Marcellus Shale - Appalachian Basin Natural Gas

Added by admin | December 1, 2009

Super Giant Field in the Appalachians.

A few years ago every geologist involved in Appalachian Basin oil and gas knew about the Devonian black shale called the Marcellus. Its black color made it easy to spot in the field make it a very easy pick on a geophysical well log.

However, very few of these geologists were excited about the Marcellus Shale as a major source of natural gas. Wells drilled through it produced some gas but rarely in enormous quantity. Few if any in the natural gas industry suspected that the Marcellus might soon be a major contributor to the natural gas supply of the United States - large enough to be spoken of as a "super giant" gas field.

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The Marcellus shale impact.

The Marcellus shale is the largest unconventional natural gas reserve in the world. While reserve estimates should be considered somewhat uncertain at this early stage, as each new Marcellus well is completed, estimates of recoverable reserves of at least 489 trillion cubic feet seem increasingly reasonable. The market and strategic value of the Marcellus Shale will no doubt grow as conventional natural gas reserves are depleted and our economy adjusts to a path with lower greenhouse gas emissions. Natural gas has considerably lower carbon content than petroleum and coal. The market share of natural gas in electric power generation continues to expand and opportunities for switching from petroleum to natural gas beckon in the transportation sector.

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Stocks vs. Land: Which is the better investment?

Many more Americans own corporate stock than rural land. Why do we invest in stock, which is risky, rather than land, which is not?

First, stocks are easy to buy and sell. Second, they’re easy to follow up and down. Third, each company provides information, the quality of which, it may be said, varies.

Fourth, the numbers and ratios associated with companies and stock lend a certainty to forecasts that gives investors confidence in their crystal balls. Quantitative analysis can always be confirmed by the guy on the next barstool who says he plays the market. Fifth, much investing wisdom is free for the listening, such as Buy and Hold. All such wisdom is true, except when it isn’t. Finally, some ordinary people occasionally win, just like in Vegas.

These reasons don’t bear much weight, though I am personally attached to each and every one.

I’m now inclined to follow a new rule: if it seems sensible to me, do the opposite.

It is certainly true that had anyone who bought the broadest possible basket of stocks many decades ago would have done okay.

As a whole, Professor Jeremy Siegel of the University of Pennsylvania’s Wharton School says that stocks show an average gain of seven percent a year when the data are controlled for inflation. This average works when looking at many stocks over many years. It may or may not work for any individual stock; it doesn’t work for the three lousy decades in our memory—the 1930s, 1970s and this one.

Adjusted for inflation, a dollar invested in the S&P 500 in April, 1999 produced no gain at the end of March, 2008. The performance of big U.S. stocks amounts to an average annual rise of 1.3 percent during the past decade after dividends and inflation are counted in. (E.S. Browning, “Stocks Tarnished By ‘Lost Decade,’” Wall Street Journal, March 26, 2008.)

If you bought any individual stock, it could have gone up, down or disappeared over time. From my perspective, buy and hold makes sense only with a very broad basket and a 20-year-plus horizon. The rule for the stock market seems to be ten years or more of good is followed by ten years of bad.

During this most recent stock-market malaise, Treasury bonds, commodities, real-estate investment trusts (REITS), gold and foreign equities have beaten U.S. stocks. These alternatives can be as difficult to understand as American equities, often more so. But stocks are easy to buy and sell, watch go up and down, etc.

Ordinary cash-strapped, middle Americans usually do better investing in rural land.

Unlike stocks, land investments can be deciphered. Documents and numbers are reasonably transparent. Buyers can learn how to evaluate assets and liabilities. Professional help -- lawyers, surveyors, foresters, consultants -- are available to help research property prior to submitting an offer.

Scoping a land purchase is not like groping for Braille in corporate reports. It’s more like checking things off a to-do list.

The market for rural land in most areas is transparent. Land of all types is a finite resource. Good land -- however defined -- is even more finite.

Demand for land grows because America’s population is increasing and the top one-third of our income distribution has discretionary cash.

To get one handle on land appreciation, look at farmland. Values of agricultural land -- cropland and pasture -- have increased steadily since the mid-1980s.

Farm value in current dollars averaged $2,160 per acre nationwide on January 1, 2007, up from $974 in 1998, a 13.5 percent average annual gain according to the U.S. Department of Agriculture. Cropland during that period rose from $1,340 to $2,700; pasture rose from $489 to $1,160.

