Interview with Darin Zanovich
CEO, Mesa Minerals Partners
Summary of a Podcast – visit Royalties & Minerals Podcasts
Darin was born and raised in Oklahoma and has over 23 years of Oil & Gas experience primarily in the E&P sector, with the last 7 years in the minerals and royalties space.
Idea Behind Haymaker
Darin: I'd known Karl Brensike for over 15 years. We have grown up in the industry together and served on a couple of boards. I met him initially at the World Oilman's Tennis Tournament where we were probably some of the youngest people there.
Karl approached me in 2013 with the idea of Haymaker being a pure play mineral & royalties company. Initially, we partnered up with operators to buy ahead of their drilling program. I thought that was a brilliant idea.
When we saw Viper going public, we knew we needed to get as big as possible as quickly as possible. So we bought a hedge fund out of San Diego that had a big position and then we also ended up acquiring a mineral package from Chesapeake. We grew very quickly and ended up becoming diversified because of the way we made those acquisitions. We then sold Haymaker to Kimbell in 2018 for a little over US$445 million and returned ~2.5x to our investors.
Mesa Minerals Partners Strategy
Darin: We formed Mesa Minerals Partners in October of 2018 and immediately started buying ahead of the drill-bit. We were able to scale really fast because:
- There has been less competition outside the Permian. We like Haynesville gas because we see it as feedstock for the Gulf Coast LNG projects coming online.
- We primarily buy underneath Rockcliff Energy who has a good balance sheet and pad drilling. When you have three to four wells being drilled at a time, you can grow pretty quickly.
- One of the other reasons we grew as quickly is that we acquired the mienrals position of large family who had a legacy timber position out in East Texas.
We're able to make that acquisition close to 2019. So that was a really big deal that gave us a huge footprint. And then we just continued to buy ahead of drilling and with pad drilling you have three to four wells at a time and can grow pretty quickly.
Misconceptions and Trends in Minerals & Royalties
Tim: What do you say to an investor who is sceptical about royalties and minerals because they don’t have any experience in the space?
“The biggest misconception is that these type of portfolios are difficult to manage and require a large team.”
Darin: The biggest misconception is that these types of portfolios are difficult to manage and require a large team. Building out the portfolio like we are building does require a team with expertise but once it is built it is relatively easy to manage from a maintenance standpoint.
Trend #1:There's over $16 billion in private equity capitals that's poured into the minerals & royalties space since 2013 and there currently aren’t enough buyers to exit all of that capital. Private equity is not an end-buyer for this type of asset class so it needs to exit at some point. The right types of end-buyers are institutional capital: pensions, endowments, insurance companies or a family office who wants to own something longer term, i.e 10+ years.
Trend #2: Pretty much every Permian operator has created a sidecar minerals acquisition vehicle that is buying ahead of the drill-bit. You see a lot of operators now carving off overrides and selling them to minerals groups like Continental did in their partnership with Franco Nevada.
Trend #3: We're seeing more direct investment from institutional groups such as Teachers Capital via Heritage Royalty and CPPIB via Long Point Minerals.
Capital is flowing into the minerals space more so than E&P. There have been poor returns for E&P investors over the last decade. However, it is important not to forget that minerals and royalties are dependent on production, which is driven by E&P companies. It’s a bit of a Catch 22 but ORRI carve outs and royalty partnerships can help E&Ps deploy capital back into their drilling programs, which makes it a win-win for everybody.
These assets are a low risk investment and very inexpensive to manage with no CAPEX and no OPEX. It is like buying underground real estate. There is really only a one-time cost to buy these assets.
We believe there's a window of opportunity over the next 2-3 years for investors with lower cost of capital (8-15%) and longer hold periods (10+ years) to enter the minerals & royalties space and make great returns.
Options for Exiting
Tim: With a small amount of large end-buyers and a challenging IPO market, what options are there for exiting?
Darin: How do we view the exit market? We think we are about the right size for it now. We think the sweet spot for being acquired is in the $100 and $200 million and we fall within that range. Today we're about 20,000 net royalty acres. Cash flow for 2020 is expected to be around $20 million. We have quite a low cost basis vs private equity and other groups that are playing in the Permian. Average net royalty interest per well for us is about 1.5%. We've got over a thousand PDP wells and over 600 undeveloped locations. We've averaged about 5.5 rigs per month over the last 12 months. So there's quite a bit of activity between Rockcliff and Comstock and some other operators on our assets.
Darin Zanovich featured on Royalties and Minerals Podcast Channel by the Oil & Gas Council on the 9th of March, 2020. Register your Interest here to get an update about our next weekly podcast or explore our Digital Platform for more options