Companies Target OH Landowners to Buy Royalty Rights

A few weeks ago, MDN called attention to a new trend in the Marcellus and Utica Shale region—companies who want to buy landowners’ rights to future royalties (see this MDN story). It seems to be happening mostly in Ohio at the moment. These companies are offering to purchase a landowner’s potential future royalties for gas wells drilled on their property, paying them an up-front, one-time payment now. Think of those commercials you’ve heard where companies offer to pay lottery winners a lump sum now for the future long-term payouts, or settlements from a lawsuit with payments that stretch over years. That’s essentially what these companies are doing for landowners with leases in the Marcellus and Utica Shales.

Is it a good thing or a bad thing? A tough question to answer. There may be legitimate reasons to accept such a lump sum payment, but both sides are taking a risk, a gamble. The landowner is risking receiving substantially lower revenue than would have otherwise been paid, but then they will get a payment now instead of later. The company buying the royalty rights risks that the well won’t produce as much as hoped, leaving them paying more than it’s worth. However, you can be sure the companies who are in this line of business come out on top more often than not. MDN’s advice to landowners: Be very careful, and consult with lawyers and wealth advisors before signing anything.

One more indication that Ohio is poised for a multibillion-dollar oil and gas boom is new information that companies from Texas and Michigan are making offers to buy up existing royalty rights from landowners.

The companies are offering cash — up to $250,000 in some cases — in exchange for the landowners’ royalties on future natural gas production.

The companies are gambling that they can make more money in the long run than they are spending up front to purchase the royalties on existing and future wells.

Among the companies identified so far as making offers to buy the royalty rights are Noble Marcellus LP of Fort Worth and Venable Royalty Co. of Dallas.

Dale Arnold of the Columbus-based Ohio Farm Bureau Federation said he is getting questions from puzzled Ohio landowners who aren’t quite sure what to make of the unsolicited offers. He said at least two companies from Texas and one from Michigan, which he did not identify, have made the offers.

Many of those getting offers own leases dating back to the 1940s, not just new leases tied to the Marcellus and Utica shales, he said.

“What’s happening today in Ohio is legitimate. It’s legal. It’s very real,” he said. “It’s something new to Ohio, although it’s occurred in other states. For us, it’s new and it’s different.”

His advice to landowners: Be careful and know what you are doing before you sign anything. Check out the companies and confer with a qualified attorney. Consider the offer very carefully.

“Be aware that if you accept such an offer, you no longer control the mineral rights under your property,” he said.

Most drilling companies pay a standard 12.5 percent royalty, although that figure is higher in some cases in eastern Ohio.

It is difficult to gauge whether an Ohio landowner would be better off with the cash up front or by keeping royalty rights that could produce income for decades, Arnold said.

Venable Royalty Ltd. is interested in acquiring royalty rights on 3,000 to 5,000 acres in Ohio, said Patrick Van Ooteghem, director of mineral and royalty purchasing for the 80-year-old firm.

“Absolutely, it’s a gamble on our part … but we’re good at what we do and we’ve been doing it a long time,” he said in a telephone interview. “We have a good track record and we make fair offers and give people more options.”

His company is interested in all or part of royalty rights from old leases and from newer leases where wells have not been drilled, he said.

The company will hedge its gamble by purchasing royalty rights across a large area, he said.*

Read the rest of the article for good information on this relatively new development in the Marcellus and Utica Shales.

*Akron Beacon Journal (Nov 5, 2011) – Ohio’s looming natural gas boom is luring new investors