ARC Resources Ltd T.ARX

Avoid those Royalty Deals

[MyHoneyPot]

Hedges

Companies put on a lot of bad hedges over the last year, going from survival to a robust and pretty exciting economic enviroment. 

Royalities

However some companies engage in Royality deals just to clean up their balance sheets, and in the process they do the following.

• Gave away 6-7 % of their natual gas Earnings, by giving away 4% royality. 
• Gave away 3-4 % of the oil liquids by giving away a 2.5% royality on oil/Condensate. 
• Encumbered they assets and make them less attractive, with lower rates of return.
• Created a royality stream they have to pay into that never goes away. 
• Depreciate the value of their land and resource in place. 

Is this really what you want to do in a low interest, high commodity price enviroment?
 ***  No way hozay ***

The average CF per boe of some oil companies is around 25 dollars with 14 dollars operating netbacks. (This could representative of a large company like TOU)

Giving away a 4% royality on a 25 dollar CF boe means you have given way a 1 dollar boe. This will result in your operating netback will go down from 14 to 13 dollars because in essence you have given a dollar away of that production unemcumbered with any operational costs. 

So the real impact of the royalities in terms of a production impace is 1/14 because you have give 1 dollar of you netbacks away unemcumbered.  That is 7.14%, it is just like giving away 7.14 percent of your production. 

TOU shareholders just watch management take the icing off the cake and give it to Topaz, not the best thing for the company TOU or its loyal shareholders. 

I suggest that ARC stays away from this royality scams, and they are like interest only loans that you will never pay off. 

Image if you were a TOU shareholder and 7 percent of you earning were gone and now all you assets were encumbered, it that the place you want to be. 


IMHO

[Beakr123]

I don't know MHP, it's not all that bad. Those are pretty low percentages for a good cash influx. Given the current environment it's not a big deal but I guess if things swung the other way the royalties could sting a bit. 

[MyHoneyPot]

I 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

[Beakr123]

Interesting thoughts thanks for the elaboration. Given that tourmaline owns almost half of Topaz the impact wouldn't be so great as the shares they own still produce cash through topaz distributions and share appreciation.

[MyHoneyPot]

Thats true, but my other concern is this, other Royality Trusts have many many companies that have contributed land and are developing the resource. Hundreds and hundred of individual companies and deals.  In Topaz case over 2 million acres is what Topaz has contributed that makes them look huge from the perspective of a land base, but the only company developing that acreage in Tourmaline

[Beakr123]

We should probably take this over to the TOU board lol. I own TOU but not Topaz however it does seem Topaz is now attempting to hedge against the TOU relationship you highlight but purchasing GORR with other players in the industry such as Whitecap. I'm interested to see where TPZ goes in the coming years.