leading the way in pre-producing royalties
ABOUT THE
SHALES
LEADING THE WAY IN PRE-PRODUCING ROYALTIES
page 2
We hope this serves as a basic introduction to our way of doing business. We are excited to share our success story with you. Since the inception of our company, ten years ago, we have followed two major rules: follow the money and follow the trend in real time. In the early days, we followed the money all the way to the Gulf Coast Basin, buying royalty interests under the best companies in the exploration business. We eventually found an exit strategy that changed our outlook. By buying early and selling after a short holding period, we found ourselves ahead of the pack. Years later, as we followed the money, we were right on top of new trends in the business. Nowhere is this any clearer than in the development of oil and gas shale in the last three years. We are acquiring reserves and securing value. The market is finally rewarding the bargain hunter. The oil and gas business has changed dramatically in the last several years. Technological discoveries have made the possibility of a dry hole in the shales a very slim one. We only buy royalty under the best companies in the country, those who have made long-term commitments to the plays they are developing; companies with substantial risk capital and the best people that money can secure. As time goes on, you will see us adopting the same exit strategy we used in the Gulf Coast Basin. One thing is for sure: we don’t like leaving money on the table, and we won’t. As trend watchers we have seen lots of our early acquisitions get developed and put into production. We only buy royalty interests in areas which the best companies in the shales deem to be prospective and productive. We have been able to buy some amazing royalty interests in the best shales around. Futura Royalties is committed to buying only the best, and we do it with our own money! The demand for oil and gas is continuously rising, which translates into high pricing scenarios. He who holds oil and gas (and other commodities) has leveraged himself considerably. Additionally, inflation is expected to significantly increase down the line as a direct result of current Fed policies. It is well known that having oil and gas revenues has historically translated into a safer type of investment in times of high inflation. Join us in this exciting ride some are calling the new oil rush and let the market reward you for becoming a bargain hunter like us! Sincerely, Juan P. Espinosa Futura Royalties Chief Executive Officer
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OUR THREE-STEP APPROACH TO SUCCESS!
WE ONLY BUY IN THE SHALES There are currently 6 proven shale plays in the United States. USGS states that there are 30 more that are untapped in a total of 30 states in the US. In the Haynesville alone there is the equivalent of 2 Saudia Arabias of Oil; in Natural Gas! Billions of dollars in foreign money are being invested in Oil and Gas Shales every month by Foreign Governments who are holding U.S. Treasury Notes. They are investing here because it’s steady, stable, and it just works!
WE ONLY DEAL WITH THE MAJORS In the Shales, the Major oil and gas exploration companies hit their wells with a 99.6% success rate! Primarily because they can afford to complete (frac) them fully and in the right manner. Oil and Gas Shales is about the Have’s and the Have-Nots!
MUTUAL FUND APPROACH We spread our risk so that we never have all of our eggs in one basket. It’s much better to own 1% in each of 100 wells than it is to own 100% of 1 well. Just like the “Majors” that we follow, we spread ourselves out so we can do more! page 4
WANTED: JED CLAMPETT, LANDOWNER
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MINERAL LEASES AND ROYALTIES
A
lease is an agreement that gives the mining company the right to enter the property, conduct tests and determine if suitable minerals exist there. To acquire this right the mining company will pay the property owner an amount of money when the lease is signed. This payment reserves the property for the mining company for a specific duration of time. If the mining company does not commence production before the lease expires, then all rights to the property and the minerals return to the owner. When minerals are produced from a leased property the owner is usually paid a share of the production income. This money is known as a “royalty payment”. The amount of the royalty payment is specified in the lease agreement. It can be a fixed amount per ton of minerals produced or a percentage of the production value. Other terms are also possible. When entering into a lease agreement the property owner must anticipate any activities that the lessee might perform while exploring the property. This exploration might include drilling holes, opening excavations, or bringing machines and instruments onto the property. Defining what is allowed and what restoration is required is part of a good lease agreement.
OIL AND GAS RIGHTS
M
ineral rights also include the rights to any oil and natural gas that exist beneath a property. The rights to these commodities can be sold or leased to others. In most cases, oil and gas rights are leased. The lessee is usually uncertain if oil or gas will be found so they generally prefer to pay a small amount for a lease rather than pay a larger amount to purchase. A lease gives the lessee a right to test the property by drilling and other methods. If drilling discovers oil or gas of marketable quantity and quality it may be produced directly from the exploratory well. To entice the property owner to commit to a lease the lessee generally offers a lease payment (often called a “signing bonus”). This is an upfront payment to the owner for granting the lessee a right to explore the property for a limited period of time (usually a few months to a few years). If the lessee does not explore or explores and does not find marketable oil or gas then the lease expires and the lessee has no further rights. If the lessee finds oil or gas and begins production, a regular stream of royalty payments usually keeps the terms of the lease in force. In addition to a signing bonus, most lease agreements require the lessee to pay the owner a share of the value of produced oil or gas. The customary royalty percentage is 12.5 percent or 1/8 of the value of the oil or gas at the wellhead. Some states have laws that require the owner be paid a minimum royalty (often 12.5 percent). However, owners who have highly desirable properties and highly developed negotiating skills can sometimes get 15 percent, 20 percent, 25 percent or more. When oil or natural gas is produced the royalty payments can greatly exceed the amounts paid as a signing bonus.
