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ACQUISITIONS

12 Months Ended

Dec. 31, 2021

3.ACQUISITIONS

AllDale I & II

On the AllDale Acquisition Date, we acquired all of the limited partner interests not owned by Cavalier Minerals in AllDale I & II and the general partner interests in AllDale I & II for $176.2 million, which was funded with cash on hand and borrowings under the Revolving Credit Facility. As a result of the AllDale Acquisition and our previous investments held through Cavalier Minerals, we acquired control of approximately 43,000 net royalty acres strategically positioned primarily in the core of the Permian (Delaware and Midland), Anadarko (SCOOP/STACK) and Williston (Bakken) Basins. The AllDale Acquisition provides us with diversified exposure to industry leading operators and is consistent with our general business strategy to grow our Oil & Gas Royalties segment.

Because the underlying mineral interests held by AllDale I & II include royalty interests in both developed properties and undeveloped properties, we have determined that the AllDale Acquisition should be accounted for as a business combination and the underlying assets and liabilities of AllDale I & II should be recorded at their AllDale Acquisition Date fair value on our consolidated balance sheet.

The final total fair value of the cash paid in the AllDale Acquisition and our previous investments were as follows:


	As of January 3, 2019
	(in thousands)

Cash	$	176,205
Previously held investments		307,322
Total	$	483,527

Prior to the AllDale Acquisition Date, we accounted for our investments in AllDale I & II, held through Cavalier Minerals, as equity method investments. The combined fair value of our equity method investments on the AllDale Acquisition Date was $307.3 million. We re-measured our equity method investments, which had an aggregate carrying value of $130.3 million immediately prior to the AllDale Acquisition. The re-measurement resulted in a gain of $177.0 million which is recorded in the Acquisition gain line item in our consolidated statements of income.

The following table summarizes the final fair value allocation of assets acquired and liabilities assumed as of the AllDale Acquisition Date:


	(in thousands)

Cash and cash equivalents	$	900
Mineral interests in proved properties		184,032
Mineral interests in unproved properties		291,190
Receivables		9,326
Accounts payable		(1,921)
Net assets acquired	$	483,527

Our previous equity method investments in AllDale I & II were held through Cavalier Minerals. Bluegrass Minerals Management, LLC ("Bluegrass Minerals") continues to hold a 4% membership interest (the "Bluegrass Interest") as well as a profits interest in Cavalier Minerals as it did before the AllDale Acquisition. This Bluegrass Interest represents an indirect noncontrolling interest in AllDale I & II. The AllDale Acquisition Date fair value of the Bluegrass Interest was $12.3 million.

The fair value of our previous equity method investments, the mineral interests and the Bluegrass Interest were determined using an income approach primarily comprised of discounted cash flow models. The assumptions used in the discounted cash flow models include estimated production, projected cash flows, forward oil & gas prices and a risk adjusted discount rate. Certain assumptions used are not observable in active markets, therefore the fair value measurements represent Level 3 fair value measurements. AllDale I & II's carrying value of the receivables and accounts payable represent their fair value given their short-term nature.

The amounts of revenue and earnings, exclusive of the acquisition gain, of AllDale I & II included in our consolidated statements of income from the AllDale Acquisition Date through December 31, 2019 are as follows:


	Year Ended
	December 31,
	2019

	(in thousands)

Revenue	$	48,411
Net income		18,543

Wing

On August 2, 2019 (the "Wing Acquisition Date"), our subsidiary, AR Midland acquired from Wing approximately 9,000 net royalty acres in the Midland Basin for a cash purchase price of $144.9 million. The purchase price was funded with cash on hand and borrowings under our Revolving Credit Facility discussed in Note 8 – Long-Term Debt. The Wing Acquisition enhances our ownership position in the Permian Basin, expands our exposure to industry leading operators

and furthers our business strategy to grow our Oil & Gas Royalties segment. Concurrent with the Wing Acquisition, JC Resources LP, an entity owned by Mr. Craft, acquired from Wing, in a separate transaction, mineral interests that we elected not to acquire.

Because the mineral interests acquired in the Wing Acquisition include royalty interests in both developed properties and undeveloped properties, we have determined that the acquisition should be accounted for as a business combination and the underlying assets should be recorded at fair value as of the Wing Acquisition Date on our consolidated balance sheet.

The following table summarizes our final fair value allocation of assets acquired as of the Wing Acquisition Date:



	(in thousands)


Mineral interests in proved properties	$	75,071
Mineral interests in unproved properties		67,701
Receivables		2,155
Net assets acquired	$	144,927

The fair value of the mineral interests was determined using a weighting of both income and market approaches. Our income approach primarily comprised a discounted cash flow model. The assumptions used in the discounted cash flow model included estimated production, projected cash flows, forward oil & gas prices and a weighted average cost of capital. Our market approach consisted of the observation of recent acquisitions in the Permian Basin to determine a market price for similar mineral interests. Certain assumptions used in our valuation are not observable in active markets; therefore, the fair value measurements represent Level 3 fair value measurements. The carrying value of the receivables represents the fair value given the short-term nature of the receivables.

The amounts of revenue and earnings from the mineral interests acquired in the Wing Acquisition included in our consolidated statements of income from the Wing Acquisition Date through December 31, 2019 are as follows:


	Year Ended
	December 31,
	2019

	(in thousands)

Revenue	$	4,625
Net income		1,291

The following represents our actual and pro forma consolidated revenues and net income for the year ended December 31, 2019. Pro forma revenues and net income assumes the mineral interests acquired in the Wing Acquisition had been included in our consolidated results since January 1, 2019. These pro forma amounts have been calculated after applying our accounting policies.


	Year Ended
	December 31,
	2019
	(in thousands)
Total revenues
As reported	$	1,961,720
Pro forma		1,966,291

Net income
As reported	$	406,926
Pro forma		411,217

Boulders

On October 13, 2021, AR Midland acquired approximately 1,480 oil & gas net royalty acres in the Delaware Basin from Boulders for a purchase price of $31.0 million. This acquisition gives us increased exposure to a prolific area of the Delaware Basin and is within close proximity to reserves acquired in the AllDale and Wing Acquisitions. The acreage is mostly undeveloped. Because more than 90% of the mineral interests acquired in the Boulders Acquisition represent undeveloped properties, including proved undeveloped, we have determined that the Boulders Acquisition should be accounted for as an asset acquisition. We have allocated the purchase price to the acquired reserves as follows:


	(in thousands)


Mineral interests in proved properties	$	12,542
Mineral interests in unproved properties		18,419
	$	30,961