Private Equity is ubiquitous throughout our lives. It is almost impossible to go through an entire day without using a product or service controlled in one form or fashion by private equity dollars.
Despite private equity’s pervasiveness, I never thought I would see private equity dollars investing in Land/Lease Brokerage Companies.
How does private equity work in the realm of the landman
My first sighting of private equity in the Land/Lease Brokerage Business occurred at NAPE in 2012 with a company named Percheron. A quick Google search told me that Percheron was a merger of three large Land/Lease Brokerage Companies: Mason Dixon energy, OGM Land, and Percheron. The merger was facilitated by equity from Hudson Ferry Capital (HFC).
According to Hudson Ferry’s press release, “HFC brought together a bank group that provided a $55 million senior debt facility necessary to close the transaction.” While I have heard of other examples of private equity groups discussing potential deals with lease brokers, I have yet to come across another example of a deal actually closing. Time will tell how many more of these may be on the horizon.
The reality of the land/lease brokerage business
I understand the logic behind corporate roll-ups such as branding, operational and cost efficiencies, as well as the ability to service customer needs wherever they may be. My biggest concern for Private Equity is – will rollups of Land/Lease Brokers be a viable model? Just the nature of the highly fragmented business with such a low barrier to entry makes roll-ups incredibly difficult.
For those unfamiliar with the Land/Lease Brokerage Business let me explain how it works. An individual or group (Party A) obtains a customer who contracts them to work on a project. The typical fee for the work is a day rate plus personal expenses. After obtaining the contract, Party A then goes out and hires one or multiple contract field landman to perform the work (Party B). In exchange for supplying the work, Party A takes a cut out of Party B’s day rate.
The entire process is based upon relationships. There are little or no licensing requirements to become a field landman. Landman are not like doctors or lawyers. As long as someone is available to perform the work he/she can claim the title. As long as the work they do is acceptable to the customer they can continue to claim the title. For this reason, new Land/Lease Brokerages Companies start all the time throughout the prolific oil & gas regions in the United States.
What does the private equity buy?
There are very few direct employees or assets to purchase in the Land/Lease Brokerage Business. As previously stated, most brokerage companies are based upon relationships. While quality of work is important to customers, there are multiple competent people that can fulfill the work requirements.
Furthermore, the people that fulfill the work are not employees, they are contract laborers. There is not a patented process or hard asset needed to fulfill the work – just the ability to find a qualified contractor who is not required to have a license. Therefore, plowing profits back into the company does not have a significant impact on growing the company.
Similarly, debt, the jet fuel for growing a private equity controlled company, would not facilitate the internal growth of a company. The primary way to grow a Land/Lease Brokerage company through private equity money would be to purchase other Land/Lease Brokerage Companies.
As previously stated, new Land/Lease Brokerage groups appear all the time. Therefore, consolidation attempts are similar to playing whack-a-mole – only a lot more expensive!
Finally, it seems difficult to gain efficiencies by consolidating multiple Land/Lease Brokers. Unlike many industries, you don’t gain efficiencies in areas such as supply-chain or sales by consolidating Land/Lease Brokerage Companies. The only real advantage is that theoretically you only need to call one company to process all land brokerage needs throughout the US.
So many questions
Is this that great of an inconvenience? Would an oil company in Midland be more likely to use a nationwide firm to process work in the Permian Basin or would they turn to a local broker? Would it be possible to acquire and obtain enough brokerage companies to truly consolidate the Land/Lease Brokerage business into just a few companies? Only time and billions of dollars will tell.
What do you think? Does private equity have a place in the realm of the landman? What brokerage resources do you think could be consolidated for greater efficiency? Leave a comment below.