Repost: Letter to beneficiaries

26 November 2010

Dear South Texas Syndicate Beneficiaries,

The South Texas Syndicate (STS) property is an extremely unique and valuable asset; the people that understand what is happening in south Texas recognize this fact. The current beneficiaries can certainly recognize it simply by the size of the distributions from recent years. The Developing Unconventional Gas (DUG) Eagle Ford Convention, held in San Antonio this October, illustrated the current and future potential of the Eagle Ford formation; the STS property is right in the middle of it. There are other formations that have not been tested with the new drilling techniques, which may be just as valuable. One of the points JPMorgan (JPM) made at the meeting was that the STS property was nearly 100% leased, perhaps on a “flat basis”, but definitely not if you view the property as a “cube” and understand that you can have overlapping leases each drilling to a different formation. There are still areas and formations that have not been promoted or leased.

In October 2010, many of us attended the 2010 STS Beneficiary meeting along with DUG Conference in San Antonio. I do not know which was more exciting, because both go hand in hand. The development of the Eagle Ford has catapulted the minerals of the South Texas Syndicate into the limelight.

· One facet of the STS meeting was the increasing number of beneficiaries attending the meeting and their growing interest in STS as an asset. There were representatives of all the original families involved with the purchase of the property in 1906, which became known as the Washburn Ranch (the origin of the STS). These gatherings have lead to new relationships and contacts among family members from all over the country. Inside the different families, the growth of STS has created discoveries of relatives that could not have otherwise happened. Having attended the last 3 meetings, the first in 2006, the second in 2009, and then the third in October 2010, it really is gratifying to see the growing interest.

· Since 2005 there has been a significant increase in leasing rights, drilling activities, and the extraction of the trust’s minerals. These increases can be directly related to two developments: the advancement in drilling technologies, and the hiring of Pattie Shultz-Ormond by JPM to oversee and promote the development of STS minerals. The beneficiaries that attended the 2006 meeting were immediately impressed with what was taking shape, saw presentations by the companies that were drilling on their leases, understood there were geological formations and areas of great potential as shown by the 3D seismic studies. We all left the meeting feeling enthusiastic with the direction and future for STS. Prior to 2005 JPM, and the predecessor trustee banks, managed STS with an attitude of “benign neglect”— one centered on waiting to be approached by a drilling company that wanted a lease and the right to drill a well. Needless to say, the 2006 meeting was refreshing and encouraging. The increased activity from 2005 to the present has been rewarding to all beneficiaries.

· In the last few years there has been a shift in how JPM regards the beneficiaries, clearly illustrated in how they planned the 2009 STS Beneficiary Meeting. We were originally told there would be a 2-day meeting with tours of the asset and possibly a helicopter ride over the property, a visit to a well site to see a fracing operation, a chance to learn more about STS, and an opportunity to meet more beneficiaries. A month or so before the meeting JPM tried to cancel it, stating there really was not enough activity to hold a meeting, not enough beneficiary interest, visiting a well site was too dangerous, and there wasn’t much to be seen from a helicopter. In fact it was only through the insistence of a small group of beneficiaries that there was a 3-hour meeting scheduled.
Then either by design or by default, the enthusiasm and the future of STS was not nearly as bright as it had been in 2006. We were told that Pattie had been assigned a different role though still fully engaged in the STS asset, and we were only allowed to hear from one lessee, Petrohawk, though only because the beneficiaries insisted on it. The JPM representatives were unwilling to talk about the future of STS as they could not make forward looking statements, and the entire meeting had a very different atmosphere. It was as if the bank was trying to return to a time where they were operating again under “benign neglect”. Most impressive was the helicopter ride we chartered and took out to the property the next day. There were drill sites and drilling rigs, there were collection facilities, there were pipelines being laid and there was a lot of activity, the nation had not yet heard of the Eagle Ford discovery, but there were a lot of people that had and they were working it.

· A few of the STS Beneficiaries that attended the meeting in 2009 started to communicate among themselves. We wanted to understand what was happening with “our” asset, the further we delved into it the more concerned we became.

1. Concerns about the new Land Manager: A month after 2009 meeting we were told that Pattie had left JPM and now we had a different land manager, supposedly one that is fully engaged and able to handle the operation. This was an immediate concern and then conversations with lessees that surfaced about the lack of response from JPM’s land manager augmented these concerns.

