In a year that began with lackluster minerals-focused M&A activity, there were signs of life in Q2 with the first transaction exceeding $10 million as Kimbell Royalty Partners acquired MB Minerals for $143 million. Compared to operating company M&A, even this deal gets lost in the shadow of E&P mergers and acquisitions where there were six deals exceeding $1 billion in Q2 (five of which were Permian-specific). Relatively speaking, mineral and royalty deals have appeared diminutive – until now. Mineral deals rarely breach the $1 billion mark, but Viper Energy Partners deployed more than $1 billion, mostly in cash supplemented with stock to acquire mineral and royalty assets from affiliates of Warwick Capital Partners and GRP Energy Capital (GRP) in the third-largest mineral deal ever tracked by Enverus Intelligence Research. Following the completion of the transaction, Viper Energy gains 7,322 net royalty acres (at 100% or 58,580 normalized to 1/8 NRA). Not surprisingly the deal is heavily weighted with Permian acreage, significantly expanding Viper Energy’s Midland and Delaware positions.
This acquisition raised the question: Is this magnitude of minerals M&A a flash in the pan or is this a sign of things to come? Given the trainwreck caused by demand destruction and plunging commodity prices in 2020 and 2021, the minerals market began its road to recovery in 2022. Given continued growth in the oil and gas sector, the path forward will likely see minerals M&A continue to heat up. Mineral and royalty interests represent a very attractive asset class to own given that operators bear the cost of extracting hydrocarbons while interest owners collect revenue streams. Thus the fight is for prized Permian acreage.
Among public buyers, the bid for GRP’s assets was a two-horse race between Viper Energy and Sitio Royalties who likely saw the mineral interests as an excellent fit for their own footprint in the Permian. Asset diversification was also at play here with about 20% of the deal including assets in the DJ Basin, which would also have complemented Sitio Royalties’ existing holdings in the Rockies.
A niche within the oil and gas sector, mineral holding companies must increase investor exposure and drive down G&A costs per BOE. This deal accomplishes both for Viper Energy along with increasing free cash flow at the cost of diluting its focused asset exposure to the Permian. While Permian assets may be prized for resource expansion, diversifying mineral holdings is a good strategy for any buyer given the battle and cost of securing Permian acreage.
Increasing interest from large mineral funds and institutional buyers for limited minerals and royalty ownership opportunities is leading to a fierce competitive landscape. The tools of the past are no longer enough to keep pace, underscoring the need for asset buyers to embrace a data-driven and analytics-intensive approach to quickly identify, valuate and seize mineral M&A opportunities. Those who do it well will thrive, build a strong portfolio and extract maximum ROI from their assets.
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Enverus Intelligence Research, Inc. is a subsidiary of Enverus and publishes energy-sector research that focuses on the oil and natural gas industries and broader energy topics including publicly traded and privately held oil, gas, midstream and other energy industry companies, basin studies (including characteristics, activity, infrastructure, etc.), commodity pricing forecasts, global macroeconomics and geopolitical matters. Enverus Intelligence Research, Inc. is registered with the U.S. Securities and Exchange Commission as a foreign investment adviser.
