Mineral Royalty Owner Earnings ($DMLP $NRP $STR $RGLD $TPL $PREKF)

Dorchester Minerals, L.P.
The market capitalization of DMLP is now $1.11 billion (at $28 per unit) and the enterprise value is $1.08 billion. For the third quarter of 2023 (10-Q), the partnership earned $30 million of net income (compared with $34 million the prior year), generated $34 million of cash from operations (compared with $46 million the prior year), and distributed $26 million to unitholders. The CFO/EV yield is 12.6% based on the third quarter results, during which the average oil sales price was in the mid-$60s/bbl and the average natural gas sales price was around $2/mcf.

Yesterday, Dorchester announced that they had leased land in Reagan County, Texas for an $11.8 million bonus payment and a 25% royalty. That upfront payment amounts to $0.30 per unit, and the royalty payments will hopefully be substantial once the wells are drilled and go into production.

Natural Resource Partners L.P.
The market capitalization of NRP is now $872 million (at $69 per unit). The capital structure is complicated so it is worth discussing the assumptions that go into the enterprise value calculation. The partnership has $60 million of current assets (mostly cash and accounts receivable) and $52 million of current liabilities. We add back all deferred revenue including $6.4 million of the current portion which is a current liability. The partnership has $171 million of long term debt, $6.8 million of other long term liabilities.

After some significant repurchases of preferred stock and warrants during the quarter (see 1, 2, 3), there is now $72 million of preferred stock outstanding and warrants to buy 2.2 million shares. For our enterprise value calculation we use the difference between the current unit price and the warrants strike price of $34 to calculate a liability of $77 million. In the end it may cost more than this to settle them if the partnership unit price continues to appreciate.

That gives an enterprise value of $1.1 billion for the partnership. For the third quarter of 2023 (10-Q), free cash flow was $80 million. (For the trailing twelve months, it has been $304 million.) That gives a FCF/EV yield of 29% using this quarter's annualized number. 

There is a slide in the August 2023 investor presentation showing annual free cash flow figures since 2015. For the year 2016, which when the coal market crashed and most of the miners went bankrupt, NRP still had free cash flow of $76 million. If that were to happen again (a 75% decline from current level), the FCF/EV on the current valuation would be 6.9%.

Recently, the producers' cash cost per ton of met coal has been around $100 per ton, with Arch at $97/ton and Warrior at $114/ton. In 2016, the cash cost of met for Arch was only $53/t. With the producers' costs per ton having doubled since 2016, it ought to be difficult for the market-clearing price to drop as low as it did in 2016 (at least for a protracted length of time), and hence it ought to be difficult for free cash flow to drop that much again.

If coal prices and production levels as well as earnings from the Sisecam (soda ash/trona) minority interest hold up, and if the unit price stays the same, then the partnership might be able to pay off its remaining $312 million of net liabilities by the end of Q4 2024. Paying off liabilities is management's stated intention. (Q3 2023 call: "We continue to believe that aggressive retirement of debt, preferred equity and settlement of warrants, while maintaining common unit distributions is the right strategy to maximize long-term common unitholder value.")

If they achieve that deleveraging, then the current level of free cash flow (~$320 million annualized) would be a 37% shareholder yield on a $872 million market cap.

Sitio Royalties Corp.
The market capitalization of STR is now $3.7 billion (at $24 per share). Unlike many of the other oil & gas royalty investments, Sitio has a significant amount of debt: about $1 billion, consisting of $601 million on a revolving credit facility (floating interest rate, currently 8.42%) and $405 million of senior notes due 2026 (also floating rate, currently 11.29%). So the enterprise value is now $4.6 billion.

In the third quarter of 2023 (10-Q), Sitio earned only $275 thousand of net income, thanks to a $24 million hedging loss. If you add back $81 million of depreciation, depletion, and amortization for the quarter, you get an "adjusted-CFO" yield of 7% on the current enterprise value, or a 9% yield if you assume the hedging loss is "one time" and add that back too.

In addition to being highly leveraged (with expensive, floating rate debt), Sitio is the only royalty investment we follow that hedges. Sitio has a slide in their latest investor presentation that says "Sitio is able to drive down Cash G&A per boe with each large acquisition". It seems like their model is to use expensive debt to aggressively acquire properties and increase scale, and they then have to hedge the commodity price to reduce risk. Lots of moving parts, with the goal being to spread the overhead cost over more barrels.

Sitio reports their their G&A cost per BOE as $2.17 for this quarter. We might also look at it as $7.45 per barrel of crude oil. By comparison, Dorchester's G&A is $3 per BOE and only $4.57 per barrel of crude oil. Another way to look at it is that Sitio spent 7.6% of revenue on SG&A for the quarter and Dorchester spent 6.6%.

So, Dorchester is smaller yet operating more efficiently. Dorchester also managed not to bungle and blow the whole quarter's earnings with a hedging loss. The entire point (to us, at least) of owning royalties and the reason that they are first class assets is that you always make some money owning them. It may not be a lot some of the time, but you never lose money. Borrowing money at 11.3% and selling both puts and calls on commodity futures puts you in a position to lose money.

