U.S. oil and gas mineral companies represent lower risk than exploration and production (E&P) companies, while offering robust tax-efficient yields, according to KeyBanc Capital Markets.
Leo Mariani initiated coverage of Kimbell Royalty Partners LP (NYSE: KRP) ($18 price target), Brigham Minerals Inc (NYSE: MNRL) ($22 target) and Viper Energy Partners LP (NASDAQ: VNOM) ($28 target) with Overweight ratings, while beginning coverage of Black Stone Minerals LP (NYSE: BSM) with Sector Weight.
U.S. oil and gas mineral companies earn by leasing their mineral rights and from subsequent royalty payments on future oil and gas production associated with the minerals, Mariani said in the note.
Minerals companies pay out almost their entire cash flow as dividends or distributions and their yields range from 7%-12%, the analyst said. He added that these payments are usually tax deferred for several years, which offers investors a highly tax-efficient income.
Since minerals companies neither have capital expenses associated with developing land positions nor need to pay the ongoing lease operating expenses, they are able to generate free cash flow “in almost any commodity environment,” Mariani wrote, adding that this was their key differentiator versus E&Ps.
These companies also enjoy significantly higher margins than E&Ps, since they have limited G&A expense, the analyst said.
Among the oil and gas mineral companies, the analyst prefers those that are levered to “lower-cost/oily plays with significant inventory," Mariani stated, while adding that Kimbell Royalty Partners, Brigham Minerals and Viper Energy Partners would likely have better dividend growth in 2020 than Black Stone Minerals.