Banks in Energy Rich States Pushing Royalty Rights Services
Peters, Andy, American Banker
Byline: Andy Peters
America's new energy boom has created an opportunity for select banks to generate more fee revenue through their trust departments.
The opening comes from managing royalty rights held by the owners of oil- and gas-producing properties. Recent technological advances in hydraulic fracturing, or fracking, and horizontal drilling have led to a dramatic surge in the U.S. production of oil and natural gas.
Banks in North Dakota, Oklahoma and Pennsylvania have either expanded the royalty rights divisions of their trust departments, or formed new units. Cullen/Frost Bankers (CFR), one of the nation's biggest managers of royalty rights, recently agreed to buy WNB Bancshares (WNB) in Odessa, Texas, partly because of the chance to gain new royalty clients.
"There's so much money right now in domestic oil and gas; billions of dollars are being spend to drill wells," says Jerry Simmons, executive director of the National Association of Royalty Owners in Tulsa, Okla., which represents families and foundations that own oil and gas real estate.
"It's creating owners who don't know anything about royalties," Simmons says. "This is all so new to them. They've never had anyone approach them with a lease."
It is easy to see why banks would be interested in getting into the royalties business, says Bud Shuffstall, senior oil, gas and mineral officer at Northwest Bancshares (NWBI) in Warren, Pa. The industry standard is to charge a fee 6% of gross royalties. Monthly royalties range from several hundred dollars to "hundreds of thousands of dollars," he says.
"You can move the decimal pretty easily," Shuffstall says. "The scope of development in the Marcellus Shale [formation of Pennsylvania and New York] is frankly unprecedented."
The $8 billion-asset Northwest added a royalty rights division in August to pursue owners of royalties in the Marcellus Shale area and the Utica Shale area in Ohio and Pennsylvania. Northwest is based about 40 miles from Titusville, Pa., where the Pennsylvania oil rush began in 1859. The company also has branches in Ohio, Pennsylvania and New York.
The business of managing a property owner's royalty rights is somewhat arcane, so few banks have traditionally offered the service, says Joseph Heringer, personal trust manager for the central region at American Bank Center in Dickinson, N.D.
The $975 million-asset American Bank Center expanded the royalty rights-management offerings of its in-house trust department when the oil boom associated with the Bakken formation in western North Dakota began, between 2006 and 2007.
"We were not nearly the scale we are now," Heringer says. "We've added personnel and gotten them education and training on how to deal with mineral rights and trusts."
American Bank Center has gotten most of its clients through referrals from professionals like lawyers and accountants outside the bank, Heringer says. The number of referrals from the bank's loan department has been minimal, he says, because the clients are "getting a good amount of revenue from their mineral rights and they don't need loans."
The $23 billion-asset Cullen/Frost has been in the royalty-rights management business for years; it manages royalties associated with about 8 million acres nationwide, which generate about $170 million in annual revenue. …