Q3 2020 Brigham Minerals Inc Earnings Call
[music].
Good morning, and welcome to the bring a minerals third quarter 2020 earnings conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May proceed Star then one on your Touchtone phone.
To withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like turn the conference over Jacobs <unk> manager of Finance and Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone welcome to the Brigham Minerals third quarter 2020, <unk> earnings conference call. Joining us today are Bob breakup, founder and executive Chairman, Rob Rosen, founder and Chief Executive Officer, like Williams, Chief Financial Officer.
We began 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 release 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.
Conciliation to applicable GAAP measures can be found in our earnings release.
Administrative items, we have a new investor presentation, titled third quarter, 2020, investor presentation available for download on our website.
That you bring in minerals dotcom recommend downloading the presentation and you refer to it during the conference call.
As a reminder, today's call is being webcast accessible through the audio link on our IR website I would now like to turn the call over to Bob.
After an executive chairman.
Thank you Jacob we appreciate everyone joining us for third quarter 2020, <unk> earnings Conference call.
Having lived through multiple down cycles in energy. We've learned that you have to build companies that are not only position to survive, but also to thrive if you've done that because we have the opportunity to differentiate performance is amplified in the cycle.
Our team from day, one worked to position broken minerals in the best geologic area, what premium talk to your assets under top performing operators.
We've also positioned our balance sheet sets it and trying time, such a great weekend one.
We need to return capital to our shareholders and to.
I've been told your sweet spot in a highly disciplined manner acquire minerals when much of our competition is on the sidelines.
As such we were able to compound value when college square at cyclical lows, while prices are rising from unsustainable levels.
Thereby optimizing our shareholder value creation.
We've done that in prior cycles, and we're doing it today.
We're now starting to see operators and the M. P space, Similarly positioning themselves to survive and thrive.
Aggressively consolidating well also accelerating the evolution of their business models towards our model more aggressively returning capital to shareholders.
During our August call, we talked quite a bit about the chevron noble energy merger and pointed to the positives of a much larger entity developing opposition.
Since then we seem to have gone on and W.P.X. Conoco Phillips in Concho and pioneer and parsley. Similarly agreed to combine and scale up to benefit from synergies and weather any storm.
Hi, again think this is a significant positive for BRCA metals as.
Yes, well fortified balance sheets will keep rigs and frac crews active and our basins and therefore drilling are well position minerals.
Further in connection with these completed and pending consolidation an increasing number of BNP companies are moving towards our longstanding return of capital to shareholders business model.
Or shale 3.0, as many are referring to it today.
Most of the indicated they plan on reinvesting roughly 75% of free cash flow into the business and therefore, returning 25% of free cash flow to shareholders.
BRIC a minerals has for the past four quarters returned 100% of distributable cash flow to shareholders and this quarter as we've indicated all along moved our dividend to 95% of distributable cash flow excluding lease bonus.
At the end of the day, we are returning capital faster without exposing our shareholders to ongoing drilling capex lease operating expense.
We also lead the pack in terms of corporate governance and executive compensation.
Pursuant to our compensation plan that has no annual cash bonus and long term equity grants with destiny tied directly to our absolute total stock return.
So we are directly aligned with all of our shareholders.
With investors pushing for more alignment between management and shareholders. Many of our energy Brethren are converting their compensation plans to move towards at least partially including an absolute total stock return metric.
I believe these efforts by energy company management teams are beginning to be noticed by investors and will change attitudes towards investing in energy.
We ended the day the global economy makes the abundant clean reliable and affordable energy that hundreds of thousands of hard working American sport to produce for US every day.
I also believe what's your investment in Bergen minerals that you get proven management pardon me I'm top tier assets.
Supported an accretive mineral acquisitions.
A well capitalized balance sheet.
Accelerated return of capital and a compensation plan aligned with shareholders.
With that I will turn the call over to Bob to cover our operational results.
Thanks, but I'm extremely excited to report strong third quarter operating and financial results as well as continued highly compelling acquisition opportunities to start our strong third quarter performance allowed us to declare a 24 cents per share dividend, which represents a 71% sequential increase from the second quarter importantly were able to increase our dividend despite having taking.
Our initial steps towards partially funding our mineral acquisitions by moving our payout ratio in the third quarter to 95% of distributable cash flow ex lease bonus. We previously message moving our payout ratio on past conference calls and in particular on our second quarter conference call and anticipate that will gradually continue to move towards a long term dividend payout ratio of 75.
80% of distributable cash flow over the next three to six quarters. The goal of course is to utilize the retained cash flow to provide a source of funding for our ground game acquisition program. I also want to highlight that our dividend does not include $1.5 million of lease bonus revenue that was generated in the Delaware basin. During the third quarter, we have always highlighted the significant optionality.
And then when he minerals that are perpetual in nature. In fact, we refer to it as a perpetual option on the geological that Optionality plays out over time through incremental zone development incremental wells better technology applied drink drilling and completion operations and the ability to lease our minerals again, if they become open that perpetual.
Optionality played out in the third quarter and it's a real testament to the quality of our asset than an operator chose to part with precious liquidity during challenging times because the rock we acquired provide superior long term rates of return to the lessee, we retained the $1.5 million in lease bonus to again provide a source of funding for our third quarter ground game acquisition program.
Moving to our ground game mineral acquisitions during the third quarter, we closed $16.2 million of acquisitions deploying that capital almost exclusively to the Permian basin and almost entirely to the Delaware basin and further almost entirely to loving County, which we've always viewed as encompassing some of the very best rock in the United States a point I do want to make when you think about the cash.
Cash retained by moving to a 95% distribution ratio and retaining the lease bonus real to fund approximately 14% of our third quarter mineral acquisitions via both of these sources of capital, which we believe is a tremendous long term value creation opportunity for our shareholders.
