Oil and Gas Mineral Interests Are in the Spotlight—And Institutions and Private Equity Teams Seeking Passive Income Have Noticed
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GOT MINERALS? Oil and gas mineral interests are in the spotlight—and institutions and private equity teams seeking passive income have noticed. Excerpted from June 2017 Copyright© Hart Energy Publishing LLP 1616 S. Voss Rd. Suite 1000 Houston, TX 77057 (713) 260-6400 1 OilandGasInvestor.com • June 2017 PHOTO BY KIMBELL ROYALTY PARTNERS LP June 2017 • OilandGasInvestor.com 2 ripe for consolidation, a favorite tactic for these investors. ARTICLE BY he meek shall inherit the earth, but not “Most of the big New York and Texas pri- LESLIE HAINES the mineral rights,” eccentric billionaire vate equity firms have a minerals team or strat- “ wildcatter J. Paul Getty famously said egy,” said Brice. RBC co-led the February IPO ILLUSTRATION BY T ROBERT D. AVILA decades ago. of Kimbell Royalty Partners LP. “The space is But in fact, after talking with close to a so fragmented … if you figure there is an aver- dozen individual investors, companies and age 20% royalty on every property out there, institutions that are buying minerals today, we that’s a lot to aggregate. It’s a great niche with can safely say minerals are having a moment. many different ways to be successful.” This asset class is undergoing modernization, Private equity provider Quantum Energy consolidation and greater visibility on Wall Partners has committed to backing minerals Street. Prices are rising. teams because as president D Verma said, A mineral interest creates cash flow out of “It’s an interesting asset class if you have the oil and gas production in the form of a royalty technical understanding of the rock and its payment, or “mailbox money.” Whether under likelihood of getting developed in a reasonable a single well or 10,000 wells spread across the time frame. While many see it as a separate country, minerals entitle the owner to receive asset class, we see it as an extension of our a payment for however long production con- core E&P franchise.” tinues. This passive income is pretty carefree, Several analysts who attended the NAPE too—tax-free to institutions. Expo in February noted a lot of interest in “The simplicity of a royalty is that it’s minerals, reinforcing the consensus view that a straight interest in a well with no costs much like drilling leases, the price for mineral attached,” said RBC Capital Markets Manag- rights is trending to record levels in the hottest ing Director Rick Brice. “There’s no call on basins. “There were even a number of buyers capital for drilling and completions, reworks, who suggested they would buy minerals in environmental liabilities or lease operating less attractive areas for the right price and sit expenses. By law minerals are considered on them, believing that drilling activity could real property just like real estate, so they are eventually follow,” wrote Neal Dingmann, E&P shielded from bankruptcy. You don’t have to analyst at SunTrust Robinson Humphrey Inc. worry as much, as long as you bought it well, Some of the entities bent on aggregating cost-wise.” these interests have massive buy-side oper- One private equity player said, “Minerals ations, noted Chris Atherton, CEO of online have been the oil industry’s best-kept secret.” auction house EnergyNet, which sells miner- Well, maybe not so much anymore. als. “Think about sending out 500,000 solici- Interest has grown rapidly due to several tation letters a year, to get 5,000 to respond, to factors. Sources cited Big Data, institutional acquire $5 million in royalty/mineral assets. attention in the space thanks to some mineral Hundreds of companies do this year in and IPOs, and a generational shift in who wants to year out. own—or sell—minerals. “Consolidating the space is the equivalent of Leasing and production data have become consolidating the blades of grass on your front more readily available from sources such as lawn. One, you typically have to cut one blade Preceding page, IHS Markit, Drillinginfo and online auction of grass at a time because you have so many in the vast houses, aiding mineral buyers. At the same unique owners; and two, more blades of grass Permian Basin, time, sellers have gotten more savvy, and are always sprouting up.” this rig is drilling for Parsley aggressive, about the value of their holdings. Institutional interest really kicked off in Energy Inc. in Specialized websites allow for sharing infor- 2010 or so when private equity funds such Upton County on mation; several software and consulting firms as EnCap Investments, Quantum, Apollo, acreage where Kimbell Royalty help owners manage their minerals. An esti- Blackstone Energy Partners and others began Partners owns mated 12 million Americans own a mineral funneling more dollars to management teams mineral rights. interest, but of course, not all of their acreage dedicated to aggregating