How Capital Budgets
Effect Mineral Owners

It’s important to understand how capital budgets effect mineral owners.   As a mineral owner, it can be difficult to fully understand everything that goes on in the oil and gas industry and how it effects you.   We recently talked about how rig count can affect mineral owners, but oil and gas operators capital budgets can also be another source of information for you to look at as well.  To better understand how capital budgets effect mineral owners, you need to understand more about capital budgets.

What is an oil and gas operator capital budget

Each year, and oil and gas operator comes up with their capital budget.  The amount they have available to budget depends on things like the amount of debt coming due, the amount of cash being generated from operations, their goals for the future, and their focus on drilling new wells.   When a capital budget is created, it tells the operator how much money they have to spend!

The oil and gas capital budget at an operator is made up of the following components:

  • Drilling Operations
  • Completion Operations
  • Facilities / Infrastructure
  • Subsequent operations (Recompletions / Workovers)
  • Leasing Activity

It’s the first and last bullet points that are most interesting to mineral owners!

Capital Budgets – Drilling Operations

As we’ve seen the price of oil drop to below $50/barrel, the amount of capital that will be spent on new drilling operations is going to quickly decline.    We have already seen layoffs happening with service companies that support drilling operations.   When you see service companies start laying off employees, this is happening because reduced capital budgets are leading to less drilling.  When there is less drilling taking place, there is no longer demand for those employees.

As a mineral owner, what does a reduced capital budget mean for you?  If you are currently leased, unless you are in one of the best possible places in the country you may not see any drilling take place on your property.  Oil and gas companies could let the lease expire and you may not get leased again for many years until oil and gas prices recover and it become economic to drill in your area again!

Capital Budgets – Leasing Activity

As you can imagine, the amount of leasing activity that takes place is going to have a large impact on mineral owners.  When oil and gas companies have a large budget to drill for well, they need to start getting more leases in place for the future.  Once they have drilled their existing leases, they need to have additional acreage to drill in the future.    If drilling starts slowing down, why do operators need more acreage to drill in the future?  The answer is that they don’t!

When there is less capital available for drilling, this trickles down into leasing activity as well.  There is less demand for more leasing activity from the operator so you’ll see a reduced amount of leasing activity.  What does this mean for you?   It means 3 things:

1. You are less likely to get a new lease
2. The amount you receive for signing a new lease will be significantly less
3. If you have an existing lease, they are less likely to use their option to extend the lease

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