Looking ahead, we continue to see strength in a ground game deal flow in the fourth quarter and have approximately 17 million in deals either closed thus far during the quarter, where our pending in or in the middle of our title verification process note that we constantly evaluate a variety of capital allocation options and their effects on our capital structure and want to make it clear that our mineral acquisition on.
Tunis currently represent the highest return of our capital allocation options as the environment changes, we will continue to evaluate our capital allocation options, but we are clearly proving the value of our mineral acquisition capital. We are deploying our creating substantial value right now and believe that deploying capital during the trough is optimal for our shareholders turning to a review of our operating results our third.
Third quarter production volumes were up 5% sequentially to roughly 9300 barrels of oil equivalent per day, we saw very nice conversions during the third quarter in the DJ will extend in Midland basins that contributed to our production growth.
Although most operators are currently favoring the Permian basin with their capital allocation I do want to point out that our assets outside the Permian continued to see the strong conversions, which again is a key indicator as to rock quality. Additionally, in the scoop and Williston basins, we benefited from the resumption of previously shut in or curtailed volumes, our diversified portfolio of the highest quality minerals.
Once again proved its value.
Despite a reduced number of frac spreads during the third quarter. We converted 1.2 net dots were 27% of our net DUC inventory available at the end of the second quarter conversions were led by Chris Stonepeak in the DJ Continental and the Wilson and Apache and partially in the Midland Basin. These companies are all in extremely different situations, but all have to convert docs to maintain pretty.
Auction, it's important to remember that while we don't have operational control operators cannot survive without converting docs and we stand to benefit from becoming resurgence in conversions. Our DUC inventory continues to be converted at an extremely rapid clip again illustrating the high quality nature of our assets our DUC inventory at the end of the third quarter was 3.8 net Ducs I was 74%.
Our position in the Permian Basin further the majority of our net Ducs are operated by Exxon Mobil Continental resources, Chevron PTC and shell the DUC balance declined mainly due to the extremely strong DUC conversions in the DJ and Williston Basin I would note that our Permian Basin does remain flat from the start to the end of the third quarter remaining at approximately 2.8 net.
Locations in the second quarter indicate that roughly one third of our ducks in inventory at the end of the quarter had been treated or Fracs and worth us waiting to be turned in line to production. We are similarly, situated here at the end of the third quarter with approximately 30% of her ducks in inventory at the end of the quarter, having been treated or Frac and that's again waiting to be turned in line to production the vast majority.
Many of these treated docs are in the Delaware and Midland basins, and we therefore believe they will be impactful the production over the next two quarters or permit inventory also remained strong with 4.3 net permits in inventory at the end of the third quarter approximately 50% of our permits are in the DJ basin and 40% of our permits are in the Permian basin, our team delivered strong third quarter results.
The Kobe 19 pandemic has unfortunately continued to dampen crude oil demand and as a result, the MP operators are being cautious we believe our docks being turned in line should result in production volumes for the fourth quarter 2020, and first quarter 2021, averaging in excess of 9000 barrels of oil equivalent per day looking ahead to 2021.
Operators are moving towards a maintenance mode capital there will have to be upward adjustments to those operators lower 48 rigs and frac fleets for those operators to keep production flat if.
If and when those Reagan Frac fleet additions happen, we anticipate being a major beneficiary to those increased activity levels given the uncertain backdrop, we're attempting to provide as much guidance as possible given data available to us when the environment hopefully normalize in the next year, we plan to provide updated full year 2021 guidance in late February 2021 with our.
Year end conference call and an update for the second half of 2021 in early August the 2021 associated with our second quarter conference call in closing, while many energy companies are challenged we're very fortunately surviving and now thriving as a result of the positioning but mentioned and we are 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 as Rob already alluded to the majority of our shut in volumes returned an operators are beginning to cautiously restart activity. Our daily production for the quarter was roughly 9300 barrels of oil equivalent per day up 5% sequentially and up 19% from the same period last year.
Product mix increased to 73% liquids with the oil cut recovering a 53% and resumption of shut in volumes the lower than our expected run rate of 55% due to stronger than expected growth from our gassier areas and the DJ and Scoop oil.
Oil cut should trend back towards our normalized run rate of closer to 55% over the coming quarters as Permian basin docs convert the PDP.
Our portfolio generated royalty revenue of $21.6 million for the quarter up 72% sequentially from the better production volumes.
And a 62% improvement in realized pricing.
Lease bonus of one and a half million dollars significantly exceeded expectations.
As Rob mentioned, we have elected to retain less cash to reinvest in the business in the third quarter, partially funding our ground game acquisitions as we continue to source accretive opportunities.
We do not expect significant additional lease bonus for the remainder of the year.
However, our portfolio continues to create positive surprises as we are always looking to optimize the capital generation from our assets.
Net loss for the quarter was $13 million, including an impairment to oil and gas properties of $18.9 million.
Adjusted EBITDA for the quarter was 16.8 million and adjusted EBITDA, excluding lease bonus was $15.3 million.
Adjusted EBITDA was up 184% as a result of a 5% increase the volumes and 62% increase to realize pricing that.
The much larger increased EBITDA showcases the uniquely high margins only possible and they minerals business.
Realized pricing for the quarter came in at $25.16 per BOE we.
62% from the second quarter.
By commodity type realized pricing was $36 or 34 cents per barrel of oil $2.02 per mcf.
And $12.84 per barrel of NGL.
On cost gathering transportation, and marketing expenses were $1.7 million or a $1.99 or me away.
And in line with the second quarter.
Severance and AD valorem taxes were $1.4 million or 6.5% of mineral and royalty revenue and back closer to our first quarter levels.
DNA expense before share based compensation was $3.2 million Gina includes approximately $2.3 million of nonrecurring expenses associated with our September secondary offering.
Excluding these costs brings generates a 2.9 million.
During the first quarter, we laid out a plan to reduce cash DNA by 15% and I am pleased to report back that we have achieved this goal and in fact exceeded our initial goal.
