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Sabine Royalty Trust Message Board

  • molar61 molar61 Sep 22, 2000 11:06 AM Flag

    unicorn - OIl & Gas 101 (continued)

    There is another type of working interest trust
    that I overlooked. In this situation, the working
    interest owner wants to cash out so they take perhaps 65%
    of the working interest (maybe 50% of the revenue
    interest) and put it in a "royalty trust" that is sold off
    to the public. The remaining 35% of the working
    interest goes to a group that actually operates the wells.
    The 50% paid to the "royalty trust" does not bear any
    part of the expenses. The group that operates the
    wells gets 35% of the gross and pays 100% of the costs.
    The revenue from the well breaks down this way:
    royalty owners - 20%; royalty trust - 50%, operating
    group - 30%. This looks like a real royalty trust
    because the trust pays none of the expenses.

    But
    the problem remains of who has the incentive to drill
    new wells. The royalty owners can't. The royalty
    trust can't. So, the only party that can is the
    operating group. Picture this: they are going to pay 100%
    of the cost of a new well and get 30% of the
    revenue. Why would anyone in their right mind do this? The
    truth is that no one in their right mind will pay 100%
    of the costs for 30% of the grease. The result is
    that few, if any, new wells get drilled. The effect of
    no new wells is that reserves decline, production
    declines and revenue declines. When you buy a "royalty
    trust" of this type, you are indeed buying a wasting
    asset.

    SBR is different because it owns landowners royalty.
    In a situation where SBR is one of the royalty
    owners, the revenue breakdown is like this: royalty
    owners (of which SBR is one) - 20-25%, working interest
    owners - 75-80%. Who has the incentive to drill new
    wells. The royalty owners can't but the working interest
    owners get 75-80% of the grease. Will people drill new
    wells for 75-80% of the gross revenue? Let me rephase
    that: how many new wells are drilled where the working
    interest owners get 75-80% of the gross? Answer: all of
    them. So, in SBR's situation, there will be new wells
    drilled so long as price incentives and tax policy makes
    it smart to do so.

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    • I don't know how many operators there are on leases where SBR owns royalty interests but it is pretty large. On the other hand, I don't know what difference it makes. If it is economic to drill new wells or rework old ones, whoever is the operator will do it.

      Remember that SBR has producing royalty interests in over 1,000,000 acres. I remember somewhere that SBR received 11,000 checks a month.

    • Hoop is alright.
      Hoop is very good imho.

    • Molar what other royalty trusts that you know of have landowner royalities? Thanks

    • Thank you for the explanation of the difference
      in these structures for royalty and working
      interests.
      I have nothing to add except to say I recall a
      royalty run by the same folks as sbr, bru, did you know
      bru?
      BRU was listed on nyse.

      I observed its price
      go from $20 per unit to $7 per unit over a five year
      period and then it was dissolved and the assets sold to
      another entity, perhaps sjt bought bru's
      interests.
      BRU did pay handsome distributions but basically it
      was a breakeven proposition at best for the long time
      unit holders.
      BRU may have been a case which you
      described as being without incentive under the set up to
      develop the resource field further. Now under SJT's
      management perhaps those limitations were lifted and the old
      field became newly productive.
      I could not
      understand why it drifted like it did, dissolve and then
      reform itself under the sjt banner except now for your
      explanation of incentive structures lacking for the
      entity.
      Thank you for the insights on topic.

 
SBR
50.81-0.21(-0.41%)Apr 17 4:02 PMEDT

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