Separate but Equal is not Equal

Are all mineral buyers the same?

With the announcement of Longpoint Minerals II securing $802 million to purchase Oklahoma (and Texas) mineral rights and royalties, the froth will return to the marketplace after a few months of reprieve. It is not uncommon for a tract of minerals to be bought and sold three times in a short period of time within the SCOOP or STACK before ending up with the end buyer. The supply of mineral acreage is finite. The billions to deploy in a relatively small geological fairway encourages many participants to enter the mineral trading ecosystem. This article will address some characteristics of each of the participants.

Opportunists
There are more opportunists in the game than anyone else. Due to the variability within any large sample, Opportunists come in all colors. The category, in general, can be defined as individuals or companies whose desired endstate is to locate and negotiate a smaller mineral purchase transaction while simultaneously negotiating the sale of the same tract to another buyer and preferably for more money. Business models vary slightly, some opportunists just broker transactions for a commission, some will assign their purchase and sale agreement for a fee to the end buyer who will fund and close the trade, and other opportunists will fund their own closing and obtain title before marketing and flipping the acreage.

Most opportunists are no better than the snake oil tonic salesmen of the frontier. Beware of their inflated offers to purchase your Oklahoma mineral rights

The companies who discredit the category as a whole are those who contract for the sale of minerals and then fail to close. Either because they don’t have their own funds or they were unable to obtain an agreement to flip the acreage. Many Opportunists mail letters to mineral owners at highly inflated prices with no intention to close. Once the mineral owners engage with the Opportunists, the prospective buyer will drastically lower the offer. These kinds of actions understandably frustrate the original sellers. This conduct also muddies the waters for potential future buyers as they have to contend with the residue of past negotiations and unrealistic price points set by the original Opportunist who didn’t have the funds to close anyways. If sellers insist the buyer have some skin in the game, these kinds of activities are less likely to occur. For seller’s, purchase price should be just one of the factors to consider when selling minerals. The opportunity cost can be very high to have one’s minerals tied up for a few months just to have the Opportunist back out at the last moment. Timelines for closing, contingencies, and most importantly, the buyer’s willingness and ability to close are also important to contemplate when selling a mineral property.

Private Mineral Companies
The next step in the mineral trading food chain are private mineral and royalty acquisition companies (disclaimer: this is how Berlin would classify her business). These are usually smaller operations that consist of sole proprietors or at most a few partners or family members that conduct the day to day affairs. Most do not raise outside money and thus are usually not active buyers in the core of the SCOOP and STACK. These companies are content to buy producing minerals for a reasonable multiple of current cash flow and non-producing property on the fringes or in front of a developing play. Deal flow is sourced by word-of-mouth and select Opportunists. Most pay the bills from a combination of producing royalties and lease bonuses.

Aggregators
Aggregators generate most of current high dollar deal flow in the SCOOP and STACK. Like the Opportunists, they are rarely buying to hold for their own account, but unlike Opportunists, they close the trades with their own funds. Most have relationships with the private-equity or institutionally backed mineral company that provides them with exclusive rights to generate deals in certain geographical areas with an established price point in which to sell their minerals to the larger company. They are paid either on a commission basis or they may be allowed to keep the spread between what they paid for the mineral property and the price set by the end buyer. Aggregators are aggressive in generating deal flow and fill their funnels with leads from call centers, direct mailings, full-page newspaper ads in the county seat’s paper and of course personal relationships with others in the ecosystem.

Private Equity and Institutionally Backed Mineral Companies
The current end buyers of high-value mineral properties in Oklahoma are private equity and institutionally backed mineral companies. Longpoint, mentioned above, is dominant in the space, but other companies like Fortis Minerals, Luxe Minerals, and Haymaker Minerals and Royalties also compete by spending large amounts of other people’s money. These companies can pay a premium for interests in the core areas of the plays due to their lower cost of capital and the longer times horizons for their funds. From a layman’s view of prices, these companies must be modeling the substantial development of multiple geological targets in order to see a return on their investment. From a prospective seller’s point of view, it can be argued that currently, no company will pay more for your interest than one of these firms.

Publicly Traded Mineral Companies
There are a few publicly traded mineral companies. Most seem to be above the fray of the day to day transactions taking place in across the state. Instead, companies like Black Stone Minerals will buy large deals from other large companies, both public and private, that are either divesting their minerals entirely or of assets located in a specific basin. They seem to make a splash on the newswire once or twice a year with an acquisition of $100m+.

Operators
While most exploration and production companies focus their acquisition dollars and efforts on leasing, some firms are finding it advantageous to purchase minerals in sections where they are likely to drill wells. One of the quickest ways to boost the economic returns of the well is to have fewer expenses. There are few items on the well ledger that are as expensive as the royalty burden of a lease. Look to see more companies attempting to acquire mineral acreage in operated units especially if the company is planning to density the section in the near future.

Please comment below or contact Berlin with any more questions about the types of mineral buyers or if you would like to sell your Oklahoma mineral rights.

More to follow,

Berlin

(This post was first published on Oklahoma Minerals on 5 July 2018)

Extending an Oil and Gas Lease

Oklahoma Oil and Gas Mineral Owners,

It can happen to the best of us, it was three years ago and nobody was drilling deep gas in Custer. You signed an oil and gas lease with an option to extend the primary term. Now, things are different, the "macro-headwinds" have shifted. There are folks with deep pockets paying 3x what you will be paid for your option. Even though $500/acre for a 160 acre lease on the home place would make most smile, you have a yellow equipment problem and were hoping that the original lessee will overlook the option and you will be able to sign a new lease at $1500/acre and buy that excavator you have always dreamed of. So what can you do? 