We expect fourth quarter to be at least in line with our initial $3.2 million run rate.
As a result of our resilient business model, we declared a dividend of 24 cents per share of class a common stock up 71% for the second quarter.
Dividend represents a 95% payout ratio on our discretionary cash flow excluding leased about us.
The 24 cents dividend is payable on December 17 to shareholders of record as of November Thirtyth.
Finally, moving to our balance sheet, which is very important during these times.
We continue to have an industry leading liquidity position.
We exited the quarter with $8.2 million of cash and 5 million drawn on our revolving credit facility, leaving us a net cash position with $138 million of liquidity.
Further as a result of our fall Redetermination, which is expected to be finalized at the end of November our administrative agency has given us a recommendation of a reaffirmation of our borrowing base at a $135 million. Initially they indicated an increase with several changes to the terms of our credit you very much.
However, we elected to maintain our current borrowing base, the mouse and along with it the flexibility and lower interest rate outlined at our existing agreements.
Capital structure remains 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.
I will now turn the call back over to Rob to wrap things up.
Thanks, Blake. We appreciate you joining our third quarter 2020 call to wrap it up I would like to reiterate buds comments about the Brigham minerals business model aka shale Threeo investors want energy exposure from companies with clean balance sheets in a demonstrated commitment to return capital to shareholders and bring a minerals checks both of those boxes, we believe that as investors return to the energy space.
Breaking minerals represents an extremely compelling investment opportunity and will be one of the most efficient ways to own exposure to the recovery operator, I'll now turn the call back over to you to begin the question and answer portion of our conference call.
Thank you we will now begin the question and answer session to ask a question May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys to.
<unk> withdraw your question. Please press Star then two just.
This time, we will pause momentarily to assemble our roster.
Our first question comes from Brian singer with Goldman Sachs and company. Please go ahead.
Good morning.
Brian how are you doing.
Great. Thank you I wanted to follow up on the comments with regards to all the consolidation that we're seeing you highlighted that you view that as a as a positive and I wondered if you could dig a little bit more into your level of confidence in the volume metric implications. There you have a couple of companies that have been part of consolidation that arguably had strong balance sheets and ER would would.
Of potentially done quite.
Quite fine on a standalone basis, what's giving you the confidence that the combined companies that from the consolidation that we've been seeing that the that the that the activity levels will be at or better than what they would have been on us on a standalone basis.
So Brian me is the key factor here and a lot of people have alluded to this is just the uplift in terms of scale. Although these companies or large this is a pioneer conoco just that further improved level of scale in my mind provides additional cushion additional buffer such that you know when there are down cycles like Weve experience.
Here this year as it relates to cool bid and then you'll pass plus disagreement that happened that it just gives incremental cushion they can feel better about maintaining rigs and frac frac fleets in basins and so as I see it you know the peaks and troughs that we'll have with respect to either frac fleets frac fleets or rigs becomes much lower in twoq.
Terms, the highs and lows and so you know what we saw here was you know post February kind of a 70% reduction in rigs almost done 90 plus percent reduction in frac fleets is that you'll see a much more consistent.
Rig and Frac fleet deployment, such that you won't have these massive peaks and troughs the amplitude of the ways will be much less and so you know that makes me feel good and you know right now you're starting to see really nice reaction to some of our operators in terms of bringing rigs back to the field. If he looks kind of in the basins. We monitor you know.
You you had about a 150 rigs running at the low point now we're kind of in the mid to upper one seventys and that's with Exxon Mobil, having reduced their rig count in the Delaware Basin from 26 to 10 rigs so offsetting that you've seen a really nice increase in rigs and so in many instances in particular as it relates to us we're seeing some really nice.
[noise] response by operators just yesterday, you know we saw that Oxy now has three rigs running in the Delaware Basin, which is very much a positive for us.
One of the rigs that showed up yesterday is now in her silvertip area drilling for US yeah. The oxy now running two rigs in the DJ Basin again very much positive other positives that I saw was a sim racks picking up a rig in and deploying that CB stack, where they haven't had a rig since September of 2019, Devon is now talking about deploying rigs to the stock.
As a result of the Dow JV. So I just think that it gives incrementally operators a lot more comfort much more running room flexibility as it relates to being able to maintain razen frac fleets in the field, primarily as it relates to scale and so to me and you know also it gives you leverage as it relates to you.
You are negotiating power with service providers are enhancing your ability to reduce costs I think a huge positive for us as weve digested and gone through the different materials here in the third quarter and the significant 10 plus percent reductions that we're seeing cost many operators are pointing to sub $600 per foot DNC costs, which you know.
At the end of the day with operators talking about their capital budgets, meaning with reduced costs you can do more with less and so I think at the end of the day, what becomes important to us at Brigham minerals is a number of wells that are drilled by each operator, each and every quarter and so we see that in many operators pointing to these <unk>.
Reductions in coffee structural nature enhances our ability to see an uplift in terms of rigs and Frac Frac fleets. So you know Brian sorry, that's a rather long winded answer, but you know at the I think it's an important one that you know I think a lot of it just relates to scale comfort being able to deploy rigs in the field consistently over time and you feel much better about that with that.
Improved scale.
Hey, Rob.
I had just to amplify that we already see that we already see that what for example, majors that that they're more stable through the troughs, whereas the independents that don't add up.
Oh, and the balance sheet really tend to really shut down that gives it its and its just a more stable to the true ups and a benefit from that the stronger balance sheets and meeting the synergies associated with that with that scale.
Great. Thank you and then my follow up is with regards to the balance sheet you talked about one half to two turns net debt to EBITDA is kind of your tolerance level and wonder given the volatility that we see in commodity prices. A if you view that at a certain price deck or price range and b to the degree you do take on.
Take on debt to to help fund more acquisitions, what your thought process is on hedging.