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WHAT YOU GET WHEN YOU INVEST IN ROYALTY DEEDS -You are investing in the Royalty Rights (with clear title) to a piece of land. This land happens to be in the “heart” of a prolific shale play. -It is likely that a drilling lease has been consummated between the actual landowner and a publicly traded explora tion company like Exxon, EOG, or Chesapeake Energy. -This land has also likely been “unitized” with other land owners who all share an undivided interest in the acreage. Drilling is usually imminent within +/- 0-18 month timeframe*. -When these wells start producing, the royalty payments come directly to You (the royalty deed owner) from the oil and gas exploration company (the operator). -Our transaction is simply a transference of a Royalty Deed. -The deeds are perpetual, meaning there are no prescription periods unless noted. They are NOT held by production or lost for lack thereof. -Much like the deed to your home, you can keep it, sell it or will it to your heirs. -You have NO exposure to liability, taxation or the need to invest any more in the future to retain your royalty. -There are NO assessments or completion calls. Once you purchase the deed it is yours to do with as you please. It is NOT a joint-venture where all of the royalty owners must come to quorum to sell. You own the deed exclusively. -The “Best” part of this type of ownership is that after six months of proven production, this asset can become liquid and it’s value might be worth in excess of 3-6 times what you paid for it! -In summary, this means that you can keep or sell (all or part) of the Royalty interest OR you may simply prefer to sit back and collect the income as long as current or future wells are produced into perpetuity. Note*- Timeframes are subject to vary and can be sooner or later than the stated timeframe.t
TAX BENEFITS •Investors in royalty interests can use depletion deductions to offset ordinary income. •The depletion deduction can be used even if it exceeds the basis in the royalty interest. •The excess deductions are not offset or recaptured by any future gain recognition. •Royalty interest may be treated as real property; for purposes of Section 1031. Therefore, investors could fund the purchases of a royalty interest with a nontaxable exchange of appreciated real property. •A low basis from the appreciated real property would “transfer” to the royalty interest. •Once the basis in the royalty interest is reduced to zero, the tax benefits to investors are maximized since the depletion deductions will not be offset by reductions to basis. •Although working interests may initially provide a greater return, royalty interests, over time, tend to outperform working interests by providing a consistent cash yield, as well as significant tax benefits. page 7
UNITED STATES SHALE OIL AND GAS America’s oil shale reserves are enormous, totaling at least 1.5 trillion barrels of oil. That’s five times the reserves of Saudi Arabia!
ANADARKO PETROLEUM Among the largest independent oil and gas exploration companies in the world, with approximately 2.3 billion barrells of oil equivalent (BBOE of proved reserves as year-end 2009
SHELL/SWEPI (SHELL WESTERN EXPLORATION) Global Oil and Gas Conglomerate Royal Dutch Shell’s Production arm.
EOG Resources EOG Resources, Inc. is one of the largest independent (non-integrated) oil and gas companies in the United States with proved reserves in the United States, Canada, Trinidad, the United Kingdom and China. page 8
HOW THE SHALES WORK
H
ydraulic fracturing, commonly referred to as fracing, is a proven technological advancement which allows natural gas producers to safely recover oil and gas from deep shale formations. This discovery has the potential to not only dramatically reduce our reliance on foreign fuel imports, but also to significantly reduce our national carbon dioxide (CO2) emissions and accelerate our transition to a carbon-light environment. Simply put, deep shale oil and gas formation development is critical to America’s energy needs and economic renewal. Experts have known for years that oil and gas deposits existed in deep shale formations, but until recently the vast quantities of oil and gas in these formations were not thought to be recoverable. Today, through the use of hydraulic fracturing, combined with sophisticated horizontal drilling, extraordinary amounts of deep shale natural gas from across the United States are being safely produced. Hydraulic fracturing has been used by the natural gas and oil industry since the 1940s and has become a key element of natural gas development worldwide. In fact, this process is used in nearly all natural gas wells drilled in the U.S. today. Properly conducted modern hydraulic fracturing is a safe, sophisticated, highly engineered and controlled procedure. Image represents the perforations in the casing and reflects how the fracture opens up the rock to increase flow. page 9
NIOBRARA SHALE
NIOBRARA SHALE The Niobrara shale is a major oil discovery located in eastern Wyoming, northern Colorado and western Nebraska. This is yet another shale oil play that has resulted from the advances in horizontal drilling and hydraulic fracturing and could be yet another massive oil discovery along the lines of the Bakken Shale in North Dakota. The Niobrara shale lies at a depth of approximately 7000 feet in the hottest part of the play. A well nicknamed “Jake”, drilled into the Niobrara shale formation in Weld County, Colorado, by EOG Resources, is reportedly producing over 1750 barrels of oil a day. The well produced over 50,000 barrels of oil in the first ninety days. According to state oil and gas commission filings the well could produce over a quarter million barrels. Imagine hundreds of Niobrara shale wells like “Jake”, over a three state area, and you can get an idea why oil and gas exploration companies are so excited about this new shale oil play. EOG Resources is currently conducting a large 3D geoseismic survey of the Niobrara oil shale in Weld and Jackson counties of Colorado. Oil companies such as EOG Resources are betting big on the Niobrara shale oil play. EOG alone has leased over 400,000 acres. As happens when an oil play is brand new and companies are frantically trying to beat each other in leasing up all the available land possible, the company is still keeping what they know close to the vest. “Too soon to tell” is the estimate of reserves listed in the most recent EOG Resources report to investors. Courthouses and motel parking lots are full, as oil and gas “landmen” rush in to secure deals with ranchers and farmers for the right to drill the Niobrara shale for oil and gas. Futura Royalties has enjoyed incredible success in the Niobrara Shale and will continue to purchase acreage here as long as the prices are reasonably viable for ourselves and our clients.
