Argent Financial Group, INC

Question: My father and I own a business together and we have somewhat different philosophies of debt. He’s totally against it, but I think there’s nothing wrong with it if you can afford it. Where does debt fit in a business?

Answer: Debt is a time machine.

Sometimes that’s a good thing. Sometimes that’s a disastrous thing. But it is always a powerful thing.

Debt brings the future into the present…but at a cost.

For the businesswoman with an idea how to make money, debt can create that opportunity right now, rather than waiting until she can save enough money to make that idea a reality.

For the young father, it can mean putting his family in a home in a safe neighborhood while the kids are still young, long before he otherwise could have saved the money to provide anything but a rented roof over their heads.

For the consumer, debt can mean he can buy whatever his heart desires (right now!) with little or no thought as to what the immediate gratification of that desire might ultimately cost him.

I think the question isn’t so much, “Is debt a good thing?” Rather, the question ought to be “is debt worth it?” Sometimes the answer is yes. Many times, the answer ought to be no.

Here are a couple of helpful questions to ask yourself.

Is this opportunity debt? Am I considering borrowing money so I can take advantage of a unique opportunity? This would be the case if you were considering buying a business or a money making business asset. Or perhaps a home became available at a very attractive price of the sort you’ve always wanted to live in.

This is sometimes a good use of debt, but only if you are a good judge of opportunities.

Is this lifestyle debt? Am I considering borrowing money so I can obtain something sooner that I will ultimately consume?

This is rarely a good use of debt. With lifestyle debt (otherwise known as consumer debt) you are really paying the price for your lack of discipline to save money. Consumer debt is simply savings in reverse, paying the lender back at 18% or more so you can have that blouse or power tool…right now.

By the way, a “sale” at the store is still lifestyle debt, never opportunity debt. Nice try though.

The trick is not to avoid all use of debt but to determine when bringing the future into the present is simply too expensive.

Byron R. Moore, CFP^® is managing director / planning group of Argent Advisors, Inc. Email him at bmoore@argentmoney.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The views expressed in the preceding commentary do not necessarily reflect the views of Argent Advisors, Inc. No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.

For a number of landowners in the state, oil and gas royalties have become a hot topic over the last few years. First with the Haynesville Shale and now with the Brown Dense and Tuscaloosa plays, oil and gas activity is high and more landowners are having the opportunity to receive revenue from oil and gas production.

Since mineral interests are commonly tied with the land, a frequent question for landowners is how to best manage their mineral assets, particularly when there is oil and gas production in the area. In managing minerals, the biggest questions usually revolve around the production payments, or royalty checks.

The royalty checks received by mineral owners are payments for their share of the oil and gas production from one or more wells that are located in a production unit that includes landowner’s minerals. Each company is required to provide the backup data for the amount that they are paying. However, this data is basically written in code and many times can be confusing – even to the experts.

Even though sifting through royalty check details can be a chore, it is important to know that what you are being paid is accurate. When reviewing a royalty check, there are a few key things to look for:

- Royalty interest – the royalty interest is the percentage calculation used to pay the royalty owner. It is based on the royalty owner’s property in the unit, the unit size, and the royalty interest that was included in the lease. Typically the oil and gas company will send out the royalty interest in a statement to the owner prior to sending any royalty checks. The statement is referred to as a “division order.”

- Deductions – historically, most leases signed by mineral owners allow oil and gas companies to deduct certain costs from royalty owners’ payments. These are costs that are associated with selling the oil or gas that is produced from wells. However, many newer leases include clauses that prohibit certain or all deductions from royalty checks.

- Severance Tax – severance tax is levied on all production of natural resources in Louisiana. However, there are several exceptions for certain oil and gas wells that qualify for the Severance Tax Relief Program. A horizontal well is one type that qualifies for the program – which includes most of the Haynesville Shale wells in addition to the wells that are planned for the Brown Dense and Tuscaloosa plays. In order for these wells to be accepted into the program, the operator of the well is required to fill out applications for each qualifying well and submit the application to the state. If accepted into the program, production from the qualifying wells will be exempt from severance tax for two years, or until the well reaches “payout.” With the increase in horizontal drilling, it has become a major task to keep up with activity involving the Severance Tax Relief Program. It is important for mineral owners to review their royalty checks to verify that any severance tax deductions are reimbursed for wells that are accepted into the program.

On the majority of royalty checks, all the information will be accurate. Oil and gas companies invest significant resources to ensure that they are paying royalty owners their fair share. However, as long as people are involved – there will be errors that slip through the cracks.

If a royalty owner finds an error on their check, the first course of action is to contact the company in writing. Many times, the error can be addressed and corrected quickly by the operator’s owner relations department. However, there are times when the payment issues are more complex and require additional action or research. At that time, the royalty owner should contact a professional that is familiar with oil and gas issues and how to resolve them – this would typically be an oil and gas attorney, mineral manager, or other related professional. Knowing the right way to resolve royalty payment issues can translate into a significant difference in the timeliness and amount of the resolution.

A preemptive way for royalty owners to help resolve payment issues is to learn more about the oil and gas industry and activity in the area. In Louisiana, the Department of Natural Resources maintains a website that can be a great resource for land and mineral owners, www.sonris.com. SONRIS provides an enormous amount of oil and gas information, including well records, drilling permit applications, and maps. Learning to navigate and use SONRIS can help land owners become much more knowledgeable in dealing with oil and gas companies.

Continuing to learn about mineral assets and making sure that they are managed properly are the keys to maximizing the value of your minerals. Royalties can be a tremendous blessing, but not understanding or not investing the resources to review the royalty payments can cause owners to miss out on the total value of those assets.

(Jeremy Pendergrass serves as President of Argent Property Services, a mineral management company headquartered in Ruston, Louisiana. Contact him at jpendergrass@argentmoney.com or 318.251.5813.)

Debt brings the future into the present…at a cost

UNDERSTANDING OIL & GAS ROYALTIES