With the start of a new year, MineraliQ presents our forecasts for the market in 2022 and reflects on how our thoughts for 2021 fared.
- Oil and gas prices would remain high due to increased demand from an opening economy and world.
- Activity would remain flat due to increased focus on ESG and staying within cashflow.
- Minerals would retain their value better than operated assets in the open market.
- It would be the year of the DUC, drilled uncompleted wells.
Many of our ideas were correct, even if the thesis behind them was wrong.
Oil and gas prices remained high but not entirely due to an increase in demand, but also because OPEC+ kept to their cuts and operators kept to their financial discipline. Gas prices shot up around the world due to an LNG shortage in the face of soaring demand in Europe and Asia.
Activity remained flat due to capital discipline of operators living within cashflow and operators opting to complete more of their DUCs, which helped sustain production at a lower cost in the fiscal year.
Minerals and royalties are still trading at an above-average multiple to operated assets, as it is not capital intensive (no opex or capex). But despite increased prices, assets are trading below historic levels due to lower activity. The number one risk to your mineral value is time. Lower activity means longer time to drill new wells which lowers value in the near term (time value of money).
So, what does 2022 look like?
In reality, not much different than 2021. Supply and demand were the biggest risk to 2021; they remain so in 2022. Demand has not fully recovered, and every new variant is on the verge of shutting down entire countries, so how fast we get back to “normal” remains uncertain. Two factors have kept supply in check: OPEC+ not bringing more barrels into the market and U.S. operators not increasing drilling activity. The European gas crisis is not going away any time soon with the coldest months of the year still ahead and an increase in demand from developing countries like China and India. The best and worst part of our industry is that we are a global commodity. It is not just what happens in the U.S. that dictates prices, global factors have great impact as well. The gas and LNG produced in the U.S. is exported overseas where gas trades at many factors of what it does in the U.S.
A perfect storm of the right factors has driven pricing as high as it is. Worldwide collapse of demand, European mismanagement of gas storage, U.S. operators living within cashflow, OPEC+ actually cutting the barrels they said they would. While a single event could have created problems in the market, it took all of them combined to create what we see today.
This isn’t all bad news for mineral and royalty owners. First, higher prices mean bigger checks. Who would be upset about that? The downside is the slowdown in activity. With less new wells coming online, it takes longer to receive new royalties. We must remember that oil and gas royalties are a declining asset. The only thing that keeps checks coming in at a steady amount is an increase in activity. With a slowdown in activity comes a decline in the future value of your minerals. Why? Time value of money. A well drilled in five years is worth less than a well drilled in one year. The risk of time must be factored in while valuing your minerals. Risk has been somewhat offset by the value of what is cash flowing today. PDP (producing) heavy mineral estates are worth more today than those that are heavier in undrilled acreage. This can be a hard concept for many owners to grasp, but it is very important in the understanding of the value of your estate. Owners who receive royalties from top operators in the best basins in the best rock will always demand a premium.
2022 might continue to be more of the same of royalty owners, but is that such a bad thing? Time will tell. Until then, remember that commodities are cyclical and what goes up can come down just as fast.
Did you miss our Minerals in 2022 webinar? You can catch the replay here.