Wednesday, May 23, 2012

Royalty Checks Likely to Slow as Natural Gas Prices Remain Low

From the Pittsburgh Post-Gazette:
Royalty checks that start to arrive when a gas company drills on your property can make for some very profitable envelopes in the mailbox. But the low natural gas prices that have disrupted industry balance sheets in recent months could start to cut into those checks. 
Put it this way: "You could be having filet mignon when they're high, and Kraft macaroni & cheese when they're low," said Craig Tillotson, executive vice president of sales at the Downtown-based Hefren-Tillotson wealth management firm. 
Mr. Tillotson is a wealth adviser whose expanding client base includes farmers and landowners signing lucrative leases for their mineral rights in the Marcellus Shale natural gas formation. So-called "shaleionaires" can take home millions of dollars by signing a lease, but they are now entering an unpredictable market that can cause royalty checks to fluctuate -- or stop altogether. 
The lowest natural gas prices in a decade also have forced a new industry emphasis on lease terms that allow companies to deduct certain well costs from landowner royalty checks. 
So far this year, the Pittsburgh region's dominant driller, Range Resources, said it has paid $65 million in royalty payments, which should put the company on pace to match last year's total of $166 million. Because it can take months to get gas from the wellhead to market, it can take months for low natural gas prices to be reflected in royalty checks. 
Landowners typically make money in two forms when they sign a lease: a per-acre lump sum and then monthly royalty checks once a well is drilled and starts producing. While the lump sums can total millions of dollars for major landowners, the potential for years of royalty checks can add up to even more. 
"The aggregate of the royalty checks should make the bonus payment appear insignificant," said Kit F. Pettit, an attorney in Pittsburgh who specializes in representing landowners. 
If a landowner's income were compared to the U.S. Steel building, he said, "A bonus payment would fill up the first floor and then a productive horizontal well -- assuming good natural gas prices -- would fill up the other 63 floors with royalty payments." 
But low prices now threaten to keep many of those 63 floors vacant.

Read the rest of the article here.

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