Leases are essential when buying and selling mineral rights. They have been the staple of the industry since the completion of the first well in 1859. An oil and gas lease is a special legally binding document that is governed by peculiar rules and languages.
Oil and gas lease terms have been improving over the years to cater to the needs of mineral owners and mineral investors. The contract permits private companies to exploit minerals and property owners to retain ownership of mineral rights.
In Texas, for instance, the appellate courts have played a significant role in influencing the development of oil and gas leases by elucidating contract terms to fulfill the objectives of both the lessors and lessees. This, in turn, has fostered tremendous development in lease forms. While leases vary from one transaction to another, they share some common terms, which will be discussed later in the article.
If you are qualified accredited investor and have never participated in oil and gas lease negotiations, you must know the process can be overwhelming, but with professional tips as the ones discussed below, you can successfully negotiate your way through this business transaction.
Understand the basic terms
It is important to understand the various clauses stipulated in the oil and gas lease. Also, it is equally imperative to know their functions to ensure a reasonable and fair negotiation process.
Here are the most crucial terms to read in an oil and gas lease:
Oil and gas lease definition
In oil and gas, the term “lease” means the transfer of mineral right from the lessor to the lessee for a given period, and at a fee. The lessee owns the minerals for as long as the contract is in force. The lessor, on the other hand, holds the royalty interest accrued from the transaction.
As an investor, it is essential to know how these clauses function in a conventional oil and gas lease contract. Note a lease features primary and secondary terms. The former represents a fixed period whereas the latter is the term after the fixed period has ended. A standard contract will state, “This agreement shall remain active for a term of two years and for as long as gas, oil, and other minerals are exploited from the leased site.”
The primary term is critical. It is one of the primary subjects that the lessor and the lessee need to discuss. Also, it is not mandatory for the lessor (who is the oil and gas driller) to start operation during the primary term because it does not have any effect on the lease agreement.
According to the lease agreement, the lessor reserves the royalty interest accrued from production.
Royalty interests oil and gas definition
A royalty interest is described as the ownership of a small portion of production revenues or resources as per the lease agreement. The person or company that owns the royalty interest is not liable for drilling and production costs. Thus, the lessor receives the benefit as it is, without any deductions. A royalty interest is calculated as a percentage or fraction, which ranges between 1/8th and 1/4th.
The lessor is entitled to a bonus as consideration for lease execution. However, the bonus amount is not included in the lease but remitted when the lessor signs the contract and delivers it to the lessee. The payment is usually paid as per “net mineral acres” that the lessor owns in the property of interest.
What is a net mineral acre?
Petropedia defines mineral acres as the amount of minerals present in a given piece of land that an extractor is allowed to exploit, as per the terms stipulated in the lease agreement.
How to calculate net mineral acres
To calculate net mineral acres, multiply the number of acres in the leased property by the mineral interests owned by the lessor. For example, if you have a ¼ mineral interest in a land of 80 acres, it means you own 20 net mineral acres: in other words, you own ¼ of 80 acres. Notably, the bonus is calculated in dollars and expressed per net mineral acre. For example, if the lessee pays a bonus of $200 per acre, they should also receive $200 from the offer for each net mineral acre the lessor owns.
Know whom you are transacting with
Once you have read and understood all the basic terms, perform due diligence on your ideal mineral investment company. Google is the best place to start your search. Perform a thorough background check on the firm. This is extremely important if you are not familiar with the company’s profile.
Another place to check for a company’s credibility is on your state’s oil and gas commission site. Here, you will see the company’s history including the number of wells it operates, drilling permits, violation notices (if any), and production operations.
While navigating through the state’s official oil and gas commission site, search for current activities near your property. Look at where producing and licensed wells are located. Also, check the legal description of your land and find the right area to determine what activities are currently going on.
If you live in states such as Texas and Oklahoma, the law allows you to review spacing and pooling orders. You can search each township to see what is happening out there. Alternatively, you can use the clerk and recorder’s site of your county to check for recorded leases, to assess the current royalty rates from the mineral investment.