Some oklahoma oil and gas mineral owners trade their right to drill a well for a royalty and yellow equipment

Some Oklahoma oil and gas mineral owners will attempt to claim that they never received the option bonus. While most lessees who desire to exercise their option will call the lessor to confirm their address before mailing a check, the call is not required. To perfect the option, a lessee is required to send the bonus payment to the lessor's address via certified mail and file an affidavit of lease extension with the county clerk. A lessor is playing with fire if they do not accept the certified mail in order to claim that their bonus was never paid.

What should another company do that would like to buy a lease from a lessor who has a option to extend in their old oil and gas lease that they claim was not exercised? Berlin argues they should do the following to protect themselves:

1. Ask the lessor if they have been contacted by the lessee or its assigns or moved since they signed the lease.
2. Check the records to see if the lessee filed affidavits of extension in the section or the surrounding sections. It would be odd that the lessee would extend some leases, but not others.
3. Request the lessor warrant title to the lease.
4. Require the lessor file an affidavit of non-payment and file the affidavit in front of the new oil and gas lease.

People do weird things when money is involved (and isn't is usually?). As was said in the gun club, "U Signed the M*****f****** Contract." There is no reason to complain (or commit fraud) if the option that you agreed to is exercised. And the company who desires to buy a fresh lease should protect themselves from bad behavior. 

Berlin wrote this post because a loyal reader asked to learn more about the situation. If you have any more Oklahoma oil and gas leasing or mineral rights questions, or would like to sell your Oklahoma royalties or mineral rights, please comment below or drop Berlin a line.

More to follow,

Berlin

Do You Boat Acreage or Push Paper?

Oklahoma Oil and Gas Interest Owners,

Are you going to fill up the boat with acres of leasehold and Oklahoma mineral rights or worthless paper and wasted efforts?

Back when Berlin started schlepping leases, her boss claimed there were really only two kinds of landmen; there were landmen who boat acreage and landmen who chased rig lines and pushed paper around their desks. Then he asked, what kind of landman did Berlin want to be? While at Amoco one had to do both, but there was certainly a bias towards the landman who could boat acreage. After all, what is a landman's purpose if she can't secure mineral rights for the technical team to exploit?

The early successes of Chesapeake Energy further emphasized the importance of acquiring leases. McClendon's philosophy was that if Chesapeake owned it all, the company wouldn't have to bend to the will of the Conoco's of the world to facilitate a trade (like a 20 year earn-out on some Western Anadarko Basin properties....thanks gents for the stellar proposal).

The ease and speed of modern communication has altered how most landmen spend their time. It is now possible for a landman to spend his entire day emailing about an issue that could be solved in a phone call or worse yet, one that doesn't even need to be solved at all. Requests from the division order departments about curative, land managers about title tracking, and nitpicking another company landman over the smallest details of a pre-pooling letter agreement can be all consuming. The relative cheapness of the communication medium hides the immense opportunity costs of engaging in this type of behavior. 

Cal Newport often writes about how the quality of work and the productivity of the average knowledge worker is in decline. He claims we are now worse at creating valuable things. And this is true. Economic oil and gas prospects are valuable. As land staffs become bloated and perform less of what Newport has coined "Deep Work," it takes more man hours to put together an oil and gas prospect. Putting together a prospect requires boating acreage. And boating acreage requires deliberate, focused efforts from running title to the disciplined negotiation that is necessary to acquire oil and gas leases in a competitive environment.

There is a lot of paper to push around these days, but does it need to be pushed?

More to follow,

Berlin

See What Happens Larry? Oil and Gas Mineral Rights in the News.

Oklahoma Oil and Gas Mineral Owners,

The Federal Bureau of Investigation (“FBI”), announced that LAWRENCE H. WOLF, a/k/a “Larry,” was arrested yesterday for defrauding banks and financial institutions around the country. Manhattan U.S. Attorney Geoffrey S. Berman said:  “As alleged, Lawrence Wolf swindled and attempted to swindle banks around the country out of millions of dollars while masquerading as an oil and gas tycoon.  Now, thanks to the dedicated work of our partners at the FBI, Wolf’s alleged scheme has finally run dry.”

A tale as old as time. A slick huckster in cowboy boots will convince a number of yield-starved investors that he has a deal for them. We saw it in "Stealing from the Rich" and "Funny Money" and we will continue to see it as long as there are mineral rights to exploit and people walking the earth (so another 73 years...?).

Do you see what happens when you commit fraud by claiming ownership in others' mineral rights?

Berlin's favorite part of the story though is that four banks lent Larry money and only the "global investment firm" actually ran title to the oil and gas properties in Wyoming that Larry was claiming ownership in. 

While Berlin has claimed in the past that some title is difficult, it is less difficult that explaining to your boss why you lent Larry millions without checking the records.

H/T to Matt Levine for the news and Special Agent Justin Rowland for putting the pieces together.

Bankers of the world, please advise Berlin if you are planning to lend on oil and gas mineral rights, royalties, or leases without running title and we can prevent you from being identified as a "Victim Firm."

More to follow,

Berlin