Undrilled but not Unnoticed: White Space Buyers Invest Now for Future Upside

The A&D universe for mineral and royalty companies in 2025 has seen its potential energy gathering in the wake of frenetic E&P consolidation, following an uneven and muted 2024.

Whether that energy translates into deals or simply dissipates is a matter for debate.

KeyBanc analysts said in January that they expected to see at least a couple of $500 million deals by public mineral and royalty companies in 2025, with Sitio Royalties and Kimbell Energy Partners the most likely buyers.

Others are not as convinced. But the aftershocks of consolidation remain a factor and riskier, speculative buying of “white space” is another.

“I’d say, holistically, it feels like the market for royalties is at a very mature phase right now,” David Deckelbaum, managing director at TD Cowen, told Oil and Gas Investor (OGI). “You’ve already seen a reasonable amount of heavy consolidation. What we’ve observed is there’s sort of a royalty M&A that occurs on the tails of upstream M&A. And, I think, because the upstream side has slowed inherently, the royalty side slows as well.”

Deckelbaum said he expects a much more muted deal market.

A key difference in the royalties market now compared to years past is that private equity has not just become involved, but has stuck with the space. In 2024, for instance, Post Oak Minerals acquired $475 million worth of interests from January through July.

However, private equity’s typical haste to exit with a monetization has been tempered by continuation funds that make it possible for portfolio companies to hold assets and maintain “reasonable returns,” Deckelbaum said.

“There’s less of an impetus, perhaps, or less of a real move to get rid of these or really pursue an exit.… You kind of roll all that up and yeah, you’re at what is just a secularly more muted royalty market,” he said.

On the public side, mass consolidation in the Permian and elsewhere has had two effects: post-transaction deals and dropdowns.

The most ostentatious example of post-consolidation minerals deals: Diamondback Energy’s dropdown to subsidiary Viper Energy—a whopping $4.45 billion deal that was both expected and somehow still an earth-shattering event in the minerals world.

Viper’s deal was, Deckelbaum said, “definitely the largest dropdown ever.” But that was a spillover effect of the largest private acquisition ever—Diamondback’s $26 billion September acquisition of Midland Basin E&P Endeavor Energy Resources.

But was it a deal-deal? Deckelbaum’s view: “In fairness, it’s not really M&A, right? It’s capital structure arbitrage.”

Deckelbaum likened the deal to the transactions made years ago between upstream companies and their MLPs “where it’s like MLPs traded at 5x. Your upstream trades at 5x. So, you drop down all your midstream assets to the MLP and you get a better multiple than your core business does.”

“And that’s basically what happened with [Diamondback] and Viper,” he said. “It’s crazy because the scale of these companies is so vast. A dropdown should not be a $5 billion transaction.”

Regardless of how to categorize the transaction, the point was that it followed upstream M&A. And the minerals market writ large will largely follow that going forward, he said.

“Ultimately, I think it’ll be interesting just to see where the royalties market moves, post- some of these larger deals closing. Particularly, you look at Chevron-Hess; look at Exxon now, post-Pioneer, potentially getting involved with this Hess-Chevron standoff. There’s still very large-scale M&A on the upstream side. That tends to then catalyze a potential wave of movement on the royalty side.”

That necessitates waiting, however, for E&P action first.

But, Deckelbaum said he sees “inherently less of that royalty-related activity.”

Luck of the draw

Another aftereffect of consolidation has been the luck of the draw; in Sitio’s case, literally the Barilla Draw.

One of Sitio’s biggest wins last year was a transaction it had nothing to do with. The company’s patience and being in the right position delivered for the public mineral and royalty company.

Among Sitio’s Reeves County holdings are 1,800 net royalty acres (NRA) held by a premier operator: Occidental Petroleum. The problem for Sitio was that the acreage was a relative dead zone for Oxy. Since 2023, Occidental had averaged four spuds per quarter in Reeves County; it did not spud a single well there in 2024.

The smaller and hungrier Permian Resources team had tried to woo that leasehold from Occidental, but the large cap E&P hadn’t been interested in consummating a deal.

Then came Occidental’s $12 billion purchase of CrownRock, which changed Oxy’s calculus as the need to shed some debt related to the transaction made the Barilla Draw a check waiting to be cashed.

Permian Resources snapped up the acreage in September for $817.5 million.

In contrast to Occidental, Permian Resources has averaged 13 spuds per quarter in Reeves County.

In November, Sitio executives were celebrating, and not just because of the Oxy deal.  

CEO Chris Conoscenti led off a third-quarter earnings’ call by pointing out that the average market cap of the five public operators on its acreage had more than doubled since the end of 2022.

“We continue to benefit from E&P consolidation as acreage transitions to better capitalized, more efficient operators or operators who will develop that acreage sooner,” he said.

The “case study” that Sitio pointed to was the Barilla Draw deal.

“This is an area that wasn’t a core focus for Oxy, however, it added more than 200 gross operated locations with high NRIs that immediately compete for capital in the Permian Resources’ portfolio,” Conoscenti said.