KEY PLAYERS IN THIS FIELD EOG RESOURCES Currently holds over 400,000 total net acres in the Niobrara. Like the Eagleford, EOG is conducting a large 3D Seismic Survery. EOG’s “Jake” Well Set the tone for the Niobrara.
CHESAPEAKE ENERGY Just sold 1/3 of their leasehold acreage in February of 2011, again to Chinese conglomerate CNOOC for $1.3 Billion cumulative. Again, the Chinese are after the Shale Oil.
NOBLE ENERGY Planning to drill 70 horizontal wells in the Niobrara in 2011. Their recent Gemini type well, the Hanscon (ph) IP’d over 1,250 BOPD then averaged over 900 BOPD for the first 30-days on a restricted choke. page 10
BAKKEN SHALE
THE BAKKEN/THREE FORKS FORMATION (Williston Basin)
T
he Bakken Formation which holds an estimated 24 Billion barrels of oil and is larger than all other current USGS oil assessments of the lower 48 states and is the largest “continuous” oil accumulation ever assessed by the USGS. A “continuous” oil accumulation means that the oil resource is dispersed throughout a geologic formation rather than existing as discrete, localized occurrences. The next largest “continuous” oil accumulation in the U.S. is in the Austin Chalk of Texas and Louisiana, with an undiscovered estimate of 1.0 billions of barrels of technically recoverable oil. The Spanish-Three Forks area is located below the Bakken shale zone and is potentially another new oil reservoir that would allow for dual completion zones. Natural gas is also found in some parts of the Bakken. The USGS estimates there is about 2.0 trillion cubic feet of gas and another 150 million barrels of natural gas liquids The Bakken Shale is the most mature of all shale formations and as such is the most difficult to acquire royalty acreage in. The window of opportunity in the Bakken is closing so we must take advantage of any opportunities that fit Futura Royalties’ criteria because soon they will be gone!
KEY PLAYERS IN THIS FIELD XTO ENERGY XTO Energy (XTO) updated its drilling operations in the Bakken Shale when it released earnings for the second quarter of 2009. The company has 450,000 net acres under lease.
EOG RESOURCES Holds over 500,000 net acres in the Bakken. They recently built and put into production a rail transport system that will transport vast amounts of oil to market.
CONTINENTAL RESOURCES Continental Resources has 864,559 Net Royalty acres leased in the Bakken. They are the largest leaseholder in this unprecedented formation.
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EAGLE FORD SHALE
T
he Eagle Ford shale (often spelled Eagleford) is not the next big thing in oil and gas plays, it is the “right now” big thing. You may have never heard of the Eagle Ford shale if you live outside of South Texas or are not in the oil and gas business but it will be big news in business circles around the rest of the country in the coming months. First recognized as a major natural gas play it is now being seen as possibly the sixth largest oilfield ever discovered in the United States and the largest discovery in over forty years.
What Is The Eagle Ford shale?
Huge Potential
It was formed during the Cretaceous geologic period approximately 65 to 145 million years ago. It lies at a depth of between 2500 feet at the edge of the hill country to over 15,000 feet deep in southern LaSalle, McMullen, Live Oak, Bee, DeWitt and LaVaca counties. The area of oil and gas activity is over forty miles wide and four hundred miles long, spanning an area from near Mexico to East Texas. It is at the deeper or more mature end of the formation where pressures are higher and gas volumes greater. The Eagle Ford shale is over 330 feet thick in some areas. The Eagle Ford shale was not recognized as an economically viable oil and gas reservoir until recently. Now, because of a technology called horizontal drilling, which allows for a hole to be drilled across shales like the Eagle Ford for up to a mile or more, and because of advances in hydraulic fracturing, which uses high pressure liquid to bust apart the shale, oil and gas can now be extracted easily.
