Description

We think OSPR (Osprey Energy) is a compelling buy with >25% upside by year end, and over 50% upside over the next 12 months.  The time to buy it is now as there are numerous catalysts over the next month.  Please pardon the bullet point brevity…

OSPR is a SPAC that announced the purchase of Royal Resources from Blackstone on June 4, 2018.  Royal Resources is a mineral and royalty business formed in 2011 and has acreage in the core-of-the-core Eagle Ford across DeWitt, Karnes and Gonzales counties.  Post-closing, the company will be known as Falcon Minerals.

Before I go any further, I strongly suggest you read the VIC write-ups by Snarfy (BSM and VNOM) and Plainview (KRP).  I believe the US oil and gas royalty sector is in the midst of a renaissance.  In 2018 alone, we have seen the creation of numerous investable public C-corps (VNOM conversion, KRP pending conversion and OSPR creation).  We are seeing the birth of an energy subsector and as interest picks up, we believe the sector will re-rate higher.  VNOM is up +53% YTD and we think it’s a preview for what can happen to OSPR over the next 12 months. 

The best way to get up to speed quickly on OSPR is by reviewing the investor slide deck from July.

https://www.sec.gov/Archives/edgar/data/1703785/000121390018009216/f8k071618ex99-1_osprey.htm

A few items that I would like to specifically call out:

·        OSPR has Tier 1 acreage with best in class operators  - EOG, COP, BHP, DVN account for 90% of 2018 cash flows

·        3,000 locations with IRRs to the operators of >100% at ~$60 WTI, implying additional inventory at higher WTI assumptions

·        Blackstone is rolling a significant amount of equity ($400 million or 47%), i.e., they are NOT cashing out.  Blackstone has additional upside via earn-outs that kick in at $12.50 and $15.00 (see slide 33)

·        The partnership with Blackstone and former Atlas management was driven by Blackstone’s confidence in Jonathan Cohen, Edward Cohen and Dan Herz’s ability to leverage deep-rooted industry relationships and technical expertise to execute on accretive deals going forward, very similar to the VNOM model. Slide 21 sizes up the potential market that is ripe for the picking, in addition to a very focused boots-on-the-ground acre-by-acre program

·        Post deal announcement, OSPR raised a $115 million PIPE and management bought $16mm in the deal

·        $1.20 in FCF at NYMEX strip per 6/1/2018 (slide 28).  This is 11.2% FCF yield vs. last closing price. We think the guidance is very conservative (more on this later).

Calendar is an important catalyst

·        OSPR filed effective proxy on August 3^rd.  Shareholder vote scheduled for August 20^th.  Expect to close a couple days later. Company will be known as Falcon Minerals thereafter.

·        OSPR kicks off roadshow via Credit Suisse on Monday, August 6^th.  Expect a new slide deck and reasonable chance we see a favorable update to 2018 / 2019 guidance

·        Post close, I think we see a wave of sell-side initiations

Eagle Ford - what a difference a wide Midland diff makes!

·        Please read the MGY write-up by Sancho on 7/13/18.  Permian activity is decelerating because of pipeline constraints leading to wider Midland-WTI differentials and service costs increasing faster than other basins.  As a result, E&P activity is shifting from the Permian to the Eagle Ford.  As an investor in a mineral interest, you get paid on volume x commodity price and obviously no capex.  We are on the cusp of a production acceleration on OSPR’s acreage! 

·        COP’s production on OSPR acreage is approximately 60% of OSPR’s current value.  To get an idea for COP’s Eagle Ford production plans, check out their slide deck from April

·        https://static.conocophillips.com/files/resources/eagle-ford-investor-field-tour-final-040318.pdf

·        COP Slide 26 – show 25% CAGR from 2017-2020.  This production growth is all-ready in OSPR’s guidance. 

·        On July 26^th, COP confirmed it was moving a rig from Permian to Eagle Ford.  OSPR has a 22.5% royalty interest in COP operated Hooks Ranch – wells drilled thus far are outperforming Ryder Scott type curve by 1.5x.  An acceleration to COP’s Eagle Ford drilling program and well outperformance is not in OSPR’s current guidance.  Note, a 22.5% royalty interest is uncommon and will have a disproportionately positive impact to OSPR FCF growth for the next several years.

·        In addition, COP’s EF completion design have been continually improving and COP is now testing a “Vintage 5” completion design at the moment. Slide 22 of the COP EF presentation shows the progression of the COP EF typecurves.

·        EOG announced on August 3^rd they are adding 2 additional rigs to Eagle Ford to build DUCs with intention to build more in 2019.  EOG’s acceleration plans are not in OSPR’s guidance

·        On July 27^th, BP announced the acquisition of BHP’s US shale assets for $10.5 billion.  BP is going to hold an investor day later this year to walk through development plans for these assets.  It is highly likely that BP prioritizes and accelerates the production of BHP’s Eagle Ford assets.  BP’s likely plans to accelerate is not in OSPR guidance   

Valuation

·        Every operator that moves the production needle for OSPR is accelerating drilling plans.  Accordingly, we think that FCF in 2019 will be in the $1.35 area.  At a conservative 10% FCF yield, that is $13.50 stock price for 25% upside

·        Taking the yield down to 8% on 2019 gets you in the 16.50-$17 / share zip code (not including dilution earn out here)

·        2019 is a more appropriate comparison window for valuation because of the number of transactions they are individually undergoing this year.

o   VNOM post the acquisitions and drop-downs currently trades at 7% FCF yield

o   BSM and KRP trade at 11% and 10% respectively

·        We believe that the closest comp to OSPR is VNOM because of the following reasons:

o   OSPR and VNOM have more concentrated asset bases which provide for greater visibility on near-term drilling activity

o   OSPR and VNOM have faster expected production growth rates than BSM and KRP.

o   OSPR and VNOM are oil-weighted vs BSM and KRP who are gas-weighted

·        We don’t believe that OSPR catches up to VNOM’s valuation overnight where execution on growth and acquisitions is needed, but OSPR is off to a great start with all the above mentioned developments in the EF, which biases management estimates of production and CF higher.

Risks and Considerations

·        EF inventory may not be as deep as the Permian but OSPR does not include many Upper EF and Austin Chalk locations. The EF basin is still testing for the Austin Chalk formation and recent completions have been encouraging with more data to come by year end from COP. There is still room for upside surprises in EF inventory especially as it relates to COP and BHP/BP foot-prints that are arguable under-booked.

·        While inter-lateral spacing is always a concern for all basins, COP’s EF spacing assumptions have been generally conservative and COP’s EF wells are outperforming the typecurve, which implies that they have not been spaced too tightly.

·        Competition in the royalty M&A market may become more difficult with more competitors, but Jon and Ed Cohen in addition to the Blackstone relationship should will provide a pipeline of negotiated deals

Catalyst

·        OSPR filed effective proxy on August 3^rd.  Shareholder vote scheduled for August 20^th.  Expect to close a couple days later. Company will be known as Falcon Minerals thereafter.

·        OSPR kicks off roadshow via Credit Suisse on Monday, August 6^th.  Expect a new slide deck and reasonable chance we see a favorable update to 2018 / 2019 guidance

·        Post close, I think we see a wave of sell-side initiations