Yes sure. This is this is like so I think on all kind of answer them in reverse order there and on on hedging you know we do believe those two go hand in hand. So we're currently unhedged or obviously encouraged by the by the macro backdrop and do offer our investor.
Direct exposure.
To the commodity, but we do believe that as a part of that policy.
We have to keep a prudent balance sheet and obviously, we've done that as we've talked about today and in the past so.
I think as we start to layer in more debt will start to look at it more more and more young as you think about kind of some of the improvements we've seen the gas curve.
You know, we it might make sense to add some some winter edges on for example.
But as far as going to your initial question on the one and a half to two times you know were we obviously run sensitivities on our capital needs and our capital structure. All the time, Yeah, I would say that the governor is kind of a.
Okay way basis, maybe looking back a little bit more and then sensitizing yet with with four turbine. Some downside scenarios. So you know we sort of we believe that in that said this in the past the only way to screw up a good mineral stores over leveraged so that's kind of top of mind for us is as we make sure that.
Always in check.
Thank you.
Thanks, Brad I appreciate it.
Our next question comes from Derek L. Whitfield with Stifel. Please go ahead.
Hey, good morning to all in great update.
I appreciate it.
Perhaps for for butter, Rob Your acquisition strategy has historically focused on all your plays but they'll your technical team and evaluation process applies to all trends.
In light of the increasingly constructive gas macro price environment, how motivated if at all are you to pursuing gas weighted opportunities within or outside of your focus basins to amplify in production profile and cash flow profile.
Yeah, I'll start off Derek and then butter, we're Blake can layer on but you know I do think you know having a diversified portfolio such that we do have offers upside to gas. So I think you know when you when you think about bringing minerals and there's a really nice summary of our portfolio on page eight of the investor presentation that we have.
David and put out yesterday evening on a basin by basin basis in terms of what our assets looks like you know I think there is significant gas exposure already embedded within our portfolio. So if you look at the stack play roughly a 42% of our production there is gas bill that the DJ Basin that's 40.
Percent gas. So we do have gas embedded within our portfolio. I think also when you think about the Delaware basin. The western side of the basin is Gassier, we do have exposure there. If he thing and then think about as you move east in particular as you get into block four and then into Ward County, there, there's kind of a gassier area. There that we do have.
Exposure to you. So you know I'd say, one that we do have exposure to gas within the portfolio a inward as I mentioned in my earlier comments to Brian as it relates to the uplift an operator to activity, we're already starting to see and hear some activity in the gas play start to ramp up when you think about cimarex running there.
First rig since September of 19, Devon now talking about ramping up their activity in stack because of the Dow JV and then seeing increased gas. There you know performance as it relates to gas Continental last night talked about deploying incremental capital to the Gassier plays and so we are seeing that I would say you know we've talked many times about.
You know.
Having that exposure to gas through still being liquids rich resource plays we're still hopeful that and we're still evaluating a lot of deals in the Eagle Ford.
I would tell you that you know if you think about the Gassier plays as it relates to Appalachia in the a and in that area. We did work on that several years ago. There were just some inherent issues there that that not its connected to the ground game, you know whether you're in or out of a unit. Even if you buy a mineral interest because of how he regularly shape. There was you know.
This can be a in whether or not you know part of the interest you have the spoilage. It's also a much more complicated environment in terms of the title verification and being able to run the title and feel good about what you're buying and so all kind of that consistently pushes US you know that the Delaware basin, Scoop stack and DJ basins, Williston basins, and then layer.
Thing on a the Eagle Ford hopefully at some point here in the near future and so no I think there is nice gas exposure within the portfolio and you know one of the things that Blake and I've talked about as we continue to monitor the draws here and go through that the winter season. You know is is when we would get to a point do we want to start hedging some of those gas by.
James.
So that's something that we'll be looking at by Blake anything else that.
No I think you covered it pretty well thank you.
Yeah very good.
Go ahead Blake.
Nothing that okay, sorry about that and then kind of staying on the ground game acquisition.
I thought process and referencing page 10. Your recent acquisitions have certainly been attractively priced relative to historical measures in your prepared comment I think you guys noted several opportunities that are in process.
More broadly how would you characterize the competitive landscape both in deal flow and competitors at the table and your ability to source similar opportunities as the ones you've highlighted in Q3 and Q4 as you look out to next year.
So yeah. It's a great question and appreciate you know you pointing to the increased levels of acquisitions, you know first and foremost I want to just reiterate that the key for US has been ways will be to be very disciplined in our underwriting process. It does no. Good for you to get out over your skis and enter into deals lean into far what's served us so well.
Over the past seven years haven't built this company is to be very disciplined underwriter.
Underwriting deals consistently being very diligent in our prophecies you know for multi section deal comes in each of those sections of worked up separately because valuations are quite different on a section by section basis. So first and foremost one of our shareholders. If you'll rest assured that we're undertaking this disciplined process east throughout I would.
Say that in terms of overall deal flow, we're seeing a tremendous amount of deal flow if anything or deal teams are busier now than they ever have and that really I mentioned this in our August call really seem to start to ramp up in July after fourth of July what I would say is is that the competition today isn't necessarily with other mineral companies, but in off.
Certain instances, we've referred to kind of reservation price and that's the sellers' willingness to part with those minerals and so you know where I would have said that historically, we might have had a 10% or so success rate in terms of the deals we've evaluated and being able to sign and close those deals were probably more in a 5% to 10% success rate, but large amount of that change or.
Or volatility <unk> reduction in success relates to just kind of that reserve reservation price on the part of the seller.
So our our game plan is to just be very active in terms of getting out there mailing, calling working with brokers et cetera, such that you know that deal flow is that an ever increasing number and.
And that we prosecute those deals are responsive get deal offers out to people expeditiously such that you know, we're still able to see a good amount of closures on a dollar basis, you know and I think it is important to point out that.