The current bubble in prices for corn, wheat and soybeans jacked up average cropland price during 2007. I doubt that corn-based ethanol will sustain the high prices for crops and cropland. Increasing global food consumption should prove to be a reliable driver of American farmland prices.

Timberland has increased in value in almost every part of the country since 2001.

Late in 2005, GMO head Jeremy Grantham, who manages about $100 billion, said that timberland will be the best-performing asset through 2012. His timberland investments have done exceedingly well. Timberland prices are being driven by investors, pension funds, university endowments, developers and managers of Big Money.

In 2007, timberland showed a total return (income plus capital appreciation) of 17.45 percent, according to the National Council of Real Estate Investment Fiduciaries (www.ncreif.com), which tracks farmland, timberland and other real-estate returns.

One study by the James W. Sewall Company shows timberland beating the stock market since 1960, up an annual average of 12 percent for stocks but nearly 14 percent for timberland.

Timberland also gets tax benefits -- deductions, property-tax help and possible eligibility for a conservation easement or 1031 exchange -- that stockowners don’t.

Both farmland and timberland are nowrunning counter to the slumping stock market. But the value of vacation homes -- which are usually more home than land -- have weakened slightly along with the decline in price and market for primary residential property.

While sales of both new and existing vacation homes dropped to 740,000 units in 2007, down from the record of 1.07 million in 2006, they still accounted for about 12 percent of all home sales,according to a March report from the National Association of Realtors. Themedian price of a vacation home in 2007 was $195,000.

One problem in tracking rural land values is that “rural land” is a term that covers a lot of ground—cropland, pasture, hobby/lifestyle “farms” with no significant cropland or pasture,timberland, undeveloped land (non-agricultural land with no timber value), land suitable for residential development, mineral land, existing second-home land, recreational land, environmentally sensitive land and so on.

No one collects property-sales data for all land types from the more than 2,000 county courthouses that serve a significant number of rural landowners. This is a big data-collection and analysis job that a land-grant university should take on.

A&M’s Real Estate Center tracks Texas land values, county by county.That’s the closest we come.

For the individual buyer, the county courthouse offers a quick way to measure local land appreciation.

Spend an hour in the office where property assessments are kept. Identify a parcel of land and go back 25 years to locate a baseline tax-assessed value. Stick with the value of the land alone; forget about improvements, such as houses.

Then dig out the succeeding reassessment values for that parcel coming forward. Reassessment periods vary among states, but all property is usually reassessed every three to five years. The five or more reassessment values will show how one particular parcel has appreciated over time.

Its actual rate of appreciation may be significantly higher than the rate calculated from tax-assessed values, because the latter usually understate current market values in rural counties.

Calculate an annual average appreciation rate, then compare that rate to the seven percent norm for stocks. Track the value of the county’s total land over 25 years to determine how your parcel of interest compares with the appreciation of all county land.

My best guess is that land nearly everywhere will exceed an average annual appreciation rate of more than seven percent since the mid-1980s.

So my hot stock-market tip of the week is this: Buy land.

With a Self Directed Retirement Account, Invest in Land

You can invest in Land, improved or unimproved with a “Self Directed Retirement Plans” since the IRS has allowed them. No one wants to talk about it. “They”, the investment firms do not make money on a Land transaction because “they” are not licensed real estate agents. Only licensed real estate companies can take commissions and are not allowed to pay referrals except to other active real estate firms. The traditional investment community has had control of over 97% percent of the retirement accounts and they have been making a great living off your hard earned money.

Your stock broker or financial advisor will not advise you how to take money away from their pockets and invest in real estate through your IRA, or 401K plan either. The financial magazines run large ads for brokerage firms and mutual funds T.V. and radio investment shows are supported by the same Wall Street advertising dollars…your money. I would be curious to see how many investment magazines will publish this article or if any investment shows will address this topic.

Stated on the IRS website “…..because of administrative burdens”, many IRA trustees do not allow IRA owners to invest IRA funds in Real Estate. IRA law does not prohibit investing in Real Estate but trustees are not required to offer Real Estate as an option. No commission for real estate sales may have a say here described as “administrativeburdens”.

An Individual Retirement Account is a personal savings plan that allows you to set aside funds for your retirement. Investments made within these plans grow in either a tax-deferred or tax-free environment.

