Themes from Q1 2020 Earnings Calls
Part 2: Mineral Aggregators
As discussed in our quarterly overview, the oil & gas industry took arguably its worst beating in history due to Saudi Arabia-Russia price war and demand destruction caused by COVID-19. Rather than restating the events and underlying economics behind the drastic downturn in the market, it would be more beneficial to read Part One of this series and cut to the chase with Part Two of the Q1 2020 earnings calls, which focuses on mineral aggregators.
Theme 1: Dividend Policies Varying Moving Forward
Participants and investors seemed to question aggregators’ current and future distribution plans, as this asset class is primarily a yield investment vehicle.
- “The $0.025 dividend payment reflects a payout ratio of 23% of pro forma free cash flow. It really is simply about getting back to a more stable economic and energy environment. I would expect that we’ll see our payout ratio return to its traditional level of 90% plus.” – Daniel Herz, President & CEO, Falcon Minerals
- “We committed to a 100% payout ratio through the first quarter, and we want investors to know that our word is important, and we remain committed to following through and doing what we said we were going to do.” – Robert Roosa, CEO & Director, Brigham Minerals
- “That resulted in us cutting the distribution to 25% of available cash. And I think it’s going to be a very fluid process. I can only really use the baseline of 25% for now.” – Travis Stice, CEO, Viper Energy Partners
Theme 2: Hedging: Defensive Strategies Leading to Limited Upside Exposure
Although mineral aggregators enjoy certain advantages relative to operators, their performance remains tied to commodity prices. As a result of the uncertain and volatile pricing environment, there have been difficult decisions made in regard to hedging. Some aggregators are hedged through 2021, limiting the potential upside of these investments if prices continue to increase.
- “We currently have a substantial portion of our oil and natural gas production hedged in the form of swaps going out two years with prices for oil averaging in the low $40s and natural gas averaging around $2.49 per MMBTU.” – Robert Ravnaas, CEO & Chairman, Kimbell Royalty Partners
- “Because of this market uncertainty and our concern that it may persist for some time, we have put in place substantial hedges for 2021 for both oil and has to further our already robust 2020 hedge positions.” – Jeff Wood, President & CFO, Black Stone Minerals
Theme 3: Aggregator Advantages Muted for the Moment
Unlike traditional royalty trusts, mineral aggregators reap the benefit of reinvesting capital to acquire new acreage. This advantage, however, has been paused as the M&A market is in a standstill due to the wide bid-ask spread between buyers and sellers. It will be interesting to monitor the performance of the aggregators closely if they are unable to benefit from their acquisition strategies.
- “Right now, our acquisition machine is silent for the foreseeable future. Now, mineral owners tend to be stickier with respect to perception of value, and there’s often less leverage in the mineral space. So, I think it’s going to be pretty quiet here for the next couple quarters.” – Travis Stice, CEO, Viper Energy Partners
- “The A&D market, as you might imagine, is pretty slow currently, but we expect it to pick up in the next, let’s call it, 2 to 6 months. From an M&A perspective, we plan to continue to fund our micro acquisition strategy at current depressed commodity prices and continue to be well positioned as a consolidator in the highly fragmented minerals industry.” – Robert Ravnaas, CEO & Chairman, Kimbell Royalty Partners
- “There will be production over time and likely growth over time. And so sellers’ expectations will remain, I think, relatively high and they’ll be patient. – Daniel Herz, President & CEO, Falcon Minerals