Q4 2020 Brigham Minerals Inc Earnings Call
Good morning.
And welcome to the Brigham minerals fourth quarter and year end 2020 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal any comfort specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Jacob Sexton manager of Finance and Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone welcome to the Brigham minerals fourth quarter and full year 2020 earnings conference call. Joining us today are Bud Brigham founder and executive Chairman, Rob Roosa, founder and Chief Executive Officer, and Blake Williams, Chief Financial Officer before we begin I would like to remind you that our remarks include.
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 reconciliations to applicable GAAP measures can also be found in our earnings release.
We have a new investor presentation, titled fourth quarter, 2020, Investor presentation available for download on our website Brigham minerals dotcom, 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 and is it.
First of all through the audio link on our IR website, I would now like to turn the call over to Bud Brigham founder and executive Chairman.
Thank you Jacob we appreciate everyone joining us this morning for our fourth quarter and year end 2020 conference call for.
First our thoughts and prayers go out to all of our fellow Texans and the rest of the United States for a recovery from the winter storms that impacted us last week.
It will take some time, we have a great deal to sort out here in Texas. However, the silver lining is that this was a very educational energy event, demonstrating the remarkable scalability and reliability of natural gas and thus, it's very important role in powering our energy grid.
We believe that oil and natural gas will be dominant fuels positively impacting human flourishing for decades to come and the Texas, we'll build out more resilient and reliable infrastructure benefiting from our tremendous natural gas resources hope.
Hopefully the rest of the country in the world for that matter will benefit from our experience.
Turning back to the oil markets. The entirety of 2020 was filled with unprecedented volatility triggered by the COVID-19, pandemic and the OPEC plus classes from crude oil pricing to rig counts to frac crews as well as individual company performance.
We started 2020 was $60 wall amazingly. It briefly went negative and then the all spent most of the year around 40 to $45 per barrel.
Markets have been healing and today, we sit here with all above $60 per barrel.
The price volatility had a dramatic impact on the U S rig for the rig fleet and our liquids rich basins, we saw the rig count in those basins in the mid five hundreds in February of last year, and then saw them decrease to around 150 rigs during the third quarter.
In the fourth quarter, we saw a 40% rebound in the rig fleet followed by a further 15% increase so far in the first quarter of 2021.
As a result, we sit today up approximately 70% from the low point, but still around 300 rigs short of February a year ago.
Frac fleets fared no better with around 170 fleets running in early 2020, and then dropping to as low as 18 fleets in may of last year.
The Frac fleet resurgence happened quicker than rigs really starting in July as operators started to complete their more capital efficient docs.
We now see it closer to 120 Frac fleets in the U S.
As a management team we've lived through many of these cycles as in prior cycles service companies and operators are currently driving up efficiencies, we'll see more productivity from each rig and frac crude than prior to the disruption.
Of course, a significant volatility in 2020 top many in the energy industry flat put it in with heavy debt loads when the pandemic and crisis hit.
Companies cut staff shut down capital spending slash dividends hedged into trough pricing and sold depressed assets.
It doesn't entirely differentiated position Brigham entered this disruption with no debt.
And flushed with cash.
Having lived through tremendous volatility in the past we were compelled to take bold action to compound value for our shareholders when others could not or did not want to.
It's easy to buy when times are good but much harder to buy for Loews, Our lean organization went into overdrive looking for accretive mineral deals in a highly disciplined manner.
We increased our mineral portfolio by almost 5% during the year and deployed over 90% of our capital to the Permian basin at highly attractive per net location cost with a very attractive mix of PDP <unk> permits and undeveloped locations.
We also maintained our peer leading pay out ratio at 100 per cent during the second quarter and then the third and fourth quarter, we're able to increase our dividend while beginning the process of gradually and thoughtfully stepping down our payout ratio in order to retain cash flow to fund mineral acquisitions.
In total as a result of 2020 operating results, we were able to return over a dollar per share of capital to our shareholders via our dividend.
Further we were able to also return capital B R. R share repurchase in September and now sit with our stock price at roughly two times for levels, while we undertook a repurchase.
