Shale mineral rights investors share insight on new market

By Luke Geiver | April 12, 2017

Longpoint Minerals is considered a startup in the relatively new business of mineral and royalty investment. Will Cullen, vice president of the Denver-based firm, helped form the company in 2016 and to date has raised more than $800 million to acquire mineral and royalty rights in shale plays throughout the U.S. Longpoint is one of a handful of firms that is now working to buy mineral rights from individual owners or large entities with the future in mind. Cullen, and others presented recently at an oil and gas event held in Fort Worth, Texas.

Mineral investment firms, starting roughly 2014, recognized the opportunity in shale oil and gas development. Purchasing acreage blocks that include mineral rights can give investors a consistent yield for many years to come, and in return to mineral rights owners that sell, a chance at a major guaranteed cash payment in exchange for their mineral rights. Advances in drilling, completion technology, well site optimization and a general increase in reservoir understanding have created a positive scenario for mineral investment firms. Outside investors can not only recoup a consistent yield on an investment into minerals without exposure to the cost of drilling or production that working interest owners in wells have to experience, but they can also potentially reap the benefits of new technology or oilfield strategies that bring more wells or better production online in a certain mineral acreage position that many may not have thought possible in the recent past.

Cullen believes the market for minerals is in the billions but the business is still in the early stages. “Most mineral owners base the value of their minerals off the value of their current checks,” he said. Mineral owners sell minerals for various reasons, but timing is the biggest reason Cullen’s clients sell. Before he starts negotiating with mineral owners, Cullen expects that 90 percent of his talks will end without a deal, however. People sell for various reasons, he said, and many understand that their acreage could yield better payouts in the future. In most cases, Cullen said, large acreage holders are very savvy, some even employ geologists or consultants to keep them informed on the value of the mineral rights.  

Bradon Fikes, vice president of Santa Elena Minerals LP, a Texas-based mineral and royalty investment firm, agreed with Cullen on the importance of timing in acquiring mineral rights. Fikes hears from many mineral owners that they were told never to sell their mineral rights because someday they would be worth something. “That someday is now,” he said. Cullen and Fikes will both perform transactions within a wide range, paying out at $20,000 or $100 million depending on the amount of acreage or mineral rights included in a deal.

Karl Brensike, CEO of Haymaker Minerals, was an early believer and pioneer in the minerals space. In 2014 he worked to solidify the business case for minerals investments to private equity firms. “We had to convince them that the industry [oil and gas] was going to evolve,” he said. Prior to Brensike’s work to educate investors on the value of minerals and the long-term yield potential of owning minerals in places like the Permian Basin or the SCOOP/STACK, Brensike said private equity firms didn’t want to invest in the space because they viewed it as a price play. “Investors didn’t want to invest in managers guessing the price of oil,” he said. Essentially, investors didn’t want to rely on the price of oil to entirely dictate when or to what extent they might recoup an investment. But, with the new approach of E&Ps to manufacture or develop fields at mass scales, along with constantly improving completion technology that is yielding more oil per well, the price of oil—at least at prices as low as $35/b—doesn’t matter to the same extent it once did.

Private Equity Interest In Royalties/Minerals

1859-2004=No Interest

2004-2010=Minimal Interest

2010-2014=High Interest

2014-2017=Very Strong Interest

Brensike believes 2010 to 2014 was a period that could be classified as the golden years of shale. Technology development, implementation and know-how grew during the period and helped investors realized the value of mineral and royalty interests. Today, there are more than 20 private equity firms involved with buying mineral interests.

Why Invest In Minerals

-No Capex

-No Environmental Liability

-Good Vehicle For Yields

-Immediate Cash Flow From Wells

-Passive Income

The Risk With Mineral Investing

-Lack of Control

-Development Timing

-No Access to Operator Data

-You can stare at dead money sitting in the ground

Mineral investment firms are most concerned about buying acreage only to see it be left undeveloped or passed over for another area.

What To Look For In Mineral Assets

-Large, Continuous Acreage Blocks

-Large Mineral Ownership Percentages

-Active Fields with Rig Count Trending Up

-Ability to Work With Midstreams, Service Companies