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The Commodity Investor Q&A
With Matt Badiali
September 24, 2008
Q: My brother lives on 17 acres in Pennsylvania, where the Marcellus Shale is. A year or so ago, the gas company was paying $50 an acre; it's now up to $2,750. How can he gain the most with the least stress? – R.W.
A: While I can't speak directly about what your family should do, Pennsylvania State University runs information sessions for landowners like your brother.
I can say his land may be far more valuable than the gas companies are letting on. For example, XTO Energy bought 152,000 acres in West Virginia and western Pennsylvania for $3,600 per acre. That was just the first big deal in the Marcellus.
More are coming.
The Marcellus Shale is a natural gas discovery that spans New York, Pennsylvania, Ohio, and West Virginia. Underneath a huge swath of the Appalachian Mountains – from West Virginia northeast up into Canada – is shale.
Shale is a sedimentary rock made of fine particles of clay and mud deposited at the bottom of ocean basins or giant lakes. The shale that oil and gas companies like has a lot of old plants and algae mixed in. Over time, that kind of shale makes natural gas and sometimes oil.
It used to be almost impossible to get the natural gas out. But advancing technology capable of mining shale took off in 1994 in Texas' Barnett Shale. Since then, it's spread to many shale basins, including Marcellus.
Thanks to an arcane bit of Pennsylvania law, the Marcellus shale was a black box for years – the companies drilling there weren't required to release data about what they found. That kept out most oil companies except for an elite few. It looks like that will change this fall, which could really open the spigots on the land rush.
Though the Marcellus shale play is in its early stages, we've already seen huge inflation in lease prices. Your brother's own experience shows you how fast the prices go up... $50 an acre to $2,750 in just a year? That's 5,500%. Wow.
Your brother has an asset that doesn't spoil. That gas has been in the ground for hundreds of millions of years already. And I believe the market will only get better.
In the Barnett Shale, land prices soared from $1,000 in 2002 to $3,500 by 2004. That same acreage goes for around $10,000 today. Gas companies want the Marcellus acreage now because many more companies will be looking for acreage in the near future, driving up prices.
Another way landowners can profit is by negotiating a royalty. Royalties are common in the oil business. The landholder leases access to the oil company in exchange for part of the cash flow from the well.
A 63-year-old farmer, interviewed in a New York Times article, already received a $16,000 royalty check for gas produced from his 700 acres. His 90-year-old parents got a $20,000 check.
Good investing,
Matt Badiali
