Oil and Gas Mineral Interests Are in the Spotlight—And Institutions and Private Equity Teams Seeking Passive Income Have Noticed

GOT MINERALS? Oil and gas mineral interests are in the spotlight—and institutions and private equity teams seeking passive income have noticed.

Excerpted from

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. Principals Michael and Evan Radler investor interest. have been buying minerals in the Lower 48 “The more generalist for decades. Stone Hill leverages the Tug Hill funds like KKR and Apollo team’s in-depth understanding of specific have developed a mineral “We’re focused basins and has accumulated sizable positions strategy in the last year on buying across not only Appalachia, but also the Perm- or two, and I strongly minerals ahead ian, the Denver-Julesburg and the Bakken. suspect we’ll see more. of the drillbit,” said Doug “Buying minerals is a different set of It does seem like this is Swanson, EnCap skills than buying a lease to drill. I think the gaining momentum,” Investments industry is just starting to understand the dif- said Frost Cochran, managing partner. ference,” noted Evan Radler, COO of both managing director, Post entities. “We don’t just pay a multiple—we do Oak Energy Capital LP. basin studies, engineering, petrophysics. We Post Oak has collected look at the regulatory climate and gas market- mineral and royalty inter- ing—it’s a multidisciplinary approach with a ests through the operating team that’s as deep as the E&P team.” companies it backs and if one of them sells, some Viperization of the mineral assets are In June 2014, the first royalty and minerals retained in its funds, a sort MLP of the modern shale era went public led of “shadow minerals strat- by Barclays: Midland-based Viper Energy Part- egy,” Cochran explained. ners LP, with an implied enterprise value of But now, Post Oak has a $1.8 billion. That caught everyone’s attention. more deliberate strategy via “This is a highly fragmented, large mar- the two mineral teams it’s ket that is ripe for consolidation,” said Mike backing, Permian-focused Ames, managing director of Raymond James Mavros Minerals II, and & Associates’ energy practice in Houston. Saxet II Minerals, which In February 2017, the company led Kimbell will acquire minerals Royalty’s IPO and before that, it co-managed throughout the U.S. In the IPOs of Viper Energy Partners in 2014 and February, Post Oak led a Black Stone Minerals in 2015. commitment of $100 mil- “Viper led it off and it went off with a huge lion to Saxet. bang,” he said. “Our phone was ringing off the “Endowments, pension hook after that because of its yield, its low cost funds, foundations and “This is a highly of capital and how much it traded up for sev- other institutions very much fragmented eral weeks after the IPO.” Viper attracted retail understand this. They’ve market ripe for investors but more importantly, institutions also been real estate investors consolidation,” bought in. for years so they understand said Mike Ames, managing When Viper held its first stand-alone earn- what a long hold period director, ings call this past February, it guided to pro- means, and they appreciate Raymond James duction of at least 8,000 barrels per day this that minerals are cost-free & Associates, which was year with seven rigs running on its mineral assets,” Cochran said. involved in three acres. A four-person team is out scouting for mineral IPOs. more (in fourth-quarter 2016 alone, it closed Minerals on Wall Street 13 deals for $68 million). About half its As institutional understand- minerals are under acreage being drilled by ing grows, that opens the IPO its parent, Diamondback Energy, or by RSP window for some. Earlier this Permian Inc. It owns an average 21% royalty year, Fort Worth, Texas-based on its Permian Basin acreage. Kimbell Royalty Partners went In May 2015, a second firm IPO’d, Hous- public after investing in this asset ton’s Black Stone Minerals LP. The latter class since the late 1990s. In 2013, traces its history to predecessor firms active it brought in Yorktown Partners in East Texas timber in 1876 and minerals to boost its capital. That and the in 1968, but today it has interests in more IPO infusion have augmented Fort

5 OilandGasInvestor.com • June 2017 Worth’s Kimbell Art Foundation and some 50 other institutions and family offices that invested in the company. since going public. Some 2,600 wells in five Today Kimbell owns mineral interests in states are included, acquired out of the bank- 48,000 wells, including 30,000 in the Perm- ruptcy of an E&P company. ian Basin alone. At press time, it announced Kimbell’s market cap is less than $350 mil- a $15.9 million purchase of mostly natural lion, so even a $10 million deal can move the gas producing minerals under 6,700 net roy- needle, said president and CFO Davis Rav- alty acres in the Anadarko Basin, its first deal naas. The MLP only buys long-life assets of

President Davis Ravnaas, right, and CEO Bob Ravnaas, left, said Kimbell Royalty Partners LP has invested in minerals since

PHOTO BY TOM FOX the late 1990s.

