For mineral owners leased by Halcon, the impact of crude prices may become apparent soon. Halcon has announced they will make additional deductions to their spending in 2015. The good news for mineral owners is Halcon does not expect significant lost lease agreements. Meaning if you are currently leased by Halcon, it is likely they will not let it expire. With that said, anytime drilling budgets are reduced, it is not good news for the mineral owner.
Budget cuts and their impact on mineral owners
Leasing Activity – If you are not currently leased, the odds of getting leased in this environment has been reduced. If you are fortunate enough to be contacted by a company like Halcon, the upfront lease bonuses and royalty percentages are likely to have decreased from even a few months ago.
Drilling Activity – the significant drop in crude oil prices will weigh heavy on Halcon and others. We hear all kinds of facts and figures about where oil prices need to be for a horizontal well in the Bakken to be profitable. One thing we do know is that forty dollars per barrel is not enough. The activity will not stop immediately as many wells are currently in the process of being drilled or awaiting completion. However, once the rigs are laid down, mineral owners will be in a wait and see mode for sure.
Hedging Activity – Companies like Halcon will hedge their future production against a market index. The good news for mineral owners leased to Halcon is they elected to participate. According to recent shareholder meetings, the company is approximately 88 percent hedged at a price over $85.00.
“Although we are significantly hedged, the continued weakness in crude oil prices, combined with elevated service costs, calls for conservative planning” – Floyd C. Wilson, Chairman and CEO, Halcon.
The future with low oil prices
It is a difficult time for the oil industry. Lay-offs, budget cuts and less activity is not good news for mineral owners. Unfortunately, reductions in oil prices mean reductions in royalty checks, lease bonuses and royalty percentages. Hang in there though. The oil industry is cyclical and it should bounce back to something a little more palatable than forty dollar oil in the coming months. At least we hope.
