Are all mineral buyers the same?
With the announcement of Longpoint Minerals II securing $802 million to purchase Oklahoma (and Texas) mineral rights and royalties, the froth will return to the marketplace after a few months of reprieve. It is not uncommon for a tract of minerals to be bought and sold three times in a short period of time within the SCOOP or STACK before ending up with the end buyer. The supply of mineral acreage is finite. The billions to deploy in a relatively small geological fairway encourages many participants to enter the mineral trading ecosystem. This article will address some characteristics of each of the participants.
There are more opportunists in the game than anyone else. Due to the variability within any large sample, Opportunists come in all colors. The category, in general, can be defined as individuals or companies whose desired endstate is to locate and negotiate a smaller mineral purchase transaction while simultaneously negotiating the sale of the same tract to another buyer and preferably for more money. Business models vary slightly, some opportunists just broker transactions for a commission, some will assign their purchase and sale agreement for a fee to the end buyer who will fund and close the trade, and other opportunists will fund their own closing and obtain title before marketing and flipping the acreage.
The companies who discredit the category as a whole are those who contract for the sale of minerals and then fail to close. Either because they don’t have their own funds or they were unable to obtain an agreement to flip the acreage. Many Opportunists mail letters to mineral owners at highly inflated prices with no intention to close. Once the mineral owners engage with the Opportunists, the prospective buyer will drastically lower the offer. These kinds of actions understandably frustrate the original sellers. This conduct also muddies the waters for potential future buyers as they have to contend with the residue of past negotiations and unrealistic price points set by the original Opportunist who didn’t have the funds to close anyways. If sellers insist the buyer have some skin in the game, these kinds of activities are less likely to occur. For seller’s, purchase price should be just one of the factors to consider when selling minerals. The opportunity cost can be very high to have one’s minerals tied up for a few months just to have the Opportunist back out at the last moment. Timelines for closing, contingencies, and most importantly, the buyer’s willingness and ability to close are also important to contemplate when selling a mineral property.
Private Mineral Companies
The next step in the mineral trading food chain are private mineral and royalty acquisition companies (disclaimer: this is how Berlin would classify her business). These are usually smaller operations that consist of sole proprietors or at most a few partners or family members that conduct the day to day affairs. Most do not raise outside money and thus are usually not active buyers in the core of the SCOOP and STACK. These companies are content to buy producing minerals for a reasonable multiple of current cash flow and non-producing property on the fringes or in front of a developing play. Deal flow is sourced by word-of-mouth and select Opportunists. Most pay the bills from a combination of producing royalties and lease bonuses.
Aggregators generate most of current high dollar deal flow in the SCOOP and STACK. Like the Opportunists, they are rarely buying to hold for their own account, but unlike Opportunists, they close the trades with their own funds. Most have relationships with the private-equity or institutionally backed mineral company that provides them with exclusive rights to generate deals in certain geographical areas with an established price point in which to sell their minerals to the larger company. They are paid either on a commission basis or they may be allowed to keep the spread between what they paid for the mineral property and the price set by the end buyer. Aggregators are aggressive in generating deal flow and fill their funnels with leads from call centers, direct mailings, full-page newspaper ads in the county seat’s paper and of course personal relationships with others in the ecosystem.
Private Equity and Institutionally Backed Mineral Companies
The current end buyers of high-value mineral properties in Oklahoma are private equity and institutionally backed mineral companies. Longpoint, mentioned above, is dominant in the space, but other companies like Fortis Minerals, Luxe Minerals, and Haymaker Minerals and Royalties also compete by spending large amounts of other people’s money. These companies can pay a premium for interests in the core areas of the plays due to their lower cost of capital and the longer times horizons for their funds. From a layman’s view of prices, these companies must be modeling the substantial development of multiple geological targets in order to see a return on their investment. From a prospective seller’s point of view, it can be argued that currently, no company will pay more for your interest than one of these firms.
Publicly Traded Mineral Companies
There are a few publicly traded mineral companies. Most seem to be above the fray of the day to day transactions taking place in across the state. Instead, companies like Black Stone Minerals will buy large deals from other large companies, both public and private, that are either divesting their minerals entirely or of assets located in a specific basin. They seem to make a splash on the newswire once or twice a year with an acquisition of $100m+.
While most exploration and production companies focus their acquisition dollars and efforts on leasing, some firms are finding it advantageous to purchase minerals in sections where they are likely to drill wells. One of the quickest ways to boost the economic returns of the well is to have fewer expenses. There are few items on the well ledger that are as expensive as the royalty burden of a lease. Look to see more companies attempting to acquire mineral acreage in operated units especially if the company is planning to density the section in the near future.
Please comment below or contact Berlin with any more questions about the types of mineral buyers or if you would like to sell your Oklahoma mineral rights.
More to follow,
(This post was first published on Oklahoma Minerals on 5 July 2018)