Favorable M&A Outlook
Transaction volume was largely muted throughout 2020 as the depressed pricing environment drove bid-ask spreads wider. Buyers were offering what they believed was supportable based on current market conditions, and sellers were convinced that their assets were being undervalued. This led to sellers holding onto assets for dear life unless they were forced to liquidate. As mineral aggregators have the reputation to reinvest capital, participants on the earnings calls were intrigued to learn about their strategy in what many believe may be a price recovery environment.
- “We had a stock price where we didn't really feel like the equity was a usable acquisition currency, and I think sellers still had higher expectations than the environment warranted. And so with prices and equity recovering, and frankly where sellers were sitting on those assets for another 12 to 18 months, we think the environment is just getting much more constructive.” –Jeffrey Wood, President & CFO, Black Stone Minerals
- “Since the third quarter of last year, we've continued deploying capital to mineral acquisitions and believe the assets we've acquired over the past three quarters will generate differentiated performance over the next several years. We will continue to employ our disciplined underwriting of deals to enhance shareholder value and at the same time see more of our acquisitions internally funded via retained cash.” –Bud Brigham, Founder & Executive Chairman, Brigham Minerals
Hedging
Hedging strategies differed among the aggregators. Some companies, like Black Stone and Viper, executed hedges that mitigated risk in 2020, but have been a detriment to recent financial performance. On the contrary, Brigham Minerals stated that their hedging portfolio was minimal which allowed them to participate in the positive pricing environment seen in the first quarter.
- “As most of you are aware, we have always been active hedgers of our commodity risk. Those hedges benefited us greatly last year when prices cratered, but also tempered the impact of the dramatic rise in prices for us during the first quarter.” –Jeffrey Wood, President & CFO, Black Stone Minerals
- “First, we did not need to panic at any point during the rollercoaster year of 2020 and execute hedges, which today are currently serving as strong headwinds to numerous companies in the energy space. Here at Brigham, we are managers of a premier mineral portfolio, non-commodity traders and we prefer to give our investors full exposure to the commodity.” –Bud Brigham, Founder & Executive Chairman, Brigham Minerals
- “Also, we believe our hedging strategy is a prudent methodology for managing the company’s future price risks on oil and natural gas. Having substantial hedges in place on a rolling two-year basis before the price shocks that occurred in 2020 proves to be a very effective risk mitigation strategy.” –Davis Ravnaas, President, CFO & Chairman, Kimbell Royalty Partners
- “We had a lot of ‘21 hedges put on this year that are unfortunately, underwater because of the recovery. But I think as you think about 2022 and beyond, putting some sort of floor under the low end of distributable cash flow is something we’re thinking about.” –Kaes Van’t Hof, President, Viper Energy Partners
Debt Situation
Aggregators continued to pay down debt and improve liquidity, which was a major priority heading into the new year. Relationships with lenders was a concern during 2020, but Jeffrey Wood, President and CFO of Black Stone Minerals, stated that the company was able to execute a favorable extension to their existing debt facility. This is a positive sign for the industry moving forward. Aggregators will continue to allocate free cash flow between debt paydown and shareholder return as the year progresses.
- “After the end of the quarter, we finalized an extension of our existing revolving credit facility last week. We added 2 years to the maturity date of that facility, which is now November of 2024. It's been a very difficult bank market over the past year, so we're really happy to get this extension done with relatively minor modifications to the terms of the facility and we appreciate the continued support from our long-term lending relationships.”–Jeffrey Wood, President & CFO, Black Stone Minerals
- “As we have done in previous quarters, the company utilized 25% of its Q4 2020 cash available for distribution to pay down a portion of the credit facility in Q1 2020. Since May 2020, the company has paid down approximately $25 million in debt by allocating a portion of its cash flow to debt paid down. We expect to continue to allocate 25% of our cash available for distribution for debt pay down in the future.” –Davis Ravnaas, President, CFO & Chairman, Kimbell Royalty Partners
- “As a result, Viper generated almost $55 million in net cash from operating activities, which enabled us to reduce debt by $27 million during the quarter. We have now reduced total debt by over $136 million, or roughly 20%, over the past 12 months.” –Travis Stice, CEO, Viper Energy Partners
Conclusion
It is safe to say that sentiment among the participants was positive in the first quarter earnings calls, especially relative to last year. Aggregators seemed to grind through 2020 and flip the script for a new year. Although a price recovery may be in sight, challenges remain, specifically with the Biden Administration taking office. The calls largely glossed over political implications of the new administration but those issues may come into focus as the year unfolds.
Mercer Capital has its finger on the pulse of the minerals market. An important trend has been the rise of mineral aggregators, which have largely supplanted the trusts as the primary method of publicly traded minerals ownership. Contact a Mercer Capital professional to discuss your needs in confidence.
