October 2017
By Oil & Gas Council

Learning Curve Still Steep For Institutional Investors in the Royalty Space

While the industry is starting to see more and more institutional money flow into the Minerals & Royalties space (PE, Pension Funds, etc.), the market still has a long way to go on the education curve.  Minerals companies who are public or have aspirations to go public have an ongoing need to educate institutional investors on what minerals & royalties are, how they should be valued, and why they are an attractive security to invest in.  Until the markets get more informed and comfortable with investing in minerals, the ability of minerals companies to go public will continue to be challenged.

 Industry Transition Into Digital Technologies – Not an Option, It is a Requirement

As global oil & gas prices continue to be suppressed, the need for extreme efficiency is imperative for oil & gas companies to not only be profitable but to survive long-term.  As automation technologies and digitalization enter the industry, companies and employees no longer have an option to adopt these new practices into their day to day operations.  The truth is, automation and digitalization are needed to stay competitive and if your company is slow to adapt, then they may go out of business due to non-competitive cost structures.

Simplify Capital Structures

There are a lot of opportunities for alternative financing right now and the need for capital is huge in Lower 48. While the bank market is significantly challenged for many reasons, public capital has been pulled back due to overallocation – small and mid-caps are looking more and more at private capital. Key challenges here are the complexity of deals and too many players. Capital providers need to work to simplify both. Engineering of the capital structure can become very problematic so collaborative approach for any type of financier or investor is now common practice. Limiting the number of players within a specific transaction is another solution. Look at those who have shown commitment to the sector and care about their reputation so they aren’t tempted to sell to secondary markets.

Diversification? Not Quite…

Diversification is happening, but not quite the way most might think. Though both investors and operators look at a broader spectrum of opportunities, more and more decide to focus on a subsector/region they can aggressively compete in. The industry is looking back at “what works” or “what worked in the past” and invest in specialized solutions for the area. Same for big Private Equity. Though not closed to new opportunities, Lower 48 deals have been successful and fast in 2017.

Know your Value Chain

Even if you know your own rock and well – you might not succeed in today’s market. With American refiners becoming more selective with crude quality, road traffic issues, 1.5 million b/d capacity to be built to satisfy Permian production – every piece of the value chain must look beyond their own business. 2017 is the time to cooperate and work together. Growth isn’t a priority anymore. Nobody is financing aggressive growth. Assertiveness, long-term strategy, detailed approach and understanding of the market needs as well as how you spend your capital is what matters the most. All of these efficiencies come from cooperation.

There are only 3-Ways to compete in the “lower for longer” market today

1) reduce your costs;

2) focus on what works and specialize;

3) invest in data analytics and digital technologies to stay ahead of the competition.