Royal Gold, Inc.
The market capitalization of RGLD (at $105 per share) is now $7.1 billion. They have $236 million of net liabilities (excluding deferred taxes) so the enterprise value is $7.3 billion. For the third quarter of 2023 (10-Q) they reported revenue of $139 million, operating cash flow of $98 million, and earnings of $49 million. The company is trading for 36x earnings (annualized) and an OCF/EV yield of 5.4%. 

Several developments negatively affected the quarter and made earnings and cash flows lower than they would have been. Newmont's Peñasquito mine in Mexico had a four month strike (although an agreement has been reached with the union), Centerra’s open pit Mount Milligan mine in British Columbia has also had some issues with ore quality resulting in guidance there being lowered, and there was also a delay to the ramp-up of Barrick’s expansion of its Pueblo Viejo mine in the Dominican Republic. 

There is upside to Royal Gold if those mines' issues can get fixed, as well as upside from mines that have already been funded but which have not gone into production. Something mentioned on the conference call is that their cash G&A costs remain are 5% of total revenue, which compares very favorably with Sitio and even Dorchester, as we noted above.

Texas Pacific Land Corporation
The market capitalization of TPL (at $1,650 per share) is now $13.5 billion. The company has built up quite a cash pile during the shareholder activism dispute, so the current assets net of liabilities are $747 million and the enterprise value is $12.75 billion.

In the third quarter of 2023 (10-Q), Production volumes for TPL (in BOEs) were down 6.6% for Q3 2023 versus the prior year. Royalty revenue was down 33% because of the lower production volume as well as lower commodity prices. (The price of natural gas in particular was much lower than last summer. Revenue for easements and other surface-related income, land sales, water sales, and produced water royalties were all up year-over-year.

Expenses were $27 million (excluding depreciation) versus $25 million the prior year. Thankfully legal fees were only $1.7 million this quarter and not the gigantic $17 million we saw one quarter earlier this year during the heat of the shareholder activist battle.

Interesting to note that the expenses (again excluding depreciation) are a hefty 17% of total revenue. That's partly because TPL has established a "water services" business which is lower margin than collecting royalty revenue.

Operating income was $127 million for the quarter, and if you add back $3.6 million of depreciation, depletion, and amortization, you get a cash flow-like number of $131 million, which would be an annualized yield of 4% on the current enterprise value.

PrairieSky Royalty Ltd.
The market capitalization of PREKF (at US$17.80 per share for the U.S.ADR) is $4.25 billion and the enterprise value (with $195 million of net debt) is $4.4 billion.

For the third quarter of 2023 (MD&A), PrairieSky's net earnings were $40 million (compared with $55 million the prior year) and earnings plus DD&A were $67 million (compared with $83 million the prior year). That's a "cash generation" yield of 6% on the current enterprise value.

Royalty production volumes averaged 25,469 BOE per day, an increase of 8% over Q2 2023 and 2% over Q3 2022. Quarterly oil royalty production averaged 12,084 barrels per day, a 4% decrease from Q2 2023 and a 6% increase over Q3 2022. The average realized price for crude oil this quarter was $67.55/bbl compared with $75/bbl the prior year.

With the cash generated from operations this quarter, the company spent $11 million on property acquisitions, $42 million on dividends (4% dividend yield), and $4 million on debt repayment. One odd thing disclosed was a "$13.3 million termination payment related to a leadership change in the quarter".

Sitio Royalties Corp. ($STR)

Sitio Royalties is a roll-up of royalty companies. They were initially private, created in 2016 by a PE firm called Kimmeridge, which is still the largest shareholder (one of the Kimmeridge partners is also the chairman of Sitio's board). They went public in January 2022 through a reverse merger with Falcon Minerals, and then changed their name to Sitio Royalties. In June they bought land from Foundation Minerals and Momentum Minerals and in December they acquired Brigham Minerals.

The market capitalization (at $25 per share) is $4 billion and the enterprise value is $4.8 billion. (Unusually for a royalty investment, Sitio has debt: $487 million on a revolving facility and $428 million of senior notes.) In the first quarter of 2023, Sitio earned $48 million and generated cash from operations of $129 million. That's an annualized CFO yield on the market cap of 13%. The dividend yield of STR is 8%; in line with the 65% of "discretionary cash flow" that they say they will pay as a dividend.

Sitio is geographically diversified across some of the major basins, but the bulk (70%) of their royalty acres are in the Permian. Their average daily production is 34k boe at about half oil. At Q1 commodity price levels, that means that oil revenue was 78% of total and natural gas was 10%, with the remainder NGLs and lease bonus revenue.

