02/07/2010 Star Telegram

Homeowners face a leasing dilemma

By Jack Z. Smith
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*Should they sign now, getting relatively small bonuses and royalties, or hope for higher gas prices, better deals?

In summer 2008, Jesus Alvarado Jr. of Arlington had a chance to sign a natural gas drilling lease with a bonus of $5,000 per acre.

"Everybody back then was saying, 'Let's hold off; it will get better.' ... I just held off," he said.

In ensuing months, natural gas prices plunged. Some energy companies rescinded big-bucks offers to neighborhood groups that called for bonuses of $25,000 to $30,000 per acre and a royalty of 25 percent or more. Drilling and leasing activity plummeted.

This year, Alvarado has been offered a lease bonus of $3,000 per acre and a royalty of 20 percent for his residence in Arlington and $2,000 per acre and a 25 percent royalty for a rental property he owns in Haltom City. He's had difficulty determining what constitutes a good offer in today's subdued leasing market.

"I'm looking for information, but everybody seems to have gone to bed on this since the frenzy died down," said Alvarado, a quality assurance consultant to manufacturers.

He isn't alone in his uncertainty. Many residents in Tarrant County and surrounding areas that overlay North Texas' natural gas-rich Barnett Shale are pondering whether to sign or renew a gas lease.

Leasing roller coaster
Exceptionally high natural gas prices led to a Barnett leasing boom in 2008, when 152,285 leases were filed at the Tarrant County clerk's office. That number plummeted to 35,167 in 2009, less than one-quarter the 2008 total.

There's considerable speculation, however, that leasing activity will rebound at least moderately this year, especially if gas prices rise. Prices soared above $13.50 per 1,000 cubic feet in July 2008, sank below $2.50 at one point in 2009 and closed Friday at $5.52 in futures trading on the New York Mercantile Exchange.

Energy companies say they need stable prices of $6 to $8 to increase drilling significantly. Higher prices often generate an uptick in leasing. Seventy-eight rigs were drilling in the Barnett on Friday , according to RigData. That's far below the peak of 214 active rigs in October 2008.

Mark Caffey, CEO of Caffey Group Llc., a Fort Worth-based leasing firm, forecasts a marked increase this year in leasing in the "Barnett core," the areas - including much of Tarrant County - that generally have the biggest-producing gas wells. He said his firm has 86 leasing agents in the Barnett, "and we just hired another 10."

Will Brackett, managing editor of the Powell Barnett Shale Newsletter, also said "leasing activity is picking up again" after the deep downturn in 2009.

Chesapeake ramping up
Oklahoma City-based Chesapeake Energy, a prolific Barnett driller and gas producer with a large regional office in Fort Worth, plans to ramp up leasing and drilling this year after closing a $2.25 billion deal with French oil giant Total S.A. that will provide Chesapeake a potent cash infusion for its Barnett operations.

In the company's online Barnett Bulletin, Chesapeake said it "has already begun hiring contract leasing agents, with as many as 300 new positions to be filled in the coming months."

Chesapeake spokeswoman Julie Wilson said the company's leasing efforts will focus on filling gaps in areas where it already has a presence and has pinpointed likely drilling sites. "I think we know where most of our drill sites are. So it's not like the leasing frenzy of earlier days," she said.

The company currently has about 22 drilling rigs working in the Barnett and expects to have 30 active rigs by year's end, Wilson said.

Chesapeake CEO Aubrey McClendon recently said the company would like to lease an additional 100,000 acres in the Barnett, possibly over several years.

Caffey agreed that much of the leasing this year will be "fill-in" activity such as what Chesapeake plans.

In many instances, companies will drill wells to retain existing leases and perhaps avoid paying a second, previously agreed upon lease bonus to a property owner for extension of an expiring lease that hasn't yet been drilled.

Huge bonuses are history
The days of energy companies offering lease bonuses of up to $30,000 an acre to alliances of neighborhood groups are over, Caffey said: "Companies just won't go there. "It's not practical. It's not a good business decision. ... The land rush is over."

Current lease-bonus offers are most commonly $2,000 to $3,000 an acre but can go higher, Caffey said.

Offers could be $5,000-plus per acre for leases negotiated with large homeowner groups, which have greater bargaining clout. Leasing companies are sometimes willing to make more attractive offers to large groups because negotiating separately with each property owner takes longer and raises personnel costs.

The Northeast Tarrant Gas Leasing Organization - a large group of neighborhoods in Keller, North Richland Hills and a small portion of Colleyville - was scheduled to vote Saturday on a lease offer from Chesapeake. The lease would provide a bonus of $5,250 per acre for a three-year primary term, with a $2,500 bonus for an optional second two-year term and a 25 percent royalty, said Doug Inscho of Keller, chairman of the group's research team. Voting results were not available by the press deadline for this article.

Royalty offers
Current royalty-rate offers - the percentage of gas-production revenues that property owners cumulatively receive from wells - generally range from 20 to 25 percent, Caffey said. In many instances, energy companies proffer five-year leases, giving them that amount of time to drill before the lease expires. But some property owners are negotiating for three-year leases that could result in their receiving royalty payments from production much sooner.

George Belcheff of Keller, president of North Keller Neighbors Together, said the group - which also includes some residents of Southlake and Westlake - is carefully evaluating "what the conditions are" in the leasing market and making certain "our members are educated as to what is going on."

At one point during the leasing pandemonium of 2008, the group was offered a bonus of $19,000-plus per acre, with a 22 percent royalty, but "we turned it down," Belcheff said. The group wanted more time to negotiate terms related to environmental concerns, drill sites, pipeline locations and other issues of quality of life and preserving property values.

Now, "it seems like most people in the group are willing to wait," he said. "They aren't just interested in getting a few thousand dollars for the leases. They want a full package that includes protections for the community."

Lease litigation
Adding to the uncertainty regarding the leasing market are pending lawsuits that have been filed by Dallas law firms on behalf of Tarrant County property owners who were part of neighborhood organizations that had reached deals with energy companies and leasing firms only to have those offers rescinded when gas prices crashed.

The lawyers have claimed that the rescissions constitute breach of contract, fraud and violations of antitrust law.

The energy companies have denied the allegations and said no offers were binding unless individual property owners signed leases.

A substantial number of property owners in the Southwest Fort Worth Alliance have expressed interest in joining the litigation, said Tolli Thomas, a Wedgwood area resident who has been an alliance spokeswoman.

The aborted offer made to the alliance in 2008 called for a primary lease bonus of $27,500 an acre for a three-year lease and 23 percent royalty, plus an additional $27,500-an-acre bonus for renewing the lease for an optional two-year term, Thomas said.

In sharp contrast, current lease-bonus offers have been "very low," generally $2,000 to $4,000 per acre, she said. Energy companies appear more reluctant to negotiate with groups, she said.

Michelle Quintana of Grapevine, a manager at American Airlines, is among the Tarrant County residents who prefer a good lease deal over one that is simply quick.

"I'm not expecting $25,000 an acre," she said. Nevertheless, an offer of a five-year lease with a 20 percent royalty and a bonus of $3,000 per acre "was a little bit of a low ball."

Therefore, "I'm going to wait," she said.
JACK Z. SMITH, 817-390-7724