Q1 2020 Earnings Call

[music].

Good morning, and welcome to the brick and minerals first quarter 2020, <unk> earnings Conference call.

All participants will be any listen only mode. So do you need assistance. Please secondly conference specialist by pressing star keep all that by zero.

After today's presentation, there will be an opportunity to ask questions. Please note. This call is being recorded.

I would now like to turn the conference over to join thought they please go ahead.

Thank you operator, and good morning, everyone welcome to the Bergen minerals first quarter 2020 earnings conference call. When he has today, but Brigham founder and executive Chairman, Rob Rosen, founder and Chief Executive Officer, and Blake Williams, our Chief Financial Officer.

Before we begin.

Actually my view the hour marks including the answers to your questions contain forward looking statements and we refer you to our earnings release for a detailed discussion of these forward looking statements any associated risks.

In addition, during this call we make references to certain non-GAAP financial measures reconciliation to applicable GAAP measures can also be found in our earnings release.

A couple of administrative items first since the last conference call, we redesigned our company website, including a redesign of our Investor relations pages.

We refer you to our updated web site at Brigham minerals Dot Com, which we believe further enhances the interactive experience for all of our stakeholders.

Second we have a new investor presentation, titled first quarter 2020, Investor presentation available for download on our website Bergen minerals Dot com.

We recommend downloading a presentation in the event, we refer to it during the conference call.

Lastly, as a reminder, today's call is being webcast and is accessible through the audio link on our IR website <unk>.

I would now like to turn the call over to buy Brigham founder and executive Chairman.

Thank you Julie we appreciate everyone joining us this morning.

First quarter 2020 earnings conference call.

First and foremost.

As I indicated in my comments and yesterday afternoon's press release.

Our thoughts and prayers go wealthy individuals worldwide that have been impacted by the Kobin pandemic.

These are unprecedented challenges to the health of our fellow Americans and associated economic challenges or has to work.

That's stated.

America will absolutely overcome this and our efforts to safely reopen America provide hope to employees across the country the jobs and motherhood can be saved.

Rob will get into more detail in his portion of the coal, but we are actively targeting reopening or offices on Monday.

T specified backed up in urban.

I had the most confidence in our employees and for that matter, all Americans to safely and efficiently get back to work.

Our country has excelled for over two centuries by interesting are great people with individual freedom and its associated responsibilities.

That's governor Abbott and other states reduce the restrictions on people and businesses I believe both or help and economic outcomes will be optimized.

Well the United States your energy industry is facing unprecedented challenges from both the co bit 19 pandemic and the pulled out from the Saudi Arabia, Russia production disagreement we use a management team whether both the 2009 2000 and non financial crisis and the all market downturn in 2015.

In 16 and are preparing to weather the storm as well.

Please recall that despite those trying times after both events our teams at Brigham we're able to create substantial shareholder value in 2011 with ourselves that old and in 2017 with or sell to Diamondback energy.

I firmly believe that it's in tough times like these and these down cycles, we have exceptional opportunities to compound value.

As such we remain committed to our business strategy of consolidating the mineral space in a highly disciplined manner that has served us well over the past seven years.

Further.

I personally believe Brigham minerals is better positioned to survive and thrive during todays tough market conditions without needing to wait for improved market conditions, given that we completed our December equity offering and as such we have cash on our balance sheet and a completely undrawn revolver.

As I've discussed in the past, we have no capital expenditures that must be incurred by our shareholders to bring new wells online.

And also we do not incur ongoing lease operating expenses.

Well no down cycle is ever fun.

The difference between minerals and M P should be clearly appreciated by investors.

Finally, our focus on the lowest cost and has right of return resource controlled by a diverse set of high quality operators has never been more important and should continue to drop differentiated outperformance.

And my final comments before turning the things over to Rob and to Blake I believe it is essential in this down cycle to once again highlights the truly differentiated compensation model adopted by Brigham minerals and our board.

My long term incentive plan compensation that was issued in April 2019.

Entirely allocated to performance based stock units, which are calculated based on absolute total stock return.

Hi, and the rest of the management team, let's say no annual cash bonuses.

The rest of the management teams long term incentive plan compensation is allocated 50% to restricted stock units and 50% to performance based stock units, which are calculated entirely based on absolute total stock return.

While many energy companies have announced cuts to their cash compensation.

Most are still nowhere close to aligning themselves with their shareholders. The way we are.

We included a very instructive example of this shareholder alignment at our proxy statement and would refer you to that document to review.

To conclude my remarks, I'm extremely proud about team for navigating. These stormy waters, we are laser focused on creating substantial value for our shareholders. I missed this chaos with that I'll turn the call over to Rob to cover our operational results.

Thanks, but before I get into a review of our operational results I want to use similar to Bod expressed that our entire organization thoughts and prayers go out to all those affected by the Kobe 19 pandemic.

I also want to thank you can command our employees under commitment diligence and flexibility over the past eight weeks that we've been working remotely. It's a true Testament to our 42 employees that were able to deliver quarterly close so what they should leave while working entirely remotely as well as to continue the evaluation of potential mineral acquisition opportunities I want to personally thank each and.

Every one of them on this call as Brad mentioned next week, we'll begin the reopening process by transitioning back to the office and the staggered manner prescribed by Governor Rabbit. Our primary goal is to maintain a safe working environment for our employees. We have changed how we work based on the best known protocols to date, and we'll continue to modify or protocols that additional information comes out from the.

CDC and other governmental authorities. Unfortunately as result of the Kobin pandemic, we're not currently allowing visitors and we have elected to convert our annual meeting tour virtual meeting.

The directions to participating in our virtual he annual meeting were released on Monday afternoon may 11th and we hope our shareholders will participate in summary, the management team at Brigham is taking the transition to a new operating environment extremely seriously for the benefit of all of our stakeholders.

