahoma royalties and re-invest in their cash crop or hold and wait for horizontal development? They are in the horns of a dilemma.

This internal monologue is the second most often cited objection to not selling minerals (the first being, "pa told me never to sell and for some reason this is the one thing that I never questioned my parents about..."). Berlin thinks of it as a dilemma. After all, it sounds like a decent trade if someone is willing to pay 4-7 years of cash flow for the asset and assumes the regulatory and commodity price risk of owning producing Oklahoma royalties. And if the mineral has higher and better uses for the cash it can be a decent trade. After all, a leased mineral owner cannot easily add value to the minerals by increasing production through development. However, one could take the cash and invest it into an enterprise that they do have control over.

Berlin would be interested in hearing your thoughts on the issue, both from the buy and sell sides.

More to follow,

Berlin

Assorted Links (and a chance to win an Amazon gift card)

Oklahoma Oil and Gas Mineral Owners:

Here are a few links that Berlin read over the weekend that will be of interest:

Duke is sad that he didn't buy more Oklahoma mineral rights and royalties in the MERGE before the Governor James B. Edwards well was drilled by Citizen Energy. 

The Perfect Oilfield (unfortunately, not the STACK/SCOOP/MERGE..): 

Once one starts tacking on zeros to the production numbers, Berlin's former tong working brain starts to spin a bit (like chains...). It sounds very impressive and I'm sure the Bedouins of that desert prefer the sovereign didn't own the mineral rights. H/T to Tyler Cowen for the link and the introduction to Shellman's blog.

‘Enormous’ Merge Play Resource Rivals Major World Gas Fields (fortunately, the MERGE, unfortunately not the STACK/SCOOP)

The secret has been out for some time, but the Governor James B. Edwards well drilled by Citizen Energy, has led to the development of the MERGE (...who coined this one and what does it stand for?*) and that means money in the door for Oklahoma oil and gas mineral owners in the Tuttle/Minco/Union City area.

Sheriff Takes Food from Prisoners, Locks up Whistle Blower (weird and legal, but shouldn't be)

For some reason, we take liberty for granted. Vote them out.

More to follow,

Berlin

*the wittiest explanation for the MERGE acronym will receive a $10 Amazon gift card. Email Berlin or comment below. Competition ends close of business 27 March 2018.

Splitting the Baby and the Pooling Bonus

Oklahoma Oil and Gas Mineral Owners:

The Oklahoma Corporation Commission has been regulating on the fly as to rule changes on multi-unit horizontal wells. One of the recent changes is that applicants now must offer a formation election if the applicant desires to force pool more than one common source of supply. Berlin thinks that this effects the unleased Oklahoma mineral owner more than the commissioners had originally intended.

Your call Sol...splitting the pooling bonus for the Oklahoma oil and gas mineral owners.

Old World for the Mineral Owner:

The Commission effectively put a stop to applicants pooling from the surface to granite, instead allowing the the applicant to only pool her target formation and the formation directly uphole and directly downhole. For example, if the applicant proposed a Woodford well, she would have been allowed to pool the Mississippian, Woodford, and Hunton. For simplicity's sake, if my man Bruce was an unleased Oklahoma mineral owner and did not want to participate in the Woodford well with his 10 net mineral acres, he would elect out of the initial well and thus have given up his ability to participate in any Mississippian, Woodford, or Hunton wells while the forced pooling order was in effect. If the only option in lieu of participation was $1,200 per net mineral acre and a 3/16 royalty, Bruce would receive $12,000 from the applicant. 

New World for the Mineral Owner:

The situation has now changed with formation elections. The applicant now has to testify to the perspective value of a well in each formation she expects to pool in order to proportionally allocate the bonus amount. If she testifies that the Mississippian, Woodford, and Hunton are equally perspective, they would receive 1/3 of the allocated bonus each. Now if Bruce elects not to participate in the drilling of the initial Woodford well, he will only receive $4,000 from the applicant ($1,200/nma * (1/3) * 10). If the applicant does not propose a Mississippian or Hunton well during the primary term of the forced pooling order, Bruce will never have an opportunity to make an election and thus will never be compensated for his Mississippian and Hunton formations being pooled for a year.

Now many of you will shout "Berlin, you're a goon, Bruce's Mississippian and Hunton will be open after the primary term of the order." And that is true. Bruce will most likely be open in a year where he could lease or even propose his own well. But Berlin would argue that after a horizontal operator has drilled a Woodford well in the unit, the chances of another operator paying Bruce a premium for his Mississippian and Hunton rights would be unlikely unless better wells are eventually made in the the Mississippian or Hunton.

As there are pros and cons to formation elections for the Oklahoma mineral owner, there are also pros and cons for the applicant/operator. Pro: Her pooling bonus will be lower in the short term, in the case above 1/3 of what it would have been under the old regime. This will be even more advantageous for the operator who is pooling (as opposed to leasing) a greater amount of acreage. Con: Many companies are now valued on their net acres in multiple formations. So now if the operator pools more acreage and initially only drills Woodford wells, her Mississippian acreage count will not see a benefit from the pooling proceedings. This should be somewhat intuitive, she didn't pay for it, she doesn't own it (unless she can convince a bigger fish with someone else's money to pay her for the Mississippian acreage if it is during the primary term of the pooling order).

Conclusion:

Berlin predicts that these rules will change at some point in the future and that an Oklahoma mineral owner will again be permitted to elect out of all formations held by the pooling order in order to receive 100% of the pooling bonus from the outset (TVM, even if they don't call it that...).  

If you have any more questions on split bonus payments under Oklahoma Corporation Commission forced pooling orders or you would like to sell your Oklahoma mineral rights and royalties, please contact Berlin.

