Are You Receiving Oil & Gas Royalty Checks?

Posted September 30, 2020

Gateway Royalty recently announced some exciting news that will allow us to work with more landowners here in Eastern Ohio. Read through this post to learn about our new PDP option and how it will enable us to help more people receive upfront payment for their royalties.

What are PDP wells?

PDP is an energy industry term that stands for “proved, developed, producing”. It means a well has been developed in an area or on a property and is actively producing oil or gas. A landowner who has a PDP well from leasing their minerals to an E&P company may have been receiving royalties as a result of that production for some time (months or even years).

How is purchasing royalties from PDP wells different from how Gateway has done business in the past?

Up to this point, Gateway has typically purchased royalties from individuals before they start receiving royalties or as they are just starting to receive royalties. However, in an effort to work with more Ohio landowners, we are now taking a look at landowners who have been receiving royalties from PDP wells over longer periods of time and assessing them on an individual basis.

Specifically, we’re looking for wells that have a couple of years of production already behind them. These wells offer us a little more data to work with—which is helpful in accurately estimating their royalty value moving forward.

One thing we see with almost all wells is they have really strong production for the first couple years and then they experience a significant slowdown. Across the board, wells tend to decline about 50% after the first 24 months. Some may decline a little less depending on the operator, but most of the operators will bring them on pretty hard because they want that initial cash flow when drilling these expensive wells.

After that significant decline in production around the two-year mark, you start seeing a slower decline rate. We use the term “Cadillac”—those wells are kind of Cadillacing and not declining as much. We’re looking for wells that have already moved past the big-time decline rate and established a steadier baseline. Once we can get a more consistent reserve report, we can make the landowner an offer.

How does the process of selling royalties work for landowners already receiving royalties from producing wells?

Once Gateway connects with a landowner interested in receiving an offer, we’ll typically ask for a couple things. The first thing is a copy of your royalty check (at least the last one, preferably the last two or three). This is essential to verify that your well is in production and to provide us some key pieces of information: how you’re being paid, the interests you have, the wells you’re under, the volumes on those wells, your deductions, etc.

It’s also ideal to have a copy of your oil and gas lease, which we typically ask for in every evaluation—whether it’s buying royalties before the well comes into production or after. Once we have those items, we can run the valuation and get you a firm offer. It usually takes no more than seven business days from the time we receive all the documentation until we have an offer in your hand.

For those who choose to accept our offer, we can move forward pretty quickly because the well is in production and royalties are already in pay. We would just need to get the document signed and make the transfer. Some preliminary title work is required on our part, but it should take no more than 30 days until you receive your payment.

If you’re a landowner with a PDP well, what’s the benefit of selling your oil and gas royalties?

While motivations vary greatly from person to person, the main reason most landowners choose to sell their oil and gas royalties is simply to receive a lump sum of cash all at once rather than waiting for royalty checks to trickle in over the months or years. For PDP well landowners, this factor may become increasingly relevant once a well passes peak production and royalty checks begin to decrease.

At Gateway Royalty, we’ve worked with many landowners who decided to sell their oil and gas royalties for various reasons. Sometimes individuals choose to sell because they want to make lifestyle changes, like retiring. Sometimes they want to take that money and invest it or diversify by doing a 1031 like-kind exchange. Maybe the individual is at an advanced age or has health issues and wants to use the money now. Or maybe they need the money to make an immediate impact—like paying off debt or sending a child or grandchild to college.

Tax savings can also factor into the decision. Regardless of where a well is in production, every single royalty check a landowner receives is taxed as ordinary income. But if a landowner decides to sell their royalty stream, then the profits they receive from that sale are taxed at the capital gain rate (which is a lower tax rate).

What should Ohio landowners do if they want to receive an offer on their oil and gas royalties?

Gateway Royalty is making an effort to reach out to landowners receiving royalties from PDP wells. So if you receive a piece of mail from us, please read through it and don’t hesitate to reach out to us with any questions.

Also, if you’re a landowner receiving royalty checks and you want to potentially get an offer, contact us. It’s just that simple. It doesn’t matter if you started getting your royalties last week or you’ve been getting them for a couple of years. Regardless of where you’re at in the curve, we can assess your wells and let you know if we’re interested in making an offer.

If you’re an Ohio landowner interested in receiving an offer on your oil and gas royalties, contact Gateway Royalty today.

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