Help Wanted
Beyond the Marcellus, other states with substantial shale production include Texas, Louisiana, Oklahoma, Colorado, Arkansas, Michigan and North Dakota. Nationwide, an estimated 8.5 million private owners currently receive royalties on oil and gas interests, says Jerry R. Simmons, executive director of the National Association of Royalty Owners (NARO), a Tulsa, Okla.-based education/advocacy 501(c)(3) organization. The majority of these owners are individuals, although the figure does include some corporations.
In total, private owners were paid an estimated $22 billion in royalties in 2012, he says, citing a figure included in a report to be issued shortly by the Royalty Owners & Producers Educational (ROPE) Coalition where he is executive vice president. And many of them need help understanding and managing their oil and gas interests, he says.
Some families don’t even know what they own. “The call we get so often is, ‘Grandpa just died, there’s a shoebox of information,’” he says. He notes that NARO always holds a couple of financial planning sessions at its annual convention.
For its part, Pittsburgh-based Fort Pitt Capital Group, an independent, fee-only investment management firm that oversees approximately $1.3 billion of assets, got involved in this space after a few existing clients began talking to energy companies. Since then, it has also developed business through referrals from lawyers and landowner groups, and it’s trying to get more.
“Our major footprint is right in the middle of the Marcellus Shale boom,” says Daryl Patten, a financial advisor and vice president with Fort Pitt Capital. A handful of clients have signed contracts with energy companies and others are thinking about it, he says.
Patten is intrigued by the vast demographics of this market. A few months ago, he met with a wealthy West Virginia family that runs a few businesses and was about to lease some of its land for shale drilling. “On the other side of the coin is the farmer who struggles to keep the family land and is now getting a nice paycheck,” he says.
Patten emphasizes to clients the importance of putting a financial plan in place and not changing one’s lifestyle immediately. He also encourages them to focus on the fact that well production has a limited life span—often eight to 10 years, he says. “If you’re fortunate enough to get wells, you will have a nice income stream, but it’ll stop or trail off dramatically,” he says. “Don’t squander the windfall. Create a portfolio that can produce an income stream in perpetuity.”
One of his clients, a dairy farmer struggling to stay afloat, signed a lease for approximately 160 acres at about $3,500 per acre—or nearly $600,000 up front. “That can get him on his feet and stable and give him a great start,” says Patten.
The client plans to use this money to pay off some debt. His CPA and Patten are encouraging him to also prepay and deduct some business expenses this year. This could include replacing farm equipment; purchasing food for cattle, fertilizer and seed; and prepaying some insurance and utility expenses, says Patten. He also plans to set up Simplified Employee Pension (SEP) plans for the client and his wife, who have not previously worked with a financial planner.
Last year, one of Fort Pitt Capital’s clients received a check for roughly $150,000 for leasing out approximately 40 acres of her non-functioning working farm and placed the bulk of it directly into an after-tax account to invest it for long-term growth, he says.