The Eagle Ford shale may indeed hold billions of barrels of recoverable oil and trillions of cubic feet of natural gas. The Eagle Ford shale is high in carbonate content, making it very brittle and therefore able to be fractured easily with a frac job. Porosity and permeability are greater in the Eagle Ford shale than other shale plays. Core samples of the shale contain as much as 70% calcite with an average clay content of eleven percent. Due to an extreme amount of activity in this South Texas Shale play and the sheer quantity of experienced landowners, the Eagle Ford is no longer a secret. Most landowners know what they are sitting on and are very reluctant to relinquish their royalty rights. Futura Royalties has every intention of acquiring any and all quality royalty acreage in the oil and wet gas windows of this play.
KEY PLAYERS IN THIS FIELD EOG RESOURCES EOG Resources calls the Eagleford a “Predictable play with repeatable well results across their 120-mile lease position.” EUR’s per well should be 430-460 Mboe (that’s million barrells of oil per well!) They have a 100% trackrecord in the Eagleford.
PETROHAWK ENERGY Petrohawk is the 3rd largest landholder in the Eagleford. Along with EOG Resources they are conducting the largest 3D Seismic survey in the Eagleford that has ever been attempted .
CHESAPEAKE ENERGY Leased up over 600,000 acres in the Eagleford. In October of 2010 they sold 1/3 (200,000 acres) of their interests to Chinese conglomerate CNOOC for $2.3 Billion (Cumulative). page 12
HAYNESVILLE SHALE
HAYNESVILLE SHALE On pace, top gas shale in the USA - 4th Largest Natural Gas Shale in the World If you follow the Energy, Oil, or Natural Gas Market.....you’ve probably heard of The Haynesville Shale Natural Gas Field Formation, also referred to as the Shreveport Shale ( Louisiana Shale ), which is located in Northwest Louisiana, East Texas, and extending into Arkansas. Back in 2008, this Natural Gas Formation made landowners rich when companies would buy mineral rights from a property owner. Researchers were saying that the Haynesville Shale Play could be as big as the Barnett Shale play which is estimated to produce around 29-39 trillion cubic feet of natural gas in the future. This would make The Haynesville Shale one of the biggest U.S. Natural gas finds in history. The Haynesville Shale has become one of the most well-known shale plays and like the others has becoming increasingly difficult to acquire. Futura Royalties has significant holdings in the Haynesville and is always on the lookout for more royalty acreage to acquire. We feel that natural gas is highly undervalued currently and are taking a “Long” position much like the Majors.
KEY PLAYERS IN THIS FIELD CHESAPEAKE ENERGY is the largest leasehold owner and most active driller of new wells in the Haynesville Shale play in northwest Louisiana and East Texas
SWEPI/SHELL WESTERN EXPLORATION Shell holds over 340,000 acres as of 2010 and will drill 70 plus by year end 2010.
EXXONMOBIL/XTO With the $41 Billion acquisition of XTO Energy in 2010, Exxon became the Nation’s 2nd largest holder of U.S. natural gas reserves. The majority of the XTO acquisition comes directly from the Haynesville Shale. page 13
MARCELLUS SHALE & UTICA SHALE
MARCELLUS SHALE Pennsylvania
UTICA SHALE New York/Pennsylvania/Ohio/Canada
“The Marcellus shale play runs through northern Appalachia, primarily in Pennsylvania, West Virginia, New York, and Ohio. It is part of the Devonian black shale and the thickness of the gasproducing rock is as much as 900 feet. The formation runs an estimated 600 miles north to south, and is estimated to hold as much as 500 trillion cubic feet of natural gas, about 50 tcf of which is recoverable using current technology. It is one of the richest gas fields in North America. The proximity to customers in Eastern urban centers is what makes the Marcellus so desirable. Fort Worth-based Range Resources was one of the early players in the Marcellus and still has a huge position in the play. Norway’s Statoil has signed a joint venture with Chesapeake Energy to work together in the Marcellus, and other US and foreign companies also are involved in drilling and infrastructure development.”Oil and Gas Financial Journal
“The Utica Shale is a rock unit located a few thousand feet below the Marcellus Shale. It also has the potential to become an enormous natural gas resource. The Utica Shale is thicker than the Marcellus, it is more geographically extensive and it has already proven its ability to support commercial production. The potential source rock portion of the Utica Shale is extensive. In the United States it underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia. It is also present beneath parts of Lake Ontario, Lake Erie and part of Ontario, Canada.”-Geology.com Futura Royalties’ feelings on the Marcellus/Utica Shale are very similar to our stance on the Haynesville Shale. The reserves here are enormous and highly undervalued!.
KEY PLAYERS IN THIS FIELD CHESAPEAKE ENERGY Chesapeake Energy sold a 32.5% Interest of their leasehold to StatOilHyro(R) in the Marcellus Shale for $3.375 Billion in 11/2008!
RANGE RESOURCES Range Resources has leased up over 1.2 Million Net Royalty acres in the Marcellus Shale.
PETROHAWK ENERGY Holds interests in over 625,000 net royalty acres in the Marcellus Shale.
