Corporate Valuation, Oil & Gas

March 8, 2021

Themes from Q4 2020 Earnings Calls

Mineral Aggregators

Last week, we reviewed the fourth-quarter earnings calls for 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 mineral aggregators' fourth-quarter 2020 earnings calls.

Status of M&A Activity

Transaction activity was quiet for the majority of 2020 as commodity prices plummeted and companies entered survival mode.  Aggregators explained that the bid-ask spread between buyers and sellers was wide throughout the year, but some believe that 2021 will offer a more active M&A environment due to their favorable outlook of an industry recovery.

  • I think what we saw in late '19 and all of '20 is that the sellers, many of whom had acquired their assets in a different commodity environment and more active M&A environment, more expensive M&A environment, frankly. We're not looking to part with those assets in a cheaper, less expensive, less active M&A environment. And so, you just – you had a bit of a mismatch between sellers and buyers who had had their cost of capital beat up pretty hard. – Jeffrey Wood, President & CEO, Black Stone Minerals
  • The acquisition market was slow in 2020 as sellers did not want to part with assets at low prices, buyers were dealing with the high cost of capital and limited new capital availability and/or unwillingness to take on additional debt. – Tom Carter, CEO & Chairman of the Board, Black Stone Minerals
  • When you look at the buyer and the seller, where you had an unsustainable, for example, commodity price period, it makes it more difficult for either the buyer or the seller to transact. And so that has been an impediment, but I think coming out on the other side of that cycle, having been at a more – a less volatile environment at a more constructive macro environment should be beneficial. – Bud Brigham, Founder & Executive Chairman, Brigham Minerals
  • I think it’s all trending in a rational direction on the M&A front and I expect – not only us but also our other public peers to benefit from that. And then the other thing I’d say is people are getting used to selling for equity. We’re not going to lever up this business. – Davis Ravnaas, President, CFO & VP of Business Development, Kimbell Royalty Partners

Rig Count & Production Recovery in Sight

Aggregators were pleased to see a production and rig count recovery in sight.  Production curtailments were put in place in response to the challenging price environment beginning in Q2, but many believe that the worst is behind the industry.  Production levels remain down year-over-year, but companies are optimistic that they will continue to rise.

  • In the fourth quarter, we began to see a strong recovery in drilling activity on our acreage, with a 30% increase in our rig count, coupled with good sequential improvements in commodity prices and revenue. We are optimistic about 2021 and the continuation of improvements in drilling activity, which is demonstrated by a 14% increase in the Baker Hughes Lower 48 rig count in February 2021 relative to year-end 2020. – Bob Ravnaas, Chairman & CEO, Kimbell Royalty Partners
  • As of year-end, there were 38 rigs active on our acreage, and the count has grown to 50 rigs by the end of January. This is above the 29 rigs operating on us at the end of the third quarter, but it's down sharply from activity levels we saw a year ago. – Tom Carter, CEO & Chairman of the Board, Black Stone Minerals
  • We saw the rig count in those basins in the mid-500s in February of last year and then saw them decrease to around 150 rigs during the third quarter. In the fourth quarter, we saw a 40% rebound in the rig fleet, followed by a further 15% increase so far in the first quarter of 2021. As a result, we sit today up approximately 70% from the low point, but still around 300 rigs short of February a year ago. – Bud Brigham, Founder & Executive Chairman, Brigham Minerals
  • Viper also benefited from third-party operated well performance and timing of wells being turned to production outperforming our prior conservative expectations, which had been lowered due to the uncertainty presented by the volatile oil prices experienced early last year. – Travis Stice, CEO, Viper Energy Partners

Aggregators Acting on Priorities

Since mid-2020, a central theme of E&P companies and aggregators was to shore up balance sheets.  Most aggregators delivered on their deleveraging agenda, whereas others, like Brigham Minerals, had no debt and were able to capitalize on the low-price environment.  Aggregators are optimistic that their leverage levels will not be of concern entering the new year.

  • Our first strategic priority was to further strengthen our liquidity and balance sheet position. We moved very early on in the year with aggressive actions to reduce our costs and reduce our debt.  Over the course of the year, we paid down a total of $273 million of outstanding borrowings under our credit facility, funded by the proceeds from 2 asset sales that we completed in July, and from retained cash flow. – Tom Carter, CEO & Chairman of the Board, Black Stone Minerals
  • The company paid down $21 million of debt in 2020, and we plan to continue to allocate 25% of cash available for distribution to pay down a portion of our credit facility each quarter. – Bob Ravnaas, President, CFO & Chairman, Kimbell Royalty Partners
  • The truly unique nature of Viper's business model is highlighted by the fact that during the fourth quarter alone, we were able to declare a $0.14 distribution, repurchase over 2 million units, and repay over $40 million in debt. Over the past nine months, we have now reduced total debt by $110 million or roughly 16% over this period. – Travis Stice, CEO, Viper Energy Partners
  • In an entirely differentiated position, Brigham entered this disruption with no debt and flushed with cash. Having lived through tremendous volatility in the past, we were compelled to take bold action to compound value for our shareholders when others could not or did not want to. – Bud Brigham, Founder & Executive Chairman, Brigham Minerals

Conclusion

Bud Brigham, Founder and Executive Chairman of Brigham Minerals, summed up the last year in a nutshell on the company’s fourth-quarter earnings call, “The entirety of 2020 was filled with unprecedented volatility, triggered by the COVID-19 pandemic and the OPEC crisis from crude oil pricing to rig counts to frac crews as well as individual company performance. We started 2020 with $60 oil.  Amazingly, it briefly went negative, and then oil spent most of the year around $40 to $45 per barrel. Markets have been healing. And today, we sit here with oil above $60 per barrel.”  Aggregators seem ready to turn the page and enter 2021 with bullish hopes of a full industry recovery.

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.  Mercer Capital has thoughtfully analyzed the corporate and capital structures of the publicly traded mineral aggregators.  Contact a Mercer Capital professional to discuss your needs in confidence.

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