Minerals Investing Comes to the Fore

Minerals Investing Comes to the Fore


Recent deals challenge long-held assumptions that minerals are uncompetitive and non-scalable as minerals investing emerges after decades in the background.

By Gregory DL Morris

In early August 2018, Continental Resources Inc. and Franco-Nevada Corp., a precious metals royalties firm, formed a joint venture (JV) to acquire hydrocarbon mineral rights in Oklahoma’s Scoop and Stack plays. Franco- Nevada will contribute about $220 million for the acquisition of existing mineral rights owned by a Continental subsidiary. Franco-Nevada committed, subject to satisfaction of agreed-upon development thresholds, to spend up to $100 million per year over the next three years to ac- quire additional mineral rights. The existing mineral rights and others to be acquired later will be jointly held through the new company.

Revenues are expected to build as Continental ramps up development of its leasehold position. Franco-Nevada, based in Toronto, intends to fund its investment from cash on hand, partial use of its credit facilities and its projected future growing free cash flows. This new relationship will add to Franco-Nevada’s existing interests in the Scoop and Stack.

“In most cases people buy mineral rights blind, not knowing when, if ever, they will be developed,” said Jason O’Connell, the vice president of oil and gas for Franco- Nevada. “The idea here is to buy the mineral rights for sections where Continental plans to develop. Sure, in offering to acquire those rights we tip our hand a little and possibly pay more than the market price, but there is still a compelling value arbitrage that can be achieved.”

The terms of the transaction are complex, but essentially Franco-Nevada will pay 80% of the cost for the mineral rights being acquired, and then revenues are split 50:50 with Continental if the latter meets certain production targets.

“The transaction is hugely attractive to Continental,” O’Connell said. “They provide the information and they manage the program. We provide the bulk of the invesment, and they get half the revenue,” which for Continental is actually reduced outlay. Franco-Nevada is not new to energy, but has focused on gold royalties. In March 2015 at the bottom of the recent oil price decline, the company decided to increase its exposure to hydrocarbons.

“We are long-term investors,” O’Connell said. “We are not looking for profits in three to four years, but in 10, 20, 30 years. That is in contrast to the short-term investment objectives of private equity.” He also recognized Continen- tal as a producer with experience in mineral rights. “They are already set up with the ability within the company to understand the complexities of mineral ownership. Most producers trying to replicate the idea would have to start from scratch. What they wanted was a strategic partner with long-term capital. That is us.”

Busting mineral myths

The Hefner family has been involved in minerals investing for more than a century. And still, Robert Hefner V, President and CEO of Oklahoma City-based Hefner Energy Holdings LLC, said that as he grew up in the industry, conventional wisdom held that minerals were unable to compete with operated or non-operated working interest, and were not scalable.

“I never bothered to question those two assertions until about 2013, when I invested in some minerals in the Scoop at $100 [per barrel] oil. I noticed, even as oil prices collapsed to $40, my mineral investments were generating strong returns. Since the former was disproven, I then questioned the latter assumption that minerals were not scalable. “I started investing more in minerals and found that minerals are very scalable. Both of the two common beliefs about minerals were wrong,” Hefner said.

Given his love of history, Hefner has a theory as to why minerals suddenly seem to be on everyone’s mind in the last few years. “You always hesitate to say, ‘This time it’s different,’ but there are things about this cycle that were not present in previous industry cycles, notably horizontal drilling and hydraulic fracturing. The shale bonanza has meant massive capital programs, hundreds of millions [of dollars] for a single unit. That has significantly increased the velocity of the cash flow and the nature of capex. Minerals investing is a capex story.”

Continental Provides Positive Project Springboard Update in the Face of Negative Industry Sentiment

Continental Provides Positive Project Springboard Update in the Face of Negative Industry Sentiment

It is a Bunch of Good News

Today, Continental Resources announced a much awaited update on their Project Springboard development in central Grady County.

  • Row 1 has been completed and results are in-line with expectations

  • Enhanced development plan will shed CAPEX costs while increasing EUR per well to 1.3 MMBoe (from 1.2 MMBoe)

  • While others are considering laying rigs down, Continental is pushing forward

    • 7 Springer rigs running drilling rows 2 and 3 (out of 5) as we speak with 16 wells awaiting completion and

    • 5 Sycamore/Woodford rigs running with 17 wells awaiting completion

  • The Triple H results are announced to be 1,516 boe/d average IP per well with a 6,065 boe/d combined IP leading to a 1.3 MMBoe type curve

  • In stark contrast to the Permian, marketing advantages associated with the Project’s close proximity to Cushing, and ample takeaway capacity, have lead to less than $2.00/bbl crude oil differentials

New Findings Significantly Alter Understanding of Anadarko Basin’s Remaining Resource Potential

New findings significantly alter understanding of Anadarko Basin’s remaining resource potential

HOUSTON--(BUSINESS WIRE)--The Greater Anadarko Basin, a prolific source of conventional U.S. oil and gas production since the 1950s, holds an estimated 16 billion barrels of oil and more than 200 trillion cubic feet (TCF) of gas** in un-risked technically recoverable resources in unconventional reservoirs, according to new energy research from IHS Markit (Nasdaq: INFO), a world leader in critical information, analytics and solutions.

