Sick of worrying about your surface leases becoming worthless if an oil and gas company goes broke?
An investment company wants to buy them from you.
“This is a good time (for us to buy and farmers to sell) because there are a lot of defaults,” said Stephen Johnston, a partner in the company that owns Surface Capital, which is offering to buy oil and gas leases in Saskatchewan and Alberta.
“We think it’ll be well-received by the farming community because they clearly will not want to manage the next three years of constant defaults by oil and gas companies.”
Surface Capital is trying to amass a portfolio of surface leases and hold it as an investment for its shareholders. It is offering to buy the lease from the farmer, rather than the land, for an up-front price.
The company would then collect the lease payments from the oil and gas company that originally signed the lease.
At the end of the lease, the oil and gas company would still be responsible for reclaiming the land and returning it to the farmer.
The company has lots of business it could do, considering there are about 700,000 leases in Saskatchewan and Alberta estimated to be worth $10 billion.
Johnston said the current lease defaults are a good opportunity for his company to get into an almost non-existent market for lease rights.
Many farmers are getting anxious that they could suddenly face a payment suspension if their lessee goes broke.
The company says there is also an advantage in receiving an up-front payment for lease rights because the farmer will likely be able to claim the money as a capital gain rather than as income, which is how lease payments are regarded.
Surface Capital sees the leases as a good investment because it can combine hundreds or thousands of them to create an aggregate risk far lower than that held by a farmer, who might see a 100 percent loss of payments.
The reclamation obligation remains with the oil and gas company, Johnston said. If the company goes bankrupt, reclamation costs should be covered by the bonds and orphan well funds that already exist.
Johnston’s management company, Rhocore Investment Trust, controls smaller companies with about $300 million invested in farmland, oil and gas and private equity.
Agcapita, which Johnston heads, is a Registered Retirement Savings Plan-eligible farmland investment fund with about $100 million invested in Canadian farmland.