Cherokee Horn Community Forum

Pooling Units: Separating the Fact from Fiction

We’ve had some questions lately about pooling units and the issue of forced pooling specifically with regard to any homeowner who has chosen not to sign a mineral lease. We feel that this is an area that homeowners in general don’t understand and one that needs to be explained to everyone.

First of all, a pooling unit is an area of contiguous tracts of mineral leases set forth by a gas company as the designated area that they plan to drill. These pooling units are formed in such a way as to extract the most natural gas possible at the least expense possible with regard to laying the horizontal underground pipe to access the gas.

This means that if you live in an area, such as a street, with only scattered signers, whether you have signed or not, your lot will likely NOT be included in the final pooling unit, because it would be too costly to include. Those who have already signed would be able to keep their signing bonus, but would not get royalty payments. Those who have not signed would get nothing.

An exception to this would be if a homeowner’s unsigned lot were absolutely crucial and the company had to include it. This does not exist in any Cherokee Horn units because we already have established drill sites and bore paths as of July 2009.

We know of only one scenario in another county where the gas company could only access the rest of their mineral pool by going through a particular unleased interest. In that particular case, the gas company was able to appeal to the Texas Railroad Commission to have the needed parcel included in their pooling unit. This is called forced pooling. In this ONE instance in the Barnett Shale, once production was established, the owner(s) that were “forced pooled” received a 20% royalty payment, but no bonus. Once the gas company had recouped 100% of their well costs, then the mineral owner(s) came in for their full interest.

Otherwise, if an unsigned homeowner has been left out of a gas company’s pool unit, they are just out, which would typically be the case in our Denton County units--for all of the unsigned properties. They can hire a lawyer and file a case with the Texas Railroad Commission. But, if they have had sufficient opportunities to sign and have simply chosen not to, the Commission will not look favorably upon their appeal to be included after the fact.

Holding out on the chance that forced pooling will allow you to earn greater royalties down the road doesn’t add up. Why? Because there has only been one incidence of this type of forced pooling by a gas company in the Barnett Shale.

Gas companies form their final pooling units in such a way as to avoid the need to “force pool” any lots. This is possible 99.9% of the time, so owners who have not signed are left out. It is simply a matter of being too late and missing the party.

Mortgage Companies, Home Values and Subordination, oh my!

Lately some residents have asked questions about subordination agreements. What do they mean? What kind of paperwork is involved?

Here’s the simple answer. Unless you own your home outright, a mortgage company holds a lien against the home and you pay them a monthly mortgage fee toward ownership. If you default on your mortgage the mortgage company can then lay claim to the property and in some cases, income from mineral leases on the property. However, this cannot happen if a resident has a subordination agreement with their mortgage company.

Subordination agreements allow the resident’s claim to the mineral lease royalty income to hold precedence over the mortgage company claim. Therefore filing this subordination agreement allows residents to continue to be paid mineral royalty income even if they default on their home loan and no longer own their home.

In the past mineral ownership has not been a large issue for mortgage companies or residents, but that is changing. Some mortgage companies are looking for ways to shore up loses that they suffered in the Fannie Mae shake out and the Wall Street Credit crunch. To help recover mortgage loses going forward they are adding language to their latest contracts specifying that they have first claim on mineral income from the property.

Most mortgage companies are charging a fee to sign subordination agreements. If your existing mortgage documents require a lease review fee or a subordination agreement, Cherokee Horn will cover that cost for you up to a reasonable amount.  If you’re shopping for a new loan, you may want to clarify your lender’s position on mineral leasing and choose a lender that does not restrict your royalties or charge for a lease review. If you have other questions, please feel free to call us.  We are happy to assist.

- - -

Other residents have asked about home values holding up if drilling occurs. The answer here is that drilling has had no obvious negative trend effect on values. In fact, drilling and the economic stimulus of drilling on the area economy have helped home values here remain relatively stable, while other areas of the country have seen home values drop dramatically by double digits.
One of the chief driving factors for home values is demand. With the economy still comparatively strong here, home values in the DFW area have taken only a small 5% drop due to general credit tightening and some job loss.

So, next time you hear someone complain that natural gas drilling has a negative effect on his or her home value, you are simply not getting the whole story. Mineral rights have become important bargaining chips in the sale of homes. Some people look specifically to purchase homes with mineral rights, knowing that it is just a matter of time before those mineral rights will become a source of income.

Setting the Record Straight

You know, we continue to run across references that claim Cherokee Horn leasing agents work for another company, so we thought that we would set the record straight. The leasing agents for Cherokee Horn work for Cherokee Horn.

In every instance, we determine the geology and viability of an area, check historical title claims, lease the drill sites for Cherokee Horn and then lease residential and commercial tracks in the areas near our drill sites. The money invested in these operations is our money. Our founding financial partners are skilled in natural gas exploration and drilling.

We do partner with other companies on drilling operations in the Barnett Shale. Why? Horizontal drilling is expensive and in some areas of the Barnett Shale riskier than others. Secondly, by bringing in another company to drill, we can spread the financial risk, conserve capital for future leasing and procure additional drill sites.

We are not a "lease-for-hire" operation that can be used by other companies seeking a team to procure leases for their own drill sites. Cherokee Horn leases for Cherokee Horn. Even after we make the decision to approach and to work with a drilling partner as we have with Titan in Denton County, we continue to handle all aspects of the leasing.

Making the Cut

What does it mean if you are notified that your home is not part of a preliminary pooling unit? Should you be concerned? What should you do?