Transitioning to a discussion of our operational results I believe for key factors set the foundation upon which we can build upon in 2021st we have no debt while many of our mineral peers are no longer able to make full distributions because of concerns regarding debt covenants in coverage ratios and MPS will see large amounts of their cash push towards upcoming debt repayments and.

Our anxiously awaiting borrowing base Redeterminations, we see soundly here at Brigham knowing no debt stands in front of our shareholders second has been mentioned in its worth reiterating as a minerals business. We have zero capital expenditures required to bring new wells online production and incurred no ongoing lease operating expenses third we plan to capture as much value as possible from the into.

As stated reduction in mineral prices over the near term via the continuation of our minerals consolidation strategy, it's likely that we'll have to be patient as minimal sellers' expectations have to be adjusted but we believe a potential significant acquisition buying opportunity will present itself later this quarter and into the remainder of 2020, and we stand ready to capture that opportune.

City fourth we believe our diversified mineral position comprises lowest cost and highest rate of return resource control by diverse set of quality operators will continue to outperform now I'd like to turn to review of our first quarter operating and financial results.

Despite incredible changes to the overall operating environment that developed in the latter part of the quarter. Our first quarter production volumes were extremely strong with 8% sequential growth to roughly 10400 barrels of oil equivalent per day production growth is anchored by continued strength from the Permian and a solid resurgence in the DJ basin in the Permian production volumes grew by.

Roughly 20% to record of approximately 6000 barrels of oil equivalent per day, although Oklahoma and will list in production declined again portfolio diversification went out and our Permian and DJ assets power the portfolio to sequential growth every quarter is showing the value of a diversified asset portfolio in the first quarter was no different.

Unfortunately, given the certain uncertainty created largely by the coded 19 pandemic and its impact on demand associated with shutdowns across the globe and the overall, resulting lack of clarity regarding operators drilling and completion operations as well as potential curtailments and shut ins were withdrawing or 2020 operational and financial guidance, we will work too.

Great additional information as soon as possible and were released updated information as soon as we deemed prudent to do so regarding our expectations for 2020, but the impacts of decreasing oil prices are obvious to our revenues and distributable cash flow for at least the second quarter as the global markets reconcile the future rebound in a worldwide economies.

That being said, we do you expect to continue to deploy mineral acquisition capital. During 2020. However, we believe it will be prudent to maintain remain extremely patient and disciplined as wafer minerals sellers to adjust their expectations. Once they experienced the full impact of lower oil prices, which we anticipate will start to happen towards the end of may as this will largely be the first month in which may.

Mineral owners see the impact of March pricing to their mineral checks going forward. We're further tightening our underwriting acquisition criteria and will be extremely judicious and deploying capital staying under the best geology in the best operators.

Strong operating momentum was once again, the key to our first quarter results with 28% of our gross stuck locations and 33% of our net duck locations in inventory at the start of the year converted to proved developed producing locations. During Q1 further we were able to once again largely reload our DUC inventory during the first quarter. Despite these.

Hi conversion rates exiting Q1 with 5.7 net ducks in inventory versus a Q4 2019 net duck ending inventory of 5.9 net locations, we're able to reload or DUC inventory as a result of the robust drilling activity that occurred on our assets during the first quarter I'd like to point out that we have updated and replaced a rig count and net royalty acres being drawn.

Held in favour of gross and net wells spots.

And the pursuit of more accurate data and better transparency, we're happy to push the level of minerals disclosure Ford yet again to statistics, we believe better reflects actual activity and the potential future impact to our financial statements. The first quarter is a great example of how critically important switching from a number of rigs to gross and net wells spud is to giving people a more accurate look.

Under the Hood, the first quarter rigs on our acreage averaged 46, a decrease from the 60 in the fourth quarter of 2019.

Statistics requires folks to make an assumption about the operating efficiency of each rig in the mineral acres being drilled by each rig critically the divergence between a private operator drilling and HBP ing, a single well and a major drilling a multi well pad under a manufacturing mode development program has never been greater we have consistently pointed out that owning under high quality operate.

There's is important and the data clearly shows that are operated for prescreen extremely efficient and large scale development.

Good activity was 50% Permian weighted but we saw strong contributions from the DJ will list in scoop.

Drilling activity on our minerals during the first quarter resulted in the conversion of 20% of our gross and 25% of our net permit cydex during the quarter again, we're able to largely reload permits maintaining gross permits in inventory at 714 from 715 and keeping net permits at approximately 4.5 net locations in summary.

Leo perform extremely well in the first quarter, even while operating conditions change extremely fast towards the ended the quarter.

Our strong operating and financial performance allowed us to declare a roughly flat dividend of 37 cents per class a share despite a 20% drop and realized pricing. We believe returning capital to shareholders are the right move for two reasons, one in an environment, where dividends are being cut left and right in interest rates are at historic lows, we believe demonstrating our business.

His unique ability to pay dividends will be a rare increasingly valuable characteristic to investors start for return of capital to we committed to a 100% payout ratio through the first quarter and we want investors to know that our word is important and remain committed to following through and doing what we said we're going to do I'll now turn the call over to Blake. So he can summarize.

For you our financial performance Blake.

Thank you Rob.

I'd like to start by highlighting the critical actions, we have taken to respond to this very challenging macro environment first given the rapid deterioration in markets that occurred in March we took swift and decisive action to preserve liquidity by significantly reducing mineral acquisitions.

During the quarter, we closed just 25.4 million in mineral acquisitions, which represents only 50% of our typical quarterly acquisition run rate further given the significant uncertainty regarding both pricing and activity for the remainder of 2020.

