Transcript of Interview with
Brandon O’Gara, CFO, Echo Energy
Interviewer, Tim Pawul (TP)
Interviewee, Brandon O'Gara (BO)
TP: Brandon, welcome to the podcast. Thanks for taking the time to do this.
BO: No problem. Appreciate it Tim. It's an odd time and I’m excited to be here so thank you for having me on.
TP: For sure. So would love to start with a background, I think what's unique about the mineral space is you have so many different avenues umm… when you look back and reverse engineer the management team of the leading royalty companies in the space right now. Some come from land, real estate finance… you come from the finance route. So building up to that, just where you grew up, where you went to school, kind of your influences… Was your family in finance, oil & gas, etc. etc.
BO: Yeah, definitely seen a lot of different people in the mineral space and it's exciting for all of us. I think for me personally, it's an interesting route, probably a little unique for a lot of people that are involved in the oil and gas space, especially in Oklahoma City & Texas. So I grew up on Long Island. For those that don't know, about an hour east of New York City in a county called Suffolk County. So from there I went to University of Pennsylvania, undergrad Wharton, and graduated from there in 2008, and continued to focus on finance related courses. I ended up at Wexford Capital 1-2 years after I graduated college, and from there was really just thrust into the energy space. Wexford those who don't know is heavily focused on the oil and gas space. I was lucky enough to be one of the early energy analysts for them when I got there and was able to focus on all different parts of the energy sector from E&Ps, Service companies, MLPs, Refiners, and Midstreamers so it was really an invaluable time for me as I was kind of building my career to learn the entire energy structure of how the world works.
TP: That is great and by the way, I don't know if we've touched upon this in our offline conversations but I grew up in Long Island as well, in Suffolk County nonetheless. So it's a super small world.
BO: I think I remember from your original phone call a 631 area code. I have a 561 area code now, which is Florida but my parents lived there for four years, while I was in college but I am a Long Island guy so we got that in common.
TP: Yeah and I hear you, you know the natural gravity is to go to a school you know a northeast school, high caliber like a UPENN, Harvard… I ended up going to Rice, which is how I got to Houston and I played golf so you played tennis so we're very similar in that regard I guess. Similar worlds, tennis and golf… I looked at Princeton and ended up picking Rice instead. But it's funny you know, it's interesting that in Long Island there was zero exposure to oil & gas so you kind of just back into it through school and job opportunities, right? That's how I got into it…
BO: Yeah, I think that's hitting the nail on the head there for me, if you think about it… It's funny, not only did I make my way into energy somehow and work at Wexford for a bit but I found my way to Oklahoma City in 2015. So you grow up on Long Island, you work in energy, you end up married to a girl from Philly, and then you tell her your moving to Oklahoma City… It's not the traditional Long Island path, that's for sure.
TP: So fast forward. So, February 15’, you guys launched the Echo Energy story. You're in OKC. You know, the year before that, and we can just touch upon it briefly, Viper goes public, and I believe PrairieSky was just before that up in Canada. That was interesting for me. My first job, you know, just talking about our years at University… I was brokering small minerals packages for a company called PLS. They did lower end divestment work in the market. Yeah, well, I understand the mineral space and the dynamics of it, but very much kind of pinned it as a “Mom and Pop Shop” type game, right… And when I saw PrairieSky and Viper go public, that got my attention. That's what got Oil and Gas Council focused on the mineral space and we started doing panels at our events and you fast forward to today, it's very much a big focus for us, i.e. we're doing a podcast on it… But I'm just curious because that was a new concept. You were involved in that briefly and then clearly saw value in the mineral space to then go launch Echo. So I would love to get in your headspace in the 2013-2015 range, going from Analyst to then a Principle running a company.