FebruaryJune 2017 2017 • OilandGasInvestor.com • OilandGasInvestor.com 6 must be valuable and that’s why you should keep them,” she said. “Someone in your family 20 to 30 years with shallow declines, in order worked hard, or traded, to earn those assets. to provide consistent yields. Some 24 rigs are Once you sell, they’re gone forever—but those drilling on its holdings at the moment, up from offers do spark a good conversation.” 15 last year, with the bulk of that increase in Nevertheless, more owners are selling as the Permian. prices rise. “If all these guys wanting to buy “The royalty space has grown dramat- minerals get capital, it’s going to be a crowded ically with the increase in U.S. oil and gas space and minerals will be over-priced in production,” said Ravnaas. “Many older a short period of time,” warned one private leases were written to pay a one-eighth or equity observer. 12.5% royalty, but with the shale boom, One mineral buyer who asked to be anony- companies were offering to pay 20% or mous complained it’s already happening. He 25%, so as the size of the industry more manages a small royalty fund for a few high than doubled and the opportunity set net worth individuals and finds himself increas- had grown much larger, we saw the need for ingly shut out—and he is skeptical about the more capital. returns on shale wells. “Seeing the success that Viper had gave “Not everything goes the way they say it us more conviction that what we were doing will. I think reserves as a rule are way over- “It does seem made sense.” billed,” he said. like this There are two main strategies in buying He cited the example of an Eagle Ford is gaining mineral interests. One is to buy “ahead of the opportunity for which he performed technical momentum,” drillbit,” to buy undeveloped acreage that the due diligence for a wealthy mineral buyer cli- noted Frost Cochran, buyer thinks will be drilled eventually. The ent. “I looked at the reserves, future drilling managing other, which is primarily what Kimbell does, plans in the area and so on. I got to an eval- director, Post is to buy only where production is ongoing. All uation of about $215 million, so I held my Oak Energy Capital, which of the company’s 4.5 million acres are HBP, nose and bid $230 million, but on the open- backs two and it never operates. ing bid round, one of the larger funds offered minerals teams. According to founder and CEO Bob Rav- $300 million.” naas (Davis’ father), more growth is ahead. What’s a mineral acre worth? It depends—an “We held back more than half our properties undeveloped one in Reeves County, Texas, may from the IPO and can use them as drop downs be worth more today than a producing one in to the MLP later. Acquisitions will still be the Eagle Ford. important as well; since 1998 we have closed People complain about “nosebleed pricing” on over 160 transactions.” in hot areas like the Delaware Basin or Scoop/ Even though Kimbell doesn’t drill or oper- Stack. “We hear that a lot, but we disagree,” ate, it has grown organically anyway for the said Kimbell’s Bob Ravnaas. past 15 years, Bob said, because it owns so “We buy on a discounted cash flow basis many minerals in hot areas where drilling has with no value given to nonproducing acreage. picked up and this offsets natural declines else- We do very detailed geology and engineer- where. Its first mineral acquisition in 1998 was ing to identify the potential upside on future in the Permian Basin. proved development, and we have a very disciplined, thorough screening process—I Nosebleed valuations would say we might get excited on only 5% Minerals have become such a highly prized of the properties we see.” asset that traditional, smaller buyers and fam- Oddly, minerals basically trade at the same ily offices are getting squeezed out. Buyers can value as working interests do, pointed out son make offers on either producing or nonpro- Davis. “You’d think a working interest would ducing assets with a wide spectrum of value, go for a lower price, but in the last few years noted Robert Ransone, partner in SRD Capital they seem to trade at almost the same level. Advisors LLC in Dallas. The firm’s partners We feel there is less competition in the min- have financed oil and gas for E&Ps for years, erals space than in working interests, for deals but now they are helping institutions looking to in the $5 million to $50 million size range.” invest in the space. Post Oak’s Cochran said when buying miner- A mineral team with a large technical staff als ahead of the drillbit, he essentially takes on has engaged SRD to raise $500 million, to be the risks of the operating companies involved, spent over the next few years, he said. their capitalization and plans for drilling. The If producing, minerals generally go for three pace of development is a key risk. to five years’ cash flow, but that’s a back of “We try to develop a sense of the timing of the envelope number because so many other development in the area, and because we back There’s ample things factor into it, said former landman Diana operating companies too, we tend to know opportunity in Frazier, principal of Guardian Mineral Man- a lot about the area. We try to stay invested minerals, but agement and Consulting in Fort Worth. She across a number of operators and not in buyers have helps mineral owners to buy, sell or market just one section of a county. We have to be to solve for many variables, unleased mineral acres to E&Ps that might get right about the geology and the way the play said Quantum them drilled. is developing. Energy Partners’ “My first recommendation to mineral own- “At the end of the day, we do an NPV anal- managing director, ers is usually to keep what you have. If an oil ysis across a range of outcomes, taking into Tom Field. company wants to buy your minerals, then they account the number of productive benches,

