VNOM and MNRL are KeyBanc Favorites - Dec 16

[dan_s]

Minerals Monthly: MNRL's Performance Is Significantly Lagging KRP's and VNOM's Despite Being
Unhedged in 2021; We Expect Acquisitions to Increase Near Term for KRP and MNRL
Leo Mariani, CFA an Analyst at KeyBanc Capital Markets

Minerals names within our coverage universe are up 38% on average (S&P 500 up 5%) since Pfizer announced its COVID-19
test results on the morning of November 9. KRP is up 51% and VNOM is up 70%, while BSM and MNRL are only up 7% and
24%, respectively.

BSM's underperformance makes sense given its high gas cut of 74% in 2021 and since 2021 HH futures prices
are down around 6% since November 9. However, MNRL's underperformance is a bit perplexing as the Company is completely
unhedged in 2021, which should give it quite a bit of upside to higher oil prices. This is in contrast to KRP and VNOM, which have
37% and 60% of their oil volumes hedged in 2021, respectively. Additionally, KRP is fairly gassy as we expect its gas cut to be 59%
in 2021 vs. oil cuts of 54% and 60% for MNRL and VNOM, respectively. Lastly, MNRL is likely the only minerals company that is
executing acquisitions at the moment, which should benefit 2021 production. Acquisitions for minerals companies ground to a halt
in 2Q20 when oil prices fell into negative territory as minerals companies decided to preserve liquidity and minerals owners put a
pause on selling acreage. However, we suspect that the attitude of these minerals owners could be starting to change now that
WTI is above $45/Bbl. Additionally, KRP and VNOM have said that weakness in their stock prices has resulted in very high costs of
capital due to high dividend yields, which has made acquisitions challenging. However, KRP's stock price is up 51% and VNOM's
stock price is up 70% since Pfizer announced its vaccine results. This has lowered KRP's dividend yield from ~13% to ~9% and
VNOM's dividend yield from ~5% to ~3% (VNOM only paying out 50% of CF) over this same time frame, which has likely helped
these companies move much closer to being able to use their stock again to make acquisitions. Overall, we expect acquisition
activity from MNRL and KRP to increase a bit in 4Q20 and by an even larger degree in 2021 if WTI can sustain a level above $45/
Bbl and stock prices continue to rise. However, we expect BSM to stay focused on developing its current inventory, and we expect
VNOM to continue to focus on reducing its debt instead of making acquisitions.