Your point as it relates to that the metrics here looking better than they have in the past because I see this is very equivalent to you what the operators are doing in terms of reducing their per well cost. When you think about us kind of being at that.
67% of the cost of prior amount that we've seen and if you think of kind of a 30 35 million dollar run rate. If you look at that that's pretty much equivalent to kind of the $50 million per quarter run rate. We were operating at the past. So you know much the same as what the operators doing doing more with less you know, we're seeing kind of an equivalent.
Additions to our portfolios in terms of net well locations added even at these lower yeah. At these lower prices because of what were able to achieve here with the different environment is our key is just to structure. Our teams such that we're able to people to handle that ever increasing deal flow and be responsive to the seller.
Hi, Ben.
No I'd just add real.
Real quick I mean.
I've seen so many of these cycles and this is why we positioned our company like with that I mean, this is the sweet spot of the cycle.
Yes, it is particularly so in this cycle because there's less capital there's a doors that capital and then in the industry. So it's much less competitive than prior cycles.
Cycles.
I believe it is in south.
That's when we acquire interest as you pointed out at the lowest cost.
While positive will be rising from the unsustainable level. So these are these going to be as they happen and our power cycles. The most accretive acquisitions that will make as a company.
Thanks, Ben Rob very helpful, guys and great update again.
Thanks appreciate there appreciate it thanks.
Our next question comes from Pearce Hammond with Simmons Energy. Please go ahead.
Good morning, and thanks for taking my questions and congrats on the success of the ground game on.
On the ground game and just an acquisition acquisitions in general just curious.
What do you target as far as how much inventory of minerals do you want to have a zero.
A certain amount of years that you'd like to see and essentially beside capital what defines the ceiling on your appetite for acquisitions.
No peers I think one of the key things for us is being able to point to transactions that are accretive immediately I would say immediately being kind of an 18 month period relative to our yield that we trade at also important is just the overall I or our other projects. So I think the beauty of it that we have as we think about our deal.
This is that we can amalgamate a number of deals together within any one quarter and synthetically create deals that meet those overall metrics and so you know we're always targeting making sure were yield accretive NPV accretive and we're able to do that by mixing together, perhaps a more PDP heavy deal or a more duck heavy deal.
So with an undeveloped deal and so you know throughout the quarter, we're constantly monitoring each and every deal that's been signed up monitoring those various metrics and seeing how we want is synthetically create an overall portfolio of deals such that it meets all these criteria. So I think that's the terrific part for US is that you know we're able to do that.
We affectionately effectively we've really refine these processes over the past 18.
18 months that having gone public you know in the past, we would probably have been on the more undeveloped side.
Given the longer runway Gail now today, obviously, we're trying to meet the near term cash flow yield hurdles and so but the great part is we're just seeing such.
Increased levels of deal flow, we're able to then kind makes all these deals together, but you know as it comes down to how always it's that you know, making sure. We're very disciplined in those prices because I can't just iterate that enough that our deal teams you know approach each and every deal the same way such that at the end of the day when we've integrated a deal for the quarter we know.
Exactly will be Bob we feel good about what we paid we feel good about those dollars per net location costs. So you know what that number numerous number of things that we're looking at each and every quarter in terms of deals and trying to bring those together.
Thanks, Rob for that that's helpful. And then my follow up you know one of the attributes about breaking them is the diversification amongst various basins, which could certainly be helpful. If there's a problem in a basin or capital gets dramatically Yo allocated away from a basin, but clearly on the environment. We're in right now like your folks.
Thing your efforts on acquisitions in the Permian and producers are centered around the Permian does it make sense to you know maybe get rid of some of the minerals and some of the other basins. The focus even more on the Permian or is there just not really much of a market for recycling capital and selling minerals.
You know I think when you were always monitoring the portfolio and trying to identify you know is there a way that we can you know achieve good results in terms of potential divestiture, and then being able to redirect that capital to perhaps higher performing area. So that's one of the key metrics that we're always looking at I would say you know sometimes.
Assets are out of favor and it's better to hold and live and fight for another day and perhaps into the future. Those assets you know the thought process ease the feelings towards those areas rebounds, and then you know it is later next year or maybe mid year next year. He never looked at it activities rebounded Theres then the opportunity to divest.
An area and redirect that capital to you an area you know, we likely perhaps a little bit better. So you know that's something that you know we're always constantly looking at much like the the capital allocation decisions that we mentioned in our transcript. Its just something that we're always monitoring making sure we're trying to make those optimal decisions for our shareholders across.
A number of different spectrum. So you know I would say that you know to the extent an opportunity presents itself to divest and redirect that capital to a different area. Yeah. We undertake that that effort and tried to make that happen. It's just I think you know, we probably got a little bit of a runway ahead of US where you know we can stuff, we're seeing the rigs and for.
Friess response, it's probably beneficial to wait.
Couple three more quarters to see that continue before doing anything and so you know I think the great part is as Blake mentioned, we have significant liquidity in place we have been disciplined amber.
And we're still able to distribute you know 95 plus percent of our distributable cash flow ex lease bonus and still able to you.
Return capital to shareholders expeditiously and so all those things I feel good about you know oftentimes, it's just better to be patient be ready and strike why arent hot.
Great. Thanks, Rob.
Thanks, Peter I appreciate it.
Our next question comes.
Comes from John Freeman with Raymond James. Please go ahead.
Good morning, guys morning, John Thanks for joining us.
Absolutely so I know that in the past, obviously, we telegraphed after quite a while that the long term sort of payout ratio you want to get to it that that 75% to 80% level and obviously this quarter being kind of a first step in that direction and I think you know right now all of US are sort of just assuming kind of that.
Kind of a 5% reduction to pay out each quarter to get you to about that that level long term run rate a year from now, but maybe you can just remind everybody sort of what potentially could either cause that to accelerate.