7 OilandGasInvestor.com • June 2017 risk-adjusted for how far out you are from the mineral packages is a lot of work, the oppor- last well drilled in that area.” tunity set merits the effort. “There’s ample Haymaker Minerals & Royalties CEO opportunity out there, but you do have to Karl Brensike noted at Hart Energy’s DUG solve for many variables in your analysis. You Permian Basin Conference in Fort Worth that need to marry the technical aspects and eco- investors used to think the value of royalties nomics of a play with knowledge of the oper- hinged mainly on an increase in commodity ator, and then form a view on timing, among prices to hit their target returns. Although this other things to consider.” is an important consideration, today minerals are valued based on the future production out- A generational shift look—drill or no drill, and the timing of same. Why the sudden flurry of competition, Discount rates are wide and are a means of which sources say picked up steam in the measuring risk. “If I’m going to have a rig on past three to five years? Experts cite several this tomorrow, then the discount rate I’d pay trends that have converged to fuel the height- is lower. If I think it won’t get drilled until ened interest in aggregating mineral rights. later, the rate will be higher,” said Quantum’s First, there are the aforementioned IPOs that Verma. “A key element here is patience; this drew attention to the concept. Second, inves- is not a buy-and-flip idea.” tors are leery of soaring lease prices in hot His colleague, Managing Director Tom plays—maybe minerals cost less and have Field, agreed, adding that while investing in more upside. PANHANDLE’S PERPETUAL OPTION

anhandle Oil and Gas Inc., based in Oklahoma City, was one of the first public companies to focus on minerals, with assets dating back to 1926 when it was formed as a mineral owners’ co-op in POklahoma’s Panhandle region. Last year it celebrated its 90th anniversary. “You won’t find a comparable public company out there,” said president and CEO Paul Blanchard. When Panhandle went public in 1979 and converted to a traditional C-corp, the co-op owners received shares, and the company began to retain cash flow to reinvest in more minerals. It made substantial acquisitions from 1979 to 2001, especially during industry downturns. Today it holds 255,000 net mineral acres in 10 states with ownership in 6,200 wells, including in Panhandle Oil resource plays such as the Scoop/Stack, Eagle Ford, southeast Oklahoma Woodford Shale, Fayetteville and Gas Inc. holds mineral Shale and Permian Basin. In 2011 and 2014, it acquired some leasehold, as an operating company would, acres in 10 but the vast majority of its holdings are minerals in Oklahoma, Texas, New Mexico and Arkansas. It does states and 6,200 wells, president not operate. and CEO Paul Blanchard said. “If you own the minerals, you theoretically own them to the center of the earth—but we haven’t had a proposal to drill that yet,” Blanchard said with a laugh. “We generally own 5% of a drilling unit and have the royalty, but where it’s economically viable, we also take a working interest in wells drilled on our minerals by investing cash flow from our existing wells,” he said. Ever since leasing in resource plays became so competitive, Panhandle has been packaging up acreage in the expansion areas of hot plays with multiple horizons such as the Permian, Woodford Shale and Scoop/Stack, leasing those to operators who will drill. “A lot of our leasing is to PE-backed operated and nonoperated companies.” Blanchard said the company historically has not sold any of its minerals. “In essence they are a wonderful perpetual option on the increase of industry knowledge and technology over time. We have acres in the Stack that were first drilled in the 1950s and ‘60s; then in the ‘80s they drilled different zones, and now, they are drilling in a completely different zone thanks to horizontal technology and high-volume fracking. In the Stack area there’s a possibility of as many as 10 different producing intervals. “Since we own the rights in perpetuity, we don’t need to go drill when it’s not economic. We’re not compelled to drill in three years to HBP a lease. Even though the downturn was painful, it was not a near-death experience for us like it was for some.”

