By Ernest Scheyder
ST CLAIRSVILLE, Ohio, Dec 20 (Reuters) - Farmers in theclose-knit Amish community who eschew electricity and mosttechnology, are among landowners capitalizing on a new financialtrend in the United States energy boom - selling decades offuture oil and natural gas royalties for an immediate pile ofcash.
Gulfport Energy Corp, Chesapeake Energy Corp, Anadarko Petroleum Corp and others have spentbillions developing oil and gas reserves on land in Ohio's Uticashale formation - often by agreeing to give landowners years ofroyalties, or a cut of future production, in exchange for theright to drill on their land.
Some Amish, traditionalist Christians numbering about280,000 across the United States, are sitting on prime drillingland in eastern Ohio, but many say the rapid development is encroaching on their pastoral way of life.
Already this year, several oil trucks have been involved infatal collisions with Amish horse-drawn buggies in the region'snarrow and winding roads.
So, many Amish are cashing out to escape the noise as theirbucolic landscape of lush green hills becomes dotted with oilstorage tanks and rumbles with the buzz of oil rigs.
"If all this traffic and development is crazy here today,what's it going to be like in three or four years?" Eli Byler, amember of an Amish community in Ohio's Guernsey County, said athis farmhouse, his 4-year-old grandson bobbing on his knee.
Byler, who mills walnut timber for furniture, decidedearlier in December to sell half of his future oil and naturalgas royalties to Flatiron Energy Partners, a private firm thatspecializes in those transactions.
Flatiron is paying Byler $221,195 cash, an amount that willbe tax-free thanks to an arcane part of the U.S. tax code ifByler follows through on plans to relocate his family toPennsylvania.
Byler's deal is part of a larger wave of companies likeFlatiron paying cash up front for oil and natural gas royaltyinterests, deals these companies hope will provide their clients- typically family trusts and other wealth funds - guaranteedincome for decades in the form of royalty checks.
At least 35 other Amish families plan to sell their royaltyrights and make an exodus from the Buckeye State to parts ofPennsylvania or New York state with little or no energydevelopment, said Byler, who plans to sell the full 53.3 acreshe owns on the surface, including his homestead, in a separatedeal.
Neighbors are joining Amish families in selling out.
"For many landowners, selling royalty rights is the best wayto reduce their risk and take cash," said Austin Eudaly,Flatiron's vice president of acquisitions. "Selling is not foreveryone, but for landowners in eastern Ohio, including theAmish, its a great option to have."
Thanks to the Flatiron deal, Byler also will not have toworry about the controversial trend of energy companiesdeducting transportation and other post-production costs fromroyalty checks, which Reuters reported on earlier this year.
With this latest development in the U.S. energy boom, theAmish and other landowners in the energy-rich states of NorthDakota, Texas, Pennsylvania and Ohio have found a way to wringmore cash out of their property than they initially receivedfrom energy companies.
'CONSISTENT YIELD GENERATION'
The number of companies buying Ohio royalty interests hasrisen to 10 from 2 since the beginning of 2013, pointing to thestrong demand for this new type of investment from Wall Street.
"This is consistent yield generation," said Derren Geiger,who manages about $150 million in oil and natural gas royaltyinterests at the Caritas Royalty hedge fund. "It's aconservative way to play oil and gas."
Since 2004, the Caritas fund has booked an 18 percentaverage annual rate of return, helped largely by its holdings ofoil and natural gas royalty interests in North Dakota, Texas,Ohio and other energy-rich states.
The royalty buyout offers are not ideal for everyone,however, something that Flatiron's Eudaly and his competitorsacknowledge. Taking a $500,000 payout at 30 years old might notmake sense if the potential exists for $2.5 million in royaltypayouts during the next 40 years.
For older residents, the offers can be too much to refuse.
David Taylor owns about 80 acres in Ohio's Belmont County, ahilly ramble of a place soaked in natural gas. Taylor, who isnot Amish, found himself more than $130,000 in debt to the U.S.Internal Revenue Service a few years ago and trying to pay itback wreaked havoc on his personal and professional life.
When Flatiron came calling, he jumped at the chance to sellhis royalty interests, especially since little oil or naturalgas had actually been drilled on his land.
"I thought the best thing I could do was get the money,"said Taylor, who used it to pay off most of his debt. "This kindof made me square with the world."
Landowners also have the option to splice mineral rights.
Byler, the Amish landowner, is 50 and decided to keep halfhis mineral rights in his deal with Flatiron, hedging his betsshould an oilfield sprout on his land.
Eclipse Energy Partners, owned by Encap, a private equityfund managing about $18 billion in assets, already drills foroil on Byler's land.
So far, though, Byler has received less than $3,000 sincehis initial lease was signed in 2000, partly because the Eclipsewell doesn't go deep enough to tap the Utica shale formation.
Flatiron is buying Byler's rights on a hunch that it cannegotiate a better lease deal with Eclipse when the companylooks to drill deeper, Eudaly said. The current well tapsrelatively shallow deposits of oil that are there. The big moneylikely will come if the driller goes deeper into the Utica.
The potential exists, of course, for energy development todry up in Ohio, as it has done so many other times in otherplaces. Pennsylvania's natural gas development, for instance,slowed substantially three years ago when natural gas pricesplummeted.
A possible bust, many Ohio landowners say, is what weighs onthem when they decide to sell future royalty rights.
"I'd rather just take the money out of play," said JamesCoffelt, who owns a 4,600 acre ranch in Cadiz, Ohio.
GREATEST TOOL
Perhaps the greatest tool in Flatiron's toolbelt is notcash, but tax policy.
Using Section 1031 of the U.S. Internal Revenue Tax Code,landowners can use cash they receive for selling their oil andnatural gas minerals to buy another piece of property, tax free.
Mineral rights count as property under Section 1031, whichwas first instituted in the 1920s and survived a Supreme Courtchallenge in the 1970s.
Coffelt has used Section 1031 to sell about $5 million inoil and natural gas royalties to buy more grazing land for hisAngus cattle.
"My philosophy and strategy is to sell all my gas and oil,"said Coffelt. "This is how we grow the ranch."
Byler is itching to close his Flatiron deal as soon aspossible so he can roll the proceeds, tax-free, into thepurchase of 211 acres in Clearfield County, Pennsylvania, wherethe low price of natural gas has led many energy companies topull back on energy development.
It is a return home, of sorts, for Byler, who grew up nearErie, Pennsylvania.
He said wistfully that since moving to Ohio 18 years ago, "a lot of this area has changed."