Looking ahead I believe the combination of the Supermajors redirecting capital to renewables independent E&ps, maintaining capital discipline, and returning capital to shareholders significant monetary intervention by governments across the globe and likely replace and that comes with those efforts have us on the precipice of an energy market, where theyre going.
To be substantial returns for those set of position themselves to capture the opportunity.
To further prepare us to capture those anticipated substantial returns and opportunities yesterday, we announced the appointment of John All day plan Ta to our board of directors.
John All has a long history in the energy space working both on the operator side of the business with a 14 year career at Conoco Phillips and on the service side. Most recently of Parker drilling where he was the president of the rental tools from well service division prior to his retirement.
We are extremely excited to announce his appointment and believe its wide ranging experience will be a valuable contributor to achieving our goal of becoming the leading premier mineral acquisition company in the United States well.
Welcome Jon Hamm, I'm personally looking forward to working with you over the coming years.
Finally, and in summary, I firmly believe Brigham provides the opportunity to capture value in the coming years, and what I view to be a likely highly constructive macro backdrop.
With that I will turn the call over to Rob to cover our operational results.
But the entire Brigham minerals team would also like to share our thoughts and prayers are with those trying to recover from last week's winter storms, we were directly impacted in Austin, including many of our team as well as many people, we know and they're all struggling to get back to some sense of normal.
Brigham minerals finish 'twenty 'twenty with a strong fourth quarter from our production volumes to our operating statistics, including our ground game mineral acquisition program to our dividend the team once again showcase the value of a diversified asset and operator portfolio and remains laser focused on acquisitions and capital allocation.
Before getting into a recap of our operating performance I do think it's worthwhile in the face of the numerous potential regulatory changes to remind everyone that our portfolio has been purposely constructed to minimize exposure to federal lands, our portfolio has less than 5% exposure to federal lands across new Mexico, Oklahoma, The D J and North Dakota, and particular only 2.5.
Per cent of our assets on a net royalty acre basis are located in new Mexico, and federal units and therefore potentially subject to federal regulatory changes the vast majority of our company's assets are in fee and state units, which we believe could be the beneficiary of regulatory changes that make drilling in federal Union, it's problematic and operators therefore have to think about potentially shifting.
Activity to the Texas side of the Permian.
Turning to our operating results our fourth quarter production volumes for roughly 9400 barrels of oil equivalent per day, which is flat sequentially with our third quarter production volumes in particular, our Permian basin volumes grew 7% sequentially during the quarter for the full year in the face of Covid, and OPEC, plus which negatively impacted oil pricing and offer.
Significantly negatively impacted Reagan frac fleets as Bart outlined we're able to increase our full year production volumes by 28% to roughly 9500 barrels of oil equivalent per day.
In my mind, another tremendous indicator as for our teams and our assets for resiliency and their faces some of the most challenging times our industry has seen.
During the fourth quarter, we converted one net DUC or greater than 25% of our net DUC inventory available at the end of the third quarter. During the entirety of 2020, we converted 70 per cent of our gross and 79% of our net docs. Despite the historic drop in Frac spreads that occurred during the year that compares to 86 per cent of our gross and 92 per.
Percentage of our net ducks converted in 2019 of our year end 2018 inventory I believe the full year 2020, 79% conversion ratio is extremely strong, especially since for the period April to June of 2020, and historically low Frac fleet levels implied almost no activity for an entire quarter of the year.
When operators did come back to work they preferentially targeted our assets our DUC inventory at the end of the fourth quarter was $3 six net ducks of which approximately two thirds are positioned in the Permian basin. Further the majority of our net docs are anticipated to be converted by Chevron and Exxonmobil P. D C Continental resources and <unk>.
Z <unk>.
As of earlier this month the top five operators of our docs for running approximately 20 of the roughly 120 frac crews operating in liquids rich basins as we continued to see the rapid conversion of our docs to proved developed producing locations. During the quarter. We were also encouraged to see our well spud increased roughly 40% to 79 wells up from 50.