The IRS allows your IRA to earn tax free or tax deferred income with NO limitations on how much you receive—you can earn thousands of dollars with no tax consequences. A “Self-directed IRA” will allow you to choose your own investment strategies to earn significantly more for your retirement.

The term ‘self-directed’ does not actually have any legal connotation. It does not imply a different type of IRA, or a separate set of IRS rules. ‘Self-directed’ is simply an accepted industry term indicating that the IRA custodian is allowing the IRA owner greater control over their investment decisions. When an IRA account is self-directed, the IRA owner makes all of their investment decisions and instructs the custodian to act. You must have a custodian as a third party administrator.

Be careful who you choose as your custodian. Most of these “professionals” are part of the same old 97% controlling crowd previously mentioned. Our recommendation is that you find one that charges an administration fee and believes in Land Investments.

Traditional IRAs, SEP IRAs, Roth IRAs, 401(k)s, 403(b)s, Coverdell Education Savings (ESA) a.k.a. Educational IRAs, Qualified Annuities, Profit Sharing Plans, Money Purchase Plans, Government Eligible Deferred Compensation Plans, Keoghs are qualified plans that can be converted into “Self-directed Retirement Plans”. For more detailed information visit the Internal Revenue Service’s website (www.IRS.gov). Also see Publication 590. On pages 40-41 you will see what investments are not allowed. Land is not included and therefore qualifies as does other types of real estate investments.

Our recommendation is to Stay away from investing your IRA money into an S corporation. S corporations only allow individuals (not entities) and certain permitted trusts to be investors. So if your IRA (an entity) is the investor, the S Corp would lose its status and its tax rate would change to a potentially less favorable one. Roth accounts can be used but take time to accumulate larger funds portfolios.

When purchasing Land with funds coming from an IRA, remember that the IRA itself must purchase the Land and hold the grant deed. All property taxes for that Land must also be paid from the IRA. The self-directed IRA should be opened first with cash or funds rolled over from other IRAs, 401ks, retirement plans, and then the Land should be purchased. Large tax penalties can occur if these transactions are not done properly. Proper care in deciding when to sell or lease the Land is also important. Land, especially pre-developed Land, is a long-term investment and often needs to be held for a minimum of five to seven years to produce the highest returns.

You can leverage a Land purchase with as little at 15% down and amortize 20 years with Farm Credit. They are located throughout the United Sates with different names (www.farmcredit.com). In the Land Brokerage business they are called “The Land Bank”. Farm Credit has had the most consistent programs for Land investors. Because of your increased buying power when you use leverage, the profits you make from the ability to use leverage can greatly outweigh the tax associated.

For more information we also recommend you visit, (www.iraaa.org) IRAAA™ is a nonprofit education-oriented alliance of financial planning, real estate, legal, banking, investment, and accounting professionals interested in further developing the niche industry of Self-Directed IRA & 401(k) investing. Their Promise is “IRA Association of America aims to provide affordable, unbiased and comprehensive education on the topic of investing with a Self-Directed IRA or Solo 401(k)”.

Make sure that you Google “Self Directed Retirement Accounts” and other associated words. Do your homework. This article’s sole mission is to stimulate your creative juices and reveal part of this untold story. After all you be in control of your own destiny and have the benefits of being a Land Owner. The greatest freedom there is.

In closing I invite you to review the results that the traditional investment community has had control of over 97% percent of this county’s retirement accounts, and “they” have been making a great living off your money. Look at the mess we are in. Ask yourself why would “they” want to let you know about alternatives that “they” would not be able to charge for?

My Land Investors have not lost a single dime and will not in the future. Land is the oldest and most stable investment there is. Contact Jeffrey Watson “Land Consultant” in Southern Ohio. They will help you evaluate the investment potential and the “Highest and Best Use” for future development and utilization. Jeffrey is ready to help you find that piece of dirt that will provide for you and your family for years to come as it always has and always will

Best Regards,
Jeffrey Watson

Funding the Sale

How will I fund a land investment?
Those beginning the process of purchasing land usually have a general idea of how they plan to pay for the investment. However, I have seen many buyers change their method of funding because they became educated on an option that was previously unknown to them and offered them some distinct advantage. Some may simply not understand the process or what they can afford. Following is a brief explanation of the most commonly used methods to fund land transactions.

