Lawrence DeFluri didn’t set out to create a niche financial planning practice, but circumstance — in the form of the Marcellus Shale formation — intervened.
He and his partner, Charles Eberly Jr., had a planning practice in Harrisburg, Pa., just southeast of the massive Marcellus Shale basin. When geological testing and improved drilling techniques turned the area into a booming gas-producing region a half dozen years ago, clients started calling him about oil companies knocking on their doors.
DeFluri’s first such client, a farmer, had 100 acres in northern Pennsylvania and was approached in 2009 about leasing his mineral rights. The oil company had already drawn up a contract, but the client didn’t know what to make of it. He brought it to DeFluri.
“We took a close look and realized they were paying way too little,” DeFluri says. “I told him how much to hold out for. After a little negotiating, he got something very close.”
A PAST IN OIL
How on earth would DeFluri know how much to ask for a mineral-rights lease? The 51-year-old planner has undergraduate and graduate degrees in petroleum and environmental engineering, and he spent 10 years working on oil rigs in the Gulf of Mexico.
In those days, his job was to drill wells and ensure that both the drilling and production came in on budget. Although he was doing well and rising through the ranks at Tenneco, DeFluri says it just wasn’t what he wanted to do for the rest of his life.
All the time he was an engineer, he explains, he had been studying up on stock selection and managing his own accounts. He saved money so that his family could handle a temporary decline in income and announced to his startled wife one morning that he was ready to make the switch.
“The stock market was a hobby that turned into a passion that turned into a career,” he says. “When I made the break, I never looked back. It’s worked out phenomenally well.”
First at Smith Barney, then Merrill Lynch and Wells Fargo Advisors, DeFluri and Eberly have worked in investments and financial planning in and around Harrisburg for almost two decades. They are the co-founders and managing partners of SevenBridge Financial Group, a firm with $190 million in assets under management that split off from Wells Fargo last August.
AN UNEXPECTED NICHE
Unexpectedly, DeFluri’s engineering background became valuable to the planning practice because it allowed him to help clients confronted with perplexing mineral rights.
“Working with geologists, we have the ability to understand how much oil and gas is in place and how they’ll get it out of the ground,” he says. “My background allows me to understand how many wells they can put on a property, and with that we can evaluate what the cash flow is currently and what it’s likely to be over time.”
Oil companies usually pay for mineral rights in two parts: an upfront bonus for the lease and then continuing royalties. At the height of the market, DeFluri says, some property owners were getting bonuses of as much as $5,000 an acre.
Royalties range from 12.5% to 21% and can be the more lucrative part of the deal, he adds. But clients have to be prepared for the fact that gas royalties are not a steady source of revenue.
A gas well usually delivers a big payload in the first year, bubbling with released gas like a recently popped can of soda, DeFluri says. But as time goes on, the well produces progressively less until it peters out completely some 30 or 40 years later.
And, of course, with gas prices falling, some producers have recently capped their wells, waiting to sell into improved markets.
AN ESTATE PLANNING MOMENT
Perhaps surprisingly, because wells can produce energy for decades, these days DeFluri is telling his clients that they should consider today’s low gas prices as an opportunity.
“For estate planning purposes, if a client is looking to gift or set up a trust to pass the royalty interest on to heirs, valuing it at today’s low gas prices is the way to go,” DeFluri says.
Tax authorities require an appraisal when you give away assets that are hard to sell, such as mineral rights. Those appraisals are likely to result in far lower values today than they would when gas prices were higher, giving clients the ability to transfer these assets at a lower tax cost. That can be a worthwhile technique for clients with significant estates that include such rights.
The firm has also helped clients figure out the right price for right-of-way easements, when a gas company wants to pipe fuel through their land or access to build a compressor station. It is rare for these rights to produce a life-changing amount of income, DeFluri says.
Only a few clients own enough land to get five-and six-figure leasing bonuses and most collect hundreds, rather than thousands, of dollars in monthly royalties. But the income can be significant to a client’s life, helping pay for college, a wedding, a new car or a vacation. The main thing, DeFluri says, is that he wants to make sure his clients get a fair deal.
Of course, SevenBridge’s business is not exclusively about oil and gas rights. Far from it. DeFluri says that SevenBridge’s bread-and-butter clients are entrepreneurs. Middle-market businesses, which span everything from growing mom-and-pop shops to engineering and construction firms with 40 or 50 employees, are largely underserved, DeFluri says.
SevenBridge works with them to help solve both personal and business planning needs. Owners of small, privately held companies, for example, may have a significant amount of their net worth tied up in their businesses. When it comes time to tap some of that equity, DeFluri says, SevenBridge routinely brings in investment bankers and accountants to determine the best way to squeeze liquidity out of an otherwise illiquid investment portfolio.
Because many of SevenBridge’s clients are in their 60s and are either retired or close to it, structuring investment portfolios with an eye to producing income can also be important. SevenBridge’s investment approach is a simple one, DeFluri adds. The bulk of the firm’s clients have portfolios comprised of individual stocks and bonds, rather than mutual funds.
Why? It takes the mystery out of the portfolio, he says. With 30 to 50 holdings, you can track each company and construct a portfolio that can produce better-than-market income from interest and dividends. For the firm’s clients, “there’s a sense of security that comes from knowing exactly what you own,” he says. “Some of our clients have stocks that they’ve owned for 20 years, and they’re generating a rising stream of income.”
Kathy Kristof, a Financial Planning contributing writer in Los Angeles, also contributes to Kiplinger’s and CBS MoneyWatch. Follow her on Twitter at @kathykristof.