You've heard of house flipping. Now, lease flipping has come to Pennsylvania's natural gas fields.
A wave of investment firms hoping to cash in on drilling in the Marcellus Shale is appearing in deed books across the region. They operate much like traditional land agents, negotiating with landowners to secure rights to the lucrative shale gas underneath the acreage.
The difference? The landowners have already leased access to the land to gas drillers, and signing away the rights now can mean forfeiting any future royalties that may come with gas production.
"It's a gamble," said Martin Schardt, executive vice president of the American Association of Professional Landmen. "The landowner can get the money right now, or the company could drill on that land and it could be a real barn-burner."
The practice has its roots in the early days of the drilling boom, when companies from around the world began leasing land as fast as they could -- locking the property into five-year deals that kept competitors at bay. Then, as drilling picked up, the increased supply of natural gas led to a record-setting drop in prices.
Suddenly, it wasn't as easy to turn a profit on a well. Many companies pulled out of neighborhoods where rigs had been planned, leaving those leases behind in the process. That left many landholders unsure when -- if ever -- they'd see a well on their property that would bring a steady stream of royalty checks with it.
The investment firms moving into the region are offering to buy those left-behind mineral rights. Landowners get money for that vacation home today, and the investment firm gets access to the royalty payments that may -- or may not -- come later.
If there's one word associated with the practice, it's risk -- risk for the company that might acquire useless mineral rights, and risk for the landowner who could miss out on lucrative royalty payments in the future.
The investment firms represent investors as varied as pension funds and Ivy League universities and bring a level of speculation typically found on Wall Street to the farmlands of Western Pennsylvania.
The firms operating in Pennsylvania are a small-scale version of private equity's newfound interest in the country's drilling boom. Last year, New York-based KKR & Co. formed a venture with Chesapeake Energy to finance the purchase of mineral rights from landowners, and the global investment also has started flipping shale leases itself.
Now, smaller companies like Energy Deep Resources, Bounty Minerals and Arete Acquisitions are filling the local county deed records with deals for complete or partial royalty streams.
"I get them everyday," said Tom Headlee, the register of wills and recorder of deeds in Greene County.
Some are only for a couple thousand dollars, while others come in the high six figures.
"The deed room is full," said Mr. Headlee. "But the people have all changed."
They include representatives from firms like Energy Deep Resources. The Pelham, Ala.-based oil and gas investment firm has been buying stakes in royalty streams across Pennsylvania since 2011.
The company doesn't buy stakes in plots smaller than 15 acres, since title opinion and recording costs associated with the transaction eat up any potential profits on small plots. Landowners with smaller plots of land tend to sell their entire royalty stream, while larger landowners sell a percentage, said Jeremey Hankins, president.
"We might pay them $250,000. That's a quarter of a million dollars immediately in the pocket, and they still might keep 50 percent if there is production down the road," said Mr. Hankins.
Energy Deep's backers are diverse, and include institutional investors like pension funds and the endowment at Harvard University. The majority investing partner at Energy Deep is Map Royalty, an oil and gas acquisition firm with offices in Palo Alto, Calif., and Oklahoma City, Okla.
Energy Deep Resources started in Alabama, where exploratory wells didn't yield bountiful shale gas. Then it was on to Shreveport, La., where a more promising shale saw drilling slow when gas prices fell.
A couple of years ago, Energy Deep's investors showed an interest in the Marcellus and Utica shales of Appalachia.
Playing hopscotch from shale to shale spreads the company's $50 million in annual investments across the country so a slowdown in one region doesn't cause the whole portfolio to collapse. The private companies don't release their financial results.
"Our objective is to invest our funds over tens of thousands of acres and spread our exposure," said Mr. Hankins. "It's like playing the stock market."
Make no mistake: The practice carries a substantial amount of risk for the landowner as well, who rolls the dice on missing out on lucrative royalty streams in the future.
That was the decision made by Curt and Rhiannon Brodmerkel, a couple in Karns City, Butler County, who leased their 40 acres of woods and horse trails to a driller in the early days of the boom.
Any potential drilling activity, they thought, would probably come if their smaller plot was placed in a larger unit with adjoining properties.
Then, late last year, notices started arriving in the mail from Fort Worth, Texas-based Bounty Minerals about how the couple could make money on the royalty stream today.
"We asked for ridiculous money per-acre and never thought it would be sold," said Mrs. Brodmerkel.
The company looked at the request and said OK.
Mrs. Brodmerkel declined to reveal how much the deal was worth, but said the money covered a down payment on construction on the home they're building on the property, with leftover cash to spare.
The Bounty Minerals deal seemed like a better option than waiting to sign another lease with a gas company, which would be subject to land-value fluctuations.
"In two or five years, could it plummet? Or could it increase?" said Mrs. Brodmerkel. "That's the risk you take."
Erich Schwartzel: firstname.lastname@example.org or 412-263-1455.