Tag: wsj

Spotlight on Mineral Rights

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WSJ: The Underground Way to Earn a 10% Yield in Oil Stocks

Mineral rights entitle these firms, including Viper Energy Partners LP and Kimbell Royalty Partners LP, to the first cut of cash once oil and gas wells begin producing. The royalties they receive usually range from about 12% to 25%. Their place at the head of the line for payouts, plus the fact that they bear none of the drilling costs and keep collecting even if producers drill themselves bankrupt, have helped minerals owners outperform most other energy stocks in a year when investor sentiment has collapsed due to low oil and gas prices and profligate spending.

Mineral rights are a uniquely American asset class. In no other country are most mineral rights owned by ordinary citizens. It is also a highly fragmented asset class, akin to rental houses. The National Association of Royalty Owners estimates that there are more than 12 million private owners of mineral rights. Kimbell calculates the total market value of mineral rights at about $550 billion, of which public companies own just 2% or so.

The principal way to acquire mineral rights has usually been to inherit them. “Never sell your minerals” is a marketplace adage. These days, though, that bit of country wisdom is being cast aside by many who have inherited the rights to oil and gas royalties. The result is a consolidation by Wall Street of assets that have long been an integral part of intergenerational family wealth.

Wild that TPL wasn’t mentioned.  Thanks to a reader for the heads up on this article!

“Eat Our Own Cooking”

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WSJ: A Real-Estate Mogul Is Behind the Hottest Stock in the Oil Patch

No, not TPL (right now), but good information nonetheless.  This ‘skin in the game’ ethos gets me fired up.

Mr. Goff first reported a stake in Contango last summer. He bought more than 18% of the company’s shares when they were trading for more than $4 and pushed the company to cut costs, particularly at its headquarters.

Messrs. Goff and Colyer joined the company’s board in August 2018. Mr. Colyer, who was 33 years old at the time and has worked at Mr. Goff’s side for more than a decade, assumed the CEO role. His first move was to cut his own salary in half.

“We’re going to eat our own cooking and keep costs low and try to get the upside,” Mr. Colyer said in an interview.

Messrs. Goff and Colyer said that in addition to running a lean operation in Contango’s Houston headquarters, they are hoping to grow without spending much on drilling, aiming instead to gather wells that are already producing oil and gas.

“There’s a whole host of avenues to grow without drilling holes in the ground,” Mr. Goff said.

Any Rare Earths Under There?

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WSJ: If You Want ‘Renewable Energy,’ Get Ready to Dig

A single electric-car battery weighs about 1,000 pounds. Fabricating one requires digging up, moving and processing more than 500,000 pounds of raw materials somewhere on the planet. The alternative? Use gasoline and extract one-tenth as much total tonnage to deliver the same number of vehicle-miles over the battery’s seven-year life.

When electricity comes from wind or solar machines, every unit of energy produced, or mile traveled, requires far more materials and land than fossil fuels. That physical reality is literally visible: A wind or solar farm stretching to the horizon can be replaced by a handful of gas-fired turbines, each no bigger than a tractor-trailer.

Building one wind turbine requires 900 tons of steel, 2,500 tons of concrete and 45 tons of nonrecyclable plastic. Solar power requires even more cement, steel and glass—not to mention other metals. Global silver and indium mining will jump 250% and 1,200% respectively over the next couple of decades to provide the materials necessary to build the number of solar panels, the International Energy Agency forecasts. World demand for rare-earth elements—which aren’t rare but are rarely mined in America—will rise 300% to 1,000% by 2050 to meet the Paris green goals. If electric vehicles replace conventional cars, demand for cobalt and lithium, will rise more than 20-fold. That doesn’t count batteries to back up wind and solar grids.

WSJ on Mineral Rights

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WSJ: As Drillers Struggle, Shale Investors Seek Safety in Mineral Rights

Mineral rights-owning companies aren’t without risk. Royalty payments are tied to both production levels and commodity prices, neither of which mineral owners typically control. Many shale companies have cut spending on drilling this year, while oil prices have hovered around $60 a barrel. Less production paired with lower prices means the value of royalty payments will drop.

“Part of the risk associated with the investments is you are a passive investor,” said Justin Stolte, a partner at law firm Gibson, Dunn & Crutcher.

Still, the value of large mineral owners such as Texas Pacific Land Trust, formed after Texas and Pacific Railway went bankrupt in the late 1800s, has soared as the booming Permian Basin of West Texas and New Mexico transformed the U.S. into the world’s top oil producer. The price of shares in the trust has more than quadrupled in the past five years to more than $760.

