Punt on Delay Rentals Before They Penalize Your Wallet

Christian Turak, GKT’s Oil and Gas attorney, recently wrote about SWN’s new leasing structure that some of our clients have been offered in Marshall County, West Virginia.  If you missed his blog, you can check it out here, 2022 SWN Oil & Gas Lease Rates.  It’s important to understand what these “delay rentals” or “yearly extensions” mean because, if you have a lease coming up for renewal soon, you may see a similar structure being presented to you.

What Does Oil & Gas Leasing Have in Common with the NFL?

If you watch the NFL, one of the things they always say is that it’s a copycat league.  Which means, if a team likes a formation or a play design they saw from another team, oftentimes this play will make it into their own playbook.  Oil and gas leasing is no different. These companies know what one another is up to at all times. 

Just this week, we were contacted by a prospective client about a lease they were being offered in Belmont County, Ohio from Ascent Resources.  Any idea what structure they might have been offered?  You guessed it. . .Delay Rentals.  I think we need to be prepared to see delay rentals being rolled out by many companies and not just in West Virginia.  If you have minerals available to lease in Brooke, Ohio, Marshall, Wetzel, or Tyler Counties in West Virginia, be prepared.  I’d say the same if you have minerals in counties such as Jefferson, Belmont, and Monroe Counties in Ohio.

Delay Rentals Penalty - throwing flag football

Should You Accept or Decline the Delay Rental Penalty?

Back to my football analogies. When a team commits a “delay of game,” they are penalized. When you accept a “delay rental,” you’re also potentially being penalized.  How so? Let’s quickly explain.

Bonus Payment “Penalty to Your Wallet”

For as long as we’ve been signing Marcellus and Utica shale leases, which is approaching the 20- year mark now, we’ve been signing “Paid-Up leases.”  A Paid-Up lease is a leasing structure where you negotiate a bonus payment to be paid when you sign the lease.  The up-front bonus is paid out generally 60-120 days after signing and covers the full payment for a committed term.  Primarily these terms have been 5 years in length.  So, let’s say you sign the lease, negotiate a bonus payment for $5,000 per acre, and you own 20 acres.  Essentially, the bonus you are paid is calculated to be $100,000 ($5,000 per acre x 20 acres) which covers that 5-year term.  You receive the full amount up-front.  Now let’s take a look at how this differs from a delay rental lease.

In a leasing structure that features delay rentals or yearly extensions, no longer are you paid up-front when you sign the lease.  Instead, these payments are delivered over time, oftentimes in yearly installments.  That’s not so bad, right?  The gas company is doing us a favor by spreading out our payments so we don’t blow all of our money as soon as we get it.  What a relief, right?  WRONG!  Don’t be fooled and fall for this trap. . .

What they tell you is that by signing the delay rental lease, they might pay you, for example, $1,200/year over 5 years.  Let’s do the math.  Which is more?  $5,000/acre all up front or $1,200/acre over 5 years?  I’ve never been very good at math, but:

            $5,000 per acre x 20 acres = $100,000 up-front, full bonus payment.

            $1,200 x 5= $6,000 x 20 acres = $120,000 potential delay rental bonus payments. 

Ok, so $120,000 is more than $100,000, I at least know that much.  So where does my math fail?  Don’t be fooled by this.  These delay rental payments may not be guaranteed.  Continue reading to find out.

“Not So Fast, My Friend.”  Don’t Be Fooled by Delay Rentals!

Let me throw in one more football reference to help me illustrate.  The great coach, Lee Corso, who we see on College GameDay every week putting on those silly mascot helmets always says, “Not so fast, my friend.”  Well, take his advice here.  If you’re going to sign a lease, especially one that comes with delay rentals, you MUST UNDERSTAND what they mean.

Simply stated, delay rentals “delay” your payments over time.  If (and that’s a BIG “IF”) the gas company would agree to guarantee these yearly payments, maybe it wouldn’t be so bad.  However, here’s the catch. . .THEY DON’T.   Instead, it’s structured in a way that incentivizes them to put your property into production sooner rather than later.  So, if you agree to the $1,200 per acre per year for 5 years, and they put your property into production in the very first year, you basically signed a lease for $1,200 per acre and not the $6,000 per acre they want you to believe you were signing.

Football Field with Oil and Gas Pipeline

The Leasing Game Has Changed

As we’ve stated and continue to highlight, the oil and gas leasing game has drastically changed over the years.  We have thousands of acres we are currently representing, and many of those acres have no current offers on them.  Simply stated, gas companies are only interested in leasing tracts they reasonably believe they will place into production in the short term.  The Wild Wild West days of leasing up everything as quickly as they can sign it up are over.  These companies are taking a much more sophisticated and calculated approach to leasing.  You need to understand the challenges and all that comes with this new frontier, and our office can help you.

Our Office is Here to Help

We can help you determine what options are available to you and what options might be best for your family and your situation.  One of the main reasons we write blogs is to try and educate our readers the best we can as to what is going on in the market. 

If you’d like our help, we’d be happy to help you.  Our consultations are free.  If I said this once, I’ve said it several thousands of times, don’t sign anything without speaking with our office first.  There have been countless times when someone has signed something they thought they understood and what appeared to be a good deal, only to find out that it was far from being a good deal. 

Contact our office today at 304-845-9750, Live Chat with us, or complete our online form.  You can also email me, Josh May, directly at JDM@GKT.com if you have a question.  We don’t know how all of this will shake out but be patient and ask for help.  The trend seems to indicate that these delay rentals are back, but for how long? That answer depends on us!