‘Shale-ionaires’ suffering from wave of bankrupt oil drillers

5/21/2015

KELLY GILBLOM

HOUSTON (Bloomberg) -- At the height of the U.S. energy boom, Texas landowner John Baen received about $100,000 a month in royalty payments from companies producing oil and natural gas on his property.

Now the checks are much smaller, and when he opens his mailbox each day, he’s afraid he’ll find yet another bankruptcy notice. So far, four of the producers sending him checks have caved in to rising debts as oil prices slumped, seeking court protection from their creditors.

“I feel like crying because I know I’m going to get another 10 notices,” said Baen, 67, who owns 10,000 acres of land and mineral rights on other property.

A rebound in oil prices that bottomed near $44/bbl in March has provided some relief to stronger companies that have been able to compensate with cost cuts and more efficient operations. For many smaller, cash-strapped producers, current prices of almost $60 still aren’t enough to make ends meet compared to the $100-plus prices seen during the boom days.

There have been at least a dozen bankruptcy filings in recent months, and more than a dozen have defaulted on bond payments or warned investors of challenging times ahead, according to data compiled by Bloomberg.

That’s sending shock waves through the world of private land and mineral rights owners—sometimes called “shale-ionaires” —who were enriched by the explosion in U.S. shale drilling. Those resource owners basically rent out their oil and gas rights to producers in return for a share of the revenues. When the industry does well, the mineral rights owners do well. When business tanks, they share the pain with producers.

Shrinking Payouts

Royalty payouts from bankrupt operations have shrunk to a fraction of the rates paid before the crash, sometimes more than can be explained by the drop in oil price. In the worst cases, landowners can be left with no one to take responsibility for abandoned waste, spills and other hazards, say industry experts who have past experience with oil busts.

“If you’re a landowner and you’re not happy with an operator, you don’t want them to go bankrupt,” said Jenna Keller, a Colorado oil and gas attorney, by telephone. “Because then you’re stuck with a mess.”

Many more companies, which make monthly royalty payments to tens of thousands of people, may go bankrupt in the next year, said John Castellano, a managing director at AlixPartners LLC, who focuses on company restructuring.

More Soon

“We’re seeing highly-levered companies, with high break-even cost requirements, with little ability to generate cash and little access to liquidity,” Castellano said. “I don’t believe we are near the end of this.”

WBH Energy Partners LLC is typical of companies seeking court relief from debts. After a drilling spree in the run-up to the oil price crash last year, the company filed for Chapter 11 bankruptcy law protection in January. A judge appointed one of WBH’s partners, U.S. Energy Development Corp. of Getzville, New York, to take over some of its Texas operations.

Baen, a rancher and business professor at the University of North Texas in Denton, said his first royalty check from U.S. Energy on March 30 was $51.88, a third of what his previous check, signed on March 2, had been.

The company had changed the payout for royalties, and reclassified some oil production as lower-priced “condensate,” according to an April 16 letter Baen received from U.S. Energy.

Legal Help

“I was just flabbergasted when I saw the check and the price,” he said by telephone. Baen said he’s hired an attorney to pursue money he may be owed.

Calls and emails made on Wednesday to a U.S. Development Corp. media line and to its attorneys weren’t returned.

Jason Cohen, a Houston-based bankruptcy attorney for Bracewell & Giuliani LLP who represents WBH Energy, said the company he represents no longer has control over royalty payments and is seeking to liquidate its remaining assets to repay its creditors.

Keller, the Colorado oil and gas attorney, said such problems are commonplace for private land and minerals owners caught in the middle of corporate bankruptcies. One of the biggest concerns is that workers who haven’t been paid may walk off the job without taking the necessary steps to clean up or secure the site.

Landowner Risks

That leaves the ranchers and homeowners that allowed companies to extract minerals from their land at risk. Filing a lawsuit isn’t helpful because the company responsible is insolvent, Keller said. Turning to state officials for help is a waiting game, as the agencies responsible for oil and gas cleanups are shorthanded and usually have a long waiting list.

Finding a company representative to sort out problems with royalty payments also is more difficult during bankruptcies, when company workforces may have been reduced to skeleton crews.

Paul Midkiff, head of the Oil, Gas and Minerals Group at Wells Fargo Private Bank in Fort Worth, helps royalty owners manage their finances and relationship with drillers. He said he’s fielding calls from mineral rights owners across the U.S. trying to make sense of their monthly checks.

“They don’t know where to look,” Midkiff said by telephone. “You’re calling an 800 number and not getting the call backs or not getting the responses in a timely manner.”

Logistical Difficulties

Geography can also become a headache when royalty owners don’t have easy access to court proceedings in another state. Quicksilver Resources Inc., which filed for bankruptcy protection in March, said in court documents it owes $12.3 million to mineral rights owners and other interests.

Most of those resource owners are in Texas, but an April 27 hearing held to give creditors a chance to meet with the company was in a court in Wilmington, Delaware, where the company filed for bankruptcy. Calls and emails Wednesday to a media line for Fort Worth, Texas-based Quicksilver Resources and to the company’s attorney weren’t returned.

Clint Liles, 73, a frequent poster on “Mineral Rights Forum,” an online chatroom for private citizens coping with the complexities of oil and gas leases, often dispenses advice to royalty owners. Liles thinks he’ll be getting busier as more drillers face down bankruptcy.

“I’ve had several people call me or message me,” Liles said by telephone from his West Texas ranch. “These oil companies—it’s hard to figure out what they’re going to do.”

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