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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (39097)	1/4/2011 7:06:39 PM
From: E_K_S	Read Replies (1) of 78470

Hi Paul E&P Land Leases - Not all are equivalent I have been studying several E&P annual reports and in particular looking at the specific types of land leases used. I come away more confused as the annual reports really do not provide the details of the specific lease terms necessary to compare which companies have the best leases. Did you come to this conclusion on your reviews? Many of the leases have both three year and five year terms. Several have different royalty payment amounts depending if on (1) Indian Reservation land, (2) BLM land and/or (3) private land. Some of the leases provide for sub-leases with an over riding royalty paid to the lessee. All of these factors can affect the final cost of production to the lease holder. I suspect that some of the older leases and/or original land owners have the best terms. Many times when they sell their land interests, they keep a small "over riding" royalty interest which when bought by a large E&P driller can generate perpetual "royalty" income to the seller. The hidden value lies with the large land and/or lease holder that have no expiration term or with the mineral rights acquired years ago. Usually the much larger company can negotiate (and even demand) the most favorable terms. That's how they can achieve such a low cost of production. In summary, all land acquisition deals are not the same. One must be careful with the smaller E&P companies as their land deals look to be the most constrictive and w/ their limited capital could be squeezed by lack of performance and lose their lease(s). Finally. what is to prevent the Federal and/or State or local agencies charging additional taxes/royalties on all producing NG/Oil wells and/or upping their permit fees for well development. This seems like a possible new source of revenue especially for States loaded w/ debt (ie California). Therefore, E&P companies w/ operations in the mid west, North Dakota, Wyoming, Colorado, Montana may be better prospects. EKS P.S. The more I study the landscape, MDU through their Fidelity Exploration Company may have the best overall package of leases (both w/ terms & locations). ( investing.businessweek.com )

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