We tightened our underwriting criteria to ensure that we appropriately priced the risk of low activity levels and price realizations into our deal economics.

We are also constantly monitoring the financial health of all of the offerings of our properties to help guide capital allocation to mineral acquisition opportunities with the best risk adjusted return in this market.

Finally, we have applied significant focus on reducing our cash DNA cost structure, resulting in an updated quarterly cash DNA savings of $550000, reducing our run rate to 3.15 million per quarter versus our previously disclose guidance of 3.7 million per quarter, which represents an approximate.

15% decrease in cash DNA.

While we already run lean we spent a lot of time with our vendors since March discussing the need to assist and cost reductions at an almost all instances we've seen a very good response and mutual understanding in the need to share the burden of these difficult times.

As Rob already mentioned, our daily production for the quarter was approximately 10400 barrels of oil equivalent per day up 8% sequentially and comprise of 72% liquids are oil cut decreased slightly from the fourth quarter, driven mainly by increase DJ production and gas and NGL type curve outperformance.

We continue to expect our oil cut to fluctuate quarter to quarter.

Portfolio generated royalty revenue of 28.4 million for the quarter with the Permian representing 61% of that.

In addition, during the quarter, we generated lease bonus revenue of 3.9 million largely out of the Delaware basin displaying the incredible perpetual optionality associated with owning minerals.

Net income for the quarter was 8.8 million with a net profit margin of 27%.

Adjusted EBITDA for the quarter was 25.1 million, an adjusted EBITDA, excluding lease bonus was 21.2 million.

Long lease bonus enabled adjusted EBITDA to be more stable relative to the fourth quarter, Despite a 20% drop and realized pricing.

Realized pricing for the quarter came in at $29.98 per via way down 20% from the fourth quarter.

By commodity type realized pricing was $45.61 per barrel of oil $1.76 per mcf and $12.07 per barrel of NGL.

On costs gathering transportation and marketing expenses were 1.8 million or $1.90 per Boe.

Severance and AD valorem taxes.

Were 1.8 million or 6.2% of mineral and royalty revenue.

Gina expense before share based compensation was 3.6 million.

DNA includes a couple of non recurring items for the quarter from service providers associated with year end reserves financial reporting and tax work and as such we would expect a lower run rate going forward.

Share based compensation expense was 1.8 million in the quarter inline with the fourth quarter.

Looking at our balance sheet, we had $31 million of cash and an undrawn revolving credit facility of 180 million as of March 30 Onest.

As a result of our spring Redetermination, which is expected to close at the end of May.

Our administrative agent has given us a preliminary indication of a $135 million borrowing base, giving us total pro forma liquidity of more than 165 million.

I would like to reiterate here that we have retained a strong balance sheets through this down market.

Continue to protect it as we deploy capital.

Targeting a net debt to adjusted EBITDA ratio of 1.5 to two times.

Our discretionary cash flow per share class a common stock was 43 cents on a pre tax basis down 5% from the fourth quarter bolstered by lease bonus of roughly seven cents per share.

Federal and state taxes are likely to be minimal the rest of the year to the extent current prices continue for the next couple of quarters.

Our 37 cents dividend, Rob mentioned represents all of our discretionary cash flow for the quarter.

I'll now turn the call back over to Rob to wrap things up.

Okay. Thanks slaves. We appreciate you joining us for first quarter 2020 call operator, I'll now turn the call back over to you to begin the question and answer session of our conference call.

Thank you we will now begin question and answer session.

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To withdraw your question. Please press Star then too.

As a reminder, we ask that you. Please limit yourself to one question and one follow up if you have additional question you may reentered the question Q.

This time real positive entirely to assemble the roster.

The first question today comes from William Tom Kim of Barclays. Please go ahead.

Hey, good morning, everyone.

Morning, Rob maybe.

Well, maybe can you talk about the influence you expect that you back continuous drilling obligation that station causes will have on foreseen operators to reactivate rigs crews and maybe suspend shut ins given the risk of terminating leases I know midstream obligations play a role in their decisions than it's been interesting to hear them a number of operators mentioned lease obligation part of their.

Decision tree about curtailments in future development plan. So just curious your thought there.

I think it's definitely going to kick in as you look forward to the third and fourth quarter in particular I know of couple of several several of our leases in Texas that in particular have pretty onerous dollar per well penalties. If those wells are drilled for us in particular as we get closer to the October November timeframe. So.

Think you know as operators pick up rigs and you have.

Mineral owners that are more sophisticated in the leases that they put in place with operators.

Those leases in general have more a highly commercial terms were in they require operators to drill wells drill wells the hold certain zones drill wells to hold certain portions of a unit within zones themselves. So you know in particular leases that we negotiated and put in.

In place are very sophisticated relative to some of the leases that we inherited from other mineral owners I would tell you obviously Blake pointed.

To a lease that we executed in the first quarter in I would say that's a sophisticated leasing require some CDP requirements in terms of holding things, but I'd just keep it at that level, just because of that operator, having.

Only filed a memorandum of understanding as to our lease but there are drilling commitments that didn't begin to kick in as you look towards the latter part of the year. The other thing that's happening now with some operators are requesting incremental time to drilling heard sorry to complete wells to bring online those wells to production.

That then affords us the opportunity to go back and renegotiate some of the lease terms to abrupt to provide them that incremental flexibility. So there are some enhancements that we can make to less sophisticated leases that modernize those leases more favorable to us. So no. This although no one wants to be in these types of circumstances there they are on.

Nice for us as we look forward to.

Hi, great our leases to capture incremental value in the event the leases not helps you know there could be the opportunity to release certain interest. So that's something that I know Brad Burris, our VP of land in particular as monitoring extremely actively in terms of operators living up to their obligations under leases. So.

