Q2 2020 Brigham Minerals Inc Earnings Call
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Good morning, and welcome to bring them.
Second quarter 2020, <unk> earnings conference call.
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Like the protocol Fritzl Mr., Chris <unk> Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone welcome to the breakup minerals second quarter 2020 earnings conference call.
Joining us today are but Brigham founder and executive Chairman, Rob <unk>, founder and Chief Executive Officer, and Blake Williams, our Chief Financial Officer.
Before we begin I would like to remind you that our remarks, including the answers to your questions contain forward looking statements and we refer you to our earnings released for a detailed discussion of these forward looking statements and the associated risks.
In addition, during this call we make references to certain non-GAAP financial measures reconciliations to applicable GAAP measures can also be found in our earnings release.
A couple of the administrative items.
Yeah, but new Investor presentation, titled Second quarter, 2020, Investor presentation available for download on our website Brigham minerals Dot com.
We recommend downloading the presentation in the event, we refer to it during the conference call.
Lastly, as a reminder, today's call is being webcast as accessible through the audio link on our IR website.
I'd now like to turn the call over to but bring them founder and executive Chairman.
Thank you Chris we appreciate everyone joining us this morning on our second quarter 2020 earnings Conference call.
The second quarter was extremely challenging for the oil and gas industry.
Experienced numerous cycles over the years, but this one is certainly unique.
During the second quarter prices reached record lows and as a result activity was significantly impacted.
In particular across the different basins and the liquid rich resource plays that we monitor.
We saw 70% to 90% of the rigs laid down and 90% of the Frac crews idled.
Well from approximately 190 frac crews in February to less than 20, but early Mike.
Great markets, where responsive to the pricing signals with operators rapidly and responsibly, reducing their activities and curtailing production.
And as a result, the industry is recovering faster than most expected.
However, this has been an extreme cycle and as such we expect financially challenged operators to liquidate our consolidated with larger entities.
Surviving operators will focus on drilling our highest remaining later part time wells.
A great example of this expected consolidation is chevron's recently announced acquisition of noble energy.
Subsequent to the acquisition Chevron will operate <unk> per se on a Brigham minerals undeveloped inventory and we are thrilled to see our assets migrate into the hands up a larger stronger company, whose balance sheet will enable more consistent resource development.
This is the Darwinism the oil field that we've experienced time and again over the years.
The core leasehold that Brigham minerals owns minerals and are continually migrates to the top tier operators, what the strongest balance sheets.
Chevron's performance during the second quarter relative to Noble's illustrates how beneficial we expect this consolidation to be for us.
During the second quarter noble dropped all their Delaware Basin Regs, well Chevron continued to run on average Bob Wix.
As previously stated the Costar lease hold is core we'd been up and permits migration to these large operators such as chevron given our unmatched ability to pursue sustaining development throughout commodity price cycles.
Thereby generating optimal development cash flow generation for BRCA minerals.
In addition, we're just starting to see the ground game acquisition pace start to return to more normal level.
We have been patients that are announcing a number of potential sellers come back to us and adjusting to the post cold They had post opening plus adjusted offer prices.
Further as always we continue to engage in the evaluation of larger transactions and believe that similar to the consolidation we're seeing among M. P operators, we're going to see a wave of consolidation in the minimal space.
And our view, it's important to achieve scale.
And nobody is better positioned to accomplish that and the premier liquids rich basins. Then we are.
I also want to point out that attempt stress periods like this when companies are challenged by macro headwinds.
The dispersion and relative performance is most evident.
Well, others or holding back distributions to Puerto father balance sheets, we as promised our distributor 100% about distributor <unk> both cash flow.
But.
With no net debt, we loaded up to acquire while others are on or impaired and this weve part of the cycle.
We're very excited about the opportunity in front of us to create substantial value for our shareholders the acquisitions.
Lastly, I'm extremely excited to welcome landslide put to the board a brick and minerals and officially back into the burden family.
My answer is a proven value creator with extensive expertise across the oil and gas value chain from upstream and midstream all the way to minerals acquisitions.
Brigham exploration Lance and his team revolutionize the Williston basin, but pioneering significant advances in completion techniques through cutting edge adoption of some of the very first long lateral wellbores, what 20, plus frac stages.
These technologies and my it's his vision and technical leadership.
Instrumental and Brigham exploration industry, leading success and of our eventual sale does that all in 2011 for $4.4 billion.
Lamps subsequently guy had extensive leadership and personal experience, leading a large organization with battle before for me, both Lux energy and Lux minerals.
Importantly, well with Lux minerals.
Lance and his team went on to acquire a substantial mineral position in the Permian basin.
I'm extremely excited about last his appointment to the board I believe he will contribute extensively to our efforts to drive continued excellent and push our teams to stay at the cutting edge of the oil and gas industry, both of which are critical to our goal of consolidating the mineral space.
With that I will turn the call over to Rob to cover our operational results.
Thanks, but first I want to thank all Verbruggen minerals employees, who have continued to operate at very high level. During these unprecedented in challenging times, we began the transition back the office in mid may on rotating basis, and they executed another quarter reporting cycle flawlessly and the face of these significant challenges I think it's important to review several key factors as we think about a recap of the.