More to follow,

Berlin

Free Rider Problem: Fee Increases at the Oklahoma Corporation Commission

Oklahoma Oil and Gas Interest Owners:

The Oklahoma Corporation Commission (the "OCC") plays a large, but often misunderstood role in the Oklahoma oil and gas industry ecosystem. The OCC is the regulator of almost all (less Osage County) oil and gas production in the state. Jack "Show me the" Money (a name destined for fame on the business desk) at NewsOK wrote a column regarding the proposed fee changes at the OCC.

Malcolm Smith: Never heard him discuss Oklahoma royalties or the free rider problem, but man could he ride.

The processing time for final orders has increased over the past year as activity has increased in the STACK and SCOOP.  This slows down drilling activity in the state. If the OCC did not want to increase fees or negotiate for a larger budget to hire more folks, it would be different than every other government agency since the beginning of time. But, before an increase in fees is implemented, the state should conduct a study on what the different applications actually cost to process. For instance:

"Increasing the permit fee to drill a well. The permitting fee now is $175, regardless of the type of well. The new fees would range from $750 for a vertical well to as much as $3,500 for a multiunit, horizontal well. The commission estimates the cost to process applications currently ranges from $580 to $2,900, depending on the type of well involved."

Instead of "estimates," the OCC should have a dollar figure that represents the cost. And, if in fact a application does cost $2,900 to process, why should the fee be $3,500? Government entities should not be profiting from their operations. If anything, their revenues (i.e. fees and taxes) should cover the marginal cost of administration while the agency should always be attempting to lower their marginal costs.

Applicants and operators bear a majority of the burden of the fees at the OCC. While it is true that the applicant is the reason of the marginal labor expense at the OCC, the "benefits" of regulation accrue to all parties who own an Oklahoma oil and gas interest. One of the purposes of the OCC is to prevent economic waste and to protect correlative rights. While the applicant for an increased density application will have to pay the fee for the time of the clerks, administrative law judges, and commissioners to review, the Oklahoma mineral owners and the working owners in the offset wells are the parties who benefit from the OCC's technical and administrative review of the application. This is an example of a free rider problem. 

The solution to this issue would be some type of split to fund the OCC between both taxpayer dollars and fees from the applicants. Berlin can hears the shouts now "hey Berlin, this is how the OCC is already funded!" And Berlin knows that. She would just appreciate some data and logical reasoning before the public spends even more private dollars.

More to follow,

Berlin

PS: Please contact Berlin if you would like to sell any Oklahoma mineral rights. We pay top dollar to buy Oklahoma oil and gas royalties and will close quickly.

How Can One Prove That They Exist?

Oklahoma Oil and Gas Royalty Owners:

Berlin received a call today from Sage, a good friend who also happens to be a company landman, Sage reported that an Oklahoma mineral owner (Red) just called to chew on his leg as the mineral owner had never heard of Sage's company (despite the fact they've drilled about 70 wells in the past 2 years). He wanted Sage to prove that his company was legitimate and their lease offer was valid.

Sage could have handled Red and his Oklahoma mineral rights in a more professional manner. Never ask about another man's jeans.

Sage was a bit perplexed as there he was speaking with another human who received a letter that Sage signed and mailed and was questioning Sage's existence. Sage asked if there was a Straussian reading of the question, but the mineral owner told Sage that it was none of his f***ing business, but that he was proud to wear Wranglers.

But with crooks on the loose, it is a valid concern. How can a Oklahoma oil and gas mineral owner verify that the company that she has been approached by is legitimate? Here are a few suggestions:

-Verify the company is registered with the Oklahoma Secretary of State. 

-Verify the company is bonded with the Oklahoma Corporation Commission (if they claim to operate).

-Inquire with your neighbors if they have been contacted by the same outfit.

-Examine the index at the county clerk's office or search for recently recorded instruments on Oklahoma County Records.

-Contact Berlin for more options.

If Sage had suggested any one of the above, he probably could have boated a lease from that call. Instead, Sage lost his cool at the owner's insistence that Sage was a fly-by-night shyster so he slammed the phone on big Red from Anadarko.

More to follow,

Berlin

Is $10 Actually the Bonus Per Acre?

Oklahoma Mineral Rights Owners,

Berlin received another call from Bruce today. He was angry and slightly confused. Bruce was sure that some fly-by-night lease flipper was fixin' to cheat him out of his lease bonus. The Duncan, Oklahoma based outfit had offered him $1,100 per net mineral acre for a 3 + 2, oil and gas lease at a 3/16 royalty for some of his granddaddy's minerals in Beckham County, Oklahoma, which Bruce accepted.

No Oklahoma oil and gas mineral owner is getting jammed on ole girl's watch.

However, upon review of the lease, Bruce read the following statement "Witnesseth that the said Lessor, for and in consideration of Ten and more Dollars, cash in hand paid, the receipt of which is hereby acknowledged...do grant, demise, lease..." Bruce asked the buyer to replace the ten dollars with the actual bonus due and the buyer balked. Bruce asked Berlin if this was proper or if he was getting jammed.

Berlin told Bruce that this is the industry standard and that lessees of Oklahoma oil and gas leases do not place the actual bonus paid of record by writing it into the oil and gas lease. As long as Bruce was satisfied with the terms of payment, the "and more" of the consideration and granting clause that he was presented is legitimate. 

Berlin has written about the terms of the basics of the oil and gas lease before, but if you have any more questions about an oil and gas lease or you are interested in leasing or selling your mineral rights please comment below or drop us a line.

More to follow,

Berlin