The contrarian streak in the oil and gas business—a general defiance of conventional wisdom—seems an oddly common quality.
Extreme examples exist, of course. Some companies sold off hedges in 2014 as OPEC began its price war, for instance. OPEC, at the same time, thought it could put U.S. shale producers out of business that thankless November.
Still, Jace Graham, CEO of Rising Phoenix Royalties (RPR), utters a phrase that might raise the eyebrows of even the most diehard oil patch rebels.
“We were kind of anti-Permian,” Graham says, “in the beginning.”
Before alerting emergency personnel, note that in August, RPR closed a deal for mineral interests in Dawson County, Texas, encompassing 230 net royalty acres (NRA) on leasehold operated by SM Energy Co.
Not a large deal, but Graham suggests that’s what RPR is all about.
Graham explained that RPR, which formed about six years ago, initially gunned for yield driven, opportunities with heavy proved developed producing (PDP) assets. The company has acquired interests in the Barnett when natural gas was $2/Mcf, went after acreage in the Marcellus and North Dakota and now owns mineral and royalties acreage in almost every major basin, Graham said.
“We were anti-Permian when all the new money came … into the Permian,” he said. “We couldn't get value add.”
With that in mind, RPR went about agnostically buying assets to create a blend across oil and natural gas.
“When I started rising paying royalties, we were pushing 40, 50 transactions a week. So we knew process, we knew how to underwrite, we knew how to fund opportunities,” he said. “Fortunately, natural gas has been hanging around $2, $3 Mcf since we started buying.”
When prices hit $6, they exited. And the company continued to look for a good value adds on the PDP side.
“So just because of the PDP nature, it's easy to underwrite that kind of stuff. And our investors, they're yield driven,” Graham said.
Entering the white space
But the Permian has changed, and that’s opened the door wider to RPR.
Graham said RPR had gone off of the Permian—where prices have escalated for minerals interests just as they have for working interest amid consolidation—but the company still was looking at prospects there.
“We were buying areas that were more heavily developed and looking for a cashflow yield for our investors.”
A recent wave of exploration by E&Ps into new areas has tilted RPR’s PDP buying strategy in the basin. Instead of chasing PDP, the company is buying what mineral and royalties companies call “white space”—areas where drilling may not be happening, but is likely to.
“We're just starting to kind of step out from what our typical funds would do to now looking at some more growth opportunities with a little bit more undeveloped. And typically we've been more, call it 70% PDP, 30% upside,” he said. “Now this type of opportunity is the flip of that. It's probably 30% PDP, 70% upside.”
That strategy is supported by companies such as SM Energy—the underlying operator of RPR royalty acquisition—where the E&P has been exploring the Dean Formation overlaying the oily Wolfcamp A—in Dawson County.
Dawson is also the site of exploration by EOG Resources, which has been exploring across different leases along the southern edge of the county.
Other companies, among them Marathon Oil and Continental Resources, are likewise appraising new intervals, such as the Woodford zone in the Delaware Basin.
“Now we're kind of starting to step out and find some opportunities where areas haven't been picked over as much,” Graham said.
The strategy isn’t without risks, particularly if an area isn’t ever drilled. But RPR’s confidence is built on years of minerals buying, underpinned by geological and technical expertise in making tactical deals.
And even in fringier or experimental areas, “you do have some data points,” Graham said. “We're not just buying so far out there that we're far ahead of the bit. We're pulling in and triangulating data points from existing wells that are out there.”
Graham concedes there may not be a ton of data, but its enough to make an analysis. The company is also pulling in the geological aspects of prospects—how thick are zones? How many benches are available?
“We might not have as many data points as, say, the core of the Midland Basin or Delaware Basin, but we're definitely able to pull off some data point that's able to give us some insight,” he said.
And RPR evaluates the operators’ performance across the entire basin, as well.
For instance, SM might be “kicking out this type of EUR versus, say, an EOG up in the same kind of areas,” he said. “And so we can kind of haircut the price accordingly based on what we think the economics can support, based on what the operators have done in other areas where there's more development.”
‘Team of snipers’
Yet in an age where scale has become a siren song for investors, Graham said RPR isn’t bent on becoming a huge mineral and royalties company. It may not even remain primarily minerals and royalties driven.
When Graham started the company around 2018, investors were friends, family and high net worth people he knew in the Dallas-Fort Worth area that were familiar with the industry.
Eschewing private equity, RPR has raised capital internally and its high net worth backers like the results. The company also has a sizeable line of credit if it wants to pull off a larger deal. Other times, the company will collaborate with some larger shops or private equity “if we want to work a club deal that is maybe too big for us.”
And not being big enough isn’t a problem, Graham said. As the oil and gas world has worked to build scale as a lure for investors, RPR, again showing contrarian colors, isn’t all that interested in being a massive minerals company.
In fact, it’s already diversifying from minerals and royalties.
In July, the company said it had entered its first non-operated deal in in Weld County, Colorado, in the Denver-Julesburg basin.
Sibling company Rising Phoenix Capital is set to capitalize on the company’s expansion. And for its high net worth backers, non-op drilling also offers favorable tax write-offs for intangible drilling costs, which ranges between 70% to 80% of the entire investment amount in the first year.
Graham said the non-op opportunities RPR will pursue will likely range between $500,000 and $2 million—something too small for bigger players to necessarily get competitive about.
The company is likely to see a bigger wedge of spending turn to non-op.
“Right now, if you were to look at the portfolio, we're probably, I'd say 90% minerals, 10% non-op,” he said. “I think we're going to start pushing to get that to about 60-40 in 2025 and probably 50-50 thereafter.”
And RPR, after all, isn’t really contrarian. It’s just an old fashioned independent. The word Graham likes to use is “boutique.”
“We're going to stay small. We're going to stay nichey, we're going to stay opportunistic,” he said. “We're not going to probably be private equity backed. We like to meet as a team. We come up with decisions as a team. We like to control kind of the narrative on where things are going within our portfolio and our funds.”
Besides, he says, RPR is nimble and good at what it does already.
“We don’t need a big team of infantry,” he said. “We’ve got a team of snipers that work with us at Rising Phoenix, and so you can leverage a lot.”