Hire a skilled and experienced lawyer
Oil and gas leases have different terms and conditions; hence, it is difficult to understand the specific terms of an offer. A credible lawyer will help answer your questions and analyze the lease with your concerns in mind. Often, a lawyer can add a few provisions, which may protect vital property interests, increase bonus payments, and so forth. Your attorney can also raise concerns that you may never have thought about before. An attorney can help protect you from signing an unfavorable contract.
Lease negotiation is a crucial process. A good lease can give you years of financial freedom, while a lousy one may provide you with years of frustration. There is no method of creating a good lease because terms and conditions tend to vary. However, knowing how the process works is the best way to prepare for a successful negotiation.
Lastly, if you are an investor looking for a qualified investment partnership, contact United Exploration for more information, but keep in mind nothing in this article is to be considered tax or investment advice. Please consult with your attorney and tax professional.
Investors, creditors, owners, and executives use Key Performance Indicators (KPI) to evaluate the performance of their companies and investment partnerships. However, every company has its own set of Key Performance Indicators designed to evaluate physical operations, financial status, as well as the safety of the work environment. Often, the management comes up with a set of KPIs for different categories to gauge how the company is performing financially.
Keep in mind, the primary goal of a business is to make profits and maximize value. For a company to reap maximum gains, it must lower its cost of production significantly, while generating more revenue.
So what is a key performance indicator (KPI)?
A key performance indicator (KPI) is a system of measurement used to assess or evaluate crucial factors that fuel a business. The company uses these indicators as a reference to which the status of the business and development of the organization can be evaluated explicitly.
This article details extensively the most critical key performance indicators that a company can use to measure its performance, to achieve a higher return in natural gas and oil production, as well as to ensure the business is sustainable.
Capital Spend as a Key Performance Indicator
AFE stands for Authorization for Expenditure. It is a budget document for planning a project. The form contains expenditure estimates that a company hopes to spend. Authorization for Expenditure (AFE) management is exceptionally crucial for oil and gas investments. It is a continuous process that a company needs to pursue and monitor as soon as a project starts, and even after the budget is approved.
You need to monitor the project constantly to ensure it is running within the stipulated budget frame and that it is on the right track. As aforementioned, the primary goal of Capital Spend performance indicator is to provide expenditure estimates or projections to help the senior management know how much money they expect to spend on different projects.
Return on Capital Employed KPI
Return on capital employed, also called ROACE, is a mathematical model that shows the ratio of money that a company has invested in a project (capital) against profitability. According to Investopedia, ROACE is especially helpful in the oil and gas field because it helps to analyze business performance. Notably, a business that can make supernormal profits from stringent capital will realize a higher return on capital employed, as opposed to a company that cannot convert capital into gains.
As of now, several oil & gas companies in Texas utilize the ROACE model as a KPI. To calculate Return on Capital Employed, you must consider the aggregate of opening and closing capital employed. ROACE measures how a company uses the business capital to generate more profits and future earnings.
In many countries around the world oil and gas assets belong to the government, and not the drilling company: this is as a result of the contract between the host government and the company regarding production. For example, if your company spends say, $2000 on a drilling project, you are allowed to recover $2000 back from your host government.
Upstream oil and gas investments require much capital to set up and run. You have to set apart finances for site acquisition, extraction, development, as well as production. Each of this stage has its own set of demands. For example, in the production stage, you may have to carry out new exploration projects or appraisals in the brownfields. However, such activities depend entirely on the agreement you sign with your host government.
There are two ways to finance an oil well investment. You can either borrow funds from lenders or generate your capital internally (self-financing). Each of these methods of funding has an impact on the Return on Capital Employed. Also to note, since money is injected indirectly into the business, you may have to make some adjustments to the Capital Employed. Keep in mind the Return on Capital Employed percentage is always higher than the cost of capital
Lease Operating Expenses KPI
While the demand for crude oil and gas has remained constant over time, prices have changed drastically.
For this reason, oil companies in Dallas tx rely on thin margins to survive. Lease operating expenses are the costs that you incur to keep oil production running. This amount does not include drilling and building costs. As an oil and gas investor, you should monitor these costs and try as much possible to cut on any extra spending that might strain your initial budget.
Also, it would help if you made financial decisions based on lease operating expenses projections. These projections show the economic status of your company. The high-level data extracted from LOE KPI also allows you to conduct detailed analysis in this field of interest.