minerals, adding to has been developed. their established stable of operating companies. Meanwhile, institutions are waking up “A huge amount of capital is out there chas- to the idea. They regard minerals as a big ing minerals, and private equity is all in,” said opportunity to own a low-cost, long-life Brendan Fikes, vice president and co-founder asset with yield. What’s more, the space is of Santa Elena Minerals LP, which is backed by EnCap. The latter has committed up to $1 billion in aggregate to the space, via Santa Elena and Fortis Minerals. properties, this extension made sense to us,” “We think we can generate PE-type returns,” he said. said EnCap Managing Partner Doug Swanson. Investors can also invest in minerals “We’re focused on buying minerals ahead of through other entities, and the number of new the drillbit on acres we think are very likely entrants to the space keeps growing. Last to be drilled. By maintaining our philosophy year The Mitchell Group and Jack Nichols of of only buying assets with the best economics, Redhawk Investment Group, both of Dallas, we can buy nonproducing minerals focused in formed the $58-million Redhawk Minerals the most attractive basins, and have confidence Fund I LP. It will acquire, own and adminis- those minerals will get drilled. By organically ter mineral interests in the Stack play in the growing this cash flow, we don’t have to com- Anadarko Basin, and through this new fund, pete with the very low yields that producing qualified individuals can get direct ownership minerals currently trade for.” of mineral rights. Swanson said there is definitely more com- Tudor, Pickering, Holt & Co. recently spec- petition today since minerals became compel- ulated in a research note that if Chevron Corp. ling for EnCap in 2013, when it began buying were to sell its minerals and royalties under these interests alongside a portfolio company, its vast Permian Basin leasehold, they might Felix Energy I. It was a logical move. fetch at least $6 billion. “The competition was becoming intense Then again, why would any E&P with min- Private equity “is all in,” said on the working interest side, and since we eral rights under the leases it drills want to Brendan Fikes, already had the title work done on these sell? By owning the minerals there’s no need co-founder of Santa Elena Sampling Of Minerals Teams Minerals LP. Company Fund Source $MM Comments/Focus Commitment Brigham Minerals LLC Pine Brook Partners N/A 4 basins, 32,500 net ac Brix & Harvest Royalties Blackstone Energy Partners $100-plus Haynesville Buckhorn Minerals III LP 22 investors N/A Multiple basins CrownRock Minerals LP Lime Rock N/A Permian Basin Fortis Minerals LLC a) EnCap Investments b) Multiple oily basins Haymaker Minerals KKR, Kayne Anderson N/A Multiple basins, has made 500-plus & Royalties LLC acquisitions (some over $100 MM) Live Oak Resource Partners I LLC Family offices 11.3 Natural gas Long Point Minerals LLC Canada Pension Plan 632 Permian, Scoop/Stack Investment Board , et al. Luxe Minerals LLC NGP et al. 254 7 oily basins MAP Royalty College endowments 2,000 Mavros Minerals II Post Oak Energy Capital N/A Permian Basin Red Hawk Minerals Fund I The Mitchell Group 58 Scoop/Stack San Jacinto Minerals LLC Lime Rock N/A Marcellus Shale Santa Elena Minerals LP c) EnCap Investments N/A Permian Basin Saxet II Minerals LLC Post Oak Capital 100 Multiple basins Senex Energy Partners LLC N/A Ark-La-Tex plays Springbok Energy Partners LLC NGP 100 Unconventional basins Stone Hill Minerals LLC Quantum Energy Partners N/A Appalachian Basin Royal Resources LP Blackstone Energy Partners 550 Eagle Ford Vendera Resources LP Families, institutions 200 Multiple basins a) Also manages assets of Phillips Energy and Sooner Trend minerals entities. b) EnCap’s total commitment to minerals is $1 billion, via Fortis and Santa Elena. c) Formerly known as OGX Holdings. Source: Hart Energy This partial list shows the breadth and depth of mineral buyers currently active. than 55,000 wells spread over 40 states. The technical staff works to pay royalties to anyone, thus the well eco- up prospects and makes sure nomics are much better. Diamondback Energy they are developed—over 1,000 Inc., Parsley Energy Inc., Luxe Energy LLC different operators are active on and Four Point Energy LLC are examples of its holdings. E&Ps that also buy minerals, or even maintain The reverberations from separate minerals companies. Viper’s IPO have been called Last summer, Four Point’s minerals cousin, The Viper Effect or “Viper- LongPoint Minerals, raised $632 million from ization” of the minerals institutions, including $450 million from the space. A handful of other Canada Pension Plan Investment Board. The minerals companies are said Tug Hill (upstream) management team backed to be working the dual track by Quantum, very active in the Northeast, also toward an IPO or sale later buys minerals via its Stone Hill Minerals LLC this year, indicating broad platform.