Dax McDavid, Sitio’s executive vice president of corporate development, said that the phenomenon wasn’t isolated to the Permian.

“We’re seeing this in all basins. In particular, in the D-J (Denver-Julesburg) Basin you see some sale of non-core assets by [Civitas Resources] where they can reallocate the capital to their priority area, being the Watkins area. But those people that bought those assets [from Civitas] were able to focus on those and bring value forward for us, and for the operator.”

The upstream deals have been good for companies like Sitio, since the positions sold by operators were often legacy assets that have now become priority targets being moved to the head of the line using advanced drilling and completion techniques.

One example: horseshoe laterals that are not just cheaper to drill, but more efficient and able to capture stranded acreage that unlocked even more value, McDonald said.

As Conoscenti noted, minerals owners are seeing not just accelerated development leading to better returns but, in the case of Civitas, completion of 13 4-mile lateral wells.

“Seven of these wells are in the Sky Ranch unit where Sitio owns approximately 240 NRAs,” he said.

But those deals practically fell in Civitas’ lap, Deckelbaum said.

“The Barilla Draw deal—it’s like a slam dunk from a royalty side because Oxy was never going to drill that,” he said.

But, he added, “it’s very difficult to position for that” as a buyer.

For mineral companies, it’s not for a lack of trying.

Hunting white rabbits in a snowstorm

One area in which private equity firms surpass their public counterparts is in the buying of undeveloped, unpermitted acreage—in the industry parlance, “white space” —in which minerals are bought from under private equity’s upstream portfolio companies. 

Deckelbaum surmised that public companies wouldn’t be able to compete with private equity (PE) using the strategy, but PE “got into royalties for that reason … the identification of white space.”

“And I think there’s probably just more continued PE buying there that’s just very difficult to compete with because they have a lot more ‘inside baseball’ and where they think drilling activity is going,” he said.

Post Oak has pressed into undeveloped areas in anticipation of future development, in what was once considered a risky maneuver in the minerals’ M&A.

“In the mineral space, when you look at the actual value of that undeveloped inventory [it] ends up being a lot higher as a percent of the total deal value than when we look at our upstream investments,” Henry May, a director at Post Oak, said at the World Oilman’s Mineral & Royalty Conference last year. “We’re actually looking at very similar upstream investments from where it is in the development cycle.”

But from the perspective of how mineral interests are valued, the approach makes a lot of sense, Austen Gilfillian, vice president of Viper, told OGI.

“On the mineral side especially, it’s a huge theme. Historically, the way that it worked is, as soon as some acreage got permitted, the value, the minerals would probably go up by directionally 50%, right? Because you’re always just having to take the risk of when it was going to get developed,” Gilfillian said. “So, having that certainty so those future cash flows increase the value of the royalty assets meaningfully.”

What Gilfillian has seen in the past couple of years is white space buyers becoming far more aggressive “because if they know if and when it gets permitted, then they’re going to have the opportunity to kind of slip it and make that money.”

The interest in buying white space has become so pronounced that, effectively, the “entire arbitrage has gone away and you’re effectively paying the price for permits today for white space in advance of that event happening,” Gilfillian said.

Opportunities for white spaces have become fewer and farther between. Viper has seized on such opportunities when it can, included its $750 million GRP Midland Basin acquisition in 2023 and, more recently, the $1.1 billion purchase of interests from Tumbleweed Royalty IV. Tumbleweed was founded in 2014 by Cody Campbell and John Sellers, the co-executives behind Permian E&P Double Eagle Energy.

“We highlighted that with our GRP and our Tumbleweed acquisitions, and that those were extremely unique gaps that … when we go put all the individual tracts into presumed units that operators were going to develop for each of those, roughly 50% of the horizontal units on a net basis at least had zero existing horizontal sticks,” he said. “So, extremely rare. It provides a really long runway for what our organic production road can look like.”

Largely, however, the game playing out in the Permian is with companies “that are trying to aggregate deals and flipping them going to buy permits. There’s not much margin there. You have to go push the boundaries and try to buy that white space and then hope that it gets permitted, hope that it starts getting drilled, and then be able to flip it to somebody that wants to hold it to the cash flow streams and is willing to pay a premium because the timing of that cash flow stream is now materially de-risked.”

The riskier bets that have paid off have been on the Permian’s extreme frontiers, such as the Dean sandstone in Dawson County, Texas. Recently, companies including Hibernia Resources IV, EOG Resources, SM Energy and privately held producers Birch Resources and Ike Operating have been wildcatting the area.

Gilfillian said the minerals buyers were already there four or five years ago.

“They had pushed the boundaries on the white space up there making the bet that they could buy the minerals,” he said. “So, it’s just a different type of risk. But I would say that that play got pushed on the mineral front way before the operator trend was actually there.”

As a case study, the white space buyers are interesting, he said.

“I think, typically, that’s what you see, that the mineral guys are willing to push the boundaries a little bit more before the operators are.”