Capital project efficiency KPI
The last few years has seen many oil and gas exploration companies increase their budget capital expenditure, but the problem has been funds allocation, this is according to the audit firm PricewaterhouseCoopers. Also notably, prices per- barrel oil continue to fall, which in turn, affects capex.
This is because the entire industry is moving to oil and gas sites that are difficult to drill. For this reason, therefore, it is essential to evaluate and interpret capex persuasively: capital project efficient KPI is a broad standard of measurement that ensures proper budget allocation, project overrun, and maintenance expenditure.
Cash Flow KPI
The Economic Times defines cash flow as the amount of money that a business receives or pays out. Similarly, cash flow KPI analyses the liquidity state of a company. It chronologically outlines financial data about cash flow, total revenue, and overall expense in different regions. The cash flow information contains numerical values and bar graphs that let you see the best and the worst performing cash flows at the same time. It also provides information on each region of operation.
Many activities occur during an oil and gas operation, and because these activities are hazardous, oil and gas drilling companies work relentlessly to curb their impacts on workers and the environment at large. It is vital to ensure production remains constant and sustainable. Additionally, oil investment companies should create performance indicators that can provide credible insights to shareholders and investors, so that they can understand the financial health of the company among industry competitors, as well as to be a goldmine to investors.
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The Oklahoma STACK Play
The STACK play in Oklahoma has caught the world’s attention and some of the largest energy companies looking for investors. However, individual investors have the opportunity to invest in oil and gas as well. Oil plays have been getting a lot of attention, especially the Bakken Formation, and Permian Basin. Now the less popular STACK Oil and Gas Play is slowly gaining recognition. STACK Play is situated in Anadarko Basin, Oklahoma. Its sister plays are SCOOP and CANA WOODFORD, also in Oklahoma. STACK Play stands for Sooner Trend Anadarko basin Canadian and Kingfisher. The name was derived from a geographic area and not a geological formation.
Oil and gas plays are economical, and the STACK play which is emerging fast started showing an economic promise in early 2016. Experts have observed the growth of STACK play and seen its potential. According to NYSE: IHS, which is the leading source of critical information and insight, STACK play garnered attention from operators, investors, and service companies. The analysis from IHS shows that STACK play has economic viability of oil prices less than $45 per barrel.
Factors such as lower costs have also lured investors, not to mention a hydrocarbon friendly environment in Oklahoma. Oil and gas producers such as ExxonMobil Corp., Jericho Oil Corp., and Alta Meta Resources Inc. have also shown their interest. The oil fields in Permian Basin have a constrained distribution capacity, unlike the STACK, and that gives the STACK play an upper hand. According to one of the investors, Ryan Wright, who is Tree Capital Ventures’ CEO, the wells in STACK play cost less and perform better than other developments, and the expenses for operating, transportation, as well as production tax have been lower. The investors get paid the full WTI spot price and sometimes receive a BTU bonus for the oil and gas produced.
Tremendous Opportunity for Long-term RO
Quality oil and gas investments may provide investors a passive income for decades. High rates of return and improvements in technology and developmental drilling have lowered the risks. STACK play doesn’t only enable investors to earn a passive income but also a strong return on investment. Most sophisticated and accredited investors benefit from the income tax shelter and the ongoing returns.
West Texas and New Mexico based Permian Basin is probably the most lucrative oil and gas producer, and investors always want to have a piece of it. STACK play is the second-most-active play just after Permian, and you guessed it right, investors are also rushing to cash in on it as well. The reason why investors are scrambling to the STACK play is its desirable location and potential for strong ROI even when oil prices are lower. That’s the reason STACK play has been recording an increase in oil production while other drilling areas have witnessed a decrease during seasons of low oil prices.
The oil reserves that constitute the STACK play have a sheer concentration of oil, and when they are tapped, the reserves produce more oil than other sites and cheaper than what it would have cost to create the same amount of oil and gas in different wells. Oil companies and investors are attracted to reserves that continue to provide oil even after the prices fall to reduce their risk and also maximize their ROI. STACK play is one of them. The oil from STACK play can also be transported easily, is easily accessible, and its taxed low and that helps both sophisticated and accredited investors achieve a higher ROI over the long-term.
