RE:RE:Avoid those Royalty DealsI works like this, think of it in terms of free cash flow, if you have a 4% royality on gas like TOU does with Topaz and they produce 400,000 boe of gas.
It is like giving away 4% of your produciton forever, assuming you company runs for free,Zero Costs, no salaries, no gas procesing costs, no exploration costs, no hedging losses, cost of stock options, retention plany, operations cost.
So, You can produce the gas for free an you have given up 16,000 boe a day. (4% of FCF, 4% of your production)
But this is not reality.
If you have a 50% FCF margin on all your remaining production, after all the costs associated with running the business, you need to give up the free cash flow generation on 32,000 boe a day.(8 percent of FCF)
If you have a 25% FCF margin on all your remaining production then it is like giving up 64,000 boe a day. Then your giving up the free cash flow generation on 64,000 a day. (16 percent of FCF)
So why do you think TOU is all concern about costs and efficiency all of a sudden, those costs for royalities are a lot higher then thay appear at the surface.
IMHO