2. Concerns about our Trustee’s approach to protect and maximize STS: The deeper we delved into the management of our asset, the more concerned we became. It wasn’t only that JPM land manager was unresponsive, we began to wonder if the STS Trust was being mismanaged; basic Trustee fiduciary responsibilities appeared neglected, like one as simple as completeing an audit on the asset. There seemed to be a concerted effort not to maximize the value of the mineral rights. Nor does JPM have a plan in place for the future development of STS. We began to believe that the decisions, or lack of, by JPM has placed the trust structure at risk.

· Earlier this year a small group of beneficiaries began having conversations with JPM about these concerns. Initially the bank was open to listening and said that they wanted to make improvements and move forward. Though after a few conference calls that appeared productive, JPM abruptly ended the calls saying that based on an opinion from their lawyers, conversing with a small group of beneficiaries threatened the tax status of the STS Trust. They terminated all calls moving forward. Ending all dialog with the beneficiaries and effectively shutting down all communication, inquiries or otherwise, regarding the bank and their operation of STS. It was shortly after this call that Jack Meyer filed his lawsuit challenging the competency of JPM to operate as the Trustee.

As most of the beneficiaries attending the 2010 meeting earlier this month can attest to, JPM has yet to answer some of the more critical questions, specifically pertaining to the tax status and alternative structures that would protect and enhance our asset.

· Tax concerns: JPM maintains that they obtained an opinion regarding the tax status of the trust rendered by Cox and Smith. However when the Cox and Smith attorney was questioned at the meeting, it was discovered that this opinion pertains only to the filing of the 2009 tax return, has a little “better than 50% chance of being correct”, and only protects the trustee, not the trust, in the event of an IRS audit. The cost the south Texas Syndicate beneficiaries? $120,000.00.

· Lack of financial audit: There have been requests over a number of years for a financial audit of the trust, the bank has resisted saying that it would cost too much, somewhere in the $15,000 to $20,000 range, although this audit would clear up a number of issues that continue to show up in the annual report, a couple are; 1) What are the fees being paid to JPM? 2) How much money is being held by the bank in reserve, at no benefit to the beneficiaries?

· Best structure to maximize value: The bank indicated they had examined a number of different structures for the trust, though did not look at a publicly traded royalty trust and other alternatives. While we are not sure of the best structure, there may be one that would maximize the value to the beneficiaries.

During the meeting, John Minter, a JPM representative, indicated that the bank would be willing to talk to the beneficiaries if there were a way to invite all 250+ beneficiaries to participate. He emphasized that all communication would have to be maintained with the entire “group”. While the dissemination of information is easily accomplished (email, blog, etc.), a meeting with all beneficiaries is clearly impracticable. Every beneficiary does not have the interest, time, or resources to be at the meetings or on conference calls. In this way JPM keeps us fragmented and unorganized. We must be organized and united in order to protect our interest and the legacy of the South Texas Syndicate.

Our thought is to establish a group of designated beneficiaries that will operate as representatives for all of the families involved. We could organize a small group to represent the STS beneficiaries in meetings with the bank. The STS beneficiary representatives would be comprised of individuals that are willing to travel and meet, both as a group and with the bank representing the interests of the beneficiaries. The representatives need to be willing to report back to the beneficiaries they represent; the idea is to keep this group’s size manageable and nimble.

Each family is asked to nominate a representative or two; the numbers is up to you and commit to be involved in helping build STS into the asset that it can be, one that is a legacy to the original investors.

JPM, our trustee, has refused to furnish us the contact information for all the current beneficiaries. We believe that inside of each family there is enough knowledge to be able to identify a large number of unit holders; these are the people that we need to help us move forward.

Please contact us with your thoughts and who you may have represent your family.
Sincerely,

Carter Piper, the Bill Piper Family
jpiper2@bak.rr.com


Please invite all your family members to visit the STS blog site. Have them email John Q Piper, quervain@juno.com, for an invitation to join. As you know it is exceptional in content and design.

If you are curious about the new techniques of drilling horizontal wells visit the link below
http://www.api.org/policy/exploration/hydraulicfracturing/hydraulicfracturing.cfm