The United States has taken a unique view on the issues of mineral rights and developed a system that is typically only found in that country. In most countries around the world, certain mineral rights belong to the state – for instance, in the United Kingdom, oil, gas, coal, gold and silver belong to the Crown, and all non-fuel minerals (apart from gold and silver) belong to the individual landowner.
Yet, in the United States, all mineral rights can be, and are, owned by people (or corporations or trusts), not necessarily the government. The owner of the mineral rights on a property may extract and use the minerals found beneath the surface of their land.
Rights ownership is not as simple as ‘if you own a piece of land, you own the mineral rights to that land.’ It has evolved over the years with the introduction of a concept known as ‘severability’ to include different rights categories – surface rights, mineral rights and royalty rights – each of them giving certain privileges to the different owner type. It is possible, in other words, to own the surface rights to a property, but not the mineral or even royalty rights – or any number of permutations of the above.
Role of Aggregators
The owner of the rights can lease these mineral rights to a third party to exploit the minerals on the property. This is a section of the market which has recently seen aggregators consolidating and bundling mineral rights for development by oil and gas exploration companies. Aggregators are becoming increasingly attractive to private equity investors who want to benefit from the opportunities of lower capital oil and gas exploration.
A significant benefit of working with an aggregator for the mineral rights owner is that of negotiation skills and experience. Aggregators are more likely to be able to negotiate favourable lease terms while being able to leverage their size in comparison to that of the individual. Also, aggregators actively monitor and manage mineral and royalty interests to ensure the maximum economic benefits of the leases are realised.
We anticipate that the role of public traded aggregators in minerals and royalties will continue to grow, as seen by the acquisition recently of more than a million acres of royalty interest in the Anadarko Basin by Kimbell Royalty Partners, for approximately $16 million.
Backed by private equity investors, mineral rights aggregators such as Kimbell Royalty Partners, are offering liquidity and value in this market and provide the opportunity to be exposed to the benefits of mineral exploration, without the operational risks.
Private equity players such as KKR and Kayne Anderson Capital Advisors, have been increasingly active in this space. Lime Rock and EnCap too have been pursuing mineral and royalty opportunities.
Other private equity players include Energy and Minerals Group, Post Oak Energy Capital, CIC Partners, Riverstone and Natural Gas Partners.
The size of the market is estimated at close to $500 billion, although some value it as high as $600 billion. Public companies make up only 2% of the total market. This equates to about $10 billion; $8 billion of which is owned by Black Stone Minerals and Viper Energy Partners.
Yields in 2018 for Kimbell Royalty Partners, Blacks Stone Minerals and Viper Energy Partners ranged between 6.7%-8.7%.
Kimbell is one of the most recent entrants to the market. Kimbell is part of a group of publicly listed aggregators including Viper Energy Partners, Black Stone Minerals, Dorchester Minerals, Falcon Minerals, and Brigham Minerals. Brigham went public in April 2019 at $18.00 per share on the New York Stock Exchange.
The major players in the market have all become active within the last five years with the Viper Energy IPO in July 2014, Blackstone Minerals in May 2015 and Kimbell Royalty in February 2017.
Mineral aggregators generally have positive cash flow, high margins and ”dividend yields that provide healthy returns straight to the investor’s pocket,” says J.Michael Sousoulas, a financial analyst for Mercer Capital. All this, without the risk.
Sousoulas continues: “The mineral interests acquired are a revenue stream that can almost immediately be paid out as dividends to investors because the investment is in properties that are already producing and the mineral aggregators receive a portion of the proceeds.”
“By investing directly in the cash flows, mineral aggregators can bypass some of the riskier and more costly upfront aspects of the process, turning their investment into a return more quickly.”
Private royalty programmes are typically reserved for high net-worth investors and take the form of limited partnerships or direct title programmes. Many investment advisors believe that royalties should make up part of any investment portfolio, in no small measure because of their tax benefits. Part of the income stream paid to royalty investors is tax free. That amount can range from 15% to as high as 35% each year, depending upon the depletion allowance,” according to William Swearingen, managing director of United Capital of Texas, Dallas.
Structural differences: Trusts vs aggregators
The significant difference between the structure of aggregators and royalty trusts lies in the fact that aggregators reinvest earnings into the acquisition of properties. Unlike royalties, aggregators do not see a decline in production as they are continually reinvesting in new properties and therefore offer an opportunity for growth not typically seen in a trust.
The benefits of either will depend on what the investor wants from the investment. One particular advantage of a royalty trust is that of favourable tax treatment in comparison to an aggregator.
Benefits of investing in royalties
Royalties as an investment provide a stable, reasonably low-risk alternative for investors and are not subject to the fluctuations typically seen in the stock market.
Investors into royalty aggregators have access to the benefits of investing in oil and gas wells, without the drilling and operating risks, and royalties are traditionally considered a good hedge against inflation.
Due to the structure of many aggregators, investors are not just investing in existing royalties, but in any new wells that may be developed on that land as well.
Public royalty aggregators are gaining momentum, and we will likely continue to see an increased number of IPOs for aggregators. At the front end of the consolidation trend, public royalty aggregators are currently riding high in somewhat unchartered territory. While this market will become more saturated with time, at the moment, they offer an attractive alternative for investor appetite for decent yields without the risks.
As part of the 2019 North America Assembly, we are hosting a day specifically dedicated to royalties and minerals companies. Some of the key speakers joining us to unpack this topic are:
President, Bellatorum Resources
Director, Waterous Energy Fund
CEO, Noble Royalties
President & CFO, Black Stone Minerals
Managing Director, BOK Financial Securities