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14901 Quorum Drive #800 Dallas, Texas 75254 Main Phone: 972-770-0500 Fax: 972-770-0565 WWW.FUTURALLC.COM
SHALES
LEADING THE WAY IN PRE-PRODUCING ROYALTIES
page 2
We hope this serves as a basic introduction to our way of doing business. We are excited to share our success story with you. Since the inception of our company, ten years ago, we have followed two major rules: follow the money and follow the trend in real time. In the early days, we followed the money all the way to the Gulf Coast Basin, buying royalty interests under the best companies in the exploration business. We eventually found an exit strategy that changed our outlook. By buying early and selling after a short holding period, we found ourselves ahead of the pack. Years later, as we followed the money, we were right on top of new trends in the business. Nowhere is this any clearer than in the development of oil and gas shale in the last three years. We are acquiring reserves and securing value. The market is finally rewarding the bargain hunter. The oil and gas business has changed dramatically in the last several years. Technological discoveries have made the possibility of a dry hole in the shales a very slim one. We only buy royalty under the best companies in the country, those who have made long-term commitments to the plays they are developing; companies with substantial risk capital and the best people that money can secure. As time goes on, you will see us adopting the same exit strategy we used in the Gulf Coast Basin. One thing is for sure: we don’t like leaving money on the table, and we won’t. As trend watchers we have seen lots of our early acquisitions get developed and put into production. We only buy royalty interests in areas which the best companies in the shales deem to be prospective and productive. We have been able to buy some amazing royalty interests in the best shales around. Futura Royalties is committed to buying only the best, and we do it with our own money! The demand for oil and gas is continuously rising, which translates into high pricing scenarios. He who holds oil and gas (and other commodities) has leveraged himself considerably. Additionally, inflation is expected to significantly increase down the line as a direct result of current Fed policies. It is well known that having oil and gas revenues has historically translated into a safer type of investment in times of high inflation. Join us in this exciting ride some are calling the new oil rush and let the market reward you for becoming a bargain hunter like us! Sincerely, Juan P. Espinosa Futura Royalties Chief Executive Officer
page 3
OUR THREE-STEP APPROACH TO SUCCESS!
WE ONLY BUY IN THE SHALES There are currently 6 proven shale plays in the United States. USGS states that there are 30 more that are untapped in a total of 30 states in the US. In the Haynesville alone there is the equivalent of 2 Saudia Arabias of Oil; in Natural Gas! Billions of dollars in foreign money are being invested in Oil and Gas Shales every month by Foreign Governments who are holding U.S. Treasury Notes. They are investing here because it’s steady, stable, and it just works!
WE ONLY DEAL WITH THE MAJORS In the Shales, the Major oil and gas exploration companies hit their wells with a 99.6% success rate! Primarily because they can afford to complete (frac) them fully and in the right manner. Oil and Gas Shales is about the Have’s and the Have-Nots!
MUTUAL FUND APPROACH We spread our risk so that we never have all of our eggs in one basket. It’s much better to own 1% in each of 100 wells than it is to own 100% of 1 well. Just like the “Majors” that we follow, we spread ourselves out so we can do more! page 4
WANTED: JED CLAMPETT, LANDOWNER
page 5
MINERAL LEASES AND ROYALTIES
A
lease is an agreement that gives the mining company the right to enter the property, conduct tests and determine if suitable minerals exist there. To acquire this right the mining company will pay the property owner an amount of money when the lease is signed. This payment reserves the property for the mining company for a specific duration of time. If the mining company does not commence production before the lease expires, then all rights to the property and the minerals return to the owner. When minerals are produced from a leased property the owner is usually paid a share of the production income. This money is known as a “royalty payment”. The amount of the royalty payment is specified in the lease agreement. It can be a fixed amount per ton of minerals produced or a percentage of the production value. Other terms are also possible. When entering into a lease agreement the property owner must anticipate any activities that the lessee might perform while exploring the property. This exploration might include drilling holes, opening excavations, or bringing machines and instruments onto the property. Defining what is allowed and what restoration is required is part of a good lease agreement.
OIL AND GAS RIGHTS
M
ineral rights also include the rights to any oil and natural gas that exist beneath a property. The rights to these commodities can be sold or leased to others. In most cases, oil and gas rights are leased. The lessee is usually uncertain if oil or gas will be found so they generally prefer to pay a small amount for a lease rather than pay a larger amount to purchase. A lease gives the lessee a right to test the property by drilling and other methods. If drilling discovers oil or gas of marketable quantity and quality it may be produced directly from the exploratory well. To entice the property owner to commit to a lease the lessee generally offers a lease payment (often called a “signing bonus”). This is an upfront payment to the owner for granting the lessee a right to explore the property for a limited period of time (usually a few months to a few years). If the lessee does not explore or explores and does not find marketable oil or gas then the lease expires and the lessee has no further rights. If the lessee finds oil or gas and begins production, a regular stream of royalty payments usually keeps the terms of the lease in force. In addition to a signing bonus, most lease agreements require the lessee to pay the owner a share of the value of produced oil or gas. The customary royalty percentage is 12.5 percent or 1/8 of the value of the oil or gas at the wellhead. Some states have laws that require the owner be paid a minimum royalty (often 12.5 percent). However, owners who have highly desirable properties and highly developed negotiating skills can sometimes get 15 percent, 20 percent, 25 percent or more. When oil or natural gas is produced the royalty payments can greatly exceed the amounts paid as a signing bonus.