If you have received a “cut-out” notice, it most likely means that your property is located in an area that has generally not responded to a company’s mineral leasing offers. Due to increased expense, companies prefer not to run horizontal pipe in zigzag patterns a mile beneath the surface as they would need to do in a “patchwork” area where leasing is very scattered.

After some point in time, the company makes the decision to stop wasting time and money to go after certain leases. When a resident receives a “preliminary pool unit cut-out” notice some homeowners who have been hanging back and holding out actually feel as though they have missed out. These people then call the gas production company and want to be included. Unfortunately, after making a diligent effort to acquire the lease, Cherokee Horn has already withdrawn the offer and ceased communication.

Will a homeowner who calls be allowed back into the preliminary pool unit? No. Their call does not change the situation that prompted the “cut-out” notice. Can anything change their cut-out status? Perhaps.

After a preliminary pool unit is formed, Cherokee Horn works with Titan to decide on the boundaries that would geologically feasible for drilling a mile and a half under the surface. Titan then goes to the Railroad Commission with their final pool unit boundaries for permit.

By now, if a homeowner who is “missing the boat” goes out and gets all of the neighbors on their street who haven’t signed to sign they still would not receive an offer from Cherokee Horn. They will be turned away.

Can that cut-out resident still collect royalties on the natural gas? Yes, but not in a timely manner and at their expense. There are also no signing bonuses.

Under the rules of “forced pooling,” these homeowners can petition the Texas Railroad Commission to be included in the final pool boundaries and they will be paid royalty income after all other expenses for drilling the well have been paid. This process is complex, involves your attorney, and becomes cost-prohibitive for properties under 1 acre.

In the worst turn of events, this is the end of the line for a hold-out.

If you would like to research the Railroad Commission's process, you can read up on Rule 37 and information on the Mineral Interest Pooling Act (MIPA).

Providing for the Greater Good

Let’s take a moment for “What If?” What if, instead of a green-eyed monster that fueled land owner greed, name calling and other ugly behavior, the Barnett Shale were regarded as a bountiful windfall, an unexpected source of greater prosperity, in short, an economic blessing for the area and its residents.

According to the Fort Worth Chamber of Commerce the Barnett Shale employs three times more people than the area’s largest single employer, American Airlines does. The Barnett Shale is responsible for the paychecks of some 83,000 individuals while American supports only 25,457. This fact alone should bring the economic impact into perspective for those who haven’t given much thought to the bigger picture.

Beyond the usual focus on bonus income and royalty income there is this phenomenal new infrastructure of employment dollars constantly flowing from Barnett Shale sources. Without these shale revenues the counties in this area might be feeling the same bind that others across the country are now experiencing as the US economy reels from an historic economic crisis.

Let’s break it down even further. A single gas well requires 40 or more employees and creates $1.75 million in wages. This does not include the jobs created and wages paid to workers employed by oil field companies that provide services to the rig. It also does not include the money that flows into title companies and other businesses including hotels and restaurants as well as into commercial and residential construction. The latter two areas saw increases of 22% and 3% respectively from the previous year.

According to a report by economist Dr. Ray Perryman, projections through 2015 forecast that natural gas from the Barnett Shale will create 108,000 jobs and will contribute $10.5 billion annually to the economy.

At the end of the day, when the sun goes down on the Barnett Shale, it’s been a good day for the greater good.

Peak Bonuses and Neighborhood Coalitions

Over the weekend local news stories pointed out that although some economic downturns would be felt in the area that the economic outlook for North Texas in 2009 is better than most. For the gas industry that means that instead of all deals being off the table, companies such as Cherokee Horn are still making offers and going forward with plans to lease out areas that are relevant to drill sites that they currently own.

Based upon activity at the end of the year, it seems that residents are finally beginning to understand that holding out for five digit mineral lease offers is like trying to auction an item on Ebay with a reserve price so high that there are no takers.

At the beginning of the Barnett Shale discovery, gas companies were clamoring to get as much land in the area as possible, which drove prices up unrealistically high. When the Barnett Shale was the only shale, it created a frenzy. Just in one year, however, gas companies have a choice of more than 21 different shale discoveries in the US alone and with that broader perspective, there’s a lot of land to be had and at much more realistic prices. It was historical that the Barnett Shale was among the first to use the horizontal drilling (fracturing) technology. It was exciting to see some competitive bidding as companies put their hat in the ring to try the new technology. Remember, this shale discovery had been known about for years, but until recently we couldn't get the gas out and bring it to market with such a minimal impact.

The same companies that were upping the ante on residential property in the early days of the Barnett Shale were hedging their bets that the price of natural gas will remain high, and the Barnett would be profitable. Holding out these days doesn’t mean much now, or in the future, because a downturn like this will not just clear up and change like Texas weather.

Going forward, holdout groups are best served by working out the best deal that they can with the company or companies that actually have drill sites in their immediate area, because those are the companies that have the only interest at all in their property.

To this end, organized neighborhood groups serve a purpose when they can organize residents to sign with the company that has a drill site. This will speed up the process of actually drilling a well and having it produce clean-burning natural gas, which in turn leads to royalty checks to residents. For those who want to be part of this opportunity, we don't want you to get left out, so whether coming in in groups or individually, we want to be sure you're get to participate.

In today’s new gas economy just as in the old days, royalties are where the money is for landowners and bonuses are just that, a little something extra that comes with the deal. Anyone, who says otherwise, isn’t very attuned to the marketplace or the business of natural gas leasing.