Kimmeridge Deal To Create Largest Delaware Basin Minerals Company

Kimmeridge Energy Management Co. LLC is on track to create the largest pure-play mineral and royalty company in the Delaware Basin by net royalty acres.

The private-equity firm entered agreements on July 18 to merge its minerals company with Desert Royalty Co. LLC, a Midland, Texas-based independent oil and gas company that has focused on the acquisition and management of mineral and royalty properties for over 25 years.

The combined company—to be known as Desert Peak Minerals—is expected to be positioned as a “logical consolidator” of Delaware Basin mineral and royalty assets, according to the firm’s joint press release with Desert Royalty.

In a statement, Kyle Stallings, founder and CEO of Desert Royalty, said: “The creation of a large mineral company with a singular focus on the Delaware Basin is the most interesting development I have observed in 33 years in the mineral business. Desert Royalty is honored to have played a role in the conception of Desert Peak.”

Desert Royalty has completed several thousand transactions since 1990, according to its website. The company currently owns and manages over 100,000 net royalty acres nationwide, over 30,000 of which are located in the Delaware Basin.

Though the financial details of the combination were not disclosed, Desert Peak’s position will total over 70,000 net royalty acres on a 1/8th royalty-adjusted basis across eight counties in West Texas and southeast New Mexico. The companies are also expecting roughly 8,000 barrels of oil equivalent per day of net production the first day the combination is complete.

Prior to forming its minerals company in November 2016, Kimmeridge managed Arris Petroleum Corp. and 299 Resources LLC, which the firm sold to PDC Energy Inc. in 2016 for about $1.5 billion in cash and stock. However, since selling the two companies that together held about 57,000 net acres within the Delaware Basin, Kimmeridge has openly criticized PDC Energy’s performance.

In a proxy campaign earlier this year against PDC that turned out to be unsuccessful, Kimmeridge called for the Denver-based producer to cut costs and return more cash to shareholders. Kimmeridge holds 5.1% of the shares of common stock of PDC Energy, according to a June 5 press release from the firm.

Kimmeridge itself was founded in 2012 by Ben Dell, Neil McMahon and Henry Makansi to focus on investments in unconventional oil and gas assets. Despite the firm’s growing frustrations toward PDC and the E&P sector, in general, Dell, who serves as a managing partner at Kimmeridge, is more hopeful on the outlook of the minerals space in the oil and gas industry.

“Against the backdrop of a challenging environment for E&P, minerals provide a compelling mix of organic growth and free cash flow generation,” Dell said in a statement on July 18. “Desert Peak will have our full support as they execute on their strategic growth plans.”

Headquartered in Denver, Desert Peak will be led by CEO Chris Conoscenti and the Kimmeridge management team.

According to Conoscenti’s LinkedIn profile, he has served as CEO of Kimmeridge Minerals since March. He previously worked as a managing director of oil and gas banking at Credit Suisse Group AG, which he joined in 2014 after working at JPMorgan Chase & Co. for over a decade.

Conoscenti believes Desert Peak will benefit from its focus on the Delaware Basin.

“As is widely recognized, the Delaware Basin is the leading oil and gas producing region in the United States, combining the best rates of return for operators, established and expanding takeaway infrastructure and oilfield services capacity, and a favorable regulatory environment,” he said in a statement.

The companies noted the benefits of the Delaware Basin are evident by the 259 rigs currently running in the Permian sub-basin, which represents 27% of all rigs running onshore in the U.S.

Sidley Austin LLP was legal adviser to Kimmeridge for the transaction led by partner Jim Rice. Meanwhile, Tudor, Pickering, Holt & Co. is Desert Royalty’s exclusive financial adviser and Kirkland & Ellis LLP is serving as the company’s legal adviser.

Desert Royalty is currently in the process of deploying its sixth mineral fund and intends to raise a seventh mineral fund from its existing private investor base in 2020.

Emily Patsy can be reached at epatsy@hartenergy.com.