For mineral owners, revenue statements are the key to understanding how much income your assets are generating. However, these statements often come with a tangle of numbers, codes, and deductions that can make them challenging to interpret. At ES3 Minerals, we believe that the more informed you are, the better decisions you can make. This guide breaks down the main components of revenue statements, empowering you to understand your income better and ensuring that every payment is accurate.
Why Understanding Your Revenue Statement Matters
Your revenue statement provides a detailed account of your earnings from the minerals extracted on your property. Beyond just confirming your income, reading these statements helps you:
- Spot Errors: Mistakes can happen, and regularly checking your statements allows you to catch discrepancies early. The longer a mistake goes unnoticed, the more exponential the impact is to you as a mineral owner.
- Manage Income Expectations: With an understanding of production rates and deductions, you’ll have a clearer picture of your monthly income.
- Optimize Tax Deductions: Statements provide the documentation you need to properly account for income and depletion deductions.
The Basics of a Revenue Statement
Revenue statements can vary depending on the operator, but most follow a similar structure. Here are the key components you’ll likely encounter:
1. Owner Information
- This section typically includes your name, owner number, and property identification details. Verify that this information is correct to avoid processing issues or misrouted payments.
2. Production Period
- This is the period during which your production was obtained by the operator, not necessarily the month you’re being paid. Royalties are often paid with a delay, so the production month may be several months before the payment date.
3. Product Code and Volume
- Product Code: Mineral rights can cover multiple resources, such as oil, gas, and condensate. Each type of product will have a unique code on your statement.
- Volume: This indicates the amount of each resource extracted, measured in barrels (BBL) for oil, thousand cubic feet (MCF) for gas, and gallons for liquids like condensate. Monitoring volume helps you track production rates and identify trends in output.
4. Price per Unit
- This shows the average price paid per unit for each product during the production period. Prices can fluctuate based on market demand, so don’t be alarmed by changes in this number. However, knowing the going market rate can help you verify that you’re being paid fairly.
5. Gross Value
- This is the total value of the extracted minerals before any deductions. It’s calculated by multiplying the volume by the price per unit. The gross value gives you a sense of the total revenue generated by your mineral rights.
The Deductions Section: Unpacking Post-Production Costs
Deductions are often the most confusing part of a revenue statement, and it’s essential to understand them to get an accurate picture of your net income. Here are common types of deductions:
1. Transportation Costs
- This covers expenses for moving the extracted product from the wellhead to processing facilities or storage sites. In some leases, these costs are passed along to the mineral owner and deducted from royalties.
2. Processing and Refining Costs
- These are expenses related to making the product market-ready, such as refining oil or processing gas. The amount deducted varies based on the complexity of processing and market conditions.
3. Marketing Fees
- Marketing fees are costs associated with finding buyers for the product. These may include costs for negotiating contracts or handling logistics. Keep an eye on these fees, as some operators charge more than others.
4. Taxes
- Severance taxes, ad valorem taxes, and conservation fees are typically withheld by the operator and paid on your behalf. These taxes vary by state and type of mineral, and they are calculated based on the gross value of production.
Pro Tip: Review your lease agreement to confirm which deductions are allowed. Some agreements limit or prohibit post-production costs, and knowing your rights can help you avoid unnecessary charges. It is very important to keep a close eye on this, as leases change hands from one operator to another from time to time. When this happens the new operator could set up the pay deck with unauthorized deductions levied against your royalty. We highly encourage regular and ongoing monitoring of your deductions!
Net Value and Total Royalty Payment
After deducting all taxes and expenses, the Net Value is what remains. Your royalty payment is based on this amount, multiplied by your royalty interest decimal. For example, if your interest decimal is 0.01 and the net value is $10,000, your payment will be $100.
Example Calculation:
- Gross Value: $12,000
- Deductions: $2,000 (Transportation: $500, Processing: $1,000, Marketing: $500)
- Net Value: $10,000
- Royalty Interest (0.01): $100 Payment
Common Red Flags to Watch For
While most operators strive for accuracy, mistakes can occur, and if uncaught, can have serious long term impact. Here are some red flags to watch for:
- Unexpected or Excessive Deductions: If you notice new deductions or ones that seem unusually high, reach out to your operator for clarification.
- Sharp Drops in Production Volume: Significant declines in production can be due to well issues, maintenance, or natural decline. Contact the operator if you have concerns about sudden drops.
- Discrepancies in Price per Unit: While market fluctuations are normal, substantial price changes may indicate errors. Compare with average market prices to ensure consistency.
Tracking Trends for Better Financial Planning
Over time, your revenue statements can reveal trends in production, pricing, and deductions. By analyzing these trends, you can:
- Predict Income Fluctuations: Understand when to expect higher or lower payments based on historical production and market cycles.
- Plan for Tax Deductions: Use your statements to track depletion, a valuable deduction that reduces taxable income for mineral owners.
- Make Informed Decisions: If deductions are consistently high, it may be worth revisiting your lease terms or considering alternative management strategies.
How ES3 Minerals Can Help
At ES3 Minerals, we understand that interpreting revenue statements can be challenging, especially when it comes to deductions and production trends. If you have questions about your statements or want to explore options for maximizing your mineral rights income, we’re here to help. Our team can provide clarity on your income breakdown, evaluate the market value of your rights, and guide you on the best path forward.
Ready to feel confident about your mineral rights income? Contact ES3 Minerals for expert advice on understanding and maximizing the value of your royalties. With us, you’ll have a knowledgeable partner to help you make informed decisions about your asset.
