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!
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.
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…
Decent use of seven minutes on a Friday morning. Nothing you probably don’t already know but it is a good zoom out to the big picture.