Thank you, everyone. Thank you to the organizers for inviting me to present.
We're kind of in the homestretch, here. We saved the best for last. There's a
couple of presentations after me. I'm definitely not the best. It's going to be
ramping up to the best. We're setting the bar really low for this presentation,
OK? And Rick, unfortunately-- parent-child relationships. My daughter was not
able to make it. She's a 3 and 1/2 year old. She was excited about the plane
and the hotel that was going to be involved with this trip, but in her absence,
we are going to talk about her college fund in light of mailbox money.
Overland Oil and Gas based in Denver. We consider ourselves an asset
manager. We manage many different asset classes, be it royalties, minerals, non-operated
working interest-- we may even consider drill coves over the past couple of
years, but we do not operate. Whoops.
So just a quick over-line of what I'm going to try and run through in a
short amount time. We'll do a quick poll. We'll do some definitions on kind of
the value chain. I'm going to cruise through that. I want to look at some of
the deal diversity that we've considered over the past couple of years-- some
analogs and some of the nuance associated with those analogs that make minerals
and royalties different than some of the analogs. We'll also look at the value.
How do you value these things, either on a time, value of money perspective, or
in the market? And then some strategies and suggestions and other nuances that
I've noticed over the past couple of years. Oh, I did it again.
So who currently owns minerals in the room? If you can you just raise your
hand? OK. Handful of folks. Maybe 10-20. Has anybody ever negotiated a lease as
a geologist-- actually negotiated a lease? And then who's bought a home? OK,
yeah, yeah, yeah. Figured. And who's picked stocks-- actually actively picked
stocks-- in their portfolio? OK.
And anybody know what a DCF is? A discounted cash flow? Anybody done those?
Some geologists have not. So PV-- present value, IRR. And then non-geos? This
is a geology conference or a geology meeting. Are there non-geos in the room?
Folks who just really do not identify with geos? OK. Cool. I'm sorry. Thanks
Well, just from a definitional perspective, I noticed they didn't tell me
this till after about a year of hanging out with the Overland guys, that there
was a difference between a net mineral acre and a net royalty acre. It's a
fairly fundamental difference. And so I include this in there just for clarity's
sake, especially in light of-- most things are not leased-- at least the things
that we buy-- are not leased today at a typical landowner's royalty of 12 and
1/2 of 1/8th, 12.5%. Particularly down in Permian, we see things that are all
the way in the 25% leased rate. We leased things last week in the Bakken at
22%. And when you're calculating a value of a future royalty stream based on
what it's going to participate in, you've got to be acutely aware of that,
because you may value one acre at one royalty rate completely different than
another acre at another royalty rate.
With regard to overriding royalty interest, we consider those as well. And
they're distinctly different. They're somewhat subordinate to a mineral acre
from an asset class perspective. It's actually carved out, typically by the
operator-- a lot of times, by the prospecting geologist. After they buy it from
the prospector, they'll carve them out an override, and that comes out of the
working interest portion of revenue, not necessarily the royalty interest
That said, there's also an equivalent type of asset class on the royalty
interest revenue side. You can call it NPRI, or non-producing royalty interest,
but that would be carved out by the mineral owner-- not necessarily the operator--
and that would typically not have voting rights, and wouldn't benefit from a
lease bonus, or anything. It's just a percentage that the royalty owner might
assign to whoever it could be. It could be his plumber. It could be his
sibling. It could be anyone.
Frequently, we see a term aspect to an NPRI, so you need to be acutely aware
of that-- whether or not the term might expire on the NPRI. We also consider
non-operated working interest or NOWI is the four-letter acronym for it.
Points-- point is a terminology that equates to 1% royalty. How much are you
willing to pay for 1% of royalty? So a typical 1/8th royalty is actually 12 and
1/2 points. And then pooling and unitization. I identify pooling more with
individual tracks that are pulled into a well, versus unitization, which is
going to be more DSU spacing and how many wells are participating in a
And just for clarity's sake, I want to show-- this is 100% spectrum on the
top here in these two bars. Do you see that? Yeah. That's 100%. What we're
talking about, really, is the red portion there. Frequently, the royalty
interest owner will take on some portion of the gathering transportation and
compression costs, their proportionate amount of taxes. But one of the things
that's interesting when you start looking at this-- if we assume, let's say, a
$60 barrel oil price and 1/6th royalty-- 16.767% royalty on a single well
that's on a 1280 acre spacing-- let's say that's Bakken. Bakken's nice and
uniform. They Space all the wells to 1280. They don't have discrete spacing for
each individual well. We look at the royalty order share for a single barrel,
and it's actually $7.97 of every single barrel.