June 2017 • OilandGasInvestor.com 8 any control over the drilling pace. That’s one reason why many such firms said they invest Third is demographics: A great generational in minerals only where they already back an shift is setting up opportunities as families E&P operating team with local expertise. decide to monetize their minerals. Most of Then too, the average mineral acquisition these date back to the 1930s, ’40s and ’50s size is small, under $20 million, so it takes a when present-day producing regions got their lot of time and effort to gather a meaningful start during booms in Appalachia, the Permian amount. Basin and Oklahoma. Nevertheless, New York’s Blackstone Energy Mineral heirs have oft declared, “Daddy Partners is one of the larger players involved. said, ‘Never sell your minerals.’” “We view this as a second bite of the apple,” But the children of those first owners are in said CEO David Foley. their 60s now; the grandchildren are in their “We take our first bite with the producers 30s or 40s. Many have concluded they don’t we back, but we see no reason not to acquire want to manage minerals anymore, even as minerals. Many of the producers in our port- comforting as it is to get that mailbox money. folio have their day job as operators, but we And for some, the recent industry downturn also ask them to acquire minerals too. And, we that caused much smaller monthly checks—or have hired a couple folks who do nothing but none—soured them on minerals. buy minerals.” “It’s a very busted up ownership group of Foley said, in general, buying minerals on Blackstone Energy Partners third and fourth generation people who don’t “pre-production” acreage is more interesting CEO David Foley want to deal with all those 1099s,” said one than buying under PDP. Blackstone’s philos- views backing mineral buyer. ophy: “There’s what you think you know, and mineral teams as taking “a “You couldn’t buy minerals at scale like this then what you do know once you’ve been in a second bite of 20 years ago, but now, it’s a desire for liquid- basin for a while.” the apple” that ity and having the ability to sell the minerals. Blackstone has invested several hundred mil- complements backing operating To diversify is attractive to a lot of heirs. It’s a lion dollars in royalties over the past five years, companies. succession and estate planning tool,” said Kim- Foley said, including more than $500 million in bell’s Davis Ravnaas. the Eagle Ford, where it was already a signifi- This highly segmented or fractured state cant investor in one of the leading local opera- of affairs, replete with chasing down that last tors there, GeoSouthern Energy Corp., prior to cousin, can make aggregating mineral interests the latter’s sale to Devon Energy. into a meaningful size a tedious and time-con- Subsequent to the acquisition of its Eagle suming process indeed. Ford royalty interests, Blackstone engaged Another driver of interest in minerals? Insti- Riverbend Energy LLC to manage that portfo- tutions and retail investors have a huge appetite lio on its behalf. Blackstone also backs mineral for yield and passive income, especially since teams in the Haynesville and Permian. many of the upstream MLPs fell into distress One source said that the best entities to back during the downturn. Investors frequently mineral teams are the PE funds based in Texas, include oilmen who have made a lot of money precisely because they see a constant stream of in their careers and want to extend their involve- measuring points while running due diligence ment in the industry after retirement or a big on operating opportunities in every basin for payday, but without the hassle and expense their E&P portfolio companies. Their geologi- of operating. cal and engineering expertise on specific plays “These executives still get to use their skills is the key because they often know where the though, in knowing where a particular area or drillbits will be turning next. play is going to work,” said one observer. Nevertheless, big financial institutions and generalist private equity funds from New York Private equity’s take or Boston are in the game, as investors search By some accounts at least 20 minerals for yield in new vehicles other than MLPs. teams are backed by private equity, with com- “Our bread and butter comes from backing mitments totaling $4 billion. However, some PE firms have struggled with the idea because owning a mineral interest doesn’t allow them

