In the relatively small world of publicly traded mineral companies, the focus has been on publicly traded options. This has been due to the number of new companies listed over the last five years and the absence of public company consolidation. That changed on Sept. 2 with the merger of equals between Sitio Royalties and Brigham Minerals to form a $4.8 billion pro-forma enterprise value company with a 260,000 net royalty acre position with 70% located in the prolific Permian Basin. The merger ties together two companies that have similar positioning in the market in terms of yields, growth prospects from untapped inventory, and outlook on M&A.
For companies on the mineral and royalty side of the upstream business, which receive payments for oil and gas production on their land but don’t pay costs to develop it, there has been less pressure to consolidate since they typically have low overhead costs and less of a need for operational synergies. However, there are still benefits from having a larger presence in public markets as these companies look to reach out beyond the investors focused on this niche space to a broader audience.
In this deal, Sitio touts that the combination with Brigham will increase its public float by 5.8 times to $1.9 billion. Additionally, even with low costs, the companies still say they expect to realize cash G&A savings of about $15 million per year with a reduction in 2Q22 pro forma cash G&A per boe by 19% for Sitio.
Brigham, which is substantially focused on the Permian Basin but owns royalties across several plays, will significantly increase the share of Permian exposure in its asset base. In the longer term, as other plays continue to mature and inventory dwindles, exposure to the Permian will be key for royalty companies to maintain a of pipeline of wells to be developed on their land.
While public company mergers may be rare, smaller scale M&A is fundamental to the minerals and royalty space. Since these companies don’t control the pace or scale of development on their properties, acquisitions are how they can drive production and cash flow growth to feed investor distributions. Sitio and Brigham were both active buyers in the Permian this summer and poised to compete against one another for the most desirable land. Now, the erstwhile competitors will have a larger and more liquid platform to continue to roll up highly fragmented royalty ownership.
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