BO: I think you're making really good points there Tim. it's a great observation and a great question. PrairieSky is I think something that people forget a lot about. I remember going to the PrairsieSky IPO lunch, before Viper was launched just to learn more about the mineral space before we made our move at Wexford with Diamondback and Viper and progressing there. The PrairieSky guys were very impressive, a little bit different structure in Canada than it is in the US but nonetheless still cashflow forever without any cost, which is the beauty of minerals as a lot of people listening probably do now. But from the from the Viper story, I think the two quick points I'll touch on there is about the unique opportunity with Viper, one big asset, one big ranch to kick the IPO off, which was an unrealistic opportunity for a lot of other people. I think that there was value seen there with the Wexford investment crew. And then a lot of what we went through early on at Wexford was what you were just talking about it. It was education of the investment community and education of really just everyone involved with minerals investment community. Equity research teams, investment banks, on what on what the value of minerals were. And I think it's interesting because I think the industry is way further along than it was back in 2014-15 but I think you could still say that we have some of the same issues today. We fast forward five years to what people understand about minerals and what they don't, I think we get a lot of the same questions about, “Do you have costs?”; “How do you forecast them?”; “What is it actually that you're getting?”; “When you buy it, do you own it forever?” A lot of the questions that you had to explain before when Viper was going public are still relevant today, albeit on a much bigger scale with a much bigger investment community.
TP: Yeah.. On the education piece, let's kind of transition into Echo now because you guys raised money from large institutional investors and would love a little more color on that… But what was that process like? Because you very much had to probably leverage the learnings and the questions that you saw on a regular basis through the Viper / Wexford stage of your career to then do the same thing on the fundraising for Echo, right?
BO: Yeah, that's a good point. And I think, if you think about the investor conferences and I think you mentioned this before, which is also something I think is worth touching on…The fact that back in 2014-15, there were no people attending any conferences and now today you mentioned it, which is funny is we've got a podcast going on right now, which is awesome. And then we also have royalty specific only conferences, right? You guys have your royalty conference that has been going on for multiple years and then you have TPH has done their conference, Credit Suisse has done private conferences, we have the MARC conference, which is purely a mineral conference. So it's exciting for the space to think that there is enough interest for specific conferences dedicated to minerals and royalties, which is great. And if you fast forward that to your question on Echo. In February 2015, when I when I first got to Oklahoma City, it really wasn't at that point yet. It was something that we had to prove as a management team, while we raised money. You hit it correctly on kind of a little bit of the background.. Echo’s story, we have raised money from a lot of different sources. We've been able to raise money from high net worth family offices, specific hedge funds and different pension funds. We really pride ourselves on connecting with the right capital partners over the course of our life cycle of almost six years now, which is crazy. We probably raised money from over 20 different people for the mineral space, which is exciting and a nice sign of success for us for what we have been able to accomplish.
TP: Yeah, that's great. And you know, at this time, private equity is starting to enter this space. Did you do the dance with them? Or did you guys fundamentally, just think this is not the right cost of capital for backing a mineral story? Any insights there?
BO: Yeah, we were never out there specifically looking for private equity. We thought there was better matches for what the mineral asset class was, being a long term asset that you own forever, that you really don't have to worry about on a on a short time period. I think from our standpoint, it doesn't feel like minerals deserve to be on a shot clock, I think is the simplest way that I could put it. And a lot of the private equity firms out there are on that five to seven year time horizon. And from our perspective, when we were building the company up, we didn't think it made sense for us to be on the shot clock if we could avoid it. So we searched for alternate sources of capital and lucky enough for us, we were able to be successful.
TP: We did an episode with Darren Geiger over at Cornerstone, they've been at it since 2004. So you look at that, there aren't too many that have been in the business for 15-16 years going into 2-3 decades. There are a handful in Midland but what is interesting is how they really took the multi decade commodity price cycle and industry cycle dynamics into play. They hedged at the right time to lock in top pricing, they sold at the right times. And when you have that multi decade horizon, you can approach the business in a totally different way. And it makes sense. And so matching the capital for that is definitely logical. Can you go on a little bit more about in the beginning days? You said you kind of had to earn the right as you fundraised. What was the strategy? You know, the basin focus.. Was it larger packages, was it a ground game, was it leveraging partnerships on the ground or line of sight partnerships? You know, with larger players like yourself, we've seen override carve outs, we've seen you know, partnerships, like the Franco Nevada / Continental deal. We've seen, you know, Long Point does a bit of everything right, they do small and large. Where do you guys fit-in in that spectrum?