9 OilandGasInvestor.com • June 2017 operating teams, but we’ve always looked at minerals and will, whether we have a dedicated strategy to that or not,” said Post New entrants abound Oak’s Cochran. Today most mineral buyers are more “We view mineral opportunities as a steady sophisticated than ever before, applying hand, and these are our longest-held assets. financial and engineering backgrounds to up If we can create value for our investors from their game. Many come from the operating or owning some minerals, we will. But we model investment banking worlds. a perpetual hold and valuations are not based Vendera Resources is a good example. The on an exit value.” Dallas firm closed its third fund in October The pace of drilling activity and full devel- 2015 with multiple endowments, registered opment affects the NPV. But it’s more difficult foundations and family offices. to model a value when the pace of drilling is “These are good, ‘sticky’ financial sponsors slow, where fewer rigs or no rigs are on loca- that we’re glad to have with us. Now we’re tion. “Hope springs eternal if you own miner- putting that money to work—we’re in two Vendera als in an area, but where no rigs are running,” PSAs right now,” said CEO Wood Brook- Resources is Cochran said. “You always hope to see a play shire, who co-founded the firm at age 29 after investing in minerals through gradually head your way. a career in investment banking and family its third fund “I bet we have seen 15 or 20 minerals-fo- office investing. with multiple cused firms that have presented to us, but He began in 2012 backed by five family institutions and family offices, we’re backing two. Some are backed by pri- offices including his own. A second fund was said CEO Wood vate equity and some are family offices.” backed by a dozen family offices and one Brookshire.

PHOTO BY TOM FOX

June 2017 • OilandGasInvestor.com 10 If consolidation is ahead, EnCap- backed Fortis Minerals is on board. It manages seven mineral entities including its own, said CEO Chris Transier. PHOTO BY MIEKO MAHI

institution. In a third fund, he went directly who founded Felix in 2013.) Fortis also man- to institutions and expanded his family office ages minerals acquired under the names of Phil- investor base as well. The goal is to create lips Energy Partners (another EnCap company), a low-double-digit annualized return and a Chisos Minerals and Sooner Trend Minerals. consistent quarterly distribution, with low- “If you successfully put together a minerals cost upside, he said. Vendera owns minerals, portfolio, you then have a cost-free exposure nonop working interests and some operated that withstands the commodity price cycle— working interests, although it does not operate you’re not pressured to drill in a low-price wells; rather, it aligns with operating compa- cycle,” said CEO Chris Transier. Web Extra nies, he said. “Probably the biggest challenge in buying “Our goal is to have at least a quarter of our minerals compared to being a traditional E&P fund in minerals and royalties. We love it— is that you have to have conviction on when we’re in 10 states and have mineral and royalty things will be drilled, so we spend a lot of time interests in over 1,000 wells. It’s a very safe bet on that. We’re looking at what E&Ps say pub- when owning these interests.” licly, interpreting what they’ve filed of record, To hear from four additional A lot of the deals Vendera buys are what looking at well permits and lease obligations. minerals buyers recorded live, visit Brookshire called “messy or complicated, so By analyzing these sources and others, you can OilandGasInvestor.com/ we really roll up our sleeves to understand craft a story—from the start we’ve taken a big minerals each property.” Last December the company data approach,” Transier said. bought out a large public E&P in the Anadarko Live Oak Resource Partners LLC in Hous- • Will Cullen, Vice Basin, picking up 197,000 net acres, comprised ton is another such company. President President, LongPoint of three buckets: royalties, working interests Andrew Keene, a former investment broker Minerals LLC and nonops. It now has about $200 million of who at the moment has a natural gas focus, assets/capital under management. started the fund last year with a target of rais- • Karl Brensike, CEO, Brookshire also sees increased competition ing $10 million, “to prove our intent and strat- Haymaker Minerals for minerals, so he remains flexible, thinking egy was real.” He closed at $11.28 million. & Royalties LLC some have gotten too expensive. “It’s all about “Our model is a bit different. We won’t relationships, and you’ve got to have your ear go up against these big guys; we’ll negotiate • Brendan Fikes, Vice to the ground, whether you’re buying from a with landowners and mineral owners directly, President, Santa Elena mom-and-pop, a landman or a mineral broker.” aggregate mineral interests, and eventually, Minerals LP If consolidation of minerals teams is on the we may sell it all to a larger company,” Keene horizon, for EnCap-backed Fortis Minerals said. “In the meantime, we’ll distribute the • Holbrook F. Dorn, in Houston, that’s happening now. It manages royalties to our LPs.” Senior Vice President, seven mineral entities, including its own. Fortis To be sure, minerals have become a more Business Development, partnered with Felix Energy about a year ago to exciting asset class that will only continue Black Stone Minerals LP manage its minerals when Felix sold to Devon to garner a lot of interest, all of our sources Energy. (Fortis’ chairman is Skye Callantine, said. M

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