Summary
- In the current rout of oil and gas, everybody is paying the short-term price.
- Longer term, I think there are still ways to invest in the space that assume less risk but still offer attractive potential rewards.
- Brigham Minerals operates by purchasing the mineral rights to properties and then leasing access to producers for a royalty.
When the Cohen brothers came out with their film "O Brother, Where Art Thou?" I went through a bluegrass music phase and picked up a copy of the Patty Loveless album "Mountain Soul." This featured a song written in 1995 by Darrell Scott, "You'll Never Leave Harlan Alive," that could have been written 60 years earlier as a ballad of the hard life of Kentucky coal mining. Its lyrics speak include:
No one ever knew there was coal in them mountains Til a man from the northeast arrived Waving hundred dollar bills, he said "I'll pay you for your minerals" But he never left Harlan alive
Coal has been declining in value as an energy source in the developed world for a long time, and of course, oil and gas has really hit the skids over the last few months. While opinions vary considerably on if there is any viable long-term future left for coal (KOL), I am not aware of any serious economist who sees no role for oil and gas for several decades yet to come. One common element between them, however, is the way the rights of ownership operate. In the United States, physical property ownership rights to anything of value beneath the surface, broadly designated "mineral rights," are considered distinct from surface ownership, including oil, coal, natural gas, minerals or precious metals. Whoever owns these legal rights can more or less do with them as they please: explore and attempt to extract anything of value yourself, sell the rights to another party, or lease the rights to another party to either develop or not as they would choose. For high-risk tolerance investors interested in potentially reaping benefits from the flexibility of owning mineral rights, Brigham Minerals (NYSE:MNRL) would be one possible way to go.
Over the last several weeks, I have been writing at a higher frequency due to temporarily reduced hours at my day job. Specifically, I have been writing about companies in my portfolio and attempting to lay out my rationale for including them at the time I decided to buy. My portfolio of individual stocks is invested in a Roth IRA, equals 15% of my total investments, and is for a retirement that is 20 years away. Brigham Minerals is one of my more recent additions, at about 10% of a full position started in January 2020, at a cost basis of $17.56.
Brigham Minerals - The Business Model
I have no particular expertise in the geological contours or projected output of oil and gas from development locations in the Permian Basin or Scoop Stack, much less the Williston or Denver-Julesburg (DJ) basins - there are terrific experts who write for Seeking Alpha that cover the intricacies of the actual exploration and production figures. However, it is becoming clear that the immense strain on oil prices is pushing the weakest players to the brink; those loaded with too much debt are already starting to succumb, with Whiting Petroleum (WLL) filing for Chapter 11 on April 1, 2020, and there are likely to be plenty more.
On the other hand, those owning the mineral rights are not necessarily loaded up with debt, and Brigham Minerals is a prime example. As of year-end 2019, the company had no long-term debt. Instead, Brigham makes its money by attempting to purchase the right and then either sell those rights for a higher price to another party or, more often than not, lease the right to another party to develop as active wells, and those parties pay royalties back to Brigham along with a lump sum payment upfront for securing the development lease. How much Brigham makes is basically a direct function of how much production the leasee decides to develop during a period and the market value of that product. When the price and / or volume being produced is lower, the value of the lease royalties is lower, but it improves under higher production or pricing. So, it is not surprising to see that Brigham moves in almost perfect harmony with the iShares U.S. Oil & Gas Exploration & Production ETF (BATS:IEO).