Seven in the third quarter and as a result, our net DUC inventory declined only 5% sequentially.
Importantly, during the fourth quarter, we saw a significant uptick in overall rig activity from some of our key operators, including oxy, adding six rigs chevron, adding three rigs and mewbourne, adding seven rigs during the fourth quarter to the Delaware Basin and the DJ Basin, we saw both oxy and Chevron restart their drilling programs in the Midland Basin, we saw pioneer at fixed.
Rates that are Midland Basin fleet. The rig count has continued to improve in the first quarter of this year with Devin restarting their stack drilling program and are currently running two rigs in Oklahoma.
<unk> P. D C restarted their D. J basin drilling program and are currently running two rigs in Colorado in the Williston Basin and we've seen a number of operators adds there North Dakota rig count, including Continental Hess offensive and Whiting.
Our Permian inventory also remained strong and relatively flat from the third to fourth quarter with for point to net permits in inventory at the end of the fourth quarter approximately 50% of our net permits are in the D. J basin and 30% of our net permits are in the Permian basin increased activity again benefited our portfolio at the number of new permits more than doubled in the fourth quarter.
The third I did want to highlight some of the drilling activity that restarted at the end of the year enrolled into 'twenty and 'twenty. One as this will help drive our production for the next 12 to 18 months in particular, we are very excited about chevron's development of previously acquired noble assets in both the Delaware and DJ basins in the Delaware Basin Chevron has completed drilling 10 gross wells.
Roughly half of our net well to Brigham minerals, and they're rather be ex pad. The first five well pad was drilled into the second half of 2020 with a second five well pad permitted at the end of 2020 and drilled this quarter and the D. J basin Chevron is drilling what noble referred to as our wells Ranch area and six North 60 for West in Weld County.
Everyone has a rig on location is drilling 13, gross or one third of our net well to Brigham minerals in the Reveille unit. These wells were permitted last year and the rig has been drilling throughout the first quarter.
All of this activity directionally points to a thawing of the drilling activity on our assets and only halfway through the first quarter of 2021, we have already exceeded on a net well basis, the organic drilling activity levels from the fourth quarter of 2020, our solid operational results in the fourth quarter drove an 8% sequential increase in our dividend from third quarter to 26.
Per share that dividend increase comes despite decreasing our payout ratio for 95 per cent to 90 per cent as we have previously messaged. We plan to continue to gradually move towards a long term dividend payout ratio of 75% to 80% of distributable cash flow over the next three to six quarters of course, taking Intel into account the macro environment.
As the board contemplates future dividends.
As a reminder, our retained cash flow inclusive of lease bonus that we also retained funded 14 per cent of our third quarter and 9% of our fourth quarter mineral acquisition programs as Bud mentioned based on 'twenty and 'twenty operations, we're going to return over $1 per share to our shareholders in dividends for 2020, we didn't stop there. We also returned $4 million in cap.
In September of last year by buying back our stock at $8 per share. Obviously, a recent trading level volumes have shown that to be an extremely prudent use of capital. In fact, it's only the extremely compelling mineral acquisition returns that have caused us to continue to pursue acquisitions. Those acquisition opportunities are plentiful right now, but I want to be very clear that we are.
Lastly, evaluating capital allocation options and will not hesitate to toggle between options should market dynamics change.
Moving to our ground game mineral acquisitions during the fourth quarter, we closed $25 million of acquisitions deploying approximately <unk> 86 per cent of back capital to the Permian basin, while the Permian remains our focus I should point out that while limited we did see some extremely attractive opportunities outside of the Permian at such attractive rates of return that we simply cannot pass them up.
We expect to continue to spend the bulk of our dollars in the Permian, but remain open to scooping up deals in out of favor basins at highly attractive prices.
Looking ahead, we continue to see strength in our ground game deal flow into the first quarter and have approximately $22 million in deals either closed during the first quarter or are pending and are in the middle of our title verification process on a net well basis, our potential first quarter acquisitions are comprised of 50 per cent PDP ducks and permits and we.