“The Anadarko Basin has long been a major contributor to U.S. production, but it is just getting started in terms of delivering on its unconventional production potential,” said John Roberts, executive director, global subsurface operations and co-author of the IHS Markit Anadarko Basin research with Prithiraj Chungkham, director of unconventional resources. “We are now witnessing a new kind of Oklahoma land rush. But unlike what happened in 1889 when lands were opened to settlement, this time the competition is for access to the energy resources that lie below the surface,” Roberts said.

The IHS Markit analysis shows that the basin is pushing toward new all-time production highs long after conventional oil and gas production peaked in the 1970s and 1980s, respectively. Horizontal drilling in the Anadarko Basin has increased sharply since 2008, and annual basin production volumes have already set new peak records.

The IHS Markit Complete Play Analysis of the Greater Anadarko Basin, Texas, Oklahoma and Kansas, USA, is the first phase of a comprehensive, 18-month-long project to model and interpret the large basin’s key geologic characteristics, including 3D geologic models of 41 plays to better estimate its remaining hydrocarbon potential.

The IHS Markit analysis provides significant advances in the accuracy and granularity of detailed producing-formation information that is historically difficult to acquire.

“By getting to a greater level of granularity and accuracy regarding producing formations, we change the entire view of the basin,” Roberts said. “For geologists, it’s like having a more powerful microscope.”

Among the most surprising results was the vast potential of the Simpson shale formation, which IHS Markit now believes could be one of the biggest yet-to-be developed shale plays in the United States.

“The Simpson has long been among the largest historical producers of vertical production in the Anadarko Basin,” Roberts said. “But our new analysis shows that there is also significant Simpson potential as a major driver for horizontal shale production.”

The IHS Markit analysis includes modeled and interpreted formations and benches in the STACK and SCOOP plays and has delivered them in a workstation-ready 3D format. The significant improvement in assigned formations not only adds detail and accuracy to the interpretive process, but dramatically changes the views of the basin and understanding of where future hydrocarbon potential exists.

“As it stands now, only about 20 percent of the Anadarko Basin’s STACK ‘sweet-spot’ locations have been drilled or developed,” Roberts said. “The play is still in its early stages of unconventional development. We can easily envision an additional 4,000 to 5,000 horizontal wells drilled.”

Overall, the new results underscore the Anadarko Basin’s renewed attractiveness.

“The Anadarko is attractive because it has 41 stacked plays, which overlap in many parts of the basin,” Chungkham said. “For operators, that means multiple targets that can be accessed from one well pad.”

The analysis utilizes the IHS Markit historical well and production database that includes more than 320,000 wells, and a new proprietary tool PRODFit™, that, for the first time, enables them to leverage interpreted formation ‘tops’ data to accurately identify formations of completion intervals on 275,000 wells. The data was then modeled and interpreted using IHS Kingdom™ geology and geophysics software.

To speak with John Roberts or Prithiraj Chungkham, please contact Melissa Manning at melissa.manning@ihsmarkit.com. For more information on the IHS Markit Complete Play Analysis of the Greater Anadarko Basin, Texas, Oklahoma and Kansas, USA, contact ann.forte@ihsmarkit.com.

Related Materials:

For a similar analysis of the remaining hydrocarbon potential of the Permian Basin, see the previous IHS Markit research entitled: The Permian Basin Interpreted in 3D: The IHS Markit Permian Basin Unconventionals Kingdom Geology Project .

**This estimate of the remaining recoverable gas resources in the Anadarko Basin does not include the significant volumes of previously identified, unconventional recoverable gas resources already known to exist in the Anadarko Basin’s Granite Wash Trend. Those resources would be in addition to the estimated technically recoverable resources referenced in this new study.

About IHS Markit (www.ihsmarkit.com)

IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. Headquartered in London, IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions.

IHS Markit is a registered trademark of IHS Markit Ltd. and/or its affiliates. All other company and product names may be trademarks of their respective owners © 2019 IHS Markit Ltd. All rights reserved.


Oklahoma Ranks #1 Best Place to Start a New Business

Sorry Coastal Elites, the Best Cities to Start a Business Right Now Are in 'Fly Over' States

Despite their reputation as startup tech hubs, San Francisco and Boston aren’t the only cities where startups can shine. In fact, they’re not even among the best. A new report from personal finance website WalletHub crunched the numbers and found they don’t even crack the top 20, when it comes to the best large U.S. cities to start a business.

Instead, Oklahoma City landed the No. 1 spot, followed by Austin, Texas; Sioux Falls, S.D.; Missoula, Mont.; and Durham, N.C., according to WalletHub.