BO: I think for us, we might be a little bit unique in this sense and just backing up a little bit for Echo in general, the beginning time when I got there in February 2015, the overarching theme that we've tried to utilize is a constant culture of innovation and doing things differently and looking for ways to be better. Like you said, the mineral game has been around for a long time and guys have been doing it for longer than me on this phone. And longer than what we did at Viper and Wexford as well but… There always felt like there are ways to do things better. And that's kind of the message that we drove home at Echo and when I first got there, we only had 12-15 people and that has grown significantly to where we are today. But the proven concept and the way we get started was some of the high net worth offices. No one really thought that the aggregation strategy of organic buying, I'll call it “On the Ground” was capable of scaling. I think some of the private guys knew it was possible but the capital markets and bigger investors, even high net worth guys who maybe weren't specific to oil and gas or specific to energy, were rightfully skeptical of the ability to buy and aggregate small tranches of minerals. So for us, we had to start doing it piece by piece, investor by the investor and showing the successful acquisition ground game machine that we were able to create, to put pieces together. So we did start in the SCOOP where Echo was the most comfortable from some legacy assets that we had there and started going piece by piece, three acres, four acres, five acres, on the ground, nonstop, really just burning through as many different smaller deals as we could. Oklahoma is a very chopped up State with chopped up interests vs. something like the Permian. So it gave us the opportunity to kind of prove what we had and then run that machine over and over and over again.
TP: You know, the one thing… so there's definitely a value arbitrage if you buy smaller there, and then if you aggregate into packages, it has a greater value all together. But then there's the cost burn of title due diligence and just the efforts of being on the ground and doing all that work. How do you guys find the balance between the two to make sure it's worthwhile, especially the scale of capital your trying to put to work.
BO: Yeah. From our standpoint, I'll run through a couple of the key differentiators for us because I think it's an important concept. And for us, we've always done things with a 100% in-house strategy. So for a lot of the buyers out there and you hit on it a little bit before ,everyone's got their own their own way of doing things, whether it be through intermediaries on the ground or buying bigger packages, but Echo has always been 100% in-house, everyone's under one roof strategy. So we've got our own buying team, we've got our own title team, we've got our own accounting team, we've got our own reservoir team, geology team, finance team, and a lot of other companies have a lot of those same things there. But from a standpoint of, I'll call it the beginning of the process and the end of the process, some things gets lost a little bit in a lot of the ways that minerals get bought in the world today… Where we have our own specific acquisition agents in house. And we also have our own title team in house. So from an incentive structure, you really want to have the guys under the Echo roof buying minerals for you. I think it aligns incentives and people are really working on the same team as opposed to a broker or someone else just doing their day job. And then on the back end, it's something similar in our mind where we don't think it necessarily makes sense to broker out title because those are the guys that are making sure that you own the asset that you're paying money for. So title defects are something that we were very cautious of going on in early into the buying cycle for us and we have been very proud of our team to be able to identify possible title defects before money goes out the door and we're proud to say that we've never had really any issues with that. And actually, we've probably found ways to increase our acreage counts because of the diligence of our team in house.
TP: What about portfolio active portfolio management? I had a really interesting episode with Robert Hefner and he has an IP on a technology platform he's built in house and he's an Oklahoma guy… and so you guys have a big portfolio in Oklahoma… Just the complexity and knowing how to go in… and you can actually find a lot of those defects up front… Is that something you guys feel has been a strength because it's not just buying at the right cost basis, right? It is very much making sure you continue to get that money and there's all sorts of loopholes that are in place for money to slip through the cracks over time.
BO: Two different situations there. One being the technology aspect of it is definitely a big part of the story. Today it's becoming a bigger piece of oil and gas in general. You hear about it with every vertical of the energy chain about people trying to manage that better, people trying to drill more efficient wells, people trying to make sure they can evaluate assets more effectively. But for us, I think going back to innovative enough to get a jump on technology early… So a big part of our advantage also came from building our own proprietary online platform to access mineral owners more frequently and faster. So we were doing that in 2015, which, gave us an advantage on some of our competitors, which I think a lot of people are focused on now as far as trying to utilize technology but that definitely helped us early on and is a platform we still use today. And on the backside of that with your request on active management, 100%. Land admin and accounting at our shop are fully functional, in depth teams, reviewing and analyzing decimal interest and ownership percentages. Every single month, every single day, actively moving wells back and forth between what operators think they own and what we think we own. The amount of money that we've been able to generate from that and additional cash flow, as opposed to someone who is a passive mineral owner is consequential, especially for the caliber of investors that we're looking to invest with and for how we how we hold ourselves accountable for what we expect in the portfolio that we're building.
