HOUSTON, Aug 6 (Reuters) - Shale oil producer Continental Resources Inc said on Monday that it formed a subsidiary to manage mineral royalties with Franco-Nevada Corp, part of Continental’s plan to diversify revenue sources.
Mineral rights are often less-risky investments than drilling wells, which can carry large operational, labor and environmental concerns.
Continental, controlled by billionaire wildcatter Harold Hamm, will as part of the deal receive $220 million from Franco-Nevada, which manages gold and commodity royalties around the globe.
The companies will fund the subsidiary with $125 million each year for the next three years to buy mineral rights in the SCOOP and STACK oil plays of Oklahoma, near where Continental already has operating wells.
Continental will only be required to fund 20 percent of that amount but will be entitled to between 25 percent to 50 percent of the subsidiary’s revenue, according to a press release.
With mineral rights, investors typically agree to pay for a cost of a well’s development in exchange for a percentage of future revenues. By forming the subsidiary with Franco-Nevada, Continental is effectively gaining access to a less-risky revenue stream. The company will also have access to data from wells in which the subsidiary invests, a key source of market information.
Continental plans to use proceeds from the subsidiary to cull its $6.16 billion debt load. The company is slated to post quarterly results on Tuesday.
“We are pleased to announce yet another growth vehicle to Continental within our core business,” Hamm said in the press release.
Shares of Oklahoma City-based Continental rose slightly in Monday trading to close at $62.75. (Reporting by Ernest Scheyder; Editing by Cynthia Osterman)