Accelerate or either or take longer or just depending on the environment. Just some of the metrics you are looking at to to keep taking that that pay down to get to that long term target.
Yes sure. Thanks John.
So we're going to always consider the macro trends as well as what our capital needs for the business are you know we're discussing how much castle, where they were retained and when do we keep stepping that down so we'll be looking at that prices will be looking at.
[noise] well be looking at the past dividend amount see obviously, we'd like it to continue continue to grow and so with that said we.
We do have a desire to invest our cash flow back in our business as we've talked about you know in the past about things, but are they already mentioned on this call we.
We think that we can compound value right now really well.
In the trough of the cycle by buying up deals for cash so.
So what will step down over time down to that down to a payout ratio, but its going to always making sure that we're taking all the variables into account.
Yes, John you know I think important point for me and just to reiterate again as we as we did multiple times in during the earlier part to prove the comments at the start was just 14% of our cash flow, we were able to reinvest that and use that utilize that to help with the ground game acquisitions I think that's a huge differentiator for us allows us to compound out.
Yes, if you think about the early history of the company and our great relationship with our private equity guys Warburg Prime brick and mortar town you know all the cash flow that was generated as a part of <unk> portfolio, we reinvested back in the business and we're able to really compound value continue to buy assets. So I see us as directionally going that way.
You know I do think though as Blake mentioned that this is more of kind of an art than a science and that's why also during the earlier comments indicated we'd be looking to go to that 75% to 80% payout ratio of over kind of a three to six quarter period, because we do want to be cognizant of the environment that we're in the macro et cetera, and so you know.
We understand how important the distribution is to shareholder so again being very disciplined diligent thoughtful in our processes as we think about future distributions. You know, we'll be very careful and be you know make sure. We take into account all these different factors much as we do with deals.
I'm not I'm not just the thought I might just add briefly in my view. This is a perfect time for us to be doing that stepping down that they were coming out of a trough with a unsustainable low oil prices and unsustainable low activity and Oh, good time to be transitioning towards.
At least 80% Oh, yeah, because we expect and I'm very optimistic that given the sustainability of prices and activity to make worldwide demand that a normalized.
Well again, we're going to see active and passive regret step up which which will enable us to continue to grow our distributions.
That's great I appreciate the color and then just my one follow up question was when the lease bonus to Y'all received this quarter was that concentrated heavily in any one one area.
You know John I don't want to Directionally point to any one area because we're constantly evaluating potentially really for leasing minerals again to operator, so don't want to point to any one area. Because I think you know competitively we want to make sure. We're extracting the most lease bonus putting in place the most favorable terms and in in two.
In terms of our leases, meaning pugh clauses et cetera drilling commitments cost three leases and so don't want to Directionally point to any one area, but you know I would say that when we do put a lease out there. It's very competitively bid we know exactly who's operators are in what areas and so in who might be.
Most interested in those minerals, so we're running very competitive processes in those areas. So I'd hesitate to defer because you know I think there's going to be incremental opportunities into the future. So don't want to give away too much but you know much the same as kind of the earlier question regarding you know potentially divesting assets you know I see this as you know we can but really.
Achieve some of that Optionality here and by being very patient very disciplined in our processes as it relates to leasing our minerals again, so for competitive purposes really don't want to give away too much but rest assured that we're doing everything possible to extract as much value as possible each and every time, we lease or minerals again.
Yes.
Makes sense I appreciate all the answers guys well done nice quarter. Thanks, Jon I appreciate you joining today.
Thank you John.
Our next question comes from Leo P. Mariani with Keybanc. Please go ahead.
Hey, guys just wanted to follow up on your production here for the quarter obviously.
Obviously, there's been significant shut ins by the industry, most notably in Twoq, but also some in Threeq you just trying to get a sense. If you guys were to kind of back out all the shut ins that you saw we able to see any organic sequential production growth between third quarter and second quarter.
Yeah, we were so certainly I think the way that would characterize these shut ins as if they came back throughout the quarter. You know these they weren't all back online in July one.
But you know I think that they'll but should be back in full force for the fourth quarter. You know we did have conversions that we that Rob Artie already spoke about.
Nice DUC conversions across the portfolio. So we did see some organic ads yeah that helps push our production higher beyond just the shut in volumes coming back for sure.
Yeah in particular, Leo I point to you within the Williston Basin had some nice additions by Continental. So you know this is above and beyond then bringing back online either shut in or curtailed volumes had some nice wells brought online by them on their sefolosha and to ramp pad. So some really nice activity kind of in the Williams County.
Urea much <unk> pretty proximate to you you know the position that the old Brigham exploration company had there just a little bit east of that but you know some really nice wells brought online. Therefore, so nice organic activity force there.
Okay. That's helpful and I guess just to kind of carry that forward a little bit obviously with the activity starting to pick back up as you guys pointed out in Brighams premium inventory is it pretty reasonable that we should expect to see sequential production growth again in the fourth quarter and then again into early next year as well as you guys look at the last.
Okay you.
No I think one of the key things for US is just you know we being in a non operated in essence position as you know we can't control the timing of when wells come online production, where you know even when they are fracked and then ultimately when an operator turns those wells online to production and so you know I think we've got to be more cautious you know instead, we've kind of talked.
About this approach of how we talk about volumes over the kind of the next six month period. Because you know you could have an operator could differ a well being brought online to the second three months of the six month period or a wells brought online towards the end of the quarter and therefore, maybe not as impactful you're seeing a lot of operators reference that here this year with it.
Speaking to you about it wells brought online in the fourth quarter. So we'll just have to monitor it I think you know what makes us feel really good about Oh, how we're dialoguing with you is much the same as what we had at the end of the second quarter, where we had 33% or so of our ducs treated we're entering here in the fourth quarter with 30% of.
Our ducs treated so I think we feel good about that we feel good about the fact that a lot of the docs are located in the Permian Basin. We feel good about the fact that you know if you look at our Ducs, it's largely encompassed by excess Exxon Mobil Chevron shell Continental PTC and other.