TP: Yeah, you know… I think one of the big questions out there is, should the pension type investors in the world, buy direct? You hear a lot of private equity folks that have portfolios that are trying to exit you know, they say we have this great turnkey asset… There's no cost, it's easy to manage if you just get the right systems in place. You can even do that with third party. It doesn't run itself, but you know, a lot of the hard work is done up front with aggregating it all and cleaning it up. But then, when I had the episode, with Will Cullen at Long Point he said the portfolio management is so crucial. And you have to be a sophisticated oil and gas team to understand how to do that, where to look, etc. And so, you know, you guys are an example of I think, it's a more preferential route for a pension to go direct through a team versus putting it on their balance sheet… That's just one of the seesaw arguments I hear all the time…. Do you think pensions will ultimately or those types of investors buy direct? I mean, we just saw, for instance, the Sixth Street Partners override package with Antero, right. Do you foresee more deals like that where an institutional investor buys it direct or do you think it's through a vehicle?
BO: I think it will be interesting to see if institutional investors, like pensions, have the ability and time and management to be able to go direct. I think something like what Will said and kind of the way Echo operates… I think you hear some of the same commentary from the public guys is the time and effort that goes into being able to manage an asset like this, the way we operate it is a true differentiating factor. So for us, I think the active management and direct investment into a team like ours or a different company, makes a lot of sense. But I'm not sure a pension themselves are going to have the ability and sophistication to go manage a large mineral asset. But I do think there's room for direct investment into situation like we are at Echo. And obviously, that's how we're set up and I'm going to be the most comfortable with that. But from our standpoint, I think it makes the most sense. And it gets the most value to the investors at the Pension Fund, which at the end of the day, is everybody's main goal.
TP: Yeah, that's a good point. So are you guys, for the most part, purely ground game focused? Do you buy larger packages? Are you looking at considering large carve outs and things of that nature?
BO: We always consider it but we've bought bigger deals, kind of upwards of $20-30 million dollars. But our main strategy is on the ground. We think we generate the most value that way. We think we can kind of differentiate ourselves from the market as far as getting the best price that way. And it's been something that we haven't changed since day one of when we started buying minerals. I think yes, Echo is always open for business when it comes to other packages that make their way out to the market. And I think that might start shifting as time goes on as some of the owners of the assets in the in the middle tiers start trying to exit based off of the way they were set up. But for now, Echo is always actively using our in house acquisitions team in our ground game to attack the market at the smallest levels to differentiate. I think it's been an important piece for us along with the fact that we've only ever bought mineral interest. And I know it's a little bit different than your question, but it just made me think of it while, I was talking. We are a pureplay, true, pureplay mineral interest company. We've got no overrides, no NPRIs, no depth severances, no exposure to federal lands. I think we've probably frustrated some people out there that we're buying from but when it comes to our title and the interest that we want to own, that's been something we've been really focused on from day one is to be truly 100% pure fee mineral interest in a truly clean portfolio.
TP: Do you think, I mean you have a finance background… And you've been involved in the fundraising of Echo… Do you think there's a window in time to really make a splash and get capital in minerals? Forget the oil price war and all the dynamics for the industry. But just at a broader level, the interest rates being so low in the market, right… Bonds and everything… This is alternative to that and capital that's out there that's looking for yield is looking for a home as the market shifts at a global level. Do you foresee less money coming in over time or just think the returns are really attractive and that it'll continue to come over time?
BO: Look Coronavirus (COVID) is obviously incredibly unfortunate and a lot of people are dealing with that every day which, is sad. And again, we talked earlier.. I'm from New York and you're from New York too so obviously it hits closer to home a little bit for me… You have that, you have the oil price war, you have a lot of things that are difficult to deal with right now. And I think as an investor or an end buyer, it's important to take a step back and say, “Today's news is bad, it's really bad but try not to get lost in the cycle about what's going on for the investments that you're trying to make.” COVID and price wars are affecting what's going on today but they don't really affect what's under the ground of what you're buying. So from that standpoint, I think it's important that investments into the mineral space right now, I think are attractive, and I think there's opportunities out there to still go get more. I think it's been a 4-5 month period here where we've had some real bad news. Obviously, oil and gas had struggles before this 4-5 month period, but there's been cycles before they're going to be cycles again… I think there's just a unique quality to a mineral ownership where you own it forever, without really having to increase any CAPEX ever other than writing your first check to buy the land that makes it a unique asset class that should really be looked at from people trying to generate yield and long term ownership of assets without maintenance capital.
