Energy Valuation Insights Themes from Q3 2020 Earnings Calls
Part 2: Mineral Aggregators
Last week, we reviewed the third quarter earnings calls from a select group of E&P companies and briefly discussed the macroeconomic factors affecting the oil and gas industry. In this post, we focus on the key takeaways from the mineral aggregator third quarter 2020 earnings calls.
Theme 1: M&A Activity Is Heating Up
The mineral aggregator space seems to be following the same M&A pattern as E&P operators as of late. Relative to the first half of 2020, consolidation efforts are increasing as aggregators are focusing on potential acquisition opportunities. Industry participants, however, continue to notice a wide bid-ask spread as sellers are often unwilling to sell at current prices.
- “I would say that, in terms of overall deal flow, we’re seeing a tremendous amount of deal flow. If anything, our deal teams are busier now than they ever have. What I would say is that the competition today isn’t necessarily with other mineral companies, but in often instances, we refer to kind of reservation price and that’s the seller’s willingness to part with those minerals.” – Robert Roosa, Founder & CEO, Brigham Minerals
- “We’ve been active on the M&A front. We’ll still look at acquisitions. We’re still working around the clock on acquisitions or submitting bids. It’s just more challenging. I mean I think that sellers in this environment need to adjust expectations when the public companies, they’re supposed to be the lowest cost of capital trade down so dramatically, us and our peers, that should trickle down to the sellers.” – Davis Ravnaas, President, CFO & VP of Business Development, Kimbell Royalty Partners
- “There’s billions of dollars of minerals held within private equity firms as well as family offices. But in places where they’re not meant to be held over the long term. And I think you will see consolidation in the space. And I think there’s an opportunity for value creation as a result of that.” – Daniel Herz, President & CEO, Falcon Minerals
Theme 2: Curtailment Situation Affects Aggregators Differently
Production curtailments continued in some basins, like the Bakken, in the third quarter, while other well curtailments were reversed and put back online in the Permian and Eagle Ford. Some aggregators had the benefit of being active in certain basins where the curtailments were lifted, and others were not so fortunate but remained optimistic that their wells would be back online by the end of the year.
- “We believe, as of the end of September, all of the curtailed wells are back online and are producing to our benefit, with the barrels of oil selling at substantially higher prices that existed during the curtailment period. Very good news for us all. While the third quarter had limited wells turned online, which is consistent with what we had expected and previously discussed, activity has begun to pick up.” – Daniel Herz, President & CEO, Falcon Minerals
- “Production curtailments, which were put in place by many operators during the height of the pandemic earlier this year, were largely reversed in the Permian and Eagle Ford during the quarter. However, curtailments were still largely in place on our Bakken assets during the third quarter. We are hopeful that these will reverse in Q4 of 2020 due to improved differentials in commodity prices.” – Bob Ravnaas, President, CFO & Chairman, Kimbell Royalty Partners
Theme 3: Natural Gas Continues to Spark Interest
Natural gas has shown its ability to remain somewhat stable during a difficult price environment. The commodity’s price stability along with the favorable outlook has aggregators interested. The participants recognize natural gas as an important asset in their portfolio and express their optimism in gas prices moving into 2021.
- “There’s already some optimism in natural gas with ’21 forward prices over $3 in MMbtu. And the recent underinvestment in oil projects, both domestically and abroad, combined with the lessening influence of OPEC is setting the stage for an oil rally once demand recovers.” – Tom Carter, CEO & Chairman of the Board, Black Stone Minerals
- “In addition to our gas weighted daily production, we also have a significant amount of future drilling inventory located across the major natural gas basins in the U.S. with a concentration in the core areas of the Haynesville and Marcellus.” – Bob Ravnaas, President, CFO & Chairman, Kimbell Royalty Partners
- “As Bob laid out a few moments ago, natural gas price futures are projected to be up approximately 50% in the next 12 months as compared to the average prices over the last 12 months, which could generate a significant improvement in cash flow for the company.” – Davis Ravnaas, President, CFO & VP of Business Development, Kimbell Royalty Partners
- “And just when we thought gas was dead, of course, natural gas prices are above $3 and that’s a great call option for us. And we have two rigs running across our acreage position. And we have a nice amount of gas.” – Daniel Herz, President & CEO, Falcon Minerals
Theme 4: Banks and Balance Sheets
Banks seem to be uneasy with E&P companies’ lending situations, which trickles down to the aggregator space. A continuing trend among E&P operators and mineral aggregators is the effort to shore up the balance sheet to create a healthier company and maintain positive bank relationships during the current uncertainty.
- “In addition, the balance sheets of many operators are strained and as we go through the fall borrowing base redetermination season. Bank and equity markets remain closed for most E&P companies. This plus a renewed focus on cash returns instead of simply production growth, has limited new drilling capital across Lower-48, which obviously impacts our production levels.” – Tom Carter, CEO & Chairman of the Board, Black Stone Minerals
- “I mean, you’ve seen obviously, the banks have had a tough time with energy companies through this down cycle. We want to be as low touch as possible with those banks.” – Kaes Van’t Hof, President, Viper Energy Partners
- “We’re not interested in using cash in this environment just given the fact that we’re really focused on cleaning up the balance sheet as much as we can and we don’t want to do an equity raise at an unpalatable discount right now to raise the cash.” – Davis Ravnaas, President, CFO & VP of Business Development, Kimbell Royalty Partners
