Grossing Up

Description of how SherWare grosses up/down entries.

When setting up the divisions of interest for a well, it is common to not know all of the owners who have interests in the well, or to have owners who are paid directly from the purchaser. Depending on how those types of owners are defined in SherWare affects how the system handles any money or expenses that get entered into the system.

Our software must know the full breakdown of all owners and their share of revenue/expenses for it to function properly. If one or more classes don’t total 100%, it can cause the system to allocate more or less revenue/expenses than it should. This commonly shows as a difference on the closing summary, and can be time-consuming to track down. Even if you don’t know who the owners in a well are, their percentages must be entered to allow the interest class to total 100%. If an owner is unknown, but you aren’t responsible for paying them, you can define them as a Dummy owner in our system. A new owner will need to be added to the owner information screen, and as long as the word Dummy is part of their owner name, the system will recognize them as a dummy owner, and won’t create checks for them.

If you have owners who are directly paid by the purchaser (most commonly royalty owners), you will still need to enter them into the division of interests screen in our software, so the interests total correctly. On the DOI screen for each owner is a drop-down list that specifies whether this owner is directly paid. Your choices are Oil, Gas, Both, or None. Specifying something other than None will tell the system that this owner is receiving their money directly, so SherWare won’t try to create checks to pay them again.

When revenue is entered into SherWare through the Production Receipts screen, it is assumed that you will be entering net units and net money. “Net” in this case refers to all the units/money that is to be distributed by your company, excluding any directly paid or dummy owners. Since the numbers you are entering are assumed to be net, the system will calculate the gross units/revenue based on the current division of interests. To better understand this process, a simple example will be helpful. Consider a well where all of the royalty owners are directly paid, and the working interest owners are paid by you. Assuming a 12.5% royalty, that means that you are responsible for distributing the remaining 87.5% of the revenue. Any money that you enter will be assumed to be 87.5% of the total money on the well, and any units are assumed to be 87.5% of the total units on the well. For this example, assume that you are being paid for 100 MCF of gas for the month @ $10/MCF, for a total of $1,000. Take the amount of non-directly paid/non-dummy owners in the well (87.5%) and convert it to a decimal (.875). Next, take the units, and divide it by that number. 100 MCF / .875 = 114.29 Gross MCF. The gross money would be $1,000 / .875 = $1,142.86. When the system turns around and distributes that money, it will give 12.5% to the directly paid owners, but then see that they’re directly paid, so it won’t cut them a check for that money. This leaves the remaining 87.5% as the actual money to be distributed, which is correct, since that was the money entered originally.

On the cash/production revenue receipts screen, there is a check box above the units that says Gross. Sometimes, the information that you receive with a check doesn’t include what the net units are, only the gross units for the entire well. In this case, you’d enter the gross units that you know, but mark the Gross check box. This tells the system that the number you’re entering in for the units is the gross, so don’t gross it up again. The money will still get grossed up, but the units will remain how you enter them. Since you’re entering gross units in the production receipts screen, the total money that the system calculates will be incorrect, since it will be calculating the gross revenue. Simply overtype the total money with the amount actually received for that well, and continue with the entry as normal.

Expenses work the same way as revenue, except that it only grosses up for Dummy owners. Again, a simple example will be helpful to understand how the system deals with this situation. Assume a well has a Dummy owner in it that makes up 25% of the total working interest. This means that you will be entering the other 75% of the expenses, when entering expenses through the Enter Bills screen. To calculate how the system will gross up, follow the same pattern as the revenue example listed above, but assume a $100 expense was entered through the Enter Bills screen. First, add up all the non-dummy owners in the well (75%), and convert it to a decimal (.75). Next, take the expense entered and divide it by that number. $100 / .75 = $133.33. When the system takes and allocates that expense to the owners in the well, it will give 25% to the Dummy owner, leaving the remaining 75% (or $100) as the amount to be charged to the non-Dummy owners, which is correct, based on the original entry. The system will recognize that Dummy Owner is a placeholder, and will not create any invoice for it's 25% of expenses in the well.

Hopefully, the two examples above have removed the mystery about how the system grosses up revenue and expenses, allowing a better understanding of how numbers that get entered flow through the distribution process.