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Oil and Gas Planning

The shale hydrocarbon energy rush spawned by new drilling technology is creating material financial wealth for many landowners in Pennsylvania.  So far, the Marcellus Shale has been the dominate shale play and many landowners will see a major financial windfall as the drilling transforms into production, transmission and (hopefully) a long-lived royalty stream.

To address the needs of our clients possessing an oil and gas lease, we offer comprehensive gas lease financial planning and royalty management services.  Since 2008, we have worked with a large number of Marcellus Shale landowner lessors, helping them make the right financial planning decisions regarding their oil and gas lease and to manage their royalty wealth.

An oil and gas lease has two distinct planning stages – pre and post production – each with separate planning challenges.  We are comfortable leading gas lease financial planning process from start to finish, pre and post production, designing your personalized plan and then coordinating a successful execution of the plan.

Our royalty management services features royalty administration, tax planning and investment management.

Oil and Gas Lease Contract

A hydrocarbon lease is a complex business contract that requires the expertise of qualified professional counsel to negotiate the best terms possible for the landowner.  Representatives of energy companies are skilled at both cajoling and charming landowners to sign legal documents with terms that are often not in the landowner's best interest.

A well-designed lease will include a number of landowner protections, including environmental, water quality, and limitations on drilling locations on your property.

Additional landowner favored provisions include limitations on the land can unitized for well-drilling, a clear definition of drilling production and a restriction on deductions taken against your royalty share.  Of course, a well-negotiated lease would contain a competitive lease bonus payment, shut-in royalties, delay-rental payments and a fair royalty rate.

Your negotiating leverage will vary widely depending on a number of external factors, many of which are beyond your control.  Adopting a tough but fair negotiating stance can often lead to more favorable lease terms, however, and it is important to have third-party counsel to keep the emotion out of the negotiating process.

Oil and Gas Lease Planning

Once you have signed your oil and gas lease, it is time to undertake some thoughtful pre-production planning to optimize your future financial windfall. 

The most important financial planning step for most landowners with substantial acreage under lease is to work with an attorney to sever ownership of your hydrocarbon assets from the surface land and assign it along with the lease to a new closely held business entity.

The most effective family business entity forms are a limited liability company and a family limited partnership.  There are more similarities than differences between the two forms.  Each entity would offer asset protection benefits, control retention, tax planning opportunities and easier estate transferability, among other advantages.  

In some rare instances, assigning the hydrocarbon asset/lease to an irrevocable trust would prudent, but for most landowners the business entity form is the better choice.

The key feature of using the business entity to manage your oil and gas lease is the landowner can retain substantial control over the enterprise for as long as desired.

Advanced financial planning can help determine how much of the business equity should be transferred to family members and how to distribute the royalty payments pursuant to the landowner's goals and preferences.   
Royalty Management

Oil and gas royalty income can be an pleasant planning challenge - we recommend it to landowners!  Managing the "lottery winner" syndrome, however, can be a primary challenge.  Working with an energy company to get information on your wells and royalty payments can be frustrating as well.

Effective royalty management involves the examination of the landowner's royalty production data, cross-checking the landowner's share of well production with the data reported to the state regulatory agencies to flag material mistakes.  The services of a Certified Mineral Manager professional may be needed to decipher the production statements and confirm your royalty payments are indeed accurate.

Royalty income is ordinary taxable income with few natural tax deductions.  Advanced financial planning can help shift the income tax burden among the landowner's family and to consider alternate ways to increase the landowner's retained share of royalty income.
The bottom line is that royalty management is a financial planning opportunity to capitalize on your good fortune and balance consumption with investing to foster financial independence for you and your family.

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Securities offered through Cambridge Investment Research, Inc., a Broker Dealer, Member     FINRA/SIPC.   Investment Advisory Services offered through Cambridge Investment Research Advisors, Inc.  Cambridge and Harvest Rock Advisors, LLC are not affiliated.  Cambridge does not provide tax or legal advice.

This communication is strictly intended for individuals residing in the state(s) of DE, FL, IL, KY, ME, MD, NJ, NY, PA and VA. No offers may be made or accepted from any resident outside the specific states referenced.

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