It's one of our critical areas are critical focus areas as we think about the remainder of 2020. So it's very high up on our radar to make sure operators are living up to their commitments.

Okay helpful color and then I I believe the plan was to trim the payout ratio above 5% per quarter going forward to build cash for M&A.

Just given that the downturn I'm just curious if that if theres any.

Change in thinking there and would you be opened a buyback I know obviously the distribution is very important you guys. Just curious on on getting out there.

I think first and foremost in glad you asked this related to the dividend because as we think about it we wanted to maintain a 100% dividend given the cash that's on our balance sheet Theres no debt. You know, we there has been reduced amount a deal flow. So.

We didnt feel the need to retain cash in this environment, given I'm kind of a slowing down of the deal flow at this point, but I think most importantly in button Blake can weigh in further.

Both the April 2019, IPO in December follow on offering we indicated that as long as it there was cash on the balance sheet, we've returned capital to to our shareholders Bert via the 100% payout and so we still have that cash on the balance sheet. I think we're going to have that through the second quarter. So we're likely to still have hundred percent.

Distributions subject to board approval of course through the second quarter, but as we are as the M&A market are ordered the seller market does thought you can expect us to deploy capital and so I would anticipate probably in the third fourth quarter that we'd continue on with the strategy that we've done.

They ended the day you can see how productive that was for us and so you know our goal is to get to that kind of 80% to 75% pay outbreaks show and thereby utilizing that 20% to 25% of our cash flow to continue to buy assets that are creative to all shareholders. You know we've had some discussions and it's kind of a mixed bag response as to.

Shareholders in their thoughts as to whether we should buybacks shares are not deployed the dividends, but I I think kind of the consensus around our discussions with our shareholders and how they view the opportunity set ahead of US most of them I think would point us towards that 75% to 80% distribution rate and then pertaining to remainder.

The cash flow to bind criminal assets, but I'll turn it over to Blake for incremental thoughts at this point.

Yeah.

Covered on on the dividend policy on the on the buybacks you know we've we've got a lot of opportunity in front of us as far as assets that we think we can we can buy so having that liquidity and that extra drypowder.

And do that is is key for US you know as far as just commenting on the on the banks facility to back facility allows us to to use it for general corporate purposes and for buying assets not for a share buybacks.

<unk> Okay. Thank you.

Thank you appreciate your running.

Mmm.

<unk>, Okay, and then energy. Please go ahead.

Well yeah good morning.

Oh. Thank you. Thanks for taking my questions and my first question is what is your base decline. If there were no new activity completed on your men are all acreage.

Yeah sure. Thanks, <unk>. So the Q2 22 21 that base declined it'd be 36% on a view basis and touch higher on on a little basis.

Okay. Thank you and then they might follow up is has the oil price downturn changed the types of mineral packages that you want to acquire and how has the downturn changed your underwriting standards.

Yeah, we we as Blake mentioned in his part portion the transcript we had tighten our underwriting transcript. So when you think about some of the primary inputs. When we look at how we buy deals on the primary ones have changed of course or price and I would say that you know as prices. Unfortunately declined rapidly beginning kind of February through the March period, we're almost.

Weekly adjusting the price decks, we used I think interestingly you know a major question Mark becomes how you handle 2020 in kind of the you know the the the point at which the the tanks become full and what impact that has to pricing. So I would indicate to you that we've been very cautious in terms of the credit will.

We're willing to give for 2020 production I would say the other major input. That's that's changed as you think about now versus prior periods is the timing of feature development well, obviously that has a huge impact we've extended the timing for all of our operators as we look at their potential to to develop feature locations one of the.

<unk> Blake mentioned in his call is we're pretty regularly updating our financial analysis of the operators that we by and or are willing to buy on her looking at their debt walls that are approaching them in in <unk> and the realization that they might have to slow production or slow sorry activity as.

We look for it as a result of the debt ahead of them and so you know I think it's a really concerted effort on a part of all of our teams to you address.

<unk> riding criteria and that goes from you know our reservoir engineering team has you who have used this kind of interim time in which dealflow slowed to go back and Relook at all you ours and all of our basins to you looking at all and this is blade myself blood and the finance team looking at all the transcripts here all the earnings.

Police that have come out over the past 10 days or so and and looking at where people are deploying Capitol again, if the finance team undertaking that financial analysis. So really it's a team effort to come up with our very best estimates as to the inputs into our underwriting criteria, but you know I think you know we've lived through this before it's been mentioned in it.

As part portion of the conference call transcript in in the period of 2015 to 2016, you know there was an obvious kind of three to four months slowdown in buying activity when when that shock happened and I think you know it's nothing different than we're seeing today, it's almost like the reset button has been habit, you know set on the computer and and we're rebooting and waiting kind of for things to fall.

And as we mentioned in the call you know I think you that that that will start to happen kind of later this month as mineral sellers are minimal owners start to see the initial impacts that march pricing decreased to those checks because pre typically operators checks lag about two months in terms of one that's distributed to the mineral owner and so that might March pricing.

Impact isn't gonna be felt until later this month.

Thank you were off appreciate all the color.

My pleasure glad to.

[laughter] next question comes from Bryan singer Clinton sacks. Please go ahead.

Thank you good morning.

<unk> wanted to pick up on a couple of points that you mentioned then but that's the point you just made on that you've been taking some of the client student analysis on on on on you ours was interesting and I wondered if you could talk about any take away whether that increase or decrease your views on supply costs, an opportunity sets in the Delaware versus the middle.

When versus the midcon versus versus the D.J. and and in any reading on implications.

That may have come about from doing that that do an analysis.