How Smaller Investors Can Participate
The Oklahoma STACK play is the future, and it couldn’t be where it is if it were not for investors who took the risk. First of all, there are four types of oil and gas investments that you need to know. They are:
It’s up to the investors to decide which investment they would like to take, or they can have the companies they invest through decide. The most recommended way smaller investors can invest in oil and gas is through partnerships with other qualified investors. Some are using a limited partnership which has a lot of potential for decent and stable cash flow, fantastic capital gains, and high yields.
This is the most specialized field of investing, and you will be engaging your broker who is an expert in this industry. You can also deal with a company’s management directly to get a private placement opportunity. Investing in STACK play offers a lot of advantages and benefits such as profit potential and tax advantages.
The Major and Minor Players
Some of the significant oil and gas investors and players are Deloitte, Fig Tree Capital Ventures, LLC, and our company, United Exploration LLC. So, who are we?
United Exploration, LLC is Texas-based independent oil and gas company that participates in drilling and development of approved oil and gas fields such as the Oklahoma STACK play, to generate a long-term income. Our management team has played roles in developing over 150 wells in North Dakota and Texas Gulf Coast.
As one of the major players in the oil and gas industry, we value our partners, and we believe that the partnership should benefit all investors. Please contact us if you have an interest in the Oklahoma STACK play and you are looking for an oil and gas company that is experienced, has top-notch drilling prospects, and friendly to do business with, we are just a call away.
The Oklahoma STACK Play
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While environmentalists and industry enthusiasts scrutinize and monitor oil and gas investment companies, sophisticated investors have a different view of the industry. Oil and gas companies have become popular over the years for reasons that make this particular investment unique above all other forms of investments.
Here are four reasons why qualified investors are choosing oil and gas companies.
Serious investors are always in search for the best return on their investments. One way to do this is by looking for opportunities that offer tremendous tax incentives. The US government continues to play a significant role in providing tax exemptions and benefits for investors and producers to foster the production of oil and gas in the country. The tax code does not have any other investment venture that offers robust tax advantages than oil and gas investment. The US government hopes that by providing generous tax benefits to investors, domestic production of oil and gas will increase, thus curbing reliance on foreign fuels.
If you would like to invest in oil and gas, you are set to enjoy significant tax benefits and exemptions such as the ones discussed below.
Both tangible and intangible oil and gas tax deductions cover about 90 percent of drilling costs. This means you are relieved of most of the drilling costs. Moreover, you will still receive incentives even if you don’t extract any oil from the ground. Note that there is no relationship between oil production and drilling deductions.
To qualify for this tax benefit, you must not produce more than 50,000 barrels of oil or 6 million cubic feet of gas per day. Depletion allowance takes into account depletion of gas and oil at a particular site for a given period.
The interesting thing about the oil and gas tax benefits discussed above is that they have very few limits. The only notable limitation is the small producer limit. This means that tax credits and exemptions from investing in this industry are the best options even for high-net-worth individuals. As an investor, you can earn a lot of profit if you own at most 1000 barrels of oil per day, and you can be exempted from most of the tax credits and exemptions discussed above.
Return on Investment
Sophisticated investors understand investing in investing in oil and gas has high return investments. Currently, however, there is an oversupply of the oil and gas although the industry still provides a window of investment opportunities for accredited investors, and it is expected to remain constant for some time. Oil and gas investments continue to offer stable returns when compared to other types of investments, where most of the profits are paid out to investors.
Long-term Passive Income Generation
Oil and gas allow potential investors to tap into a financially lucrative venture with long-term high yield return on investments. Furthermore, you do not need to be actively involved in the business. Plus passive income attracts low taxation.
The workings of the oil and gas industry have always been different from the general economy. When the economy is not performing well, your business can experience huge financial losses, but the demands and supply shifts in the economy do not affect the prices of oil and gas. In fact, as the prices for natural gas and oil rise, their stocks increase simultaneously. Thus, investments in the oil and gas sector can protect you against slowdowns in the economy.
Oil and Gas Investment Opportunities Available
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