Second quarter and the outlook for the remainder of 2021st in the second quarter, we continued to pay out 100% up our distributable cash flow to our shareholders.
Close to 70 million of cash on the balance sheet as of June Thirtyth, We again delivered upon our promise to be out 100% number distributable cash flows our dividend was down compared to the first quarter, but the decrease was largely driven by the roughly 50% sequential decrease in energy prices related to the demand destruction associated with the economic shutdown implemented to attempt.
Rain in the Cobot 19 pandemic.
Additionally, our dividend was impacted by shut ins during the quarter, which reduced our average daily volumes by around seven her barrels oil equivalent per day ultimately, we expect to benefit from east shut ins as these barrels should be produced in the future at higher and more sustainable oil prices.
Second our outlook for the remainder of the second half 2020 isn't pre with rebound in crude oil prices that occurred in June and that's continued into the third quarter already we estimate that crude oil pricing is on average approximately 50% better through the month of July as compared to the entirety of the second quarter next the shut ins that we experienced in the second quarter already.
Appear to be coming back online and left will positively impact the third and fourth quarters. A 2020 in particular, we're already starting to see continental resources, bringing back online or Oklahoma volumes very late in the second quarter and those volumes will positively impact our results for the remainder of the year.
Third our DUC inventory remains strong with 4.6, net ducs and inventory at the end of the second quarter importantly, approximately 60% of our docs are located in the Permian basin and drilling down an additional detail approximately 17% of those ducks are operated by Exxon Mobil, who based on research is rapidly increased our frac fleet over the past several weeks in.
During July average running 3.5, Frac crews, which is the highest amongst the operators. We monitor further and I believe we've been kit. This on past calls we actively monitor satellite data and determine when we believe frac crews have a ride up down or drilled but uncompleted drilling spacing units, where do yes use our analysis of recent satellite data indicates that approximately one third.
Of our docs have been treated or frac to date.
Ultimately our operators will decide when to turn those wells online to production, but we believe these wells represent the fastest and most capital efficient production for our operators and assuming continued market stability are treated ducs should provide the cornerstone for improved and stabilize production. During the second half of 2020 to summarize my second and third points and again assuming.
<unk> marketing conditions hold we believe shut in volumes were turning online and treated docs being turned in line to production should result in production volumes for the second half a 2020 stabilizing in averaging in excess of 9000 barrels oil equivalent per day. This outlook represents returned rather than volume growth versus the second quarter fourth based on increasing deal flow that.
Really transpired post the fourth of July It appears we're seeing a thawing of the mineral acquisition market, we purposely reduced our acquisition activity in the latter half of the first quarter largely through the entirety of the second quarter in order to preserve liquidity and maintain optimal balance sheet flexibility and that's positioned ourselves to capitalize on more attractive opportunities we expected.
The second half of the year, that's playing out well for US now our deal teams are fully engaged working up or ground game acquisitions, our singles and doubles as well is continuing to work on our larger transactions. Thus far in the third quarter, we've already closed or have under P.S. say, a number of highly attractive transactions totaling approximately $15 million of course, we still have.
Run title on deals that we P. assayed, so there's potential closing rest, but we've historically closed at very high percentage of our deals and don't anticipate a different outcome in the third quarter.
Excitingly and as I indicated would be our focus during our first quarter conference call, we anticipate deploying more than 90% of those acquisition dollars in the Permian Basin and further we anticipate that of the April mentioned deals more than two thirds of our capital we will be deployed to loving county, with our Undrawn revolver Brigham minerals remains ultimately position to continue to capture acquisition opportunities.
Such as these during the remainder of 2020, turning to review of our operating results. Our second quarter production volumes were down 15% sequentially to roughly 8900 barrels oil equivalent per day as I've already mentioned the majority of the decrease related to operate or shut ins of approximately 700 barrels of oil cooler equivalent per day, our total shut ins close to two thirds or about 400.
50 barrels of oil equivalent per day related specifically to continental resources volumes and in the Anadarko and Williston basin of the entirety of our remaining portfolio, we anticipate that only 3% of our volumes were shut in which is a positive outcome given the significant shut ins is close by operators during the current learning cycle duck conversions or wells turned in line.
Production and thus subsequently classified as proved developed producing locations during the second quarter did slow relative to the first quarter, which is largely resulted in April mentioned decrease in black frac fleets in the likely deferral I bring online well to production that have been treated until a more normal pricing environment presented itself.
During the second quarter, we converted 1.2 net docs were 21% of <unk> DUC inventory available at the starting the second quarter versus 1.9 that ducs in the first quarter, which represented 32% of our DUC inventory at year end 2019, as I look toward tuck in inventory at the end of the second quarter is strong with 4.6 net ducks of which.
60% our position in the Permian Basin further the majority of our docs are operated by Exxon Mobil Continental resources crest, Stonepeak Chevron PTC and shell looking ahead I would point to the rather positive fact that as I. Previously mentioned it appears that we do have a meaningful percentage of our ducs and inventory that are ready to be turned in line to production buyer operators.