You know at a high level I think you know our economic analysis as to you. The the returns a well still directly points us too in terms of overall ranking of the opportunities that would be one to the Delaware basin due to the Midland basin, the D.J. assets before him very well and so you know it that's why you saw us in S.

And the first quarter deployed 90 plus percent of our capital to the <unk>. If if you think about the future ahead of US it's really the the continued development of those assets and so you know it's it's it's you really year over year haven't seen much of a positive increase in while results in terms of E.U. ours.

We at least for the internment probably hit the technological wall, that's not to say that we won't see incremental positive improvements in you ours happened into future I would tell you probably when times are tough like this us having the operator background realize that people continues refine and then update their completion techniques to drilling techniques.

And so you're likely to see I think sizable efficiency gains as we think about using utilizing every dollar that you have your liquidity most effectively and so a lot of that will transpire over the next kind of six months people reset refine their completion techniques you know much the same as kind of I would say we are using this time to refine or.

You are if you will see operator slow down and then they can refine instead of that really ragged pace of development. They can kind of use this time to read look at how they drill incomplete well. So I think all that'll happen over time as well. So to me you know, we think about operators in the N.P. space or some of the most innovative folks that that we know and so there.

Highly likely to become much more efficient in the future, but in terms of where we look at the point Capitol you know I think there's great opportunity for us in the permission. When you think about I think that the Texas <unk> independent petroleum and royalty owned a report indicates there's over 600000 mineral owners in Texas for us to reach out to.

<unk> acquired deals from there's a huge opportunities that in Texas that being said, there's still opportunity and the D.J. The Wilson basins in Oklahoma. They just have to be priced accordingly. So you know I think you know our shareholders. Other people looking investing a in us should realize that we've been doing this modeling transactions the past seven years.

And we're going to deploy Capitol effectively be are very stringent underwriting criteria. So any deal that we enter into is obvious going to clear all of our hurdles.

Yeah, this but I'm not just add just in general.

You know we've you. This really is the though it's a really difficult period <unk> really to sweep part of the cycle because.

Assistance, when we could make the most attractive acquisitions and investments and it is Rob said as operator, so we're going to be much more efficient and and benefit from a low cost structure and it coming out of this with.

With the very best crews and and equipment innovating and and producing l. as prices right. So there's this this is the time that companies such as ours. So let's do these cycles really real fortunate to be position like we are to quite a lot of value for shareholders and which will benefit.

Upcoming years.

Thank you for that and then my follow up it's with regards to set in that they that you're seeing and then a follow up to the question on on leases and drilling commitments are you seeing evidence now or do you expected if prices up today hold that you'll see a reversal of some of the shut in production on the areas in which you got.

Mineral rights and for the producers that are in the operators that are facing giving up some of the leases due to production for drilling commitments do you see it's more likely that those leases will be renegotiated Ah you talked about previously or will be given up entirely.

<unk> the companies start to bring back active.

I think it's most advantageous for an operator just start to slowly bring those wells on line to production as long as there's economically economic production. They can continue to hold those leases. So I think you know pretty typically there's I would say two to three month period in which an operator can shut in well without penalty after that time.

Originally leases require you to bring those wells on line two production. So you know you've heard a lotta people talk about April May June shut ins you know realistically when you think kind of about a two to three month window that logically lead you to believe that kind of say in the July timeframe predominantly in the third quarter, therefore, you're going to see a reversal of those.

Buttons, just so operators can maintain the leases without having to go back to a a mineral when winter and renegotiate those leases I mean, as you think about mineral owners in the leases that have been negotiated there's probably no more sophisticated mineral owner than in the state of Texas and so when you think about those leases.

Being very sophisticated and probably the shut in or require as being the most peanut <unk>. There I would think you know if when you think about all the states. In this is just a generalization that you're probably going to see production come on line quicker in Texas, just because of the highly sophisticated nature of those leases going forward.

Yeah. The other thing on missing from from a high level I know, we're talking about some previous calls, but we're 95% minerals. So you have to us at the different risk profile than than it override override is just carved out of the least so to the extent a lease is up.

Subject to.

To to falling apart you know that override would disappear, whereas a mineral right somewhat of an opportunity for us to renegotiate with with an operator, either get at least bonus again or negotiators more stringent or more brigham minerals friendly clauses as a part of that <unk>.

Yeah, just to kind of build them upon what Blake said just to kind of recap, we're probably 95% <unk> true mineral rights and and and N.P.R.I.'s, which are into perpetuity. Another kind of say, 2% of our portfolio or mineral classified lands and the state in Texas in wit, and so these are lands in which we own the surface, but then share 50 50 with the state.

Texas in terms of the pool T.'s and then the remainder kind of 2% as override so always been very cognizant of the fact that overrides have to be well held because those were contractual obligations that are only is only last as long as the lease contract is enforceable and so there's obviously a higher risk profile with an over.

To pure mineral rights or owning the surface. So just a point of clarification I think Blake made a good one but just to kind of expand on it further.

Thank you.

The next question kind of sound, Kyle NASA capital insecurity, Thanks, Oh, how.

The morning.

Morning sounds like he in the day activities on the back part or for now, but wondering if you can talk a little bit more about what you're saying on the ground in the current environment and going a little bit more detail, how you're thinking about the landscape changing later in the year.

No I <unk> I think <unk> totally on the back burner, we're still talking to folks about larger deals and so that that I don't think will slow entirely and I think one of the one of the things that will happen. Unfortunately as as to what's this current environment N. is it's going to place continued pressure on private equity.

Backed minimal firms to look for exits because as we all know the clock ticks they've got their cost of capital that they're facing.

And obviously for most folks that's over the past six months of largely been able to not do anything because of the capital markets being shot. So obviously that's in continuation today. So I think you know you might there there is going to be opportunity that we're hopeful that we'll see this year I think in terms of our ground game acquisitions that we've talked about kind of that $200 million prior to.