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WHAT YOU GET WHEN YOU INVEST IN ROYALTY DEEDS -You are investing in the Royalty Rights (with clear title) to a piece of land. This land happens to be in the “heart” of a prolific shale play. -It is likely that a drilling lease has been consummated between the actual landowner and a publicly traded explora tion company like Exxon, EOG, or Chesapeake Energy. -This land has also likely been “unitized” with other land owners who all share an undivided interest in the acreage. Drilling is usually imminent within +/- 0-18 month timeframe*. -When these wells start producing, the royalty payments come directly to You (the royalty deed owner) from the oil and gas exploration company (the operator). -Our transaction is simply a transference of a Royalty Deed. -The deeds are perpetual, meaning there are no prescription periods unless noted. They are NOT held by production or lost for lack thereof. -Much like the deed to your home, you can keep it, sell it or will it to your heirs. -You have NO exposure to liability, taxation or the need to invest any more in the future to retain your royalty. -There are NO assessments or completion calls. Once you purchase the deed it is yours to do with as you please. It is NOT a joint-venture where all of the royalty owners must come to quorum to sell. You own the deed exclusively. -The “Best” part of this type of ownership is that after six months of proven production, this asset can become liquid and it’s value might be worth in excess of 3-6 times what you paid for it! -In summary, this means that you can keep or sell (all or part) of the Royalty interest OR you may simply prefer to sit back and collect the income as long as current or future wells are produced into perpetuity. Note*- Timeframes are subject to vary and can be sooner or later than the stated timeframe.t
TAX BENEFITS •Investors in royalty interests can use depletion deductions to offset ordinary income. •The depletion deduction can be used even if it exceeds the basis in the royalty interest. •The excess deductions are not offset or recaptured by any future gain recognition. •Royalty interest may be treated as real property; for purposes of Section 1031. Therefore, investors could fund the purchases of a royalty interest with a nontaxable exchange of appreciated real property. •A low basis from the appreciated real property would “transfer” to the royalty interest. •Once the basis in the royalty interest is reduced to zero, the tax benefits to investors are maximized since the depletion deductions will not be offset by reductions to basis. •Although working interests may initially provide a greater return, royalty interests, over time, tend to outperform working interests by providing a consistent cash yield, as well as significant tax benefits. page 7
UNITED STATES SHALE OIL AND GAS America’s oil shale reserves are enormous, totaling at least 1.5 trillion barrels of oil. That’s five times the reserves of Saudi Arabia!
ANADARKO PETROLEUM Among the largest independent oil and gas exploration companies in the world, with approximately 2.3 billion barrells of oil equivalent (BBOE of proved reserves as year-end 2009
SHELL/SWEPI (SHELL WESTERN EXPLORATION) Global Oil and Gas Conglomerate Royal Dutch Shell’s Production arm.
EOG Resources EOG Resources, Inc. is one of the largest independent (non-integrated) oil and gas companies in the United States with proved reserves in the United States, Canada, Trinidad, the United Kingdom and China. page 8
HOW THE SHALES WORK
H
ydraulic fracturing, commonly referred to as fracing, is a proven technological advancement which allows natural gas producers to safely recover oil and gas from deep shale formations. This discovery has the potential to not only dramatically reduce our reliance on foreign fuel imports, but also to significantly reduce our national carbon dioxide (CO2) emissions and accelerate our transition to a carbon-light environment. Simply put, deep shale oil and gas formation development is critical to America’s energy needs and economic renewal. Experts have known for years that oil and gas deposits existed in deep shale formations, but until recently the vast quantities of oil and gas in these formations were not thought to be recoverable. Today, through the use of hydraulic fracturing, combined with sophisticated horizontal drilling, extraordinary amounts of deep shale natural gas from across the United States are being safely produced. Hydraulic fracturing has been used by the natural gas and oil industry since the 1940s and has become a key element of natural gas development worldwide. In fact, this process is used in nearly all natural gas wells drilled in the U.S. today. Properly conducted modern hydraulic fracturing is a safe, sophisticated, highly engineered and controlled procedure. Image represents the perforations in the casing and reflects how the fracture opens up the rock to increase flow. page 9
NIOBRARA SHALE
NIOBRARA SHALE The Niobrara shale is a major oil discovery located in eastern Wyoming, northern Colorado and western Nebraska. This is yet another shale oil play that has resulted from the advances in horizontal drilling and hydraulic fracturing and could be yet another massive oil discovery along the lines of the Bakken Shale in North Dakota. The Niobrara shale lies at a depth of approximately 7000 feet in the hottest part of the play. A well nicknamed “Jake”, drilled into the Niobrara shale formation in Weld County, Colorado, by EOG Resources, is reportedly producing over 1750 barrels of oil a day. The well produced over 50,000 barrels of oil in the first ninety days. According to state oil and gas commission filings the well could produce over a quarter million barrels. Imagine hundreds of Niobrara shale wells like “Jake”, over a three state area, and you can get an idea why oil and gas exploration companies are so excited about this new shale oil play. EOG Resources is currently conducting a large 3D geoseismic survey of the Niobrara oil shale in Weld and Jackson counties of Colorado. Oil companies such as EOG Resources are betting big on the Niobrara shale oil play. EOG alone has leased over 400,000 acres. As happens when an oil play is brand new and companies are frantically trying to beat each other in leasing up all the available land possible, the company is still keeping what they know close to the vest. “Too soon to tell” is the estimate of reserves listed in the most recent EOG Resources report to investors. Courthouses and motel parking lots are full, as oil and gas “landmen” rush in to secure deals with ranchers and farmers for the right to drill the Niobrara shale for oil and gas. Futura Royalties has enjoyed incredible success in the Niobrara Shale and will continue to purchase acreage here as long as the prices are reasonably viable for ourselves and our clients.