They forgot management agency risk…

WSJ on Texas Water

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WSJ : Neighbors Face Off Over Texas’ Other Lucrative Resource: Water

Frackers in the region pay an average 50 to 75 cents for a barrel of water, according to Bluefield Research, a water advisory firm. That amounts to more than $200,000 a well. Supplying water for fracking in the Permian is a roughly $1.2 billion industry annually, and including transportation and other costs, water spending for fracking there will surge to as much as $54 billion over the next decade, the firm said.

By the 1980s, Mr. Williams had amassed about 18,000 acres above a number of aquifers, deep deposits trapped in a natural underground dam some scientists believe an asteroid impact formed millions of years ago. The aquifers are valuable because they fill every winter from nearby mountains. The Williamses are Texas’ largest private water owners, some hydrogeologists estimate.

 

Tact and Discipline

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WSJ: Second Wave of U.S. Shale Revolution Is Coming, Says IEA

Not high on the Texas oilman’s trait list.   Don’t give away the store fellas.

 

Shale was largely behind the glut of American oil that flooded the market more than four years ago, leading oil prices to fall to $30 a barrel from more than a $100 a barrel in late 2014.

U.S. shale production in 2018 grew faster than it did during the boom years of 2011 to 2014, the IEA said last year.

The U.S. last year surpassed Russia and Saudi Arabia to become the world’s largest producer of crude oil, with output currently hovering around 12 million barrels a day.

U.S. crude production is expected to rise to 13.7 million barrels a day by the end of its five-year forecast period, the IEA said Monday.

“Annual gains will boost the U.S. to levels never seen in any country, in excess of maximum capacity in both Russia and Saudi Arabia,” the report noted.

A Tortoise Named Chevron

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WSJ: Chevron, Exxon Mobil Tighten Their Grip on Fracking

In the next five years, Chevron expects to more than double its production in the Permian Basin in Texas and New Mexico to 900,000 barrels of oil and gas a day, the company announced at an investor event Tuesday. That’s a nearly 40% increase from its previous forecast.

“The shale game has become a scale game,” Chevron Chief Executive Mike Wirth said in an interview. “The race doesn’t go to the one who gets out of the starting blocks the fastest. The race goes to the one who steadily builds the strongest machine.”

Not to be outdone, Exxon on Tuesday announced plans to increase its Permian output to 1 million barrels of oil and gas a day by as early as 2024, a day before it was expected to disclose growth at its own investor meeting Wednesday. BP PLC,Royal Dutch Shell PLC and Occidental Petroleum Corp. are also focusing on the region.

Five years ago, Exxon, Chevron, BP, Shell and Occidental collectively made up about 9% of crude production from modern fracking techniques in the Permian. In October, the latest period for which relevant figures are available, they made up about 16%, according to data on ShaleProfile, an industry analytics platform.

Meanwhile, the big companies are just getting started. Exxon is now the largest operator in the Permian, with almost 50 rigs. The company estimates its Permian wells can generate a 10% rate of return at an oil price of $35 a barrel. While many companies reduced fracking activity in the fourth quarter of last year, Exxon increased it significantly to over 80 wells, more than double the total in the fourth quarter of 2017, according to Rystad Energy.

Chevron is raising its production guidance to 900,000 barrels of oil and gas a day by 2023. Last year, it predicted 650,000 barrels a day by 2023. The company is boosting production without adding to its rig count, a testament to how size can lead to greater efficiencies.

Chevron employed what could be described as a tortoise-and-hare strategy in the Permian. While smaller companies at times paid more than $40,000 an acre to gain rights to prime drilling opportunities, Chevron held on to land it already owned in the region, which decades ago was one of the world’s biggest traditional oil fields, without having to join in the buying frenzy.

Couple more similar articles:

https://www.bloomberg.com/news/articles/2019-03-06/exxon-targets-32-billion-in-annual-spending-on-drilling-plants

‘Society needs us to make these investments,’ Woods says

https://www.bloomberg.com/news/articles/2019-03-05/exxon-plans-massive-permian-growth-to-offset-international-drops

Within hours of each other on Tuesday, the two largest energy companies in America announced they want to pump almost 2 million barrels a day combined in the Permian Basin of west Texas and New Mexico, a higher amount than most OPEC nations. Chevron plans to reach 900,000 barrels a day by 2023, while Exxon aims for 1 million by 2024.

“Our position in the Permian just continues to get better and underpins our resource base,” Chevron Chief Executive Officer Mike Wirth said in New York. The value of the company’s Permian position has doubled over the past two years with reserve additions, he said.