Again about one third of our docs have been treated it can be rather quickly turned in line to production increase tribute to our production volumes in the third and fourth quarters, when and if operators decide to do so.
Additionally, our permit inventory remains strong with 4.5 net permits in inventory at the end of the second quarter, approximately 50% of our permits on the DJ basin and 40% of our permits are in the Permian Basin Lastly, as book, but pointed out we're excited about the Chevron agreement to acquire noble in particular, this will result in 8% or almost nine net and.
Since being drilled force by Chevron of which seven net undeveloped locations are anticipated to be located in the Permian basin and two in the DJ Basin as a result, Chevron now becomes the second largest operator of undeveloped locations on our operator, we'll we're excited as Chevron has continued to focus on the southernmost portions of Reeves County, with particular emphasis in the.
Block 51, T. Ada Es portion of Reeves County, where they currently have a rig running and largely have had a rig running since 2017 and are continuing to issue permits as we look at this portion of the southern Delaware Chevron and noble in essence have a highly contiguous position in integration of those two positions optum lead position Chevron to drill 10000 foot laterals.
Across the significant area, where mineral owns approximately 2000 net royalty acres in fact in July Chevron just issue for permits across a half section in this area and their Red Bee ex 11 unit, where Brigham minerals has an interest with significant capital deployed at a much higher probability of deploying rigs on a consistent basis I think you can understand.
Why we get excited about M&A activity in our basins as more than likely given our propensity to stay under the very best rock you acquire is going to have purchase leasehold, where we also owned the mineral.
Overall, our portfolio performed well considering the very challenging backdrop and most importantly, our company is poised to capitalize where debt free with cash on the balance sheet and actively on the hunt for accretive core mineral acquisition opportunities I'll now turn the call over to Blake. So we can summarize for you our financial performance Blake.
Thank you Rob well this environment is certainly challenging on several fronts, our business model and clean balance sheet set us apart from our peers and other energy related investments not only are we in an advantage position to execute on our acquisition strategy through our ability to fund accretive growth opportunities, but also to return capital to shareholders.
Further we still do not have any debt outstanding which coupled with our unhedged production. It will allow our shareholders to fully participate in a recovery and commodity prices and activity through the maximization of distributable cash flow.
Looking at our balance sheet, we had 16 and a half million in cash and an undrawn revolving credit facility with a capacity of $135 million as of June thirtyth, giving us total liquidity of about 150 million.
Capital structure is important in our highly cyclical industry and we will remain mindful of that as we deploy capital to acquisitions by ensuring we limit our net debt to adjusted EBITDA ratio to less than one and a half or two times.
Our daily production for the quarter was approximately 8900 barrels of oil equivalent per day down 15% sequentially, though up 31% from the same period last year product mix was roughly flat at 71% liquids.
Our oil cut decreased due to impacts from reduced Permian and Wilson volumes as well as gas and NGL type curve outperformance relative to our expectations and particular in the DJ Delaware basins.
We continue to expect our oil cut to fluctuate quarter to quarter, but trend back towards our normalized run rate of closer to 55%.
Our portfolio generated royalty revenue of 12, and a half million dollars for the quarter, we did not generate meaningful lease bonus this quarter and expect that to continue for the remainder of the year and this environment. We are focused on maximizing option value through high impact upgrades and qualitative lease improvements and have significant leverage with operators to do.
Do so.
Net loss for the quarter was $6.8 million adjusted EBITDA for the quarter was 5.9 million and adjusted EBITDA. Excluding lease bonus was also 5.9 million.
Producing positive EBITDA, despite significant pricing activity challenges is another unique aspect only possible and minerals business.
Realized pricing for the quarter came in at $15 on 57 cents per Boe.
Down 48% from the first quarter by commodity type realized pricing was $24. Some 15 cents per barrel of oil $1.11 cents per mcf and $7.28 per barrel of NGL.
On costs gathering transportation, and marketing expenses were $1.6 million or $2.02 per Boe.
Severance and AD valorem taxes were $1 million or 8.2% of mineral and royalty revenue DNA expense before share based compensation was 4 million DNA includes approximately $700000 of expenses associated with our June secondary offering and other annual.
Costs, excluding these costs brings DNA to $3.3 million and on track to achieve our DNA cost reduction goals described in the first quarter.
Lastly, we declared a dividend a 14 cents per share of class a common stock, which is down from 37 cents last quarter, primarily due to declines and realized prices and production as well as a reduction in lease bonus which has historically irregular in timing and size and contributed seven cents to our first quarter dividend.
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This dividend represents all of our discretionary cash flow for the quarter.
We also do not anticipate paying federal income taxes for the first half of the year and are therefore, returning roughly $2 million of cash to shareholders that was withheld for tax payments in Q1.
In essence, we view the inclusion of our lease bonus in the first quarter.
And the return of tax Withholdings and the second quarter. That's the continued desire on the part of our board and our management team. So the return of capital as expeditiously as possible to our shareholders. We're excited to see many operators such as Devon and pioneer migrating towards our established approach of variable return of capital the 14th.
Dividend is payable on September 3rd to shareholders of record as of August 27th.
I will now turn the call back over to Rob to wrap things up. Thanks Blake. We appreciate you joining our second quarter 2020 call operator, I'll now turn the call back over to you to begin the question and answer portion of our conference call.