Withdrawing guidance that have ground game that we thought we could do you know we we are seeing that start the thought we are working up deals providing offers I would tell you. The one thing is we've been kind of close on executing on a couple of offers but to us kind of when we go back and do a re evaluation and the off.

It looks like to us people are being a little bit more aggressive in terms of 2020 pricing than we were being just us being cautious as to what actually pricing, we're going to see in 2020 and the impact of that production and pricing tour a cash flows but I think you know we think that there's going to be a large opportunity as we mentioned the conference call transcript beginning in.

June and through the remainder of 2020 similar to what we saw in 2016 and the opportunity sat there in which were able to capture value because I think you know it's worth reiterating the point that button made it's really continuing to reach out to minerals sellers throughout this period and trying to engage them because it's in in these periods. It's it it really provides us.

The opportunity compound significant value.

Yeah, just to amplify that just a little bit I mean, I think we provide a very attractive option for the <unk> premiere middle owners out there right now.

Otherwise do not have attractive options and and that is again, let so important for us to continue to do what we've said, we're going to do and and not change our strides because because where that shiny little object that by the people like to own it will want to continue to so.

It's it's set up really well for us.

Mm.

Okay. That's that's very helpful and one other thing I wanted to follow up on you talked about the least bonus uplifting first quarter, just wondering with the current environment and cater.

Comments about.

<unk> least activity and resenting.

Renegotiation do you think least bonuses for Brigham this year could be higher than you previously expected when you get choir goddess.

You know I I think is the issue as you think about least bonuses going forward is you know, it's obviously a a bonus per bonus dollar per acre times and number acres that you own and so obviously the number acres that we own is not going to change, but the least bonus per acre than an operator is able to pay is obviously reduced relative to before.

So you know when you think about the the P. times the queue equaling you know you're at least bonus the P. I think the price it hasn't been impacted going forward I would tell you, though that that could be somewhat offset by incremental lease bonus opportunities come here, sorry, Lisa incremental leasing opportunities ahead of us that wouldn't wouldn't have <unk>.

Themselves. If this current environment had not transpired and so you know I think you know an overall basis, though the opportunity force. It had in terms at least bonus is going to be reduced relative to probably initial thoughts just because the the bonus dollars per acre are going to be less going forward, but you know that being said you know the opportunities for us.

Two.

<unk> Harley's Mickey Mort much more commercial much more mineral lunar friendly I think's ahead of us in terms of other potential items, and whether that CDP clauses or Pew clauses et cetera, gross gross margin or you know gross values in terms of the products instead of netting so there's a lot of different.

<unk> was that we can toggle to on an overall basis make that lease more favorable to us. So as I said, that's something really that Brad and his group or in particular are gonna be extremely diligent on looking at going for it because I think there is opportunity for us to enhance overall value to us.

That's very helpful. Thank you.

Yep.

You bring a he joined in.

The next question comes from the L.P. Marini keeping people how.

Yeah, I just wanted to follow up a little bit on shut ins. Obviously, you guys aren't the operator here. So as a result, just trying to get a sense you have any visibility on current shut ins on your properties you know right now any thoughts on one where a those could occur as we work our way through the second.

<unk>.

No one of the issues that when you think about shut ins and how they applied to US is just the very high level generalized manner in which operators have talked about shut ins and so when you think about companies like Exxon Mobil or chevron, making highly generalize statements about shutting in you know 250000 barrels a day to 400000 barrels a day, there's really no way.

For us to determine how they've decided to allocate those shut ins on a well by well basis and so.

You know much the same as as my Powerpoint as it relates to mineral sellers not seen impact of pricing until June of this year for March volumes really when you think about shut ins that are happening. This month in may we're really not going to see those on our checks until July on in in.

Individualize, well by well basis. So you know, it's it's difficult at this time, unless an operator points to a specific area in which they've decided to shut in production that how it necessarily impacts us no I do know that from reading the diamond back portion the transcript they refer to you in particular, an area kind of been in a western.

You said they had shut in production you know, we don't really have a lot under them in that area. So when you think about that instance, we're not likely to be very impacted by their shut ins.

But you know I think you know on an overall basis. When you think about our asset quality and you look at the maps and things like that you know our goal has always then to stay under the very best G.O., which naturally leads you to the most economic locations and when you think about you know looking or slide deck and you see 50 plus.

Per cent of our little net locations being in the Permian, 35% of those being Wolfcamp locations. Those are some of the most economic locations in the U.S. Some hopeful that potentially that that is the shut ins <unk> may not be as impactful to us as others, but you know at the end of the day, we just won't have that clarity until a later this year.

Well I guess just with respect to recount. Thank you guys said it was kind of 46 rags on average out when the quarter just want to see if you can maybe walk us through how that changed on your minerals that during the course a quarter. So plan, where did you start a quarter kind of words in the quarter and you know any visibility on how that.

Changed subsequently you know say through April or into early may here.

You know I I would say you know again kind of with the understanding that we're trying to you highgrade quality of the data that we provide you guys and again, that's kind of moving away from the rigs and net royalty acres being drilled to that that metric of gross and net buds. When I think about kind of the fourth quarter to first quarter.

Activity, we did see a a good uptick in Delaware basin drilling activity in four q. versus one q. So when I think about four q. activity, we we drilled or had drilled fourths about 0.6, net wells and the Delaware and the first quarter that was 0.9 wells that the D.J. basin was slightly lower.

But when I think about you know the activity levels a lot of that was was driven by the fact that we did have a nice upticking net locations in the Delaware offset by some reductions elsewhere. So on the net basis. You know we went from 1.7 net wells drilled force and four cute at 1.6 so.

