The New Minerals Frontier Expands Beyond Oil, Gas

Phillip Dunning is director of product management for minerals at data analytics company Enverus.

The long-tail market is experiencing heavy competition as real asset investors seek alternatives to traditional real estate investments. Several companies have recently announced new fund closings, which will increase pressure on the institutional mid-market.

While there have been no significant public announcements aside from the drop-down from Diamondback Energy to Viper Energy Partners, a critical question remains: Where will activity occur outside the core areas? Investors are keen to get ahead of the competition, particularly in regions beyond the Permian Basin. In mature plays, strategies such as refracturing, down spacing and infill drilling are essential.

In the natural gas sector, activity in the Haynesville Shale is driven by the completion of LNG terminals and feedstock requirements, while the Appalachia region’s activity is influenced by weather and power generation needs, competing with Haynesville for LNG economics.

Supermajors are beginning to sell off non-core assets to reduce debt and complexity, creating opportunities for private companies to acquire these assets at favorable prices. Private drillers, with their specialized focus, are likely to add rigs as these opportunities arise.

Additionally, natural gas continues to play a crucial role in power generation due to its stability, cleanliness compared to coal, reliability and cost-effectiveness. As artificial intelligence (AI) and data centers demand more electricity, states like Ohio are expected to consume nearly as much power as major metropolitan areas like New York City.

The appeal of non-operated ownership

Non-operated ownership has awoken over the past few years as investors realized that it’s a less capital-intensive way to own oil and gas assets. Royalties, overrides and other non-working interest ownership have been the most attractive ownership as there is no cost to hold after the initial acquisition.

An investor just has to collect revenue checks. Investments are not risk-free, though. The investing obstacle course runs from mistimed acquisitions in relation to commodity prices to assumed near-term activity to operator risk. The interest in royalties ranges from a few public acquisition companies (Sitio and Viper to name two), private equity vehicles, family-office and private capital vehicles, and retail investors who are looking to hedge against other real property investments.

With the rise in interest in the market space, competition has spurred ever increasing valuations in the core of the core. There are just not enough deals to chase compared to the money targeting them.

Publicly traded mineral companies have to build inventory, like an operator, to ensure they can continue to pay the yields that attract investors to their stock ticker. Private equity vehicles have time horizons to deploy capital in a large format to make the returns necessary to continue investment. Family offices are looking to hedge or deploy capital against other real property ownership (1031 exchanges, etc.) as a search for yield is ever fleeting.

Resurgent Eagle Ford

I’ve believed for a number of years that mature basins and plays are primed for a resurgence. From seeing the truckloads for EOG Resources’ EOR program rolling past me in Dripping Springs, Texas, just southwest of Austin, to watching the movements of rigs and filings of secondary completion permits, basins such as the Eagle Ford are seeing an increase in activity.

To me, it never went out of style. Existing infrastructure with capacity, location to the Gulf Coast, a core that was drilled pre-2016, evenly mixed commodity opportunities and location in Texas … The cheapest place to drill for oil is where we have already found it and the Eagle Ford defines that.

Refracs, downspacing and infill drilling are the cheapest way to bring new production online. Determining where those opportunities exist is a multi-variable analysis that requires software to determine remaining inventory, understimulated wells, or wells under their economic return threshold.

Large cap operators’ results in 2024 have given further proof that looking at drilling spacing units (DSU) that are pre-2016, with wide spacing and low proppant intensity, will provide a unique buying opportunity. Investors are purchasing at today’s value, with some upside, and will benefit from when an operator decides to come back and commence further activity. Worst case, you continue to cash the checks that are already coming in.

Non-core assets

The second place to look outside the Permian is non-core assets. In our 2024 Year-End Mineral Outlook, I talked about the accordion effect of the consolidation that has occurred over the past couple of years. Majors and supermajors have acquired almost all of their mid-size counterparts. Those acquisitions are valued off their core assets, but all operators carry some non-core assets.

It was only a matter of time before major acquirers started to market and sell off non-core assets. We are now starting to see a small flurry of activity in this area as they pay down debt, reduce complexity in their portfolios or just realize some extra cash.

The risk for investors is that when an operator is acquired by a major or supermajor, it does not mean you will see activity. In fact, a lot of times you will see lower activity because these companies have a portfolio of assets that have a variety of returns. They will turn dials and deploy capital in places where they believe they will get the best return.