Well I'll begin the question answer session.
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First question comes from Chris Baker of Credit Suisse. Please go ahead.
Hey, good morning.
On the acquisition front.
Just on the acquisition front that great to see the improvement in pricing and I think.
Third quarter came in call it 45% lower than than the first quarter on a dollar per location basis can you just talk about some of the major drivers behind that improvement.
Maybe beyond commodity prices.
Just trying to.
Got a sense of how sustainable.
Much better prices.
The for the rest of the year.
No I appreciate the question, Chris Obviously, we're pleased to see the activity levels levels force pick up again, obviously as we indicated on our May call. We thought that there'd be a pause in the activity. We did see that happened in the latter part of the first quarter and throughout probably the majority of the second quarter, but that's not unexpected given what we lived through into.
15 2016 so.
Knowing that there would be a slight pause in activity. We knew it was in our best interest to remain disciplined patient.
In our undertake a underwriting a potential deals and so integrating the new data such as pricing.
Rig activity levels Frac crew levels, what the impact of permits and ducs should be as it relates to valuation models et cetera. All went into the calculus of they'll offers that we put out and so.
We did remain engaged putting out all first throughout the entirety of the second quarter, because really we thought that that was in our best interest just a reset from the sellers perspective, what the new pricing for minimal should be given the current market conditions and so a lot of that probably three to four months of limited buying activity was really did reset expectations and so.
Now I think you've seen that happened.
We do think or I I always think for a time here in probably throughout the remainder of 2020, you know as sellers think about their mineral position and really the continued signaling of operators as it relates to lower activity levels related to you.
This is the past.
The rig counts, where they are today relative to the past you know I think longer term or at least here throughout the remainder of 2020, you're going to see folks kind of the realization there that that pricing is different and hopefully that is sustainable. So I think you know to the extent you do see operators being more disciplined you'll continue to see pricing more akin to the levels that were estimate.
Being seeing it in Q3 here and that's roughly that $3.7 million per net location, Chris that you're talking about.
Great.
That's helpful. And then just as a follow up you guys mentioned remaining interested and larger scale acquisition opportunities can you just maybe talk about how that framework might have.
Yes, good post oil price crash.
I think one of the big things that we think about when we think about a larger deal is to continue to maintain a liquidity flexibility going forward even announcement post the larger deal and so the discussions now are centered upon more up taking the entirety of the consideration back in terms of equity thus, leaving.
The balance sheet much as it is today.
So we can continue on with those singles and doubles the ground game that we've undertaken throughout because you know we've spent the past seven eight years building that ground game network. So it's really not in our best interest to try to over Levered transaction or otherwise take on debt to fund the transaction instead fund that through almost entirety equity.
Because it gives us a lot of flexibility to continue to buy within the future because.
We do think and continue to believe that we have tremendous opportunity you continue to compound value going forward via our acquisitions and that's that's that's what's really buying when you buy into Brigham minerals is that 40 person team happened, whom are on the acquisitions acquisition side evaluating every deal that comes in every section to make sure we're paying them.
Copper price undertaking a very disciplined process.
And generate continuing to generate those leads so it's imperative that even upon doing a big deal we have that flexibility going forward to continue with our ground game.
Great. Thanks.
Thank you.
Thank you next question comes from Bryan singer Goldman Sachs. Please go ahead.
Thank you good morning.
Right.
You talked about the benefit.
The shut in production curtailments coming back online as well the ducks that will help push production greater than 9000, a day mark on average in the second half.
What degree do you see that as a temporary.
Or in your conversations with the operators.
Level of activity and what is the likelihood of that activity that you would need to see to sustain or grow that 9000, plus 9000 type but today in 2021.
No I think one of the keys is as you think about our portfolio in general is our continued propensity to stay under.
The best operators under those very best areas. The core geology that is can continue to see rigs deployed the physician capital deployed to the position also our continued to desire to stay in that northern portion of the Delaware Basin, Northern loving Reeves Southern New Mexico, such that you know that scenes at the higher activity.
Levels.
As of late as well and so I think because of our really the philosophy that we've undertaken from the very beginning in terms of making sure. We stay in the very core parts of the basin. The most economic parts of the basin that operators are going to naturally migrate and deploy that capital to do their most economic location. So we're hopeful with.
Operator is acting in a rational basis that with that realization that some of our locations are the most economic in the basin, even at kind of maintenance level capital expenditure levels, you you'd see a disproportionate level of activity directed to weren't position and so our hopes are that given that philosophy that you'd content.
Good to see growth as we think about 2021 going forward.
Great. Thank you and then my follow up goes back a little bit too I think the M&A.
In but up any comments talked about the benefit are you talked about the need for any interest in gaining scale for operators that scale is.
You really see that with regards to any cost the cost structure.
The ability to execute can you define how you see the benefits of scale in Europe in your business model.
Investors can best measure that.
Yes.
Clearly we've got.
An exceptional technical team here that.
Hitting on our ground game acquisitions and also.
Evaluating the larger opportunities and and so you know scaling up our.
The enterprise.
