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Oil and gas leases or wells change operators when they are sold to another company. If you have a royalty interest in the wells, you end up getting royalty checks from the new operator once the sale goes through. This is a time in royalty ownership where you need to be on top of your game to make sure the transition goes smoothly so you get paid what you deserve.
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Why Did My Well Change Operators?
An example of when this can happen is when an operator declares bankruptcy and sells their properties as part of the a liquidation or as part of a reorganization. This is an issue that I’ve dealt with in the past year and I’ve had to contact the new operator to make sure everything was transferred correctly because I stopped receiving royalty checks after the change in ownership. In my case, the reason the checks stopped was these wells have only been producing intermittently in 2020 and I have a small interest so my check hadn’t hit the minimum payout amount.
The way I found this out was to contact the owner relations department of the new operator to ask them how much was being held in suspense for my interest. And there were also some additional steps I took to verify this information.
How to Find out if your Lease or the Wells That You Have an Interest in Were Sold to Another Company?
There are two ways to go about this. The first way is to be proactive by staying on top of your interests. The ways you can do this include:
- Reading articles about your current operator to find out their plans.
- Visit their website to see if there are any press releases or investor presentations that might indicate plans to sell assets. They may indicate that they are planning to divest a certain dollar amount or a specific asset.
- Research the state oil and gas commission website to see if there are any recently filed change of operator forms or if another operator name shows up when you search for your the wells.
The other way for lack of a better term is to be reactive. That is, when there is a gap in your royalty checks and you go to state oil and gas commission website to find out why. Or you might receive a letter in the mail that tells you that your interests were sold to another operator. This is is the way most people find out.
What Should You do if You Find Out That Your Wells Were Sold to Another Operator?
It usually takes time for the sale to close and for the appropriate forms to be filed and for the wells to be loaded in the new operator’s system. Usually this is done in advance and if done correctly is relatively seamless from a royalty owner perspective. There may be a delay in receiving a royalty check from the new operator so you want to make sure there is no gap in months that you are paid on between the previous operator and the new operator.
For example, say the first operator pays royalties thru production in the month of April and the new operator starts paying royalties for production in May. You want to check the royalty statement from the first operator to make sure you got paid for all reported production through April, then check your first royalty statement form the new operator to make sure they started paying you for production for the month of May.
The original operator performed a division order title opinion, the new operator may review or update this but probably will default to the original title opinion.
Will I Receive Division Orders From the New Operator?
The short answer is that it depends on where the property is located.
You may also receive Division Orders from the new operator. It is a good idea to check the division order effective date against the date of the change in ownership. Per our previous example, if the new operator began operating May 1st, the new division order effective date should be May 1st.
Making Sure the Division Order is Correct
You will also want to make sure that your decimal interest for all of your wells are correct. The document that confirms your interest in oil and gas wells is called a Divsion Order. We cover Division Orders in detail in Episode 16 of the show. Some states require that you return the division order in order to start receiving royalties from the new operator, some don’t, check your state law for more information.
To do this, pull out your copy of the original division order from the old operator and compare it with the new operator’s division order. The decimal interests should match exactly, unless you have sold a part of your interest during the change in ownership. If you don’t have a copy of the original division order for whatever reason, maybe you lost it, it doesn’t matter at this point. You can always fall back to your last royalty statement from the last operator and make sure the owner decimal or Net revenue interest (NRI) matches between the royalty statement and your new division order.
Another scenario while less common in this circumstance, let’s say you just inherited the property and you know nothing about it other than the letter you received from the operator telling you about the change in ownership and the division orders that were included, you can calculate your Net Revenue Interest or NRI on your own to check against the #’s shown on your royalty statement. If you want more information on how to calculate your Net Revenue Interest (NRI), listen to Episode 3 of the Mineral Rights Podcast to learn step-by-step how to calculate your NRI.
If this is all new to you, it may require doing some research to find copies of the oil and gas lease that was originally signed by your relative and any deeds that might provide information as to what your undivided interest in the property is and what exactly is the legal description for the tract in question. You can find this information at the county clerk & recorder for the county where the minerals or royalties are located – sometimes online, other cases you may have to go there in person. We talk about how to research this information with what is called a title search in Episode 10.
Make Sure the New Division Order Doesn’t Change Your Payment Terms
Most states have laws that prevent operators from including terms on the division order that try to modify the payment terms of the oil and gas lease in question.
Specifically, they might try to include language asking you to waive claims against the operator for any errors in the decimal interest or other conditions that might take away some of your rights, or change the lease or pooling order terms or allowing post production costs to be deducted, or asking you to warranty title.
When reading the new division order, it is important to check that nothing appears out of order from this standpoint. A best practice that many royalty owners use is to make sure the division order is on the most recent NADOA model division order form. The NADOA is the National Association of Division Order Analysts.
If it is not and you take issue with any additional clauses on their Division Order form compared to the NADOA form, simply strike through them and initial it and you can always include a letter with why you crossed it out.
Many also write a statement that says the royalties are to be paid according to the lease terms with no changes
Again, this is not legal advice and you should hire a competent attorney licensed to practice law in the state where your royalty interests are located if you have any questions.
What Should I do if I Get a Suspect Division Order?
If the Division Order you receive from the new operator contains language that appears sus (“sus” means suspect according to my kids :). If it appears to change the payment terms or any terms of your lease, get help from your attorney.
In this situation, I’ve heard of others using the NADOA model division order form and filling out the information on that form instead of the operator’s form and returning that instead. Again, get with your attorney to make sure this is allowable in your state.
Reset the Minimum Payment Amount
The change in ownership also presents another opportunity to reset the minimum payment amount – many default to $100. If I get a division order with this, I cross out the $100 and initial it and write $25 as the minimum amount to ensure that I receive regular payments over time as the royalties get smaller and smaller as the production rate declines for those wells.
If the original operator filed bankruptcy, you may also have some additional steps to take to make sure your rights are protected. In some states, you need to take a few steps as a royalty owner to become a secured creditor. This would ensure that you would have a higher priority claim for any unpaid royalties that is superior to unsecured creditors of the company. Get with your attorney if your operator files bankruptcy to make sure you’re taking the necessary steps. Also, listen to Epsiode 58 to find out what operator bankruptcy means for mineral and royalty owners and some actions you can take.
Finally, once you start receiving royalties from the new operator, be sure to regularly inspect the royalty statements to make sure they are correct. This is especially true at the beginning as you want to catch any errors right away. Listen to Episode 97 on how to audit your royalty statements for more information on how to double check your royalty statements to make sure they are accurate.
In closing, operators regularly buy and sell leases so it is not uncommon to find yourself in the situation where your royalty interests in wells were transferred to a new operator. This is nothing to be worried about but you should be sure to take a few steps to make sure you continue to be paid what you deserve.
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