Sure. So people that are getting active back getting back in the field fracking wells turning those wells online to production. So no I think you know we just want to you know be cautious you know because we don't control when wells come online. So that naturally leads us to kind of point to more of a six month guidance period than a near term quarter to quarter period because.
Activity can fluctuate.
Okay. That's helpful. Thanks, guys.
Thank you appreciate you joining.
Our next question comes from TJ Schultz with RBC capital markets. Please go ahead.
Great. Good morning, So I think.
The lockout from the September secondary ER has expired at this point. So can you just comment on your view.
The intent for the remaining original owners that still have meaningful positions.
And then I also hear the comments on.
Acquisitions offering the best economics on capital allocation, but given your stock repurchase on on that last secondary how should we think.
About capital allocation moving forward as you consider acquisitions versus any potential levers you may have on on repurchases. Thanks.
Yes sure appreciate you joining TJ. So just a couple of thoughts and then we'll let Blake join in but you know I think as it relates to the stock repurchases. We did you kind of the September offering as a unique opportunity to get in there and buy block at the point that we felt like that that deal did provide or acquisition provided good metrics I think.
Thank you know in my comments, we indicated that we're going to continue to monitor the situation. So you know we will be very thoughtful as we move over the next six to 12 months and continually evaluate you know acquisitions versus other potential opportunities. So rest assured we're continually monitoring that you know I think as it relates to you.
The private equity sponsors that Weve had that obviously alluded to this earlier as you. We've had a terrific relationship with you know there are a much lesser percentage of the ownership of the overall company now I think it's 17, 18% ownership and so I think we feel really good that they're a much lesser percentage of the company. Therefore, there was much more float out there.
There is much more liquidity and so you know I can't comment as to you you know their intentions going forward, obviously, they're very independent as it relates to that but I would point you directionally them being much less a percentage of the company and therefore be much less impactful into the future in terms of.
Any actions they do take or don't take.
Yeah, and I think the sponsors I mean, they they had a piggyback rights and they did but their feet. This last this.
This last secondary offering that we had so I'm just to reiterate Ross points I mean, I think on the on the buyback bronze you know certainly we think our stock is too cheap relative to.
Two you know the underlying assets, but I think that we're very excited about the the private to public are but were able to capture a ground game. So we.
Let it though to push our capital that way as we're you know really saying some attractive opportunities on that front.
Okay got it thanks, just quickly on the on the lease bonus is.
The path forward to retain lease bonus revenue to help fund acquisitions person is included as part of the pay out or just how you make.
That decision going forward. Thanks.
Yeah. Thanks, TJ you know I think you know much as it relates to kind of the comments earlier, it's kind of more of an art than a science and so we're going to be just overall cognizant of the overall environment and I think you know the great part is we have a lot of optionality going forward for us in terms of you know adjusting the payout ratio including X.
Excluding lease bonus so theres a number of toggles that we can take to you know.
Be productive and you know monitors the distribution going forward and so you know I think you know as Blake mentioned, we're just seeing some really nice opportunities here in the third quarter as it related to ground game acquisitions, the ability to really put in place and highly accretive acquisitions and this quarter in particular allowed us to retain that.
These phones to help fund that those acquisitions and in essence fund, 14% of our deals that we didn't third quarter. So again, you know theres a lot of dialogue that goes along with our board of directors, each and every quarter as it relates to the dividend and planning and so again rest assure that you know all those discussions are being had as it relates to modify the town.
Ratio, including excluding lease bonus so I know not being very definitive, but you know theres a number of different levers that we have as it relates to optionality in how we look at each and every quarter independently. So I think the great. Part is is that we were provided a lot of optionality a lot of flexibility as we think about the dividend going forward.
Okay. Thanks, guys.
Our next question comes from Kyle Me with capital One Securities. Please go ahead.
Good morning, guys wanted to follow up on your comments about the Eagle Ford and see if you could talk more about your interest there and how you're thinking about potentially entering the basin.
Yeah, you know I think the Eagle Ford to tremendous play in particular, you know theres. Some operators that you can follow that still have pretty undeveloped units in particular some of these operators are beginning now to co develop the upper and lower Eagle Ford together.
And these operators related some of our earlier discussions do you have the scale to continue drilling and so I think our entry into the Eagle Ford will probably be here in the beginning kind of on a ground game basis, you know with the.
The singles and doubles looking for triples et cetera into the future and so that's something we're doing but you know as I indicated you know just being very disciplined in our underwriting when we do look at transactions, though we we are monitoring and working up eagle for deals, but no I'm highly encouraged as to what what we're seeing there if you look at.
The Eagle Ford in particular going into basin that we monitor probably more so than anywhere you've seen kind of a rapid increase in recoveries going forward almost a doubling of the rig fleet. There in the Eagle Ford. So you are seeing a positive response from operators in terms of their ability to rapidly ramp up and deploy capital to the area. So we are looking at that do you.
Viewed eagle for Favourably, and and I definitely want to get our ground game up and running there and to buy assets. So encouraged about about the Eagle Ford.
Got it that's very helpful and also on slide 10 of the presentation. It shows the dollar amount per location, increasing in the fourth quarter versus the third quarter can.
Can you talk a little bit more about what's driving the change just trying to get a feel if this is market driven or composition of the well type or just anymore color you have there.
So Kyle I think if you look at page 10, one of the key data points. We tried to include so if you're looking at the upper right part of that slide you see third quarter acquisitions, and that's $4.2 million on in the third quarter and so that 5%. That's next to it relates to ducks and permits.
If you look at the fourth quarter acquisitions. The dollars per net location costs was $5.9 million that 19% next to it relates to the composition of Ducs and permits during the quarter were thus far we've experienced during the quarter. So you can see you have almost four times more visibility as it relates to you either wells that will be turned in line.
