WM Market Reports

FEATURE: The Wealth Management Industry And The "Fracking" Phenomenon

Tom Burroughes Group Editor July 29, 2013

FEATURE: The Wealth Management Industry And The

The surge of energy wealth is welcome news for advisors seeking new populations of high net worth individuals.

The “fracking” revolution in energy has already gained a lot of media attention and even spurred Hollywood to make a film about it. The surge of energy wealth is welcome news for advisors seeking new populations of high net worth individuals. This publication takes a look. The editors here are grateful to researchers working with WealthMonitor, a firm tracking sources of wealth, for their help in contributing to this article.

Now that “fracking” has entered the vocabulary, the promise of immense riches to be generated by this technology hasn’t been overlooked by the North American wealth management industry. However, tapping the market is not as easy as it appears.

A number of wealth management houses have hired teams and opened offices in areas where the shale gas revolution is taking place. Earlier in July, for example, Baird bolstered its private wealth management business with the addition of seven veteran financial advisors from Wells Fargo Advisors at its newest office in Houston, TX. (That second office opened in April.) Other firms, such as Wells Fargo, BNY Mellon and Raymond James have made hires in cities such as San Antonio, Houston and Dallas. While not all of these hires are directly related to energy, it is hard to avoid the conclusion that the industry is having a positive effect on places that might once not have been on the wealth sector’s radar.

(The term fracking derives from hydraulic fracturing, a process of creating fractures in rocks and rock formations by injecting fluid into cracks to force them further open. This allows more oil and gas to flow out of the formation and into the well-bore, from where it can be extracted.)

One of the best-known fracking tycoons is Harold Hamm - the founder and chief executive of Continental Resources. It has tapped the formation of oil-bearing rock that sits beneath much of North Dakota and Montana. According to Forbes in March, Hamm is worth $11.3 billion, making him the 90th richest person on the planet, according to that publication’s annual ranking of the world’s billionaires. Other notable figures are Phil Anschutz and George Kaiser, with fortunes of $10 billion each (Forbes).

But the ripple effect of the fracking development is not just touching oil and energy businessmen and women. Hundreds, thousands of landowners – not all of them rich to start with – have gotten rich very suddenly due to mineral extraction deals.

"In the North Dakotas, San Antonios and Midlands, or parts of Pennsylvania, people who have never had any serious wealth before have recently got big royalty checks in their mailboxes,” said one advisor and former geologist in Texas, who asked not to be named.

And that point touches on a significant issue: not all of the people getting rich on this development are used to large amounts of wealth in a sudden windfall. It means firms prospecting for new clients, if they are mindful of their reputation, need to help educate recipients of sudden largesse, rather in the way of lottery winners.

In recent years, if you asked an industry practitioner where the hotspots for wealth were in North America, they’d probably point to the big coastal cities, or, perhaps, some of the smarter districts in between. And they’d also mention oil-rich Texas and some other places. What has changed, though, is that parts of the US that were thought of as in post-industrial transition or decline have got a big boost.

Big scale

The scale of what is on offer is not always easy to measure. According to one study, up to $65 billion of wealth had been created in areas west of Dallas as a result of shale gas and associated technologies. (This wealth was created from the Barnett Shale geologic formation, which was exploited and developed by a number of private companies.). Several other fields in south Texas, North Dakota and other places are much larger in size than the Barnett field. Three “mega-fields” in south Texas, west Texas and North Dakota now account for fully two-thirds of the oil and gas drilling in North America.

“The boom is having a transformational effect on communities and industry, it will improve the competitiveness of the US economy versus those of Asia and Europe, and may well alter the balance of global power. The US economy is being rebooted and recharged,” Poppy Allonby, managing director and co-portfolio manager of BGF World Energy fund and BGF New Energy fund, said in a recent note.

Late last year, data from the Bureau of Economic Analysis about the richest communities in the US showed that Midland, TX, was the second-richest, behind traditionally tony neighborhoods such as Bridgeport CT and ahead of San Francisco and San Jose, CA, homes to many a dotcom billionaire. And just as the software revolution of recent decades has been a big driver of the West Coast wealth sector – as chronicled by this publication in the past – now it might be the turn of the fracking millionaires.

A study issued a few days ago - via the New York Times - shows that parts of Montana and North Dakota have some of the fastest upward income mobility in the US. And fracking seems to be a reason why. 

What sort of people are making money?

“It is less about the old wildcatter types and more about engineers and financial engineers and lucky landowners these days,” according to Chad Watt, a reporter for Mergermarket in Dallas.

“Over the last 10 years, there has been a land rush proceeding,” he said, citing examples of landowners, and farmers, suddenly getting rich on the back of energy firms buying up the mineral extraction rights on their property.

The relative ease of securing such property rights has been one of the reason why the fracking development in the US has been relatively quick, he said. Well-drilling activity can be disruptive for nearby farmers, ranchers and residents, but private mineral ownership in the US helps ensure that the residents and land owners nearest to new develop see direct benefit from that activity, he said.


The impact on some once-modest locations can be immense.

For example, ten years ago, the relatively quiet town of Williston, ND, was an agricultural community with little more than 10,000 residents. The oil boom has led to the population trebling, low unemployment (3 per cent) and the highest wage inflation (13 per cent) in the US. This town plans to spend $625 million on infrastructure over six years to keep pace with the growth.

The American Chemical Council has estimated that companies plan $82.5 billion of spending on new chemical facilities along the Gulf and Eastern coasts, creating a further $194 billion of new economic activity including 1.2 million jobs and $20 billion in new taxes.

One way or the other, a lot of new wealth is likely to be generated as a result of fracking and not just in the US. (Countries such as the UK might be getting into the act.) Wealth managers should be on the alert to cater to the people getting rich from this development. 

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