J.C. Butler, Jr.: Let’s go back to the history. And I would love to say that we’re earning that kind of return on the investment, $68 million. But I went through the history lesson of where we got the Appalachian minerals, which are the biggest income producers for us. And our cost basis in those things is like zero, as they were acquired eons ago. So there’s a bunch of that Appalachian stuff that has no meaningful asset on the balance sheet. So when we look internally at our numbers, our returns right now are astronomical. We believe, over time, as we make investments that we think this business is going to be – ultimately, as we get more and more and more new money invested, we think we’re going to earn high teens. I’d like to think low 20s, but high teens on our investments.
And it’s this interesting point, we’re investing in a business that’s got extraordinarily high returns and it’s going to blend down to something in the high teens, as you’ve noted. What’s our advantage? I think our big advantage, one is, I think we have assembled a great team of people that are very thoughtful about their analysis. And one of the things that makes them a great fit for us is they take a very long-term view of investing in the space, which is partly how they’re wired, it’s 100% how we’re wired, if you’ve spent time looking at the company. We are perfectly happy to take decades long views of investments. So when we acquire minerals, we’re perfectly happy to acquire minerals that won’t be developed for 10 or 15 years because we’re building that base that’s going to deliver dividends way out into the future.
And you don’t have to pay a lot for those, but we’re willing to look at those packages. I think a number of the competitors, certainly not all, but a number of the other people that play in this space are either doing so with money that’s coming out of private equity firms or they’re borrowing money or they’re operating a yieldco, which means they’ve got to constantly be feeding the yieldco model, which means their primary interest is in producing wealth. And that’s what they want to buy, and that’s what they bid up. You start diluting that with things that aren’t going to get developed for 2 years, 5 years, 10 years, 15 years, they’re less interested in that. So it’s less frothy in that part of the market, at least generally speaking. In every kind of market there’s exceptions to the rule, but generally that’s kind of what we see, and it’s the long-term view that we think gives us an advantage.
John Huber: I noticed you have a few – some undeveloped acreage in the Williston Basin. How much do you think? I don’t know if you guys have a way to break this down, but of the $68 million that you’ve spent since 2020, how much of that is undeveloped? Or how much of that is sort of untapped potential for future production?
J.C. Butler, Jr.: I don’t know. I will give you a very honest answer and say I don’t know. Liz is flipping into the K right now.
Elizabeth Loveman: We have provided some of that data in our 10-K. So, I don’t know if you’ve looked through that. But that would provide you some additional information.
J.C. Butler, Jr.: Where is that, Liz?
Elizabeth Loveman: Yeah. Like, if you start on the page 46 of the 10-K.
John Huber: I see the amount of acreage. I was just trying to get a sense for how much – maybe if you had a view of what – what I’m really trying to do holistically is get a sense for, from a strategic level, how are you guys thinking about the capital that you’re investing in this? So you’ve touched on – you give me a nice background, that was super helpful. You mentioned – I think you mentioned like high teams returns. Obviously, you have this sort of legacy assets, these legacy assets that have been part of the company for decades and decades. But when you look at a project – I’m sure you’re coming up with some sort of IRR calculation, but I’m trying to get a sense for how you compare that to perhaps other uses of capital within the business, including perhaps buying your own stock back, which you’ve done some of. So just wanted to get a sense for what types of return hurdle rates you’re looking at for this minerals business.
J.C. Butler, Jr.: So when we look at investments in this business, you’re right, we’re looking at IRR kind of metrics, as well as other metrics, but IRR is certainly a piece of it. And all of IRR’s cousins, like NPV and ROTC calculations, things like that. When we’re looking at projects, we’re looking at the projects as standalone projects. We’re thinking about them in the context of what does it cost to add this to a portfolio? And there’s an overhead component, certainly. But when we look at stuff, we’re trying to buy things that we think are going to deliver IRRs in the high teens, understanding that the undeveloped, anything that’s not producing, we’re discounting what its value might be in the future because you just don’t know.