Cash — Most land transactions that I work with are cash transactions. This is not to say that I work with only the independently wealthy. Most people that pay cash for a property have recently sold some other type of investment and are simply moving that investment into a property that works better for them. Many investors prefer this method as it is the most hassle-free and gives the buyer a negotiating advantage—the general thought is that a cash offer is stronger and that because the terms of the offer are stronger, the investor can offer a lower price.

1031 Exchange — 1031 exchange, Like-kind exchange, Starker exchange, Tax-deferred exchange—all refer to a method of exchanging a property or properties for other similar properties without the realized capital gain being recognized as taxable by the IRS. This is only available to those who hold the property for a business purpose. In the past few years, this has become very popular with investors seeking to grow their investment portfolios without taking cash out. For example, if you sell a farm that you have operated in Texas, you can utilize a 1031 exchange to move that money into a timber property in Alabama. There are many special conditions that must be adhered to in order participate in a 1031 exchange. You should consult your attorney regarding a potential 1031 exchange prior to accepting an offer from someone to sell the property you will be selling in the exchange.

Home Equity — In most of the land deals that I work with, the buyer is purchasing a property that will not be, at least immediately, their primary residence. Most of these buyers also have significant equity in their current primary residence. A home equity loan on the buyer’s primary residence offers many advantages over a traditional land loan. First there are the tax benefits from using the interest on the loan on your income taxes. Also, when a buyer is using a home equity loan, that buyer can go through the loan process prior to making an offer. Since the buyer then knows how much money he or she has available for the purchase, they can make an offer as a cash offer, which strengthens the buyer’s position in negotiations. Many times you can get more favorable terms on a home equity loan than on traditional land loans as well. It also makes your investment in land more liquid since to sell it, you will not have to then pay off a mortgage on it- so if the right opportunity comes along, you can liquidate your investment and roll that money into whatever it is that you wanted…just like you had bought the property with cash. Most banks, credit unions, and mortgage brokers offer home equity loans.

Land Loans — Land loans are those loans that hold the land itself as collateral. Whereas many times you can buy a home with 5-10% down payment, most times you will need 15-30% of the purchase price as down payment to get a land loan. Land Loans typically have a slightly higher interest rate than you can get on a home equity loan or regular home mortgage, however, many institutions that specialize in land lending are becoming more competitive with the conventional home loan market. Local banks (local to the property) are a good source for land loans, as well as lending cooperatives like the Federal Land Bank, and the Farm Credit System. My experience with land loans is that you want to work with a lender that understands land and land issues. Most, not all, mortgage brokers and loan officers are not as experienced in land lending as are those that work for companies that specialize in that segment of the industry.

Owner Financing — Many times buyers and sellers find advantages in owner or seller financed transactions. This typically occurs by the buyer making a down payment to a seller on a property. The seller then conveys the property to the buyer, with the seller holding a mortgage on the property until the buyer pays the remainder of the amount due. Terms and conditions of owner-financed sales can vary greatly. In my experience, sellers usually want 15-20% down payment from the buyer and an interest rate that is slightly above what rates are in the conventional markets. Repayment terms can range from monthly payments over 30 years down to a single payment soon after the initial transaction. This must be worked out between the buyer and seller. It is important to note that not all sellers are willing or able to offer this option on a property. The buyer should be sure to perform the same due diligence that a lending institution would require to protect themselves from potential pitfalls in owner financed transactions. Owner financed sales are advantageous to some sellers because they can differ some of the income from the property and get a steady stream of income over time. Buyers benefit since most owner financed sales do not typically involve credit checks, origination fees, and the hassle of dealing with a lender.

Lease Purchase — Some properties are contracted for in a Lease/Purchase Option contract. In this type of arrangement, the buyer leases the property from the seller for an agreed upon timetable at the end of which the buyer can elect to buy the property or forfeit their money paid to the seller until that time. Sometimes these arrangements do not leave the buyer with an option to buy, but rather an obligation to buy at the end of the lease period. Typically, monies paid as rent and for the option are deducted from the purchase price, but this is not a requirement. In this type of arrangement, title to the property does not pass to the buyer until the end of the lease period, when the buyer exercises their option to purchase the property. Usually there is interest charged by the seller on the principal amount due during the lease period. It might be helpful to think of this as “Rent to own”. Again, not all sellers are willing or able to offer this arrangement. Also, it is important that the buyer performs sufficient due diligence in checking out the property, as well as the seller of the property, since the seller will retain title to the property during the lease period.

Best Regards,
Jeffrey Watson