The Money Spring

All,

Mike Shellman at Oily Stuff, pens the best blog on the oil business. He often writes regarding the unsustainability of the shale drilling business model.  In his most recent post, he commented on a recent report that Haynes & Boone released on what sources companies are using to raise capital to fund their 2018 exploration and production efforts. The report indicates that 58% of the capital deployed in 2018 will be from the raising of debt. Berlin argues that this number is actually higher as the report notes that "Joint Ventures with Private Equity firms such as farmouts, drillcos, etc" will account for 12% of the capital deployed in 2018, but those arrangements are going to be partially funded with debt also. Regardless, there is a lot of borrowed money at play. 

Sheikhs v Shale from The Economist

Is this sustainable? Mike argues that it is not and his fact based writing often explains why. Berlin argues that it is sustainable. There are many reasons why it is sustainable and listed below are a few of them:

1. We have an expanding money supply that keeps interest rates artificially low and drives yield hungry investors to riskier margins....and
2. Incentives are skewed in most public corporations and management teams often enrich themselves at the expense of the majority of the owners. This can be observed when companies take on new debt to improve short term metrics at the expense of the company's long term financial health and stability....and most importantly
3. The longer something has occurred, the more likely it is to continue to occur. While 15 years is not a long time in the span of world history, capital markets have been funding marginally profitable shale wells for 15 years. You might say "it does not make sense, why are these companies being funded?" Berlin would argue that it is your mental model that does not make sense and needs to be updated. It hurts her head too, after all, wouldn't the equity stake holders want to profit on their investment? But, since the market has funded the exploration efforts, it makes sense.

Please comment below or contact Berlin with any more questions about the suitability of debt financing and the continued sustainability of the shale drilling business model. Or if you would like to sell your Oklahoma mineral rights under any unconventional (and conventional) oil and gas well.

More to follow,

Berlin

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)

Hall v. Galmor (we waited two years for this?)

All,

Berlin isn't an attorney and she hesitates to provide legal advice to her readers, but she must opine on the plaintiff's answer to maybe the biggest softball of a question ever slow-pitched in the District Court of Beckham County, State of Oklahoma...

Attorney: ...now in your opinion, do you believe that you could produce seven wells in question here today in--in paying quantities?

All Hall has to say here is "no." He sued to have title quieted to his new top leases as he believed the older set of leases, not released of record, were no longer held by production. Why he topped a unit just so he could produce the wells is almost beyond belief, but stick with Berlin here. All he needs to say to this question is....

Hall: It would pay to me.

Homer often confuses the words "yes" and "no" too.

Not that Hall! Anything but that. You just agreed with the defendants' case (that the leases were commercial when the wells were shut in). And when you agree with the defendants' argument and then you lose the case in district court and then appeal the case to the Supreme Court of the State of Oklahoma and the Supreme Court of the State of Oklahoma takes the case and then issues its opinion, it's going to use that fouled off slow-pitch softball in its decision to uphold the judgement of the district court. By quoting, "but perhaps the most convincing testimony was the following exchange between Hall and his attorney" (see above for that exchange)...and, "the judge seemingly relied upon this admission in reaching his judgement." "Seemingly" seems a bit gentle, but nonetheless, Hall lost (on most of the issues).

Berlin was hoping that Hall v. Galmor would carry a bit more water in helping craft the future of these lease cancellation suits. The courts are still waffling around "capability" language, but in an interesting twist in this case, they opined that a well only has to be capable at the time the well is shut-in and that the operator (or its successors) do not have a duty to maintain the shut-in well. This is a bit odd in Berlin's view as it penalizes mineral owners which Oklahoma courts tend to not do. Either way, Berlin is certain there are many out there who will claim that Berlin is incorrect and it is in fact a landmark decision and Berlin would welcome your comments and debate below.

More to follow,

Berlin

-.pdf and link of the Supreme Court's decision

Tom Ward is back and that is good news for Oklahoma mineral owners

Oklahoma Oil and Gas Royalty Owners,

NewsOK business writer Jack "in the" Money, reported a new partnership, BCE-Mach, LLC ("Mach"), that was formed earlier this year between Mach Resources, LLC, and Bayou City Energy. Bayou City Energy will be providing capital to the acquisition and development efforts of Mach Resources, LLC, that is led by Tom Ward.

Mach Lease Bonus = Pleased Oklahoma Mineral Owner

This announcement should make Oklahoma oil and gas mineral owners smile (and dream about purchasing a new combine...). In the recent past, Ward has been associated with Chesapeake Energy, Sandridge Energy, and Tapstone Energy (so much energy that its giving Berlin chest pains). Chesapeake and Sandridge specifically, were known for paying 2x-4x the going lease bonus in the area in order to assemble their prospect. 

Mach stated "It is our intent for this platform to be aggressive in consolidating and redeveloping select under capitalized regions of the upstream sector" (in Oklahoma and Kansas). Mach has not recorded any oil and gas leases in Oklahoma to date, but one could read the under capitalized tea leaves steeping in the mid-continent and see Mach stepping back into the watery tar pit f/k/a the Miss Lime.