Speight, adding 1.6, net Permian ducks and permits to our quarter end inventory, which is roughly equivalent to approximately 42 per cent of our Permian ducks and permits in inventory at the end of the fourth quarter of 2020.
Our acquisition team has been extremely busy on the mineral acquisition front in 2020, and while we made great progress in 2020, we believe we have even more exciting things in store for 2021, we plan to deploy $90 million to $110 million for mineral acquisition capital during 2021 that will generate production and cash flow with a specific focus on near term activity with clear line of.
Site to rapid return of capital we are off to a great start and I want to reiterate that our acquisition team is finding deals every day that will contribute meaningfully to our production and cash flow for both 2021 and 2022. We are also excited to provide initial full year 2021 production guidance of 9200 9900 barrels of oil equivalent per day.
Day for a midpoint of 90 550 barrels of oil equivalent per day. This production guidance assumes the $90 billion to $110 billion for mineral acquisition capital I want to point out that this guidance range includes the impact of the severe weather that I. Previously mentioned, we currently estimate that the severe weather will impact production volumes during the first quarter for approximately five.
Days and that this downtime will likely result in our full year production volume is running approximately 150 barrels of oil equivalent per day lower during the full year 2021 than we originally envisioned for Windsor doubt had our operator has not been impacted by the severe winter weather, we estimate that our full year production volumes would've been closer to 9700 barrels of oil.
Equivalent per day at the midpoint.
As I mentioned, we also intend to continue moving towards our long term payout ratio of 75 to 80 per cent and believe the retained cash flow will contribute meaningfully to funding a portion of our mineral acquisition capital as a reminder, we will update guidance for the second half of 'twenty 'twenty, one and early August of 2021 associated with our second quarter Conference call.
I think it's worth reiterating buds comments that we firmly believe the energy industry will experience a resurgence over the next decade, while there are many ways to get commodity exposure Brigham minerals represents an unhedged high margin business that is poised to reach substantial benefit perhaps more importantly, the management team here at Brigham his experience at creating value and we believe we will continue to drive.
[noise] outperformance beyond the positive changes in commodity prices.
As Bob indicated we've enhanced our overall team depth at Brigham minerals by adding John All day plan Ta to our board John All joins us with terrific wind regime experience at both Parker drilling and Conoco Phillips and I'm very excited about having the opportunity to work with Jon Al and driving out performance I'll now turn the call over to Blake. So he can summarize for you our financial performance like.
Thank you Rob.
Our daily production for the quarter was roughly 9400 barrels of oil equivalent per day flat sequentially.
Product mix was flat as well at 72% liquids with oil cut at 52%. We expect to remain in the 52 to 55 per cent range as an improved gas curve will bring operator investment too and stronger growth from our lower oil cut areas in the DJ in Scoop, we anticipate that.
Activity in the Delaware and Midland will continue to drive oil volumes higher assuming a normalized environment in 2021.
Our portfolio generated royalty revenue of $23 8 million for the quarter up 10% sequentially due mostly to a 10% improvement in realized pricing.
Realized pricing for the quarter came in at $25 16 per Boe.
Importantly realized pricing per barrel of oil was $40 40.
Up 11% sequentially and clearly set to continue to trend higher based on current strip pricing.
Given that oil revenue amounted to roughly 76% of our total royalty revenue for the fourth quarter. We are excited about the continued momentum in oil prices given such a large portion of our revenues are derived from oil.
Realized pricing for the gas stream was $2.29 per Mcf and $14 11 per barrel of NGL. The forward curves for these commodity types are also trending higher.
Net loss for the quarter was roughly $47 million. This included a $49 million impairment net of tax largely driven by reserves impacts from reclassifications of pods and lower SEC pricing.
Adding back the impairments, we have adjusted net income of roughly $2 million.
Adjusted EBITDA for the quarter was $17 2 million and adjusted EBITDA. Excluding lease bonus was the same given we did not generate lease bonus this quarter.
On costs gathering transportation, and marketing expenses were $1 $9 million or $2 18 per Boe.
From the third quarter, though within our normal historical range.