(Read More)

Continental Resources to Focus on SCOOP Springer Field Development

While the market continues to have a fascination with Continental Resources' (NYSE:CLR)  earnings release surrounding STACK density pilot results, they are failing to notice their amazing announcement - Continental will (finally!) be developing a portion of their most prized asset - the SCOOP Springer.

Our internal analysis suggests the SCOOP Springer boasts the best Initial Production-to-Type Curve combination of any play in the United States with the average well producing more than 1,000 barrels of oil coupled with very shallow initial decline rates (~55%), which is why Continental improved their type curves from 940 Mboe to 1,200 Mboe (175% ROR at 7,500' lateral length). We can expect 31 gross wells (26 net) to be completed to the Springer in FY2018, being drilled by 5 dedicated rigs.

CLR Springer Density FY2018 Plans.JPG

Fed: Oklahoma, Texas Boast Lowest Breakeven, Opex

The Permian Basin and Oklahoma’s STACK/SCOOP are at the center of the oil and gas recovery with the lowest breakevens and opex, according to a Dallas Federal Reserve report.

The Fed polled around 60 E&P companies in mid-March to ask two questions: What WTI price do you need to profitably drill a new well and where does WTI need to be to cover opex for existing wells? The companies’ responses largely indicated that the current oil price is slightly above breakeven in the prolific plays while prices at the depths of the downturn still weren’t low enough to shut in wells in the top shale regions.

The Midland Basin had the best breakeven for new wells at $46/bbl. This was followed closely by the STACK/SCOOP at $47/bbl, Eagle Ford at $48/bbl, Delaware at $48/bbl and Central Basin Platform at $50/bbl. The average Permian breakeven price was down to $48/bbl this year from $51/bbl last year, according to the survey.

The Midland also led the pack as the cheapest play in terms of opex, with operators saying $24/bbl was needed to keep their wells flowing. The STACK/SCOOP again was second at $27/bbl, followed by the Eagle Ford at $29/bbl and the Delaware and CBP at $33/bbl. Opex for 1Q17 was similar to 1Q16.

Source: PLS PetroScout

Oklahoma Federal Court Delivers Blow to Sierra Club

AAPL - In a win for the industry, on April 4, in Sierra Club v. Chesapeake Operating LLC (Case No. 5:16- cv-00134), the U.S. District Court for the Western District of Oklahoma dismissed an environmentalist lawsuit against multiple oil and gas companies blaming hydraulic fracturing for increased earthquake risk.

The lawsuit was premised on the notion that the Oklahoma Corporation Commission (OCC) - which has primacy over the U.S. Environmental Protection Agency's Underground Injection Control program - is doing an inadequate job implementing induced seismicity mitigation measures. 

The Court disagreed, noting that "the OCC has been taking the action requested by plaintiff." Further, the Court noted that the OCC "has responded energetically to that challenge" and that the OCC "has brought to bear a level of technical expertise that this court could not hope to match."

Read more.

Hefner receives national award from the AAPL

Hefner Energy's Founder & CEO, Robert Hefner V, has been named 2016 "Best Member Communication" from the American Association of Professional Landmen (AAPL) for his work and social media interaction surrounding the lightning rod issue of (and titled) Induced Seismicity

Earlier versions of his work had been published by the Oklahoma Independent Petroleum Association (OIPA) and Oklahoma City Association of Professional Landmen (OCAPL).

Marathon Oil Pays $888 Million to Acquire Payrock Energy

Marathon Oil announced they will pay $888MM to acquire Payrock Energy's position in the STACK, covering roughly 61,000 net acres and current net production of 9,000 barrels of oil equivalent per day (Boe/d).

Marathon Oil's Investor Relations Webcast Highlights:

  • The deal implies $11,800 per net undeveloped acre after backing out PDP production value.
  • Initial production rates on a few of their 1-mile lateral wells exceeded 1,300 Boe/d.
  • 330 MMBOE 2P Resource with 490 gross operated locations ($2.20 / Boe implied value)
  • 6 well Meramec density per section assumed in their valuation
  • 940 MBoe EUR per well type curve
  • 790 Boe/d average IP30

Marathon's shares surged since the announcement was made.

Payrock Energy is a private oil and gas portfolio company of EnCap Investments and was advised by Jefferies, Inc. on the transaction.

HighMark Energy Acquires Atalaya Resources 4,095-acre STACK position

HighMark Energy of Dallas, TX announced June 2, 2016 their acquisition of nearly 4,100 acres from Atalaya Resources in the STACK.

The position covers mostly Blaine and Canadian Counties, Oklahoma.

About HighMark Energy

With the equity backing of Natural Gas Partners, HighMark Energy was formed in the fall of 2013 to acquire, develop and produce upstream oil and natural gas assets.

HighMark's principal strategy is the acquisition of mature, high quality, producing properties. Management has the skill set and experience to undertake a broad range of negotiated and competitive transactions including mergers, direct acquisitions, and equity and debt participations.