That was an increase in Delaware base, and drilling offset by lower activity levels, another base and and so kind of to give you a little bit further sense about the net activity on her assets. When we looked at kind of that 1.6 net wells about 40% of those net locations for us were drill by Exxon Mobil and Chevron so to very high quality operators drilling.

A significant portion of our first quarter net location. So no again kind of given even this is even going back to the fourth quarter, we indicated we'd be moving to these metrics and so hence providing you the clarity in terms of net locations rather than number rig so hopefully find that beneficial.

Okay, just to follow up on the emanate side of the equation here you guys are obviously very well positioned to capitalize here. During the course, the are going to strike that balance sheet, but.

Do you think that there's a high probability that some of these chunky ordeals apart from the Crown game are actually going to shake loose in in 2000 in 20 here, how you sort of doing that market do you think there's enough stress on the holders of those larger pieces in the p. shops to where they're getting a little bit more force just start negotiating with you here this year.

Same versus last year.

I mean, this but I mean no question about it.

Rob touched on you know we've we've had this period of lack of capital flows to the industry and private equity you know with less capital just just less upward mobility immobility for for.

Some terrific assets that have been acquired and and now of course.

Cool.

Fewer and fewer options and so we had very productive discussions last year I'm anticipating that that here that we're we're just going to be we're in a very good spot that we provide.

I think easily the most attractive option for for for those with quality mineral assets to to to move into a more liquid and and a long term a better position. So so I'm very optimistic I'll, let Robert Blake they want to add to it but.

I do think this is a sweet spot for us and we're position.

Better than or enterprises ever have been before yeah, and so when I think about those larger deals you know, there's obviously you're going to be preferentially for us to have them take back a fair amount of equity in return and so that's one of the things that we see happening going forward I'd say the other point to make his and we've made this on the road in the past that if you are the.

Poor person to join forces with us in terms of doing a deal initially and taking back equity you're an advantage position relative to guide number four or five that comes along and you know seeing us or creating value and deals one two and three you're better off in that position relative to deal with four or five and six so you know if I'm logically a potential seller I'd I'd like to be that.

Person in line, taking back that equity you're able to compound value in c. incremental deals transpire and come to us in the future. So.

The cycle Yep Yep, and so you know I I think you know for that first guy that's thinking about doing a deal with US you know I'd I'd urge them to consider that relative to being person four or five.

Yeah, and then one thing I want to touch on before we leave. This point is is the the balance sheets. Obviously today you know we've been really conservative than our approach to how we manage our financial policies and will continue to do that in the future. So yeah, you probably saw in the press release that you no longer term are <unk>.

It's a debt to to eat a dollar leverage ratios are no greater than than one aptitude times. That's that's by no means a a mandates I would say you know, we'll we'll we know the balance sheet, where it makes sense you know to to capture some attractive value, but you know that's that's just kind of.

A limit or a a a pretty hard governor force.

<unk>.

I appreciate your joining thank you.

The next question comes from websites Patrick soundtrack. Please go ahead.

<unk> thanks for joining.

Thank you you guys have always had a really nice balanced approach of P.D.P. and undeveloped acreage and well to ask how sad.

Calculus change given given what's happening to the recount are you guys more focused on P.D.P. or as undeveloped stuff, especially in the base and sort of held up like the permitted is that still pretty high on your to do list.

No preferentially, we as a team as I spend a lot of time talking about this you know which direction. We think we're going to be headed in 2020, and I think as a team we preferentially kinda migrated to more undeveloped transactions ahead of us wanting to secure those going forward.

You know weekend as as a mineral acquired no you know based on our technical teams that the geologies, great. We're buying under good operators and when things turned around their preferentially going to direct their activity to these higher quality assets.

I think there is just a lot of uncertainty today as you think about PDP or even ducks. When there was going to come on line what price you're getting receive into 2024 those production volumes. So I think as we think about it as a team and you think about deals that we might be doing later this year, they're probably be would be more biased towards undeveloped.

Locations and so I think you know when when you look at some or deals that we had done last year. You know I think our portfolio was probably 27% or so P.D.P. duck and permits on a net basis, you know I would I would think that that.

Mixed might go down going forward, just because of us preferentially seeking more undeveloped deals, but you know it's something that we spend a lot of time talking about and as a management team about what type of assets, we want to target and I think you know our our preference is giving or.

Superior or as to what we've you are superior technical abilities. We can use those technical technical abilities to identify that tier one G.O. under the good operators and those wells are going to get drove force isn't nothing different than we were doing and you know 2013 2014. When these mineral efforts kicked off and we're using those same technical abilities to identify those undeveloped.

<unk> that are now getting drilled force today, you know we know we have the technical team in place on the employees here that can identify that rock, that's going to get drill, forcing them into the future.

That's interesting interesting so.

Well, there's there's a game on you know just just equivalent on that it's a lack of ballot initiatives in Colorado does that kind of reinvigorate your your desire to be releasing up in the D.J. in this environment or.

Is that still maybe maybe a little bit lower tier.

You know I would probably rank the D.J. behind the permission of course I mean, the just the assets and the per me interstellar that being said I mean, there's some tremendous wells being drilled in the D.J. when I think about in the first quarter of this year. We had some really nice wells brought on line for us by Ox Oxy in there Oh J.B. pad by extraction.

Coyote trails, we've seen some really nice incredible while results by noble in their wells Ranch area, a drill forced overtime in brought on line to production and so you know in particular, they they just drilled force in the first quarter or their readily pad maybe in a long horn I don't know how much I like that name but.

You know it is what it is but you know I I think you know the D.J.I. again and it comes down to the capabilities of your technical team and being able to integrate the appropriate variables into your model in in in undertaking your models such that you're comfortable so again, it's our 42.

