Land leasing expense refers to the cost to lease mineral rights from owners in plays that a company is involved in. The company will usually pay a per-acre fee up front, and then a percentage of the revenues once the well is producing.
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Joint Shales
Goodrich Petroleum (NYSE:GDP) was fairly early into the Haynesville Shale, and had lower than average land leasing costs. In 2008, the company entered into a joint venture with Chesapeake Energy (NYSE:CHK), and received $178 million for partial interests totaling 10,250 net acres.
Since the acreage had increased so much in value over the last few years, the payment from Chesapeake Energy offset the total cost of its land expense, giving Goodrich Petroleum a negative cost basis. The transaction led to a $2,500 credit per acre for Goodrich Petroleum. This will, of course, lead to higher returns for the company and shareholders.
Chesapeake Energy benefited from this as well, when it entered into some joint ventures in 2008. In the Haynesville Shale, the company entered a joint venture with Plains Exploration & Production Company (NYSE:PXP), and received $3.1 billion. The company did a similar deal for its Marcellus Shale acreage, entering into a joint venture with Statoil Hydro (NYSE:STO) and received $3.375 billion in upfront cash and drilling carries. In the Fayetteville Shale, this time it was BP Inc. (NYSE:BP) that did the deal. Chesapeake Energy received $ 1.9 billion in cash and drilling carries form BP, Inc., in that joint venture.
The Numbers Game
One-way to look at these companies is as value investors, like in the stock market, with a longer-term time horizon. The assets are bought at low prices years ago, and then sold later on when the market realizes its value.
CNX Gas Corp (NYSE:CXG) also has low cost acreage, but for a different reason. The company received much of its Marcellus Shale acreage in fee from its parent CONSOL Energy (NYSE:CNX). CNX Gas then does not pay to lease the acreage, and will typically have a 100% revenue interest in its wells here because it does not pay a royalty out to a landowner.
The Bottom Line
The exploration and production companies that were late to the shale plays in North America are paying dearly for it, providing a boost to those companies that took the chance and entered the play early. This cost advantage might come in handy in the future. (To learn more, check out our Oil And Gas Industry Primer.)
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