Severance and AD valorem taxes were $1 $4 million or 6% of mineral and royalty revenue and in line with historical levels G&A expense before share based compensation was $3 2 million and in line with the third quarter.
I'd like to highlight that full year 2020 cash G&A came in at $14 million significantly below expectations and showcases the intense efforts carried out by our team during the course of the year to squeeze cost out of the business.
As Rob already stated we declared a dividend of 26 cents per share of class a common stock. This dividend is payable on March 26th to shareholders of record as of March 19th.
Moving to our balance sheet, we continue to prudently deploy capital into highly accretive acquisition opportunities, we exited the quarter with $9 $1 million of cash and $20 million drawn on our revolving credit facility for net debt of $11 million, leaving us with total liquidity of $124 million.
We have $115 million undrawn and have positive pricing as a potential tailwind into our redetermination that will occur in may. We're also constantly evaluating other sources of funds, including potential asset sales among other options to enhance our liquidity and portfolio.
There is no change to our thoughts on capital structure as we continue to reiterate our comfort level at an upper bound on net debt to adjusted EBITDA ratio of less than one and a half for two times.
Lastly, we have been pioneers with our executive compensation plan and have seen other companies in the energy space begin to adopt the more shareholder aligned approach, we embraced as a newly public company two years ago. We.
We do not have annual cash bonuses and tie the payout of our long term equity grants to absolute shareholder returns, we believe that with a properly aligned and consistent compensation plan design management stands with investors through the commodity cycles and benefits only when we have performed well for our shareholders.
I will now turn the call back over to Rob to wrap things up.
Thanks, Blake, we appreciate you joining us for our fourth quarter and full year 2020 call. We're extremely excited about our results in 2020 and the actions we took to create value as commodity markets recovered with oil prices back in the sixties the value of those efforts is likely to be felt very soon further we have an exciting 2021 business plan that will continue to push Brigham to the <unk>.
<unk> level in our never ending pursuit to be the best investment in the energy industry op.
Operator, I'll now turn the call back over to you to begin the question and answer portion of our conference call.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speaker phone.
Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Chris Baker of Credit Suisse. Please go ahead.
Hey, Good morning, guys. My first question is just on the organic growth profile you guys saw in the Permian last year. It looks like maybe on an exit to exit basis volumes were up 7% to 8% versus the base in which as you know.
Maybe down low single digits can you just talk about the organic growth profile, you know underlying that just in the context of the call. It two and a half net PDP wells acquired last year.
Yes, Chris Thanks for joining you know I think you know.
Our growth relative to kind of that down low single digits growth or decline for the remainder of the Permian clearly points to you the outperformance of our portfolio relative to others and so that's something that we've consistently pointed to you. When you think about our asset and what we've tried to do in terms of buying in loving County, and really what we eat and the surrounding area.
We are really what we consider the core under some of the best operators, you're talking about ex T O shell EOG and others really points to the ability to continue to drive growth and so really we're quite pleased with the growth of the organic growth portfolio and we've continued to see that some of the comments that I made related to the fourth quarter we saw.
Hum did the rigs activity on our portfolio in the fourth quarter, increasing for a 40% here in the first quarter. We've already seen the net additions to ducks are through just the first half of the first quarter already exceed the entirety of the fourth quarter. So really what we're pointing to is the fact that you know as rigs.
Return to the basin and really what Bud and I. Both mentioned that started to happen in the fourth quarter and has continued to happen through the first quarter really should drive a resurgence in the organic activity of our portfolio, especially as you consider the second half of 2021, because really you know realistically. It takes an operator wants they spud a well go through all the completion processes put all the.
The infrastructure in place nine to 12 months for those wells to be added to production. So I'm, particularly encouraged by the ramps activity that we've seen in the fourth quarter into the first quarter.
Especially as you think about some of my commentary some of the operators are adding rigs where they've not been operating to date you know in particular, when you think about Devin and stack. They immediately hit some of our drilling spacing units you think about PTC you think in particular about oxy are the single largest component of our undeveloped wedge rapidly.