That said, when we look at taking that up to their share of the well,
assuming a 400,000-barrel well, they're talking about maybe $3,186 associated
with royalty income from-- is that right? Yeah, yeah, yeah. I lost myself. My
And what we see here is just a multiplying effect. You see a single well,
let's say $3,000 for the royalty portion of that well. We multiply that times
actually 12 wells in the unit. Now you're at 38-- oh, it's million, sorry, I
was thinking 3,000-- $3 million. you multiply it times 12 wells. You get up to
$38 million in royalty income for the royalty owner, assuming, this is again
assuming that they own 1,280 acres, the entire royalty stream for the unit. And
that backs into a per acre price for that revenue stream of roughly $29,000 per
So, a fairly sizable amount on a per acre basis. And we've actually transacted
on a couple. We've sold some things in the Bakken recently at that roughly
$25-$30,000 per acre mark. With regard to the deal spectrum, we consider things
really that we would call three different tranches, really-- marketed deals,
unmarketed deals, kind of off-market deals, and then auction sites. We
participate in auction sites as well.
From the big perspective of marketed deals, we've looked at things up to
74,000 net mineral acres. It's a shotgun blast throughout the producing areas
of the United States and the non-producing area goat pastures of the United
States. The original ask we sized up to about 150 million. And in the end, we
heard it transacted for roughly 75 million, about half that.
It was already producing also 500,000 per month. So that's the PDP
component. From a smaller perspective, we looked at something just up in the
Bakken with 6,000 net royalty acres. It went to market at 80 million. And we
heard it transacted for less than 20 million. And it was all in one basin.
Un-marketed deals, another fairly large, wide spectrum. Saw something in the
past year, it was roughly 2,000 net mineral acres, marketed at 45. Eventual
sales price, we think was somewhere around 17. That's said, we've also looked
at things that were half net royalty acre and it was marketed at 25. Eventually
transacted for 15. And it had 25 DUCs just waiting to go into production.
From an auction site perspective, you end up with a much larger, again, a
wide spectrum, but a little bit lower on the overall size. We saw recently 100
net mineral acres in Williston. Cash flowing already roughly $600 a month.
What's interesting about the auction sites, and you have to watch these things
acutely, is that they may be on the auction block for, let's say, in an open
bidding process for, let's say, seven days. And the first six and a half days,
the price won't even budge. And then in the last couple of hours, you'll see it
just go, dida, dida, dida, and climb on up. In this case, we saw something
transact greater than 22,000 an acre, and that all happened in the last six
hours. It can be fairly exciting if you're that kind of junky. But it can also
be kind of scary, as you go into that trying to win it. You got to be careful.
Don't go too high too early, because you may need to save some of that powder
for later. That was acreage that was already permitted and the rig was nearby.
It wasn't necessarily goat pasture. That said, we've seen some smaller
packages. And you regularly see smaller packages on auction sites, down to roughly
10 acres, 40 bucks a month. This is the greater Green River gas PDP Wyoming
deal. And it really only transacted for 3,500 an acre.
Overland-- like I said, Overland's really on asset manager. That said, we
are heavily weighted in minerals and royalties. The things that we do beyond
there are really kind of secondary to the modus operandi for our committed
capital. We have two funds. Currently, approaching 100% deployment on our
second fund. And with that, we've been able to buy roughly 12,000 net royalty
acres throughout the DJ and the Bakken. We do own some things in the Uinta. We
own some things in Marcellus Uinta. We've done some Permian deals. And we
actually-- we stepped out and started looking at deals beyond our backyard we
were most familiar with. One of the things I'll note is that this is a great
market. And it helps to go into there cautiously. Because really, in the gray
market aspect of things-- actually, I'll get to that in just a second. Let me
go ahead and--
The other thing to note on this slide is the permitting, the DUCs, and the
sum of total wells that we calculate to be on the acreage, essentially you're
trying to calculate what is the future cash flow of the potential that this
gets drilled out in its entirety. We aren't necessarily just buying PDP. We're
buying looking for upside typically. So we go ahead and forecast how many wells
we think are going to be there. And the intrinsic value today is really focused
on that, but heavily weighted to is it permanent, are the DUCs waiting to go on
line for production.
When we look at analogs, the reason I asked about the houses is that it's
definitely an analog market. I mean, that's one way to make money with money.
You buy a house on the premise that it's going to appreciate. The efficiency in
the market, it takes roughly four weeks to close on your house, and yeah, you
can look at comps in all the neighborhoods around you and see what the comp
price per square foot should be. Stocks, even more efficient. You get quotes on
the seconds, quotes up to the second. You can close deals in seconds.
And both of those are regulated formally, including savings account, just
another really passive way of making money with money. Typically the
appreciation rate's or the interest rate's published. Minerals are different
though. It's very much a gray market. The efficiency really depends. I've seen
folks write checks on the spot for minerals. I've seen folks take three months
to a complicated deal that had hair on it. The transparency is limited. It is occasionally
regulated, particularly when you're working with-- well, it's regulated when
you're working with investment banks that are dealing with marketed packages.
