Public mineral and royalty companies are outperforming market peers. But hesitant investors are slow to enter the fray, experts say.

Market values emerging from the COVID-19 downturn have been strong for publicly traded oil and gas producers and for public minerals and royalties players, according to data compiled by RBC Richardson Barr.

The S&P XOP (Oil & Gas E&P) index, the general index for the upstream energy sector, has risen about 170% since January 2021, said Tim Perry, RBC vice chairman of global energy.

Meanwhile, the market value for oil and gas minerals and royalties companies has grown about 130% since that point.

E&Ps and minerals and royalties aggregators have seen better returns than the S&P 500 index, which has grown by about 36% since the beginning of 2021.

In that same time frame, WTI oil prices have grown approximately 84%, to $87.24/bbl on April 15 from $47.47/bbl in 2021, per U.S. Energy Information Administration (EIA) data. Henry Hub natural gas prices have decreased more 33% during that time—to $1.73/MMBtu from $2.60/MMBtu, per EIA figures.

But investors haven’t raced back to pour money into the upstream or minerals and royalties sectors, despite their relatively strong performances in the market.

“The problem we had with investability in the industry was volatility in commodities,” Perry said April 15 during the World Oilman’s Mineral & Royalty Conference in Houston.

Some of the bigger institutional investors still have wounds healing from previous cycles of low commodity prices and bankruptcies, like the industry saw following an oil price collapse in 2014.

Institutional fund managers, like Fidelity and Wellington, have “hugely shrunk” their investments in the upstream energy space, Perry said.

“We don’t have many energy investors out there,” he said. “So what we need to do is get generalist investors interested in our sector.”

But the stock price performance of the upstream and minerals sectors, and the robust return-of-capital programs producers have used to pay out shareholders, have started to pique the interest of prospective investors.

“Those generalist investors…they are now calling us and saying, ‘Who can I invest in?’” Perry said. “That’s not only for energy E&P companies—it’s also starting to happen for mineral companies.”

Running room

Where minerals stocks have lagged is on multiples, Perry said.

Minerals and royalties aggregators have relatively low spending compared to their E&P peers. To maintain oil and gas production, operators need to allocate millions of dollars each year to drill and complete wells.

After an initial capital outlay for the purchase of subsurface rights, mineral and royalty players don’t have to spend capex to drill wells. Since they have low operating expenses, mineral and royalty companies spit off relatively larger buckets of free cash flow.

Free cash flow for the minerals sector is “almost double the free cash flow” of the overall S&P 500, Perry said.

“If we go into multiples, the overall S&P 500 is about 15x,” he said. “Minerals is about half of that.”

“We think we have a lot of room to run just to get to the S&P 500 average,” he said.

Investors are taking notice of minerals. The minerals sector’s market cap doubled in the past five years, collectively accumulating more than $30 billion in today’s market.

But “that really isn’t that much,” Perry explained.

Size matters to investors—both in market cap but also in the volume of trading activity. And minerals companies are definitely getting bigger: The market has seen the largest examples of corporate consolidation cross the finish line in just the past few years.

Late last year, Viper Energy Partners LP, a subsidiary of Diamondback Energy, acquired Permian Basin mineral and royalty interests from GRP Energy Capital and Warwirk Capital Partners for roughly $1 billion in cash and stock.

In 2022, Sitio Royalties completed a $4.8 billion merger with Brigham Minerals, expanding the company’s footprint in the Permian and other U.S. basins.

But higher trading liquidity for minerals companies, allowing a greater number of investors to buy into and sell out of the sector, should attract more capital into the space, Perry said.

Higher multiples can then create a “virtuous cycle” for the public minerals space, where companies can better raise capital to make acquisitions and grow in the future, he said.