“Designing an optimal structure for a mineral
and royalty interest MLP requires analysis of the
traditional MLP structure and the modifications
necessary to accommodate a mineral or royalty
a limited term, and may terminate once the recipient has received
a specified cash payment, or it may terminate upon the recipient
receiving a specified value of production. As a general rule, an
ORRI will terminate if the underlying lease expires and all mineral
interest revert to the owner of the mineral estate.
Suffice it to say that there is generally no limit on the manner
in which the mineral estate may be carved up – however, royalty
interests, working interests, and ORRI are the most commonly
negotiated mineral interests.
BENEFITS OF MINERAL AND ROYALTY INTEREST
Mineral and royalty interest consolidation appears to be creating
a more efficient market for negotiations between mineral interest
owners and the oil and gas producers with which they contract
for consolidated acreage positions. Consider the following potential benefits for mineral interest owners and oil and gas
Mineral interest owners
• Aggregators are likely to receive more favorable lease terms,
and have the expertise and flexibility to modify terms to encourage development.
• Aggregators have access to proprietary market data and other
• Aggregators have increased negotiating leverage relative to
• Aggregators structure leases to encourage development by
• Aggregators actively monitor and manage inventory of mineral
and royalty interests to ensure the economic benefits of the
lease are realized.
Oil and gas producers
• Producers potentially can lease larger acreage positions from
• Producers benefit from negotiating with sophisticated parties
to streamline the process and manage expectations.
• Producers may benefit from proprietary data and market
knowledge acquired by aggregators who focus on specific
• Producers reduce administrative burdens by contracting with
a manageable number of aggregators, instead of hundreds or
thousands of individual mineral interest owners.
Given these potential benefits, the trend towards mineral and
royalty interest aggregation is compelling. As this subsector
matures, we expect many of the
mineral and royalty interest com-
panies will benefit from further
consolidation in the market. For
example, Kimbell Royalty Partners,
a Fort Worth, Texas-based owner
of oil and natural gas mineral and
royalty interests, recently acquired
over one million gross acres of
overriding royalty interests in the Anadarko Basin for approxi-
mately $16 million. As this consolidation trend continues, we
believe access to low-cost capital through an MLP will be a
competitive advantage for buyers.
STRUCTURING MINERAL AND ROYALTY INTEREST MLPS
Designing an optimal structure for a mineral and royalty interest
MLP requires analysis of the traditional MLP structure and the
modifications necessary to accommodate a mineral or royalty
focused business. As with most MLPs, the primary objective is to
structure an investment vehicle that generates sufficient current
cash flows to pay distributions to unitholders, has low capital
expenditure requirements to grow its asset base, and has significant
long-term growth opportunities to increase cash distributions to
unitholders over time. Each company is unique, and there are
material, subtle variations in asset characteristics, cash flow
volatility, and other considerations that may warrant modifications
to the typical MLP structure.
Organizational structure of MLP
The basic organizational structure of a mineral and royalty interest
MLP is substantially similar to other MLPs that have been around
for several decades. It involves two tiers, with the MLP being a
limited partnership whose sole asset is the ownership of all of the
membership interests in a limited liability company or all of the
partnership interests in another limited partnership that owns
and operates the assets of the operating business (See Figure 1).
The general partner of the MLP typically owns a non-economic
interest in the MLP, and may own rights to increasing portions of
cash distributed by the MLP, which are referred to as “Incentive
Distribution Rights.” Limited partnership interests in the MLP are
allocated between the sponsor of the MLP and the public investors.
A portion of the sponsor’s limited partnership interests may be
subordinated (so called “subordinated limits”) in right of distribution payments to the limited partnership interests held by the
public. Subordinated units are designed to ensure that public
investors receive all of the cash distributions to which they are
entitled before the sponsor is entitled to receive distributions.
T1: ALLOCATION OF DISTRIBUTIONS AS DISTRIBUTION THRESHOLDS ARE SATISFIED
— Marginal percentage interest in distributions —
Unitholders GP & IDRs
Up to 1st Target (115% of MQD) 100% 0%
Above 1st Target, up to 2nd Target (125% of MQD) 85% 15%
Above 2nd Target up, to 3rd Target (150% of MQD) 75% 25%
Above 3rd Target 50% 50%