But otherwise, it's not necessarily. It's up to you to regulate how the legal
aspects of it, with regard to the deeds, and the transaction, and the assets.
And then, kind of uniquely, minerals, I think, we've got to notice this, is
that they appreciate all the way up to the point that they depreciate. I mean,
we're buying a depreciating asset, an eventual depreciating asset. So what you
notice is that really in spots one through-- let's say spot one, it's a basin
for inheritance that came to the current owner.
And then maybe it's leased it 1,000 an acre. And eventually, someone comes
in, and the development in the basin comes in. Then it gets permitted. Then it
gets-- the permit gets extended and the timeline gets drawn out further,
eventually gets drilled. But then it goes online for production. And that
production cash flow stream is going to depreciate with time. And so when you
enter and when you purchase the asset, it's very important to be acutely aware
of where you are in that appreciation and depreciation curve.
That said, I think PDP, we've heard already, frequently gets valued as a multiple
of monthly cash flow, less so of PV. PUD, an even higher discount rate. That's
what created a lot of the bid ask separation that yielded very few deals over
the past couple of years. When things are permitted, it helps. If they're
leased, that helps. We've definitely bought open acreage before. Frequently,
it's open acreage and surrounded by other leased acreage.
But unleased, who knows. And why do we not know? Because there's so much
uncertainty associated with the duration risk and the time that you'll actually
begin initiating cash flow from that and revenue from that asset. And that
duration risk is something you have to be acutely-- I would suggest need to be
acutely aware of with regard to spending that money. Every money has a ticker
on it and an expectation for that money to yield a return. And if you're not
acutely aware of that going in, you're bound to end up, at least economically,
under where your expectations were.
And with regard to the markets, I will say the markets are definitely gray.
Before doing our first deal in the Permian, we looked at nine months of deals
in the Permian, probably in excess of $100 million worth of deals, eventually
resulting in us closing a slightly less than $10 million deal, just so we were
familiar with that market. It wasn't our backyard.
So with regard to strategies, I think it's important to pick your strategy.
You got to know who you are and stay in your lane. The slide to the right is
actually some takeaways from a presentation I did at ICE this fall, this last
year for AAPG in Salt Lake City. But are you looking for dividend paying
mailbox money, like the residual dividend income? Or are you looking to play
that appreciation curve and buy low and sell high at the peak before you
actually start realizing?
One of the things you'll get is you'll get ordinary tax income on the
mailbox money. And contrary to that, you'll get a capital gain on the
appreciation if you buy at one basis and sell it before it actually goes into
income. That can be a key differentiator as how you want to spend your money.
It can't be looked at as a potential hedge to a paper position, given that it's
fiscal. This is essentially the ultimate physical hedge.
Eventually, this oil and gas should have some sort of value. And so you can
hedge against a paper position. And also, operators are frequently-- sometimes
we're exiting to operators, because they just want to improve their NRI. So
they're looking at a cost benefit of, well, should I continue to work at this
NRI, or can I buy out my NRI? That said, if you're looking to source these
deals, I might suggest checking in with some of the energy advisors out there.
All you have to do is search energy advisors. Here's a list of a couple of
You can also start participating on Energy Net or PLS. They have tons of
deals. I mean, shoot, 2,300 properties on Energy Net right now. Or you can
start originating your own title and getting out there. One of things that's
interesting about originating your own title is a lot of this stuff is post
Louisiana Purchase type land grant stuff, that's filtered through the
generations. And if you just consider that every couple had two kids, and you
keep passing that on through the generations, you end up with roughly 256
independent, discrete tracks nine generations into it today and each two and a
half acres apiece.
Granted, it's not that easy, but there's plenty of opportunities out there
to transact in minerals in the Western-- west of the Mississippi. Assuming
that, I would say that it helps to have access to database and production--
databases of production for analogs for doing your type curves. Excel,
DrillNomics, PHDWin, Aries. Also your landman is your best friend. They're
frequently the better negotiator than you. Lease and title analysts tend to
know who and what you're actually buying from and what the lease terms are.
The division owner will help you determine actually what you're going to get
paid on and how much you get paid. And the deal attorney's necessary. They
remove all the hair and allow for the transaction to go through, so you
actually own something after paying for it. And we frequently participate out
deals and have many partners, because it's better to split the deal and take
half rather than go lone wolf and not have anything to fight another day.
Service lease agreements can be a lot of nuance. I think I'm short on time, so
I'm going to go ahead and kind of wrap it up.
1031 exchange is a unique component to this, because it is a real property
interest. And you can exchange real estate for minerals without paying tax. And
I'm going to leave it right there for now so we can move on to the next one.
Thank you very much.