This is our bias and production and cash flow, there's going to be a lot of leverage there associated with that because this team.
Can continue to execute execute on the ground game, but.
But but on a larger base. So just just.
Memps leverage there and it's something investors want to see as well I mean, we already enjoyed exceptional margins.
But those are clear opportunities to be.
A more appealing enterprise to a larger pool of investors Blake.
This may want to the only thing I'd add.
Is that larger scale helps mitigate development timing so to the extent, we've got more acreage in the right areas on the right operators.
It's going to help mitigate some of that some of the timing risk, yes, I'd reiterate the investability point that been made is an important one just to continue to it.
Broaden that investors that can invest in Brigham minerals I think also want to think about scale. It's that the sizing of the RBL much larger RBL as you much longer runway to continue to buy with our ground game acquisitions and then obviously, there's the margin piece of the gene a such that we have to add value.
If you employees demands for larger enterprise given the systems and we've been at this seven plus years. So I think that scale benefits come in numerous different forms and John just not necessarily operating margins.
Thank you.
Thank you next question comes from William Thompson of Barclays. Please go ahead.
Hey, good morning, maybe to follow up on Brian's first question it sounds like with continental bringing on those volumes in Oklahoma that without the benefit.
Immediate benefit to Threeq, you just thinking in terms the timing of those stocks that have been tailed how we should think about the cadence from threeq to Fourq you and then it sounds like we will kind of go back to that the historical trend of 55% oil oil mix just want to make sure we confirm that.
Yes, I think a couple of the factors or you think about that oil cut going up to 55% is the return of the shut in volumes that you mentioned and so as we think about the shut in volumes being largely continental's volumes. There in springboard play where it is more oily earlier volumes in the Williston basin that should help improve the oil cuts.
And then as well, we think about that percentage being 60% Delaware basin focus that should incrementally also help the oil cuts. So I think theres theres. Some real important factors there that will continue to improve the oil cuts and help address that like the June.
Thats right. We also had on the on the oil cuts there was a bit of NGL and gas type curve outperformance.
In the quarter, but just to confirm we do expect that to go back to that.
55% run rate that we've had past quarters, yes, I think you know as you think about continental and bringing those volumes back online here in the third quarter. They signaled in there in their communications that second quarter volumes, roughly 200000 barrels equivalents per day in the third quarter ramp into 290, and then the fourth quarter to exit rate 320000 barrels a day so.
Clearly indicative of them, bringing the shut in volumes back online.
In into play and then I think about the ducks in general.
Percentage, we've continued to see Frac crews improvements in Frac crews deployed due to our basins and thats something that we monitor on a week by week basis, but alluded to the fact that now when you look at the data and towards the end of February you're at 190, plus Frac crews in some of the key basins that we monitor and then within a 10 week period.
That Frac crew total went down to less than 20, the great part as we've seen a doubling of the frac crews. So mid forties in terms of Frac crews and in in the basins that we monitor and in particular I alluded to at some my comments the Expo frac crews being substantially higher relative to then than in the past or here recently and so.
Within controlling 17% of the ducks that very conducive to us being able to hit the guidance that we put forward. So I think as you think about the natural progression of Ducs and operator ramping up activity. It's just natural to expect that.
The conversion percentage in the third quarter would likely to be slightly less than the fourth that activity levels pick up and a lot operators are indicating that Dave will be picking up frac crews here September Christian throughout the LNP remainder of the year I think you know lot of it is just real positives that you're seeing from operators in terms of their indications that the resuming to more.
Normalized activity levels, because when you think about it it's really pretty astounding look at that kind of the 30 key operators. We watched 20 of them had a frac holidays. During this period, but 10 of them have already gone back to work. So you are seeing those operators come back and be active again. So I think it's very conducive to to us being able to hit that nine to average of 9000 barrels a day.
So that we alluded to in the in the press release yesterday.
No I might add.
I think I think.
One thing its.
Emphasize that we can feel good about the visibility of the frac crews increasing on a quarterly basis.
Really all the way through to the first quarter of 21, So and then I think you're going to.
So I'll follow up on that with the with the drilling rigs.
Because as Rob talked about in here. So I mean operators are motivated coming out at this portion of the cycle.
Focus their activity on the on the opportunities I have to generate the best margins at the highest or and of course that means our minerals and so so I think that gives us a lot of comfort with accelerating activity. Both on the Frac crews and then and then as well with the rigs.
Helpful color and I guess, some as my follow up on slide 11.
It appears you added some some incremental acreage and so the new Mexico and your comments.
Dr. That's what I'm actually I'm, just curious based on the concentration or rig activity in new Mexico can you just remind us your federal and exposure into what you think would happen in terms of maybe some of those rigs migrating.
Back into Texas in terms of having a.
Issue.
If I didnt get to liked it and we see kind of.
Issue on permitting.
Yes, so just as a reminder, overall mineral position I were 89% steam enrolled so those were minerals kind of unburdened by kind of the federal regulatory issues that might be happening here post post the November elections.
8% of our minerals or our state minerals within the state of Texas. So obviously, given the propensity in the positive response to Texas oil and gas industry don't see any risk there the remaining portion or minerals roughly about 3% are in federal units and so that's just not new Mexico, you do have federal units in North Dakota.
