How Elk Range Took the Leap to Buy Oxy’s $905MM D-J Heirloom

Elk Range Royalties’ acquisition of Occidental’s Colorado minerals and royalties interests was— pick a superlative: monumental, transformational, epic.

For a company that had never done a $100 million deal before, Elk Range’s fortunes in the Denver-Julesburg (D-J) Basin altered overnight with the purchase of minerals and royalties from Oxy for $905 million.

Before the deal for Oxy’s D-J net royalty acres (NRA), Elk held interests in 1,000 net acres in the D-J. After: Elk holds 251,000 NRAs underneath two premier operators: major Chevron and E&P Civitas.

Across all plays, Elk Range’s NRAs prior to the deal were a net 58,000 acres. The Oxy deal pushed them to approximately 300,000 NRA. Elk Range has interests in more than 23,500 producing wells.

"This is the largest deal I've done in my career," Charlie Shufeldt, Elk Range Royalties co-founder, president and CEO said in an interview with Hart Energy.

Shufeldt said the deal, financed through a mix of equity from funds managed by NGP Energy Capital Management and debt arranged by JPMorgan Bank and Texas Capital, represented a different approach to minerals ownership for the company.

The opportunity to make the deal arose last fall when financial advisers from Wells Fargo and CIBC Capital Markets approached Elk Range on behalf of Oxy pitching the interests. Oxy has been working to reduce debt after closing its $12 billion deal to buy CrownROck LP in August.

The scale and historical significance caught the attention of several industry players, setting off a competitive bidding process for the interests, Shufeldt said.

The NRAs date back to 1850, when the U.S. government granted land and mineral rights to the railroads to incentivize connecting the country via railroad, Shufeldt said.

“This is an incredibly unique asset. But it's one of those assets that doesn't get re-created. That land grant has only happened once. And to have the opportunity to buy something of this scale is really a truly unique opportunity,” Shufeldt said.

Over the past nearly 175 years, the asset has been transferred through a number of companies before eventually landing in Occidental’s hands, he said.

Elk Range saw a deal that checked all of the boxes. A mix of current production, DUCs, undeveloped upside and best-in-class operators.  

“With a larger asset like this, I think we can be more strategic in our interactions with those operators, Chevron and Civitas, and find ways to perhaps incentivize them to be more active on the acreage we own,” Shufeldt said.

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Diving into the D-J

The company, which is fully backed by NGP Energy Capital Management, has made nearly 270 deals since its founding in 2020.

Elk Range has browsed for mineral and royalty interests in the D-J, Permian, Appalachian, Uinta and Powder River basins; the Eagle Ford and Haynesville shales; and the Midcontinent, according to the company’s website.

The strategy behind getting deeper in the D-J was rooted in pursuing assets with long-term value and favorable prices per NRA. Shufeldt said the company intends to hold the Oxy interests, not sell them in a few years’ time.

“Certainly acreage prices are lower here, but you have fewer zones to exploit relative to the Permian. That said, they're highly productive acres in terms of how quickly the oil, the revenue comes back to you,” he said. “So again, that's why we've always found the D-J Basin as an attractive place to put money to work.”

The D-J’s regulatory hurdles aren’t a pressing concern for Elk, either.

Colorado has layers of complex environmental regulations—and is still in the process of refining them. Shufeldt is confident in Chevron and Civitas’ ability to navigate the regulations. 

“We've watched the space evolve over a much longer time horizon. And it's fair to say there's more regulation in Colorado, but as a minerals owner, we don't deal with that directly. I think how we experience that is just watching our operators, making sure that we are partnered with operators who are skilled in navigating that,” he said.

Where it all began

Elk Range’s journey began in 2020 when NGP was looking to deploy funds focused on acquiring oil and gas royalties.

The timing coincided with Shufeldt’s growing interest in the minerals and royalites space since joining an advisory board in 2016 that manages a portfolio of mineral and royalty assets at Stanford University.

NGP reached out to Shufeldt and founding partner Clinton Koerth to lead and build a team that was an extension of NGP rather than a “traditional portfolio company,” he said.

“I felt very good about my ability to go out and put together a team of land, engineering, geology and accounting professionals to run a business like that,” Shufeldt said.

Elk Range made its first D-J acquisition in August 2020.

“That was the first thing we ever acquired. So in some ways it's where we started,” he said.

The decision to focus on minerals was strategic.

With a background in finance and no operational experience in oil and gas, Shufeldt saw minerals as a more attractive investment model.

"Buying minerals and royalties is very similar to investing in financial paper," he explains. "You just have to understand the underlying oil and gas assets very well."

The key differentiator was the risk profile.

In the minerals business, “you own a revenue interest in the assets," Shufeldt said. "You're not exposed to any costs. You don't have field personnel to manage. You don't have equipment in the field to manage. It's just a much simpler business."

In conjunction with the Occidental transaction, the company launched Elk Range Royalties III, which holds substantial dry powder, the company said.

Elk Range III will continue its core strategy of opportunistically pursuing attractive acquisitions, Shufeldt said.

"This is our third iteration with NGP," he said, "and we're quite a bit bigger this time around."

The commitment to Elk Range III is approximately 10 times larger than the original commitment, though the exact amount is not for public release, he added.

While the third iteration is open for business for larger transactions, Shufeldt doesn’t see another deal remotely similar to the size of the Occidental acquisition on the table.

“Prior to this deal, I think the largest deal we've done was about $70 million. And so we're capable of executing on multi hundred million dollar acquisitions and we hope to find more of those,” he said.

Elk Range III is looking at growth opportunities across multiple basins, including the D-J, Permian and beyond, similar to Elk Range II.

In one of Elk Range II’s last acquisitions, “we bought a multi-basin package from a family in South Texas. Those were assets in the Eagle Ford and the Permian and a few other places. So we'd love to find more things like that as well,” Shufeldt said.

In January, Elk Range acquired Permian and Eagle Ford mineral and royalty interests from Newton Financial Corp., Concord Oil Co. and Mission Oil Co. The deal added 13,500 total net royalty acres to the company’s portfolio.

Shufeldt describes the royalty business as a “high volume, low hit rate business. So you have to look at a lot of transactions, but you're going to win very few of them.

“We're set up to look at 500 to 600 deals per year and we expect to win a small fraction of those. And we'll just continue to do that in the places we've had success,” he said.

Long-term vision: buy and hold

While historically focused more on oil investments (more than 90% of its acquisitions have targeted crude), the company remains open to natural gas opportunities, Shufeldt said.

“We've acquired deals in Haynesville and in Appalachia. But I think for whatever reason, possibly because we started in the Permian, we've just been a little bit more skilled at winning deals in oily places,” he said.

As for going public, Shufeldt sees it as a potential in the future, but there’s no rush.

In the meantime, Elk Range plans to continue its buy-and-hold strategy in the minerals and royalties space, its partnership with NGP and “remain as a private company and hold these assets and just return cashflow to investors,” he said.

 "We're not there yet," Shufeldt said. "To be an effective public company, you need a certain minimum scale. But maybe we will be in the future."