Something else different about Sitio is that they hedge some of their production. They presold 3,050 barrels of oil per day at $93.71 through the end of 2023. They sold 3,300 bbl/day at $82.66 for the year 2024. And they sold 1,100 bbl/day at $74.65 for the first half of 2025. They also have a collar (bought put at $60 and sold call at $93.20) on 2,000 barrels per day in the first half of 2025. That leaves a good bit of the 17,655 bbls/d of oil (at the Q1 production rate) unhedged.

In Q1 they produced 60,000 Mcf/d of gas. For the remainder of 2023, they have 8,500 Mcf/d collared at $4.82 (floor) and $7.93 (ceiling). In 2024, 11,400 Mcf/d collared at $4 and $7.24, and in the first half of 2025 11,600 Mcf/d collared between $3.31 and $10.34.

It will be interesting to watch how this aggressive management team maintains this hedge book, going forward.

This was a good discussion of the business model on the Q4 earnings call:

In 2023, we will also be acutely focused on gaining additional efficiencies and implementing new technologies to help us continue to scale and provide competitive advantages that will allow us to replace less effective third-party vendors. Professional management of oil and gas minerals is still a relatively new concept, and we believe there is a large opportunity to transform the industry, which currently uses many outdated methods and tools.

Technological advances geared specifically for the challenges of an independent mineral owner are in their very early stages of development, and we are piloting a number of new efficiency tools. We also see a large opportunity to fundamentally improve the relationship between operators and mineral owners while saving money and time on both sides and eliminating inefficiencies in the system from duplicative work done by hundreds of operators and tens of thousands of mineral owners.

So we're really excited about a couple of the initiatives we have starting this year. And we sit here in a pretty unique position where we view ourselves as the permanent owners of these assets. And we're buying assets and people who maybe aren't necessarily the permanent owners, and that's why they're selling them to us.

And as the permanent owners, we're going to manage them differently, meaning we're going to make sure we're getting paid timely on every well, every month. Making sure that the decimals on which we're paid matched the decimals on which we believe we own. And we track these things monthly. We prioritize the missing payments that we believe we're owed, and we pursue them with operators.

And to do that, a business of our scale with 5,000 leases, over 25,000 wells, it takes a lot of technology and data management to do it efficiently. And so we are developing tools on our own just because there are -- there's no suite of software that effectively manages a minerals business. So we've spent a lot of time in 2020 building out our data warehouse and data management system, and that has allowed us to scale up the way that we have.

And now we're working on ways to make our team more efficient by having them touch fewer of the data points and just automatically process some of the data points. So things like revenue or division orders are just begging for efficiency measures. So we're working on those things this year.

Also on the Q4 call:

At the end of December, we made our first quarterly amortization payment at par of $11.25 million on our senior unsecured notes, reducing the outstanding principal from $450 million to $438.75 million. The senior unsecured notes prohibit us from making stock repurchases, which we would like to be able to opportunistically do with the 35% of our discretionary cash flow that we don't distribute as a quarterly dividend.

We are monitoring market conditions for an opportunity to refinance these notes either after the first call date on September 21 of this year, or sooner, if warranted, to provide our company the appropriate amount of capital allocation flexibility. Regarding our outlook for additional large-scale acquisitions, we remain focused on our underwriting discipline and believe that there will be fewer opportunities that meet our returns criteria in 2023 compared to 2022.

There is still a large opportunity set of high quality and sizable minerals positions to consolidate, and we have made several offers to acquire additional mineral assets this year, but the bid-ask spread has been too wide. If attractive consolidation opportunities do not materialize, we will continue to focus on strengthening the balance sheet by paying down our prepayable debt and building liquidity for when market conditions normalize.

In the first quarter earnings announcement, they mentioned:

Producer activity on our assets continues to be steady, with average production of 34,440 Boe/d in the first quarter, which is in-line with Sitio’s pro forma production of 34,424 Boe/d in the fourth quarter of 2022. We evaluated approximately 50,000 net royalty acres for acquisition in the first quarter of 2023, but we did not find any opportunities that met our returns criteria. This was the first quarter in over two years that we haven't announced or closed an acquisition. Instead, we focused on strengthening the balance sheet by reducing long-term debt by approximately $34 million and continuing to improve our internal efficiencies.

The Dorchester model is: no debt, no hedges, low overhead. In Q1 2023, Dorchester spent $2.7 million on G&A cost, plus $0.76k allocated to the general partner, which amounted to about 9% of total revenue.

Meanwhile, Sitio spent $11.7 million on G&A which was 8% of total revenue. They also spent $22 million on interest expense (their debt is pretty high coupon) and had a $15 million benefit from their commodity hedges.

It will be interesting to see which one performs best. Dorchester seems safe and steady but it may work to put some capital with the aggressive gunslingers of Sitio. It is encouraging that they are talking about building out software and management tools to manage their properties and make sure that they are not being shortchanged by the operators. We do not see any other royalty companies talking about this, and it is an especially big problem at the royalty trusts, which are frankly under-managed.

Sitio has a scale advantage ($4.8 billion EV versus $1.1 billion for Dorchester and only $125 million for Cross Timbers) that will allow them to invest more in this area.