KEY PLAYERS IN THIS FIELD EOG RESOURCES Currently holds over 400,000 total net acres in the Niobrara. Like the Eagleford, EOG is conducting a large 3D Seismic Survery. EOG’s “Jake” Well Set the tone for the Niobrara.
CHESAPEAKE ENERGY Just sold 1/3 of their leasehold acreage in February of 2011, again to Chinese conglomerate CNOOC for $1.3 Billion cumulative. Again, the Chinese are after the Shale Oil.
NOBLE ENERGY Planning to drill 70 horizontal wells in the Niobrara in 2011. Their recent Gemini type well, the Hanscon (ph) IP’d over 1,250 BOPD then averaged over 900 BOPD for the first 30-days on a restricted choke. page 10
BAKKEN SHALE
THE BAKKEN/THREE FORKS FORMATION (Williston Basin)
T
he Bakken Formation which holds an estimated 24 Billion barrels of oil and is larger than all other current USGS oil assessments of the lower 48 states and is the largest “continuous” oil accumulation ever assessed by the USGS. A “continuous” oil accumulation means that the oil resource is dispersed throughout a geologic formation rather than existing as discrete, localized occurrences. The next largest “continuous” oil accumulation in the U.S. is in the Austin Chalk of Texas and Louisiana, with an undiscovered estimate of 1.0 billions of barrels of technically recoverable oil. The Spanish-Three Forks area is located below the Bakken shale zone and is potentially another new oil reservoir that would allow for dual completion zones. Natural gas is also found in some parts of the Bakken. The USGS estimates there is about 2.0 trillion cubic feet of gas and another 150 million barrels of natural gas liquids The Bakken Shale is the most mature of all shale formations and as such is the most difficult to acquire royalty acreage in. The window of opportunity in the Bakken is closing so we must take advantage of any opportunities that fit Futura Royalties’ criteria because soon they will be gone!
KEY PLAYERS IN THIS FIELD XTO ENERGY XTO Energy (XTO) updated its drilling operations in the Bakken Shale when it released earnings for the second quarter of 2009. The company has 450,000 net acres under lease.
EOG RESOURCES Holds over 500,000 net acres in the Bakken. They recently built and put into production a rail transport system that will transport vast amounts of oil to market.
CONTINENTAL RESOURCES Continental Resources has 864,559 Net Royalty acres leased in the Bakken. They are the largest leaseholder in this unprecedented formation.
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EAGLE FORD SHALE
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he Eagle Ford shale (often spelled Eagleford) is not the next big thing in oil and gas plays, it is the “right now” big thing. You may have never heard of the Eagle Ford shale if you live outside of South Texas or are not in the oil and gas business but it will be big news in business circles around the rest of the country in the coming months. First recognized as a major natural gas play it is now being seen as possibly the sixth largest oilfield ever discovered in the United States and the largest discovery in over forty years.
What Is The Eagle Ford shale?
Huge Potential
It was formed during the Cretaceous geologic period approximately 65 to 145 million years ago. It lies at a depth of between 2500 feet at the edge of the hill country to over 15,000 feet deep in southern LaSalle, McMullen, Live Oak, Bee, DeWitt and LaVaca counties. The area of oil and gas activity is over forty miles wide and four hundred miles long, spanning an area from near Mexico to East Texas. It is at the deeper or more mature end of the formation where pressures are higher and gas volumes greater. The Eagle Ford shale is over 330 feet thick in some areas. The Eagle Ford shale was not recognized as an economically viable oil and gas reservoir until recently. Now, because of a technology called horizontal drilling, which allows for a hole to be drilled across shales like the Eagle Ford for up to a mile or more, and because of advances in hydraulic fracturing, which uses high pressure liquid to bust apart the shale, oil and gas can now be extracted easily.
