Themes from Q2 2020 Earnings Calls

Part 1: Mineral Aggregators

Current Events Special Topics

As discussed in our quarterly overview, the oil & gas industry experienced a volatile path to price stability as COVID-19 and the Saudi-Russia price war took a toll on supply and demand.  The road to recovery was apparent late in the quarter and was driven by supply cuts from OPEC+, curtailments by U.S. producers, and an increase in demand.  Mercer Capital has aimed to focus on the mineral aggregator space, most recently with the release of the second quarter mineral aggregator valuation multiples analysis.  In this post, we capture the key takeaways from mineral aggregator second quarter 2020 earnings calls.

Theme 1: M&A Activity Is Momentarily Taking a Back Seat

Although mineral aggregators have the reputation to seek acquisitions through reinvesting strategies, they seem hesitant to pull the trigger as the current environment is providing many challenges.

  • The world’s greatest deal would have to present itself, and that’s always possible.  But the world’s greatest deal would have to present itself, given where we’re currently trading. – Daniel Herz, President & CEO, Falcon Minerals
  • I think it’s fair to say that it’s always more difficult to get deals done when the bid ask spread is just so severe.  I mean, the volatility in oil prices kills deals.  I mean, it just makes it really hard to get things done. – Davis Ravnaas, President, CFO & VP of Business Development, Kimbell Royalty Partners
  • The balance sheet is most important, holding us back from M&A.  I mean, if we saw the best deal in the history of minerals, we’d have to think hard about it, but unfortunately those deals just aren’t out there. – Kaes Van’t Hof, President, Viper Energy Partners

Theme 2: Consolidation and Operators’ Stability Is Affecting Aggregators

As the difficult environment plays out, a number of operators will be forced to liquidate or consolidate, leading to opportunities for aggregators to work with new, and often financially improved, partners.  In Brigham Minerals’ second quarter earnings call, Ben Brigham expressed his excitement to have their assets migrate into the hands of Chevron, subsequent to the closing of Chevron’s acquisition of Noble Energy (expected in the fourth quarter of 2020).  As times are tough, aggregators assess the stability of their operators, and may be fortunate, like Brigham, to land a major partner.

  • We expect financially challenged operators to liquidate or consolidate with larger entities and those surviving operators will focus on drilling our highest remaining rate of return wells.  So I think that’s going to continue to play out – where you have a weak operator with the weak balance sheet, they’re going to get taken out by a stronger operator with a better balance sheet, and that’s going to benefit our asset base. – Ben Brigham, Founder & Executive Chairman, Brigham Minerals
  • Dorchester Minerals states that during the challenging environment they are observing the “Financial stability of our operators and lessees and paying increased attention to operator credit risk and revenue recovery.” – Dorchester Minerals Annual Meeting Presentation held May 18, 2020
  • What we have found to be very successful in times like this is that you need to be more of a partner with your operators now than maybe you do in really good times where capital is more available. – Jeff Wood, President and CFO, Black Stone Minerals

Theme 3: Natural Gas Optimism Is Increasing

It is pretty ironic that the industry is shifting its focus to natural gas, as it was viewed as a secondary asset not too long ago.  Although at a historically low price, it has shown consistency and resiliency during the first half of the year as opposed to greater volatility in oil prices.  Aggregators have not ignored this trend and seem optimistic about the future for natural gas.

  • We’re seeing increased deal flow in gas. A lot of Marcellus stuff is coming to market. – Davis Ravnaas, President, CFO & VP of Business Development, Kimbell Royalty Partners
  • While it’s been challenging to find many silver linings lately, one of them is a more constructive outlook for natural gas prices with several of our major equity research firms calling for gas prices well above the strip for 2021. – Tom Carter, CEO & Chairman of the Board, Black Stone Minerals
  • Furthermore, combining this competitive advantage with our robust hedge book and significant natural gas production, which has an increasingly positive macro outlook, provides even more enhanced cash flow stability into the coming quarters, as we emerge from this volatile period.  And I think some of our gas positions have been remarkably resilient. – Davis Ravnaas, President, CFO & VP of Business Development, Kimbell Royalty Partners

Theme 4: Balance Sheet Priorities: Preparing for the Worst, Hoping for the Best

It is no surprise that aggregators are paying close attention to their balance sheet positions.  Participants on the calls gauged their company’s balance sheet flexibility.  The aggregators remained confident that their ability to pay down debt and appease investors continues to be a priority.  This may come at a cost to some companies such as Black Stone Minerals, as they sold two asset packages in the Permian in June to strengthen their liquidity position.

  • In early June, we announced the sale of two asset packages in the Permian. Both of those transactions closed in July and brought in net cash proceeds of $150 million. That cash, together with the retained free cash flow from our operations, enabled us to reduce total debt by over $230 million or 60% from the end of the first quarter of this year. – Tom Carter, CEO & Chairman of the Board, Black Stone Minerals
  • We purposely reduced our acquisition activity in the latter half of the first quarter and largely through the entirety of the second quarter in order to preserve liquidity and maintain optimal balance sheet flexibility and thus position ourselves to capitalize on more attractive opportunities we expected in the second half of the year, that’s playing out well for us now. – Robert Roosa, Founder & CEO, Brigham Minerals
  • We will use the retained amount to strengthen the balance sheet by paying down debt of $2.5 million in the coming days. We continue to manage the Company in a conservative and prudent manner, especially given the risks and uncertainties in the energy sector and the broader economy so far this year. – Davis Ravnaas, President, CFO & VP of Business Development, Kimbell Royalty Partners