In Oklahoma, and so roughly that's about 1% in federal units of our middle position in New Mexico.
Houma in North Dakota, and so.
One of the we've historically kind of reduced our activity levels in new Mexico relative to Texas, just because of that potential issue as it relates to permitting et cetera lot of talk regarding the length of the permitting process how much harder. It is in new Mexico. So there were cycle is much more clear line of sight to development in Texas.
With that in Mexico I do think you are as you mentioned seeing elevated rig activity levels in new Mexico today relative to in the past in for instance, I think if you looked at the stats roughly about 60% of the rigs in the Delaware basin or on the new Mexico side of the basin and I think thats largely as you heard from the commentary by some of the operators here too.
To address kind of the impending potential risk in new Mexico as it relates to the potential Federal fact, frac band and so I would assume that if anything does happen in the future. The vast majority of those rigs are going to naturally migrate south of the border and you're going see much higher elevated levels of activity in Texas, which would be very been.
Official to us as we think about our portfolio and how we've structured it.
Okay. Thanks for taking my questions.
I appreciate it thank you.
Thank you. So next question comes from Pearce Hammond some into energy. Please go ahead.
Hey, good morning, and thanks for taking my questions. My first question is thanks for the 22nd half a 20 production guidance do you expect the oil mix to be similar has first half 20 or better given the production curtailments, which occurred in the second quarter.
Yes.
I'll send before appears we expect that to migrate back to that 55% that we've historically seen.
Okay Perfect and then my follow up question pertains to kind of the puts and takes dealing with large producers and so on the prepared remarks, but highlighted the chevron noble acquisition will be beneficial as old placed more of your minerals in the hands of a large well capitalized operator.
Just curious what you see or the puts and takes of dealing with large.
Producers like someone like a chevron because one could argue that they have a wider choices of place water choice of places to deploy their capital around the world and may not be as responsive to higher oil prices driving improved activity as would be an independent. So just curious your puts and takes around dealing with these larger.
Better capitalized producers.
Well this but ill.
I'll take the first shot at that.
You know I do think five or 10 years ago is quite different.
The.
The it was it was the independence the more entrepreneurial independence that we're we're making it happen then you a shale, but I think now it's.
It's a large degree the factory has been built and it's about execution and.
And so I do think this does darwinism is so beneficial.
For us at this stage because.
I think the majors are finally in my view.
Understanding that it's very difficult for the international projects to compete with us shale and and particularly coming out of this cycle.
It's my view that they're going to increasingly.
Lean on.
US shale further further stable base of growth in production, particularly.
So given the the the pill political risks associated with a lot of the international endeavor. So.
So.
I think it's.
And as you would expect and as we touched on.
These large operators with the strong balance sheets, they want to own the very best assets and and so it really just as evidenced as our belief all along that Brigham minerals, we want to focus on the best of the by US kind of like real estate and by doing that you are subject to less volatility and even.
Even through the troughs and I think I think we're we're demonstrating Matt. So so I think thats going to continue to play out that the.
You have a week operator with a week balance sheet, they're going to get taken out by stronger operator with Doug.
Better balance sheet, and and that's going to benefit our asset base and monetization of it go ahead, Rob Yes, I think that we think about the kind of the option to terminology that used I think in particular, you think about these larger operators you almost buying a floor option in that your mitigating your risk to the downside by having continued deployment of rigs and activity tier.
Position, but alluded to some of that at the time of the announcement of the merger noble wasn't running any rigs in the Delaware Basin.
Chevron five or so on average over the second quarter, so tremendous ability there to continue develop even in the down cycles.
Below the other real positives I think as it relates to think about the much larger operators, which larger balance sheets and you think about the overall tank development of each spacing unit those larger operators are going to be able to drill the 15 16 wells within three or four different to producing horizons that might otherwise communicate if they are produced in.
Pendley or slower rates and so it's going to lead to overall higher recoverability of the mineral resource that we own. So I think thats a huge positive when you think about.
The deployment being able to deploy a large amounts of capital to one single unit bring all those wells online at the same time frac them all and allows for.
Orders within each of those wellbore to maximize on our part and then I think you know as you think about these larger operators and even though they do you have relatively big positions you think about your ability to fine tune and invest in the highest rate return projects that they have so when you think about and that this is whether its.
Chevron and then buying noble or oxy historically, we've stayed on the eastern side of the Delaware Basin Thats been more oily. So as you think about these operators and their ability to accelerate activity you think it'd be naturally to those orly parts of the basin on the eastern side, and then, particularly as you think about that Chevron noble deal and you look at that.
Area that I pointed out there in the southern Delaware Basin, it's very oily relative to some of the culberson position that you have there that that chevron's drilling with.
Some racks and others and so we're very pleased that were in these highly are higher oil cut areas that we would anticipate will be drilled on an expedited basis relative to kind of the western side of the Delaware.
Yes.
Thanks.
Go ahead.
Four of the value chain as well as have leverage over that value chain. So in keeping with the full development aspects.
Their abilities that that'll bode well for US also as they've they've gotten midstream they've got refineries all those things.
