The gripe among the new crop of oil and gas mineral buyers in the Permian Basin and other hot plays is that there are far too many new buyers.

Some of the more established buyers—businesses formed in 2016 or 2017—have rapidly captured interests in thousands of wells in the Permian, Oklahoma and other shale plays.

But the space increasingly mirrors the interests companies are after: crowded and scattered.

“There are new competitors every week, it feels like,” Nick Varel, president and CEO of Wing Resources LLC, said at a mineral workshop at Hart Energy’s DUG Permian conference.

The relative ease of entering the marketplace, escalating values, the Permian’s “DUC problem” and new competition has the mineral business turning from a game of chess to 52-card pickup.

Wing Resources formed in 2016, and “just seeing where things were in 2016 and 2017, the competition has ramped up in an unbelievable way,” he said.

Companies also have to deal with the occasional mineral carpetbaggers: buyers that grab interests to flip at a higher price, said George Soulis, vice president and business development manager at Oil & Gas Asset Clearinghouse.

“Many mineral buyers really aren’t in the position to buy and hold the minerals, they simply are making an offer and hoping to run out and turn them to someone quickly and make a profit,” Soulis said at the mineral workshop in May. “It appears to me that acquisition of minerals today is a very inefficient marketplace.”

In a sector thick with competition, prices are already skyrocketing as E&Ps shift to development mode, he said.

“In the past, buying a mineral interest was a way to participate in a prospect and the pricing reflected this, usually as a percentage of the well cost,” he said. “Now we’ve entered a manufacturing paradigm, which equates to a belief in repeatable results.”

The costs also have E&Ps taking on aggressive approaches to acquiring mineral rights. In August, Continental Resources Inc. entered a deal worth up to $600 million that creates a new mineral company—largely as a way to capture more revenue from its own labors in the Scoop and Stack.

The resulting price escalation is, in some cases, staggering. In January 2017, mineral interests on a 1,900-acre track in the Delaware Basin with one well and a 26% nonoperated working interest sold for $2,329 per acre, according to a transactions database by 1Derrick.

In January 2018, royalty interests for the same 1,900 acres sold for $31,579 per acre, or 13.5 times more than the mineral interests. More recent Delaware transactions averaged as much as $219,512 per acre.

The game has changed, said Mike Allen, president and founder of Providence Energy Corp.

Through the first decade of the new millennium, mineral interest prices were based on roughly six years’ cash flow, said Allen, whose company has acquired interests in more than 10,000 wells since 1993.

“That’s how you’d buy minerals,” he said at the workshop. “For nonops, you’d pay three years” cash flow.

Since 2016, relative newcomer Varel said, “We’ve seen prices on the ground go up 40%, 50% in some cases. It’s tough for somebody to buy something and sell it.”

Permian pin cushion

In the Permian, the basin’s well-publicized infrastructure crunch has led to another headache for mineral buyers: a backlog of drilled but uncompleted wells, or DUCs.

From January through July, the Permian’s count of unfinished wells increased by an average of 128 DUCs, or 4%, per month. The cumulative effect is a Permian pin cushion that, in seven months, has added 20% more DUCs pinpricks to the basin.

William Cullen, vice president of Longpoint Minerals, which holds interests in the Permian and in Oklahoma, said his company tries to build out a schedule of when the wells will be drilled and when others will be drilled and completed.

“To the extent you have a DUC, you can accelerate the timing of those wells forward,” he said

Varel said DUCs aren’t especially helpful to him, since completion of the wells could be a matter of six months or two years. On Wings’ properties, Varel said, in May he saw 25 or so DUCs added with just five or six horizontal, PDP wells brought online.

“The DUC issue in the Permian Basin is real,” he said.

Yet more mineral companies are coming, with few barriers to entry in the mineral market. In part, that’s because of the nature of plays in Texas and Oklahoma, where mineral rights are fragmented, Cullen said.

With $3- to $5 million, enough rights can be cobbled together to create lucrative cash flows, said Henry S. May III, vice president at private-equity firm Post Oak Energy Capital.

While private-equity funds are more likely to invest with existing mineral companies, start-up companies can generate attractive returns with small “friends and family money,” he said at the workshop.

“It’s not like the upstream space where you’re going to be drilling $8- to $10 million wells,” he said. “You can start very small and if you’re successful, you won’t have trouble.”

Continental’s gambit

Larger competition is headed into the field in Oklahoma’s most well-known plays through a singular pairing: a deal that unites E&P Continental Resources Inc. and gold royalty and streaming company Franco-Nevada Corp.

In August, the two corporations said they will create a new company designed to combine Franco-Nevada’s capital and Continental’s operations. During three years, the company will spend up to $375 million to acquire interests. Continental’s share of acquisition costs will be about 20%—but by hitting production targets, the E&P stands to gain 50% of the revenues.

Franco-Nevada will also pay about $220 million for a partial interest in Continental’s minerals.

“We’ve always understood the value of minerals at Continental,” said John Argo, Continental’s head of business development.

But as in other areas, the mineral business has changed with the industry.

“You look at the original HBP drilling of these plays and drilling one well to hold acreage, there was value in the minerals there,” Argo told Investor. “But the minerals, and leasehold for that matter, dramatically increase in value when you go to full-field development.”

Franco-Nevada sees the new strategy as a way of working directly with an operator to purchase mineral rights. While most mineral companies buy interests where they anticipate drilling to occur, Franco-Nevada’s deal incentivizes Continental to drill where it buys mineral rights.

By doing so, Continental receives up to 50% of revenues, based on production targets.

“This is a unique deal,” John D. Hart, Continental’s CFO and treasurer, told Investor. “You have not seen this in the industry.”

Continental has already worked to buy mineral rights in the Scoop and Stack, where its net revenue interest (NRI) varies, but in the aggregate averages 81.25%. In theory, that leaves 18.75% of NRI left to acquire.

Continental is the largest acreage holder in the Anadarko Basin, where it is running 18 rigs and has plans to increase that number, Argo said.

“We were able to put together a good position given our existing ground game,” Argo said, noting that the company’s land teams used their relationships with leasehold owners and existing title work to acquire mineral rights.

“Once we did that and had some success, we looked at how do we scale this business long term and how do we grow it,” Argo said.

The company said it has been faced with competing goals: paying off debt while also spending to acquire more mineral interests. Since 2015, the company has reduced its net debt by $1 billion and is eyeing a reduction of another $1 billion.

“That focus on aggregating additional minerals and growing them … is a little bit contradictory, if you will, because it takes some capital away” from the upstream business, Argo said.

Companies such as Diamondback Energy Inc. have spun off their mineral interests into a separate entity, Viper Energy Partners, but Continental sees its deal as the first of its kind.

“This is a structure where an operator is partnering with a royalty-focused company that’s providing capital,” Hart said. “And we’re using our expertise to accumulate minerals and grow a new business, from the ground up.”

Argo added that Continental is doing the work already “on drilling all these wells and bringing all this production online.

“We understand the potential so well. It’s really just an add-on. It’s incremental to what we’re doing in capturing more of that value from our existing operations and our existing footprint,” he said.

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