TP: Yeah… Well, going back to some of the questions that investors might ask… In other calls I've had, they said that estimates are that the Permian Basin from a minerals perspective is 60-70%. institutionally owned. So companies like yourselves and your peers own about 60-70% of the minerals in the Permian. I think that a question that a lot of investors will ask is, “Hey, we're interested in investing in Echo but what kind of upside is still available? This looks interesting, it's a compelling story, there's a good trend going upward in this space the last 5-10 years… But what's left?” Do you get that question a lot? And how do you kind of respond to that with a ground game strategy?
BO: Yeah, that question to me, is similar to the question we were getting early on in our fundraising, which is, “Is there enough to scale and create a meaningful investment?”. I think there's proof in the pudding as far as the number of minerals available, as far as an exact number goes, I don't knowon that fact you stated earlier. But I would feel pretty comfortable saying there's multiple millions of acres available in very, very, very good places in the Midland and Delaware basin, as far as what is available to buy out there with little development on it. I think the opportunity is there to continue that ground game for sure for future investment. And again, depending on your lifecycle of capital, do you have a couple years or multiple years? Because if anybody's going to try and tell us or tell you or me or anybody else, what's going to happen in the oil and gas space in the next five years, I think it's just made up. No one knows… No one would have guessed what's happening now, and no one would have guessed what had happened when oil went over $100 but there's too many variables at play when it comes to geopolitics and supply demand balances and everything else that goes into an oil and gas price that, in our opinion, the ability to own minerals with that ultimate option value for when things do get a little uncomfortable or prices do spike, without having to pay to hold leases or pay to drill wells, seems to me like a pretty attractive investment.
TP: And the second follow up part of that question, and we're too early to see this fully play out. Whereas the oil and gas industry broadly speaking, we've seen M&A cycles and commodity price cycles play out for, you know, 50 plus years… As the minerals in the good areas are largely acquired and they're not owned by individuals, then it comes down to cost of capital or how well they were bought, or the strategy for someone who can hold longer term and start to let the decades play out. Do the opportunities start to arise where you know certain corporations need to exit, they need to get money recycled back into private equity funds… Or they bought to incorrectly and have to monetize and there becomes some good value opportunities through corporate acquisitions? I still think a lot of folks that have acquired in the last five years, that say, “Well, I don't need to sell right now, we're not in a rush… We bought at $50-$60 oil”… But wait another 5-10 years on that… It might be different, right. And so where you said you might you guys might start to look at evolving your acquisition strategy where there's still plenty of value to capture through ground game, I’m just kind of wondering… Throw that idea out there that in 5-10 years with the mineral space looks like, maybe the value opportunities are different as well.
BO: Yeah, like I said, we're buying on the ground now, for sure… And the distressed opportunities, that's like any industry, right? I mean, in bad cycles, there's going to be times where people are selling distressed assets for great value. I don't want to look any further than just what's happening in the general E&P space right now with everything going on. And that should open up the possibility for bigger mineral companies and end users, whether they be public or large privates, to accumulate positions that would have been difficult to accumulate without having some of these sellers come to market. So that's something that makes sense. I think you're right on that.