Oh, great point, thanks, so much guys.
Yeah I appreciate it thanks for joining this morning.
Thank you next call.
Keybanc. Please go ahead.
Okay I.
I think you know kind of three Kevin you guys had an expectation the might be able to do just over $200 million of acquisitions annually.
Well they talked about the pace starting to pick up again here in the last month, which is very nice to see just trying to get a sense from a magnitude perspective. The I think you can kind of get back towards this 200 million type of run rate later this year or do you think maybe that would take a little while to kind of revisit here.
I think we're going to ramp into that kind of $50 million quarter pace. I think you know as you mentioned, we've seen some really nice incremental activity in in really starting post fourth of July through current and so the deal team has been extremely busy working up low singles and doubles really great response from the deal team to keep up with that deal flow.
Through the quarter as well as continue to work up those larger transactions that we've been looking out and so.
Thank you think about the third third quarter, we might be on a kind of a 20 to $25 million to $50 million acquisition pace, and then ramping up to.
To higher levels, there in the fourth quarter, maybe targeting kind of 37 and a half million dollars midpoint I'm, just obviously thinking about this now you're.
Asked the question, but I think it's going to be a ramping into that 50 million of quarter pace and I'd be hopeful given our balance sheet and the activity levels, we'd be closer to that $50 million a capital deployed level early into 2021, I think theres just has been mentioned a tremendous opportunity here to continue to acquire and consolidate and.
So it's our job to be responsive to mineral sellers when they are thinking about selling and getting back to them as quickly as possible because I do think on overall basis do you think about some of the other commentary provided.
Here recently within the conference call Theres, a real unique ability for us to be public consolidator within the basins and so I think you know we need to do everything possible to endeavor to take advantage of that situation, while as president and so.
With the understanding obviously that we're going to be continued to be very.
Disciplined in our underwriting approach consistent with what we've done in the past.
Is the so there theres multiple things that we're balancing wanting to deal deals, but then also being consistent in our approach in the deal evaluation phase as well so I.
I think you'll see us ramping into you and I do think that that 50 million dollar a quarter level is achievable and probably seeing us hit that probably Q1 of next year.
Okay. That's great color for sure I was hoping you guys can maybe speak a little about any potential to use the balance sheet for stock buybacks.
Obviously, all energy equities have really gotten hit during 2020, I guess, which is you surprised given that the downdraft in oil, but just given how clean your balance sheet is have you looked at all stock buybacks and potentially supplement some of the M&A has effectively I guess, you'd certainly be kind of buying back existing minerals in the portfolio.
I'm pretty cheap at these levels as well.
Sure sure and Leo we are always evaluating all of our acquisition opportunities, including ourselves on you know, while we certainly think that were undervalued at this time.
We're pretty excited about the acquisitions that we've been able to to execute on and get under contract here in the third quarter. So with the with that dollar for net location dropping to $3.7 million unit, where we're pretty excited about putting capital to work with what those acquisitions as at the at the moment.
Yes, this but I'm not add.
The private market.
Our assets is also less competitive and others less capital out there.
Jason minerals, and and we certainly believe we represent those the premium public.
Liquidity option for for a lot of mineral owners out there and the premier liquids rich resource plays.
Okay. Thanks, guys.
Yes, I appreciate your time, thanks for joining.
Thank you next question comes from call My capital One Securities. Please go ahead.
Hey, good morning, guys.
Good morning so.
Putting aside the additional expense related to the secondary offering it seems like your Opex was elevated in the second quarter on a per unit basis can you give us any color on what drove the change in the second quarter and how you see things trending going forward.
Yes sure. So obviously, we as you mentioned, we did have some cost associated with that secondary offering in June that's running through Gionee. There. We also had some some more annual oriented costs.
We don't expect to see in the in the third and fourth quarter those are tax related and.
Annual meeting related those types of things.
So those won't be there and the in the second half you know we have made headway on our DNA cost saving initiatives now that we announced in the in the first quarter hammering on a lot of our service providers and have been able to achieve.
A lot of those savings as far as some of the other costs. You know GTM is is largely a dollar per per barrel I'm. So.
Prices per barrel increase that should level out is more in line with what we've seen in the past.
And then as far as severance and AD valorem taxes, you know those are normally percentages of revenue.
You did see a little bit of an uptake from the from the first quarter. Some of that's related to the AD valorem taxes being being property tax and having a little bit stickier value. That's.
More.
Caused by valuations from from last year, effectively so again as prices increase that should level out back to kind of where we've seen it in the past.
Got it okay. Thanks, Mike Thats helpful and I know you talked about your.
I guess your capital thinking for larger strategic acquisitions, but can you give us an update on kind of what you're seeing or hearing from sellers of of those larger packages.
I think sellers are equally understanding that maintaining a clean balance sheets important if you think about a larger deal that sellers going to be taking considerable equity backup from us and so they'll want to see that equity trade well and so I don't think its anybodys real interest to you.
Do anything other than a largely equitize deal and so I think that that will be critical date. There is the understanding that it would take them a while to unwind that position if they want into and so.
If you think about being a long term shareholder it's in their benefits to take back equity such that they provide us with the runway to work with to continue to.