In selling off non-core assets, owners in these areas are primed to see some activity on their assets. Oklahoma comes to mind. I have been negative on the growth in the Midcontinent for the past couple of years, not because opportunities don’t exist but because the companies that own the majority of decent acreage are companies that have better returning assets elsewhere.

As more non-core assets are sold off to private companies that have a singular focus, I think we will see an increase in activity. It’s never guaranteed, but a more dedicated, single-basin player has greater incentive to invest in a non-core asset than a large company with dozens of assets at play.

Global commodity prices

Oil and gas are truly global commodities. They impact every aspect of our life, from refined commodities like fuel to refined materials like plastics.

The U.S. is just one player in the global market, but an important one. Global commodity prices are, to a large extent, determined by OPEC+ and the U.S. With demand from developed countries being pretty stable, any increase in demand comes from countries moving out of being undeveloped, with the exception being new growth drivers like AI. This is why prices have remained range-bound the last couple of years with some hiccups up and down as global politics come into play.

I have always related determining future commodity prices to predicting the weather: at the end of the day the wind blows where it does, and the rain falls where it wants. Our models are only as good as the next event.

That being said, gas prices are primed to come back from a rough couple of years. After Europe was able to stave off a near catastrophe three years ago when Russia invaded Ukraine, gas prices have been severely depressed. In some basins, prices are negative due to the limited capacity and demand to get gas out of the basin. Originally, gas was primed to move higher because it’s the main feedstock in LNG terminals, many of which are coming online in 2025 and beyond. The need to fill those contracts would drive dedicated acreage to complete DUCs, which could lower the oversupply we are in.

Today, it’s both that and the rise of AI and data center electricity usage. I have met many who are flabbergasted that when they plug in their electric vehicle, they are still using fossil fuels as the grid is driven in a large part by natural gas.

AI and data centers are no different. Whether it’s a college student using AI to transcribe a lecture or methane-detecting satellites processing large amounts of data in near real-time, it all uses electricity and that electricity has to be generated. The rapid deployment of alternative sources of fuel provides a great opportunity to adjust the energy creation mix, but the sheer demand that is sweeping the nation, if not the world, cannot be met by alternative sources alone.

Natural gas power plants are a consistent form of energy generation that are faster to market than nuclear, cleaner than coal and more reliable that alternatives. Their feedstock is also plentiful and relatively cheap. While we are just in the beginning stages of determining the total energy demand required from AI, the electrification of the world has already started. This long-term understanding provides a great opportunity for generational investing.

Expansion beyond mineral company

Historically, mineral companies were defined as owning minerals and royalties from oil and gas activity. That has adjusted over the past couple years to expand outside of production to surface rights, water disposal, renewables, etc.

The concept of being a mineral and royalty company encompasses any activity that can generate a passive cash-flow. With the introduction of carbon capture and underground storage (CCUS), the pore space owner benefits, which in many cases is the surface owner, not the mineral owner. The same is true for water disposal, water impoundment, pipeline right-of-way, etc. These hybrid companies utilize their expertise in energy to expand the idea of how a royalty is paid beyond that of legacy activity.

The largest public company of this hybrid approach is Texas Pacific Land Trust. It generates revenue and royalties from far more than just oil and gas production and has been rewarded for it in the public space. While renewables or alternative energy sources are larger scale projects, we have seen an increase in assets for sale from these owners looking to sell their royalties to further hedge their portfolios.

Unlike oil and gas, alternative sources do not have declining production and, under normal circumstances, increased costs or payments, annually leading it to be more like a passive real estate investment.

Expansive opportunities

The future is bright for owning mineral and royalties. While there are always headwinds in a cyclical commodity, the opportunities are expansive, whether you are competing for top acreage in the Permian or looking for edge opportunities in mature or forgotten basins.

Mid-market aggregators and family offices will have it easier than larger public entities or private equity-backed companies with less transformative deals to chase. There is plenty of opportunity for larger firms to consolidate mid-market portfolios or even acquire mineral portfolios from operators, but it’s a competitive market compared to small, fractionalized deals that are comprised of ground game aggregators.

Transformative technology changes such as the rise of AI and computational power will provide a long runway for clean and consistent fuel across the world. World demand for computational power, heating and electricity will increase the need of LNG, a market which the U.S. is primed to lead.