Line soon permits that will be drilled and so when you think about how we modeled transactions and work up each and every section improve visibility as it relates to ducs and permits.
Does drive higher pricing a in essence, it's a much rest less riskier pop proposition and so you know a less risky situations, obviously improve increased the pricing and so that's then the reason for us including the dollar per net location, but then also indicating to everyone. You know what the composition of abduction permits are.
For that synthetic blend of deals that we brought together for the quarter, either thus far when a quarter's close because then I think it gives.
Our investors and research analysts the ability to understand you know how contributory those deals are going to be to the company over kind of that next 12 to 18 month period, which obviously is very important to all of you all.
Got it that's that's very helpful. Rob I appreciate the additional color. Thanks, Yeah. Thanks, guys. Appreciate you joining.
Our last question comes from Chris Baker with Credit Suisse. Please go ahead.
Yeah. Thanks for squeezing me in most of my questions have been asked but just wanted to follow up on some of the comments you made earlier around need to see rigs and crews increase or should we see production held flat next year, just curious where you see that shaking out in terms of maybe completions year over year in the Permian.
Yes, sorry, Chris or it kind of broke up there a little bit for me anyway could you repeat the question sorry about that.
Take out of my head sounds Yeah, I was just I was saying that most of my questions have been asked but.
Just wanted to follow up on the earlier comments around needing to see an increase in <unk> rigs and crews next year for production to remain flat and I was just curious if you had any sort of directional color you could share in terms of where that might shake out in terms of.
Gross completions in the Permian you know year over year.
You know I I do think you know given that flat keep flat dialogue relative to the fourth quarter that operators are alluding to you know I think you know a lot of people have written about you know, it's going to take a pretty rapid increase in rigs and frac crews to keep volumes flat I think you know what a lot of people are struggling with.
This how many rigs or frac frac fleets does that take because the cost part of the equation is changing so rapidly, but I think rapidly in our favor. So again it gets back to do more with less and you know I think we're going to be encouraged as you look forward to 2021 and the potential for operators to you ramp up.
Their activity on our asset just given what we've seen here in the last you know.
Six weeks or so you know in particular I'd highlight again kind of you know oxy having.
Having rapidly increased the rigs running in loving county in particular, although they are at three rigs right now just yesterday added the rig to the silver to the area you know even wins in the Delaware basin, you're starting to see the private operators add back rigs, you're seeing encore in jetta add rigs and so you know and then you're starting to see people.
I'll add rigs to scoop stack. So I'm encouraged that you know as we've always talked about the key for US is to have a good gross acreage footprint within a basin because that gross acreage footprint. If its widespread enough and there is an increasing level of activity within the basins that inherently means that.
You're going to have a higher probability of those rigs and frac fleets hitting your position because of that tremendous gross acreage footprint. So I'm encouraged that as we move throughout 2021.
You know when you think about the rigs that are going to be deployed in 2021, and moving forward you're going to see some nice improvement in the gross to net spreads on our acreage as as these operators ramp up that activity. I think you know, it's just too early to call what that rig and Frac fleet activity levels might be for 2021 just.
Because there are so many moving pieces for these operators and you know how much of their cost improvements are structural related to temporary you know that being said I do think a lot of people are pointing to 60, 70% of the improvement cost being structural so it looks very positive.
Positive for the industry in general and so I'm encouraged that you're going to see some nice response to rigs and Frac fleets in 2021, and then as a result of our good gross acres footprint spread that being beneficial to us.
Hi, Rob I could add just briefly and I don't we don't have the modeling in front of EPS, but when you. When you look at you know in the.
Big picture, what happened with the subs that bump up in rig and completion activity and plenty [noise].
That's going to be more up here and you see it in the model I wanted one in terms of the decline rate that and start really sets up in my view, a very very bullish scenario for activity in orders.
Well said earlier, an order in order for us Bob supply to meet the demand here at some point, it's going to take us a meaningful uplift in activity and and given that our minerals located in the premier.
Acreage the best of the best there's going to be the first area that the rigs are going to get a move to so that's that.
It's up very well for us in 2001.
Yeah, I think the only thing I would add is that one trend that we're seeing is we're seeing ups spacing and a lot of operators starting to talk about spacing in the lower price environment. So.
I think that that's that's actually going to be upside relative to how we have even how we.
Analyze our own portfolio and continue to analyze acquisitions given that.
We've never laying down.
Over the years and the number of locations that were underwriting too. So as operated sort of converge, but you don't end up with a better ROE well results than than we have.
Then we have assumed I think that's just upside for us going into 21.
Yeah and in particular, you know you think about operators directionally pointing to co development of X Y up upper Wolfcamp et cetera that whole down there you're going to get much more efficient development much more recoverable reserves produced from these D.S. use into the future. So I'm, particularly encouraged like if you were to look at you know how.
W.P.X. here as recently talked about their development of of their areas and you know clay Gaspar our tremendous and so he is really going to take the reins there at Devon and really lead them going forward and so I think you know as you think about their development plans for all the different zones, you're seeing in particular, you know the third bone line through the M&A.
Good to see some tremendous results there as those wells are co developed and brought on line and at the end of the day see much better total you ours on the DS you buy DS you basis by these operators drilling kind of the 12 plus wells that wants relative to the single one off that we've seen in the past.
Great. Thanks, guys appreciate the update.
Thanks, Chris I appreciate you joining us.
This concludes our question and answer session.
I would like to turn the conference back over to the rubber assessed for any closing remarks.
Yes again, we appreciate you joining us on third quarter Conference call. This morning, I'm looking forward to getting back with you guys on the phone after that when we posted fourth quarter results and anticipate that that's going to be.
Late February of next year, so any interim.
Take care and thanks again for joining us appreciate your time.
This concludes our.
Our conference today. Thank you very much for joining you may now disconnect.
[music].