This would be weird, but not unusual. After all, if you are the only company taking a risk and you fail, you will get fired and will be accused of being a poor steward of your investor's capital and a poor explorationist (Johnny's word, not Berlin's) to boot. But if you are one of many to take a "risk" and you all fail, you may get fired (or may not), but you will be okay enough (because others were just as wrong) that you'll get an "atta boy" or "we understand, the macro-headwinds shifted" or "man, we were just as surprised as you were that the LOE never decreased" and will be able to raise money again. 

Either way, it will advantageous for the Oklahoma mineral owner to follow Mach's war path to greatness. If you have any more questions on Mach or you would like to sell your Oklahoma mineral rights and royalties, please contact Berlin.

More to follow,

Berlin

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

I Thought You Were a Professional?

Oklahoma Minerals Owners,

Berlin was having coffee at the sale barn this week where she ran across an ol' boy named Keith. Keith asked Berlin what she did when she wasn't raising stockers and she mentioned she's a landman. Keith looked a bit perplexed when he said "a landman? I thought you were a professional, like an accountant or doctor or some sh*t."

Sorry to disappoint Keith, both you and daddy wished Berlin was a doctor or some shi*t too. But even landmen can continue to learn. Below are some items that Berlin thought might be of interest to the readers of The Oil Scout. 

Everything from these pipe fences to producing oil and gas from Oklahoma mineral property is going to become more expensive thanks to the new tariffs.

Saturday Assorted Links

Learning How to Learn: A new course from Coursera created by UC San Diego

Never Split the Difference: Negotiations book (recommended, but you can't use what you learn when negotiating the sale of your Oklahoma oil and gas royalty interests to Berlin)

The Tariff Folly: This tax increase on imported aluminum and steel will punish American workers, invite retaliation that will harm U.S. exports, and make everything that is made out of aluminum and steel more expensive (so...,almost everything). Berlin predicts this will negatively affect the Oklahoma oil and gas industry more than the proposed increase in the gross production tax that the OIPA enjoys complaining about.

More to follow,

Berlin

Smooth Move: Oklahoma Independent Petroleum Association

All,

If Berlin was a betting woman, she would venture to guess that an organization with the words "Independent Petroleum Association" in the title and that represents itself as the unified voice and advocacy group for the Oklahoma oil and natural gas industry might support an independent producer in court proceedings against a municipality. In most cases, the bet would pay out, but not when the Independent Petroleum Association in question is the Oklahoma Independent Petroleum Association (the "OIPA").

In a truly bizarre action, the OIPA, filed a motion with the Canadian County District Court to file brief of amicus curiae to oppose the actions of Citizen Energy II, LLC, a Tulsa based, independent oil and gas operator. There are various Latin terms contained in their motion, but the gist of their argument is that the municipality, Mustang, Oklahoma, was within their right to only conditionally approve the permit to drill. Not only is this weird because the OIPA is supposed to advocate for independent oil and gas producers, but it sponsored legislation to hamstring municipalities' restrictions on drilling operations in 2015 (52. §O.S. 137.1).

Were we supposed to hit send on this fancy letter to the judge?

In a quote from the OIPA's 2018 annual meeting invitation:

After years of oppressive regulation and months of low prices, we’re making the independent oil and natural gas industry great again. Come reflect on our success, plan for the future, expand your knowledge and take it easy at the legendary OIPA Annual Meeting.

Their words, not Berlin's. Who doesn't love greatness? Berlin would like to ask the OIPA how they define success (and legendary), but they would probably just say that it comes before work in the dictionary. Now, Berlin isn't arguing the validity of Mustang's case, she just finds it odd that the advocacy group is anti-advocating. Would it have been a better idea for the OIPA to keep its expensive opinions to itself? Its one thing to whisper to your attorney over a bloody at Cheever's and say "hey, why don't we hang Citizen out to dry?" It's quite another to be openly hostile and support Mustang.

The staff of the OIPA don't appear to be oil and gas folks, but their board appears to be comprised of industry professionals. Berlin is positive that one of the 80 board members own or are employed by companies who will attempt to drill a well inside a municipal boundary in the next year. Did they vote on this action? Weird.

The cat that came in from the cold and now must be nice to the other cats in the office.

It really isn't any surprise the OIPA fumbled this extremely easy to hold (easy_to_hold = nerf) football. Most Southern Oklahoma producers defected last year to form the Oklahoma Energy Producers Alliance after they were disgusted with the OIPA's policies towards extricating Oklahomans from the financial tar bit that is the State's budget. The larger independents left before that to lead the Oklahoma Oil and Gas Association. All groups advocate for crony capitalism and preferential treatment, but only the OIPA advocates for preferential treatment of groups that oppose the companies that compose its membership. 

As 1stSgt Benny once yelled at a young Corporal for agreeing with a Lieutenant, "whose side are ****ing you on" it might be time to ask the crew over at the OIPA the same question, but in an "inside cat" tone of voice.

More to follow,

Berlin