Capitalize on our ground game that I mentioned that we've been working at for seven eight years to develop and so I think there's equally that realization on their part that given the current environment, It's best to maintain significant balance sheet flexibility such that.
If they think about unwinding the positions they over an 18 to 24 month period that Theres, one way for the comp company to continue to work with see share price appreciation going forward as we continue to generate value by acquiring and so I think you know.
It's rational for seller to think in that manner.
Got it that's helpful. Alright, Thats all from me. Thank you.
Okay. Thanks.
Thank you next question comes from John Freeman at Raymond James. Please go ahead.
Good morning, guys.
Morning, John.
Yes, the last few years I've had a pretty consistent sort of annual debt conversion rate of that 86% to 88% yeah. The production guidance you all got now for the second half year, and what does that translate to for kind of else updated assumption for what that the annual dot conversion will be this year.
So just as a reminder, so the ducks that we can burden in the in the first quarter roughly 30% of the net debt balance that was on hand, thus far. We then incorporate the second quarter conversions were at.
50% or so.
At the.
At the midpoint of the year and so when you think about.
Roughly about a third of those ducs already being fracked.
You've got another 30% of our beginning of the year Frac balance in hand that should be converted this year. So you're already looking at kind of say at 80%.
Doug conversion number in 2020, and that's assuming that there is no further duck conversions, which we anticipate there will be given kind of the rig.
The ramp up in the Frac fleets that we're seeing today and so I'm hopeful that you know we're going to be closer to that 90%. When you you Mifi think about already being at that kind of 80% increment already and so just a small amount of incremental activity on behalf of our operators can clearly push us to that 90% level again so.
I'm very confident or but feel good that we'll be in that 90% range again, given where we are today the knowledge about ducs that have been treated and then just how much increment small of an additional incremental required to get us back up to that 90% level.
That's great, especially given how unprecedented everything as we've gone through that youd still be at that higher rate.
The follow up question I had.
Previously I think ill talk about kind of a 36% base decline rate.
To Q 20 to 21, what is based on the production outlets in second half here do you have started a rough assumption of what the for Q 20 base decline rate would be based on that production outlook.
Yeah, I think it will be.
We're looking into it right now.
But I would expect that it will be about the same.
It's really been no major shifts in the portfolio. When you think about the areas that we're operating under the basins, where the consistency of the additions. So I don't think theres really anything inherently different that that would cause us to really change or shift.
Thoughts as it relates to.
The decline rates of the portfolio.
That we talked about.
Great I appreciate it guys.
Yes. Thanks I appreciate you joining.
Next question comes from TJ Schultz with RBC. Please go ahead.
Hey, guys good morning.
You mentioned a couple times on on buying.
Packages more fully with your equity to keep the balance sheet intact and sellers want to see this too. So is there really no appetite to put on debt now for deals you've talked before about targeting one and half to two times debt leverage as you deploy capital but has that changed.
Well I think when we think about adding debt to the balance sheets are largely really to capitalize on those ground games kind of.
Those deals that are say 500000 to 1.5 million a piece that it's really not.
Feasible for that seller or they're not really interested in selling for equity.
Really the they're selling because there's a need for cash to fund whatever might be currently going on their life for one to diversify out of oil or diversify out of operators et cetera, certain our operators and so.
I think as as we think about it those deals will be the deals that would be funded by the debt piece and so.
As we continue to capitalize on the consolidation thesis and and capitalize on the ground game opportunities that we're seeing that will be kind of the toggle such that those acquisitions, we funded by debt, while leaving the equity piece to be GB utilized for the larger deals.
Okay.
Makes sense and then on the larger deals and are those two primarily Permian packages that you're looking at or.
Are you looking at deals are considering any with that with assets outside the Permian or even outside your current footprint. Thanks.
I think there is actually quite a few larger deals in the queue that were working and so those are spread amongst basins et cetera. So don't we don't want to in particular talking about any one transaction but.
I would say you know our focus has been the Permian and probably will be going forward and so thats, largely where we're focusing our efforts, but thats not to say that there aren't other packages that might include a Permian plus other piece and so I think when you think about our technical teams and our diversified portfolio to the extent that there is a diversified deal.
Out there, there's probably nobody else better in the marketplace to quickly evaluate that deal and get response to the seller just because of our experience having worked all these basins overtime, but.
I think the key will be always as we think about a larger deal to make sure it's accretive near term in terms of.
The distributions to shareholders as well as accretive more longer term in terms of the net asset value and so really again when we think about these larger deals, it's a being disciplined and making sure in our underwriting that that we've experienced accretion both short term and longer term because we are aware with the expectations relative to the 113 net.
Undeveloped locations that we had out there to be to drill for us over time, you know there is an implied growth in our portfolio. So we want to any deal we do to make sure that there is that the associate growth that comes with it.
Great appreciate it.
Yes. Thanks.
This concludes our question answer session.
Turning the conference back over Mr. Rob We're also for any closing remarks.
Now I appreciate everybody joining us this afternoon in the second quarter call look forward to you our reporting back to you in November with the third quarter results.
And we'll speak with you guys. Thanks, a lot for joining in.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.