While there are plenty of potential big deals on the horizon hinting at a busy Q2 for U.S. upstream M&A, last week remained slow with just one deal announced with a price tag exceeding $10 million. That transaction did highlight an interesting development — more than three months into 2023, it was the first significant publicly announced mineral and royalty deal. Kimbell Royalty Partners agreed to acquire MB Minerals, a subsidiary of EnCap-backed Sabalo Holdings, for $143 million.
After falling precipitously in 2020 and 2021, mineral-focused M&A rebounded sharply in 2022 with about $6 billion in total deals. The universe of significant publicly traded mineral companies in the U.S sits at six including Texas Pacific Land, which also owns surface acreage and trades at different multiples relative to the rest of the space. Three more are based in Canada, including one — Freehold Royalties — that is a buyer in the U.S. These companies will need to pursue M&A opportunities to achieve their desired scale, something particularly true for smaller players like KRP or Freehold. The challenge is keeping deals accretive, though, with companies currently trading at about 7x 2023E EBITDA and a 13% DCF yield for U.S. companies.
With an average dividend yield of about 10%, U.S. mineral companies are still well ahead of E&P operators with oil names averaging about 5%. However, some large-cap operators like Pioneer Natural Resources, Devon Energy and Coterra Energy have dividend yields competitive with minerals companies, potentially eating further into their traditionally yield-focused investor base. Buying more assets, provided it can be done at accretive multiples, is the main control lever mineral and royalty companies have to increase distributable cash flow, since they don’t control development on their assets.
Given that dynamic and the need for scale, mineral and royalty M&A could accelerate later in the year. The challenge, and a potentially unscalable wall that could pose difficulties for both the M&A market and the public minerals companies themselves, is a persistently high bid-ask spread between what they can offer and what private sellers are willing to take. Considering the minimal costs associated with owning minerals and the strong cash flow they can generate, the hold case for potential mineral sellers is more acute than on the working interest side of the industry. Watching the need for deals play out against a tough market that favors sellers should make for an interesting 2023 in the mineral and royalty M&A space.
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