Why Is My Royalty Check Going Down?

If you’re used to getting a royalty check in the mail for the minerals that you own beneath producing wells, you may have noticed your checks have been getting smaller lately. They may be decreasing a little bit each month or they may have dropped significantly since you first started receiving royalty checks.

You’re probably reading this because you’re wondering: (1) Why this is happening? and (2) Will this continue to happen? Let’s explore the answers to these and a few other related questions.

A lot of Ohio landowners are seeing their royalty checks dropping right now. Why?

The biggest reason landowners are seeing a drop in their royalties is because of oil and gas prices. Particularly relevant to most Ohio landowners are natural gas prices, which have been on a downward trajectory for some time.

Natural gas prices have been hovering between $1.60 to $2.00 thus far in 2020. The current “strip price”—which is the NYMEX Henry Hub price you can lock into to buy futures of natural gas—is under $2.00 in the near term months and greater than $2.00 in the outer months. This number basically forecasts the market price of natural gas in the future.

Unfortunately, we’ll likely be in this rollercoaster pricing environment for the foreseeable future. We are hoping that prices have hit the bottom and will begin to rise soon. What we don’t know is how the supply and demand curve will shape out going forward because of the current market conditions we are in.

What is causing natural gas prices to fall and stay at these low levels?

The main reason natural gas prices are so low is there continues to be an oversupply and not enough demand for the product. The U.S. has become the #1 producer of natural gas and right now we’ve got a lot of it.

Natural gas is pretty seasonal. We have had a mild winter without cold temperatures thoughout most parts of the country for extended periods of time. As a result, suppliers didn’t have to inject as much natural gas that was previously forecasted in order to be prepared for heating our homes and businesses—especially in the Northeast regions of the country.

As we move past the winter season and into the summer, many of those natural gas tanks that normally need filled this time of year are still at high levels. Until demand starts to catch up with supply, prices will more than likely remain low in the near term.

What impact is oversupply of natural gas having on companies drilling in Ohio’s Utica shale?

Operating companies will begin to drill fewer wells because their revenues will be falling due to lower prices. This will cause the operating budgets of these companies to decrease, which will limit the numbers of wells that can be drilled. This time last year there were about 25 rigs running in Eastern Ohio. Right now we’re down to 10 rigs running. That’s 60% fewer rigs than we had just one year ago.

The reduction in natural gas rigs operating isn’t just something we’re seeing in the Utica or Appalachia either. This is a nationwide trend that’s happening in basins throughout the country due to lower natural gas prices and current over supply of natural gas.

The market will eventually correct itself like it always does. We go through these cycles every so often. The last time it happened was in 2016, when natural gas prices hit lows of around $1.55 or $1.60. We’ve recently seen prices at this level, and hope that they don’t move any lower.

What specifically is causing the reductions in landowner mineral royalty checks right now?

A couple things are causing royalty checks to decline for landowners. Royalties are based on the oil and gas production from your minerals being developed. As oil and gas production decreases and oil and gas prices decrease, unfortunately royalty checks begin to decline. However, these are not the only factors.

The other significant factor at play is the deductions companies typically take out of landowner royalties. These are shared costs paid to the middlemen who help your minerals get to market. Thing is, these infrastructure and midstream companies typically charge a fixed cost no matter what the price of natural gas is.

So as the price of gas goes down, the differential begins to widen for the royalty owner. For example, if you have a $3 fixed cost, that same amount is deducted from your royalties whether you are receiving $100 (due to high prices) or $50 (due to low prices). Basically, as you earn less money in royalties, those deductions eat up a higher percentage of your check.

Is there anything landowners can do to stop their royalty checks from decreasing?

Once you’ve leased your mineral rights, you can’t change or go back on your agreement because your royalties start to decrease. The oil and gas industry is by nature a volatile one, filled with ups and downs, and you can never truly predict what your royalties will look like over the life of your lease. That’s not to say royalty owners don’t have any options.

What we do at Gateway Royalty is purchase mineral rights and royalties from Ohio landowners for a lump sum. This gives landowners who want to eliminate the volatility and uncertainty of receiving royalties the ability to cash out. Essentially, when you work with us, you’re locking in your price regardless of what happens to the market long term.

Want to learn more about the option of selling all or a portion of your mineral royalties? Reach out to Gateway Royalty today. We’re happy to chat with you and answer any questions you might have.