The Parent-Child Problem

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WSJ: Shale Companies, Adding Ever More Wells, Threaten Future of U.S. Oil Boom

Good read on technology and science at play in the Permian.  This is a reminder that a great deal of what is happening (in my estimation) is still experimental.

Known in the industry as the “parent-child” well problem, the issue is surfacing in shale hot spots across the U.S. as companies ramp up production. Most of the tens of thousands of planned new wells will be child wells—wells drilled close to an already producing well.

It is one of the primary reasons why thousands of shale wells drilled in the past five yearsare producing less oil and gas than companies forecast to investors, a Wall Street Journal examination of drilling data has found.

Shale producers across the country are finding “you can get a lot of interference, one well to the other,” said billionaire Harold Hamm, who founded shale driller Continental Resources Inc., in an interview last year. “Laying out a whole lot of wells can get you in trouble,” he said. Mr. Hamm was discussing other companies, not Continental.

Many of the largest shale producers, including Devon Energy Corp. , EOG Resources Inc.and Concho Resources Inc., have disclosed they are facing the problem. Some have begun drilling wells farther apart to get around it, which means they have fewer total wells to drill on their land.

Water

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Harvard Quietly Amasses California Vineyards—and the Water Underneath

This post is a bit off our normally beaten path but the parallels are interesting.

 

The university’s endowment manager, Harvard Management Co., was stealthily building a sizable grape-growing business on the Central Coast through entities including Brodiaea. With the land, it was acquiring rights to vast sources of water in a region where the earth’s warming is making the resource an ever-more-valuable asset.

In a warming planet, few resources will be more affected than water, as more-frequent droughts, storms and changes in evaporation alter a flow critical for drinking, farming and industry.

Even though there aren’t many ways to make financial investments in water, investors are starting to place bets. Buying arable land with access to it is one way. In California’s Central Coast, “the best property with the best water will sell for record-breaking prices,” says JoAnn Wall, a real-estate appraiser who specializes in vineyards, “and properties without adequate water will suffer in value.”

 

 

From the WSJ Archives

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Texas Pacific Land Trust Offers A Get-Rich-Slow Opportunity

Oldy but goody here from 1998.  The modern owner has to wonder if Bregman’s quote around a “creeping buyout” will hold true from here.

“People are going to become less interested in ‘concept’ stocks that sell at hope times greed times infinity,” says Mr. Shaefer, who is also editor of the Investor’s Edge newsletter, which has pushed Texas Pacific. Instead, investors will “be looking for real underlying asset value in the companies they own.”

Mr. Shaefer says his fund bought an undisclosed stake in Texas Pacific in January 1997 at $27.63 a share, and he doesn’t plan to sell until the stock reaches at least $80. By his calculations, the underlying assets are worth about $100 a share right now.

At its current rate, the trust is buying back stock more quickly than it’s selling land. Between 1980 and 1995, the trust reduced its number of outstanding shares by 34% but reduced its land inventory only 8%, from 1.2 million acres to 1.1 million acres.

Steven Bregman, president of Horizon Asset Management in New York, has researched Texas Pacific for his firm’s Contrarian Research Report and believes the stock is worth buying. “It’s cheap,” he says. “As long as you want to hold it for a decade, you put it away and forget about it and get rich slowly.”

The buybacks, says Mr. Bregman, are “like a creeping buyout. It’s a snowball effect.”

 

 

Large Players Ramping Up Shale Production

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WSJ: Oil Giants Start to Dominate U.S. Shale Boom

Some good stats and soundbites here on US onshore shale production.

Chevron’s output in the Permian Basin of Texas and New Mexico rose 80% for the year ended in September, eclipsing some of the small producers that spent years building up their fracking positions.

While many big oil companies were slow to fracking, bigger companies have tended to benefit as technology matures and drillers shift from exploration to large-scale production.  That trend is most apparent in the Permian Basin. Large companies including Exxon, Chevron, BP, Shell and Occidental this year are set to produce an average of about 600,000 barrels a day of crude in the region, up 54% from last year. By 2021, their output there will exceed 1.1 million barrels a day, or about 20% of the area’s total shale-related output, according to consulting firm Rystad Energy.

Pipeline access is another area where bigger companies fared better. As U.S. oil production soared above 11 million barrels a day, growth exceeded existing pipelines, forcing smaller companies to sell their oil at a discount. Crude sold in the Permian Basin was discounted by an average of $14 a barrel during the third quarter, according to S&P Global Platts. That differential has since contracted to about $5.