We’ve got high confidence that it’s going to get developed, but we don’t know exactly when, and we certainly don’t know what prevailing oil and gas prices will be at the time. We’re shooting for high teens based on what we have a reasonable sense of achieving. And the other stuff is over and above. It can outperform. It can underperform too. But we think by buying lots of highly diversified packages of mineral interests, we’re getting a lot of exposure to a lot of acres and a lot of basins, and we’re getting oilier. We used to be very gas heavy. And that’s creating the right dynamic that we’re looking for. And I will tell you, over time, a lot of the Appalachian natural gas has been developed, and so we’re going to be way out on the decline curve eventually.
And so, it won’t be as meaningful to the portfolio at that point.
John Huber: It sounds like you may be interested more in acquiring oil assets than gas. I know a lot of the legacy stuff, the Appalachia, a lot of the stuff in the Gulf Coast is more gas related, but some of the Permian Rockies is more oily. Is that kind of where you’d like to go?
J.C. Butler, Jr.: If you go back to 2018, all of our eggs were in Appalachia natural gas. That’s what we had. And so, if you think about diversify, we want to be in other basins. We want to have more oil. We want to have more operators. We like the asset. We like the space. We like this asset category a lot. And so, we want to diversify that position into other things in the United States.
John Huber: The Catapult team, this $20 million, I had a question on maybe – I don’t know what you can share with us, like how they’re incentivized. But what happens if you can’t find assets that meet your hurdle rate? Is it something where, hey, if we don’t get to the $20 million, that’s okay? Or…?
J.C. Butler, Jr.: Without getting into the nitty-gritty details of our incentive plans, we take a one team approach to incentive. Everybody that participates in incentive plans all operate, so that we’re all incentivized to help each other, make it a team sport. Watch sports, you’re going to always know that wins. So if they invest, that’s great. If they don’t invest, that’s okay too, because everybody participates in the same incentive programs that are tied to total company performance. We think, if you carve people off into individual groups, they’re going to start – people, by their very nature, it’s true of me, it’s true of everybody, right? Everybody will start just focusing on what they’re interested in and that’s not how you build a company for the next 100 years.
John Huber: No, well said. I would completely agree and that’s music to my ears. You don’t want to have – I’ve seen too many situations where you have incentive structures where, hey, we’re going to allocate up to $20 million and that typically means we’re going to allocate $20 million come hell or high water. And that’s not necessarily the best use of capital. There’s some other sources returns that you can generate elsewhere within the business. That’s great. I had a quick question on – and thank you for that again, that’s really helpful on the minerals. On the CapEx in North American Mining, I was reading the filings this morning, so I may have missed this or misunderstood this, but I believe that the $23 million of CapEx that you spent at the Nevada project is reimbursed by the mine owner, is that correct?
J.C. Butler, Jr.: Yes, from a cash standpoint, we will be reimbursed over five years. From a GAAP standpoint, it goes…
Elizabeth Loveman: Revenue is recognized over the useful life of the asset. So, you get paid back over five years in cash. And then, of that $33 million that I think you’ve guided to in that business, what percentage of that is reimbursable, if any?
Elizabeth Loveman: A small amount. The majority of that is for the…
John Huber: It is small.
Elizabeth Loveman: …remaining North American Mining business, not for [indiscernible].
Operator: Well, thank you so much everyone. At this time, I’ll turn it back over to Christina Kmetko for closing remarks.
Christina Kmetko: Okay. Well, with that, we will conclude our very robust Q&A session. As J.C. said, that was very informative for everybody. Before we conclude, I would like to provide a few reminders. A replay of the call will be available later this morning. We’ll also post a transcript on the website when it becomes available. And if you do have any follow-up questions, please reach out to me. My phone number is on the release. So I hope everyone has a great day and I’ll turn it back over to Bailey to conclude the call.
Operator: This concludes today’s conference call. A replay of the conference will be available for seven days, ending May 9th, 2024. To access the replay, please dial 1-800-645-7964 or 1-757-849-6722, then enter the playback ID 9435 followed by the pound key. Thank you for attending.