TP: The only dynamic that makes minerals a bit unique versus Midstream or Services or E&P that struggle through a downturn, is that minerals companies, for the most part, have zero debt. And if they do have any debt, it's very very minimal. So when you look at, you know, “a distressed mineral company”, there's a different definition there. And again, I think it's going to take time for those type opportunities to really surface… But you know, another side comment, which is interesting, and pertains more to the smaller companies and potential buying opportunities for someone like yourself… I was talking with a guy on the phone the other day, he’s a Bakken player. He said that he was monetizing some Non-Op interests in kind of a fire sale back in March/April because he said to himself, “You know what, I'll take a 50-70 cent on the dollar write off on this because I think it's better to redeploy that money into minerals because of the value buying opportunities”. And he found that, that actually didn't play out. Unfortunately, prices haven't gone down that much. And this kind of goes on to one of my more final questions on the current environment… There's a bid-ask-spread out there that's challenging. And it's not necessarily tied 100% to oil price. I think it's indirectly tied to oil price because of the uncertainty around drilling activity. And in a place like the Permian, the pricing on minerals, at least expectations on the sell side, are predicated on getting paid for that development, because that's what they've come to expect the last 5-10 years. What are your thoughts on… How’s it been going on the ground? And have you guys been able to get deals done? Going forward, how do you foresee the bid-ask-spread narrowing so that deal flow can continue again?
BO: So for us we've been buying for 6+ years now… We've bought through a couple cycles… 2015 when prices were down in the 20s and obviously when prices had been back up and back then today. I mean, we bought over, we're looking at over 80,000 acres of ownership for Echo as a whole. We've got over 5,000 wells, and we've been in the Permian, really substantially here for the last two years. We were in there earlier, while we were mainly in Oklahoma, just dabbling but, but now mainly in the Permian for the last two years. Our portfolio is inching closer and closer to that 50-50 split but… I thought April was a month that I've never seen before and I don't think a lot of other people have either. With oil prices going negative, the bid-ask-spreads, the market was confused. No one really knew what was right and what was wrong but post that, May and June, at least from our standpoint, as we've been continuing to buy, and the ground game is continuing to move, prices have come off where they were prior to the Saudi / Russia price war and unfortunately the Coronavirus and bid-ask-spreads are starting to tighten and people are starting to transact. I think a lot of buyers may be out of the market a little bit because of some of the reasons we talked about previously on the episode but some of the longer term focused buyers like us, we've seen some opportunity to transact and we've been buying in a way that we feel really good about for the month of May and June and as we head into July.
TP: No listen… That's great to hear that you guys are getting stuff done. I think what I was alluding to before is… I asked on another call the other day, I said, “Oil is at $40 again, deals have to start to get done… bid-ask-spreads have to start to narrow”… And one of the comments was there's still a lot of uncertainty on drilling activity and so at least in the Permian, where undeveloped is getting paid more of a premium vs. other basins, that's still been a challenge.
BO: That's definitely right, that's definitely right. You're on point there and mineral owners don't want to hear that their acres aren't going to be developed. So you have to trust your underwriting and make sure that you know what you're buying and how long your durations are but… There are definitely minerals owners in Midland that are smart. They've been playing this game for a long time. So you need to have some patience.
TP: And last question here… Going forward, what are the plans for Echo? You guys are Permian and MidCon. Is gas going to enter the picture? Do you look at Appalachia? Do you look at Haynesville? Or do you continue and follow with the same strategy for the time being?
BO: For the time being, we're gonna stick around in the Permian. I think at the end of the day, that basin is core and to the country. Drilling activity, when it returns, is going to be heavily focused there. So our efforts are going to stick there for the time being. I do think you have a point with gas… That's probably a whole different podcast and a whole different conversation as far as natural gas demand and the upside for natural gas prices into the next 10-15 years. But for right now, we're gonna be sticking in the Midland and Delaware.
TP: Well, Brandon, thanks for the time and I enjoyed it. It's always fun to chat with you. I'll give you the floor to close out the episode. Any closing messages on behalf of Echo or to your peers, to the investment community about your team or the space in general? I'll let you take it away…
BO: Yeah, appreciate it. Thanks for having me on. Tim, I enjoyed it. It's nice to hop on and talk about the industry in this way. I think you guys have done a fantastic job putting this stuff together, it's not an easy environment. And I think you specifically and your group have done a great job pivoting to make this happen so I definitely appreciate it. Thank you. I think two parting thoughts for me… On the mineral side of it, for anyone thinking about minerals out there, just remember, you sign the front of the check once and the back of the check forever and no one's gonna argue about that. And on investing in general, I think eliminate the noise and trust your process. Everyone always going to have an opinion but at the end of the day, you're the one pulling the trigger. And that's the most important thing.
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