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 Gulfport Energy Corp, Chesapeake Energy Corp, Anadarko Petroleum
Corp and others have spent billions developing oil and gas reserves
on land in Ohio's Utica shale formation — often by agreeing to give
landowners years of royalties, or a cut of future production, in
exchange for the right to drill on their land.
Some Amish, traditionalist Christians numbering about 280,000 across
the United States, are sitting on prime drilling land in eastern
Ohio, but many say the rapid development is encroaching on their
pastoral way of life.
Already this year, several oil trucks have been involved in fatal
collisions with Amish horse-drawn buggies in the region's narrow and
winding roads.
So, many Amish are cashing out to escape the noise as their bucolic
landscape of lush green hills becomes dotted with oil storage tanks
and rumbles with the buzz of oil rigs.
"If all this traffic and development is crazy here today, what's it
going to be like in three or four years?" Eli Byler, a member of an
Amish community in Ohio's Guernsey County, said at his farmhouse,
his 4-year-old grandson bobbing on his knee.
Byler, who mills walnut timber for furniture, decided earlier in
December to sell half of his future oil and natural gas royalties to
Flatiron Energy Partners, a private firm that specializes in those
transactions.
Flatiron is paying Byler $221,195 cash, an amount that will be
tax-free thanks to an arcane part of the U.S. tax code if Byler
follows through on plans to relocate his family to Pennsylvania.
Byler's deal is part of a larger wave of companies like Flatiron
paying cash up front for oil and natural gas royalty interests,
deals these companies hope will provide their clients — typically
family trusts and other wealth funds — guaranteed income for decades
in the form of royalty checks.
At least 35 other Amish families plan to sell their royalty rights
and make an exodus from the Buckeye State to parts of Pennsylvania
or New York state with little or no energy development, said Byler,
who plans to sell the full 53.3 acres he owns on the surface,
including his homestead, in a separate deal.
Neighbors are joining Amish families in selling out.
"For many landowners, selling royalty rights is the best way to
reduce their risk and take cash," said Austin Eudaly, Flatiron's
vice president of acquisitions. "Selling is not for everyone, but
for landowners in eastern Ohio, including the Amish, its a great
option to have."
Thanks to the Flatiron deal, Byler also will not have to worry about
the controversial trend of energy companies deducting transportation
and other post-production costs from royalty checks, which Reuters
reported on earlier this year.
With this latest development in the U.S. energy boom, the Amish and
other landowners in the energy-rich states of North Dakota, Texas,
Pennsylvania and Ohio have found a way to wring more cash out of
their property than they initially received from energy companies.
"CONSISTENT YIELD GENERATION"
The number of companies buying Ohio royalty interests has risen to
10 from 2 since the beginning of 2013, pointing to the strong demand
for this new type of investment from Wall Street.
"This is consistent yield generation," said Derren Geiger, who
manages about $150 million in oil and natural gas royalty interests
at the Caritas Royalty hedge fund. "It's a conservative way to play
oil and gas."
Since 2004, the Caritas fund has booked an 18 percent average annual
rate of return, helped largely by its holdings of oil and natural
gas royalty interests in North Dakota, Texas, Ohio and other
energy-rich states.
The royalty buyout offers are not ideal for everyone, however,
something that Flatiron's Eudaly and his competitors acknowledge.
Taking a $500,000 payout at 30 years old might not make sense if the
potential exists for $2.5 million in royalty payouts during the next
40 years.
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For older residents, the offers can be too much to refuse.
David Taylor owns about 80 acres in Ohio's Belmont County, a hilly
ramble of a place soaked in natural gas. Taylor, who is not Amish,
found himself more than $130,000 in debt to the U.S. Internal
Revenue Service a few years ago, and trying to pay it back wreaked
havoc on his personal and professional life.
When Flatiron came calling, he jumped at the chance to sell his
royalty interests, especially since little oil or natural gas had
actually been drilled on his land.
"I thought the best thing I could do was get the money," said
Taylor, who used it to pay off most of his debt. "This kind of made
me square with the world."
Landowners also have the option to splice mineral rights.
Byler, the Amish landowner, is 50 and decided to keep half his
mineral rights in his deal with Flatiron, hedging his bets should an
oilfield sprout on his land.
Eclipse Energy Partners, owned by Encap, a private equity fund
managing about $18 billion in assets, already drills for oil on
Byler's land.
So far, though, Byler has received less than $3,000 since his
initial lease was signed in 2000, partly because the Eclipse well
doesn't go deep enough to tap the Utica shale formation.
Flatiron is buying Byler's rights on a hunch that it can negotiate a
better lease deal with Eclipse when the company looks to drill
deeper, Eudaly said. The current well taps relatively shallow
deposits of oil that are there. The big money likely will come if
the driller goes deeper into the Utica.
The potential exists, of course, for energy development to dry up in
Ohio, as it has done so many other times in other places.
Pennsylvania's natural gas development, for instance, slowed
substantially three years ago when natural gas prices plummeted.
A possible bust, many Ohio landowners say, is what weighs on them
when they decide to sell future royalty rights.
"I'd rather just take the money out of play," said James Coffelt,
who owns a 4,600 acre ranch in Cadiz, Ohio.
GREATEST TOOL
Perhaps the greatest tool in Flatiron's toolbelt is not cash, but
tax policy.
Using Section 1031 of the U.S. Internal Revenue Tax Code, landowners
can use cash they receive for selling their oil and natural gas
minerals to buy another piece of property, tax free.
Mineral rights count as property under Section 1031, which was first
instituted in the 1920s and survived a Supreme Court challenge in
the 1970s.
Coffelt has used Section 1031 to sell about $5 million in oil and
natural gas royalties to buy more grazing land for his Angus cattle.
"My philosophy and strategy is to sell all my gas and oil," said
Coffelt. "This is how we grow the ranch."
Byler is itching to close his Flatiron deal as soon as possible so
he can roll the proceeds, tax-free, into the purchase of 211 acres
in Clearfield County, Pennsylvania, where the low price of natural
gas has led many energy companies to pull back on energy
development.
It is a return home, of sorts, for Byler, who grew up near Erie,
Pennsylvania.
He said wistfully that since moving to Ohio 18 years ago, "a lot of
this area has changed."
(Editing by Terry Wade, Peter Henderson
and Grant McCool)
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