People on staff half of which are on the technical side executing upon that acquisition strategy that use our technical capabilities to identify the very best rock under the best Best operator, So it's a recipe you know we've been building on for seven plus years, and so I'm I'm very comfortable that our team is gonna could be able to continue to identify those superior opportunities and.

<unk> forced into the future and really compound value.

Under this year.

Okay, and then and then from a follow up have have you seen you know obviously is operators programs slowdown have you seen any of them trying use that that lower cadences right try and renegotiate their royalty rates in exchange for a near term drilling plot and and is that something you would even entertain.

No I think there's other ways to toggle the lease to achieve benefits and and really what we've seen thus far is operators come to us and ask for incremental time to bring walls on line to production. So you know pretty typically we've seen operators ask for kind of three to six months extensions to to the least to be able to have incremental time to.

Refracking bring a well on line turn it in turn it in line to production and so you know we we are looking at.

We're thinking about continuous development clauses Pew clauses gross proceeds in terms of our leases. So the great. Part is is is Brad and his team had done a tremendous amount of work and you know we're very sophisticated in terms of our leases and being able to try to maximize our value. So we'll be doing that going forward.

Thank you.

[laughter] next question kind of having John framing.

Please go ahead.

Firemen and 21.

We'll go back to those prior sort of thoughts on the payout ratio, which should then.

It really only pair back the ratio when doing so it's still allowed dividend girls in other words, if you would EBITDA of Didnt grow you don't pay back the Devin I understand that's not possible in the current sort of Unprecedent environment Moran, but just maybe how to think about that sort of balancing act of the long term 70, 580% talent with me.

Some of the prior thoughts on the payout ratio when we get to more normalized environment.

Yeah, maybe I'll, just said a rubber Blake with more detailed discussion, but but you know.

You said, we've been consistent that at the appropriate time as as as we're growing the enterprise are going on cash flows will be moving towards that goal. This is not that time, you know I think coming down on the other side, there's tromp, we're going to see us.

My view of a really significant and nice expansion.

Our cash flows and a nice growth and that'll that'll be a optimal time to to start to transitioning Blake you want to add to the yeah. I mean, I would just say to you know we do put a high value on doing what we say we're going to do which is why we stand by our desire to continue to return capital to our shareholders.

But at this point as as button, Rob both already said you know I'm. There is a desire on our on our fronts to make the business a little bit more self funding.

And compound that value that's why we've got the team we've got in place they can evaluate all the deals.

You know at such a high level and performance such a high level. So it's it's really going to ascribe a lot of value I think too.

Our ability to capture those those transactions in the future. So I mean at this point, we're still discussing it with the board on a on a go forward basis, it's still subject to their approval, but right now there are any changes to that policy.

Great I appreciate it guys.

Based on present you joining thank you.

Next question today comes from Jeffrey Campbell of Tuohy Brothers. Please go ahead.

Good morning, and thanks for taking my questions.

Good morning, Thanks for joining.

You bet, you mentioned closely analyzing operator helps preparatory to making any acquisitions I'm just wondering if you're running the same analysis on the existing portfolio and if that is motivating any tweaking within the current assets.

No we're not when I think about the current portfolio and operators when I think about we kind of have a green yellow red light.

Scheduled put together in terms of our operators in who we want to invest under.

You know.

We will the vast majority of our portfolio is green and so we feel really good about the operators that were under.

And so historically.

But I think the key metric for me as a way staying under the best rock because even if you have an operator thats currently underperforming, but the rock is terrific. Eventually operatorship of those set sections is going to change hands, and so you're more than likely going to have.

A more sophisticated better capitalize operator coming in and drilling that position for you. So the key tenants staying under the very best rock are number one checkmarks still apply NR, probably the most valid when you think about deals and where our positions located I think you. You know you look at our maps that we haven't our website or by outlines Ron there.

You can see how well positioned our assets are within each of the basins and how diligence our technical teams have been in terms of making sure we stay under the best rock in so that's always is as long as you check that box a lot to any other issues that you have tend to go away.

I appreciate that insight.

My other question was I was wondering if you're keeping an eye on the improving Nat gas market into 2021 and that will have any influence on.

Leasing.

You know in terms of our acquisition criteria and where we buy you know you can get higher gasket in particular in the Delaware Basin as you move to the west in so that is one of the interesting things we've been thinking about historically you wont see us play in the Marcellus.

We tried to get into we bought some assets. They are relatively small amount theres just a lot of issues. When you think about some of the gas plays in terms of the structure of the units how they performed the title tend to be very difficult in those areas and so you won't see us enter the Marcellus or Utica curious like that and so I think when.

Do you think about optimization and maybe switching the portfolio slightly the gas you can do that in the Delaware Basin. You can also do that in the DJ basin that before provide you opportunity to get a higher gasket going forward and so.

I think theres opportunities and our geologic and reservoir engineering teams have clearly identified you know gas cuts within each of the townships or blocks and so we know where those more gassy areas are within the basins that we already play in and so directionally. If we feel like that we want a little bit more gas exposure, we can find that in our current basins that we.

That we acquire and especially if it offers attractive value.

Makes sense, thanks for the assets I appreciate it.

Yes, thanks for joining us appreciate it.

And again I think that probably.

Operator are there any further questions.

At this time there are no further questions. So this does conclude our question and answer session and I'd like to turn the conference back over the Robert So for any closing remark.

Now we are pretty greatly appreciate everybody joining us this morning again.

No. It's obviously.

Tough times, but you know diligently the team is working and we think theres opportunities ahead of us for the remainder of 2020, especially on the acquisition side and look forward to reporting back to you guys.

I guess with our second quarter results again, thanks for joining us appreciate it.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.