The Eagle Ford shale may indeed hold billions of barrels of recoverable oil and trillions of cubic feet of natural gas. The Eagle Ford shale is high in carbonate content, making it very brittle and therefore able to be fractured easily with a frac job. Porosity and permeability are greater in the Eagle Ford shale than other shale plays. Core samples of the shale contain as much as 70% calcite with an average clay content of eleven percent. Due to an extreme amount of activity in this South Texas Shale play and the sheer quantity of experienced landowners, the Eagle Ford is no longer a secret. Most landowners know what they are sitting on and are very reluctant to relinquish their royalty rights. Futura Royalties has every intention of acquiring any and all quality royalty acreage in the oil and wet gas windows of this play.
KEY PLAYERS IN THIS FIELD EOG RESOURCES EOG Resources calls the Eagleford a “Predictable play with repeatable well results across their 120-mile lease position.” EUR’s per well should be 430-460 Mboe (that’s million barrells of oil per well!) They have a 100% trackrecord in the Eagleford.
PETROHAWK ENERGY Petrohawk is the 3rd largest landholder in the Eagleford. Along with EOG Resources they are conducting the largest 3D Seismic survey in the Eagleford that has ever been attempted .
CHESAPEAKE ENERGY Leased up over 600,000 acres in the Eagleford. In October of 2010 they sold 1/3 (200,000 acres) of their interests to Chinese conglomerate CNOOC for $2.3 Billion (Cumulative). page 12
HAYNESVILLE SHALE
HAYNESVILLE SHALE On pace, top gas shale in the USA - 4th Largest Natural Gas Shale in the World If you follow the Energy, Oil, or Natural Gas Market.....you’ve probably heard of The Haynesville Shale Natural Gas Field Formation, also referred to as the Shreveport Shale ( Louisiana Shale ), which is located in Northwest Louisiana, East Texas, and extending into Arkansas. Back in 2008, this Natural Gas Formation made landowners rich when companies would buy mineral rights from a property owner. Researchers were saying that the Haynesville Shale Play could be as big as the Barnett Shale play which is estimated to produce around 29-39 trillion cubic feet of natural gas in the future. This would make The Haynesville Shale one of the biggest U.S. Natural gas finds in history. The Haynesville Shale has become one of the most well-known shale plays and like the others has becoming increasingly difficult to acquire. Futura Royalties has significant holdings in the Haynesville and is always on the lookout for more royalty acreage to acquire. We feel that natural gas is highly undervalued currently and are taking a “Long” position much like the Majors.
KEY PLAYERS IN THIS FIELD CHESAPEAKE ENERGY is the largest leasehold owner and most active driller of new wells in the Haynesville Shale play in northwest Louisiana and East Texas
SWEPI/SHELL WESTERN EXPLORATION Shell holds over 340,000 acres as of 2010 and will drill 70 plus by year end 2010.
EXXONMOBIL/XTO With the $41 Billion acquisition of XTO Energy in 2010, Exxon became the Nation’s 2nd largest holder of U.S. natural gas reserves. The majority of the XTO acquisition comes directly from the Haynesville Shale. page 13
MARCELLUS SHALE & UTICA SHALE
MARCELLUS SHALE Pennsylvania
UTICA SHALE New York/Pennsylvania/Ohio/Canada
“The Marcellus shale play runs through northern Appalachia, primarily in Pennsylvania, West Virginia, New York, and Ohio. It is part of the Devonian black shale and the thickness of the gasproducing rock is as much as 900 feet. The formation runs an estimated 600 miles north to south, and is estimated to hold as much as 500 trillion cubic feet of natural gas, about 50 tcf of which is recoverable using current technology. It is one of the richest gas fields in North America. The proximity to customers in Eastern urban centers is what makes the Marcellus so desirable. Fort Worth-based Range Resources was one of the early players in the Marcellus and still has a huge position in the play. Norway’s Statoil has signed a joint venture with Chesapeake Energy to work together in the Marcellus, and other US and foreign companies also are involved in drilling and infrastructure development.”Oil and Gas Financial Journal
“The Utica Shale is a rock unit located a few thousand feet below the Marcellus Shale. It also has the potential to become an enormous natural gas resource. The Utica Shale is thicker than the Marcellus, it is more geographically extensive and it has already proven its ability to support commercial production. The potential source rock portion of the Utica Shale is extensive. In the United States it underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia. It is also present beneath parts of Lake Ontario, Lake Erie and part of Ontario, Canada.”-Geology.com Futura Royalties’ feelings on the Marcellus/Utica Shale are very similar to our stance on the Haynesville Shale. The reserves here are enormous and highly undervalued!.
KEY PLAYERS IN THIS FIELD CHESAPEAKE ENERGY Chesapeake Energy sold a 32.5% Interest of their leasehold to StatOilHyro(R) in the Marcellus Shale for $3.375 Billion in 11/2008!
RANGE RESOURCES Range Resources has leased up over 1.2 Million Net Royalty acres in the Marcellus Shale.
PETROHAWK ENERGY Holds interests in over 625,000 net royalty acres in the Marcellus Shale.
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