Increasing to 12 rigs are eight in the Delaware for in the Midland Basin and so all of this activity will be in particular very constructive to growth for us as we look later this year and into 2022. So we're encouraged from a in particular, the overall energy industry perspective, and what we're seeing out there Chris.
Yeah, that's great and just as a follow up.
On the on the commentary around the <unk>.
Potential to optimize the portfolio.
You know any additional thoughts in terms of where we could see.
See you guys focus.
And would that be you know it would it be fair to assume that that's.
You know areas, where there's maybe less development visibility or no current cash flow.
Yeah. So that's a great question Kristen that's a topic I in particular alluded to you in the third quarter conference call. The rationalization of the portfolio, that's continuing and continuing continuing to want to desire to enhance the portfolio and so when you think about it you know we wanted to make sure. The environment was constructive when we undertook that process and so when you think about that.
Early November period, when we had our conference call crude oil was priced in the 36 to $37 range today, where we sit obviously in excess of $60. It feels a lot more constructive in terms of getting out there and rationalizing the portfolio and so in particular, you know I think what the team did at the end of 2019 in terms of making sure.
Sure we have plenty of liquidity.
In hand to work with throughout the period prevented us from having to take reactions when prices were low and provide the opportunity and instead capitalize when the market rebounded and so what we're seeing is that market rebound right now pricing activity et cetera, which all should be extremely conducive to evaluations that others might undertake.
As to any type of mineral position that we do want to put out there in the market and so I do think you know it could be across the entire spectrum of our asset you know from the Permian more undeveloped section because we are having tremendous success in particular here in the fourth quarter and the first quarter in terms of buying units with heavy activity and so you know you.
You will likely see us do that as well as you know there's the opportunity to rationalize in Oklahoma, The DJ and Williston basins. So you know I think you know the team is looking for to potentially capitalizing on the opportunity that we see out there as it relates to improving overall market conditions provide us flexibility to rationalize that.
Portfolio and continue to enhance the Permian portfolio and really what we're seeing there is a big positive. So we're looking really looking forward to 'twenty, one and the opportunity to redirect some of those more undeveloped hum sales into high activity sections.
Great. Thanks, guys.
We appreciate you joining.
The next question comes from Brian singer of Goldman Sachs and company. Please go ahead.
Thank you good morning.
For you Brad.
My first question is with regards to some of the comments that you made on efficiencies and productivity. It seems like you had an optimistic view there on on both of those and I wondered if you could dig in a little bit deeper certainly we've seen costs come down which would all else equal.
Lower the supply cost for some of the for some of the operators, but how do you see the push and pull on capital discipline across the areas in which you're you're you're focused and.
Given some of the questions or concerns on.
The acreage day to be developed being a little bit less in the core of the core and more in outer lying areas in some of these players how do you think about your per the outlook for well productivity in 2021 and beyond.
Well.
But I'll start more generally and then Rob will probably add to it but.
As you know we've lived through a number of these cycles and this one was certainly the most extreme but in every one of these cycles.
And we've been on every side of it is from from the operator perspective to that to the net.
And the service side as well and.
And in every one of these cycles you know when when operators and the service companies are are really pressured.
It's when you say.
Very substantial in.
Innovation and improvements in efficiencies and and and and we're seeing that of course again coming out of this cycle. Just one example, societal fracs.
So I think there's no question, whether it's whether it's drilling the wells, but also in fracking and completing the wells.
We're already seeing that on this side of the cycle and that you know so you can't just look at the rig count relative to to prior to the pandemic and the Frac crew count prior to the pandemic because each rig and each a frac crew is going to be more productive than it was prior and so we're going to benefit from that as we go forward, Rob may want to add to that no.
Brian I think you're exactly right in that we're going to see enhanced efficiencies in terms of operators and I went into this in either the second or third quarter call that we had and it's really during as Bud mentioned these extremely tough times the operators really drive efficiencies and that can come in many forms and fashions and so when you think about what we've read thus far in the fourth.
Quarter, you've seen a lot of that a lot of positive commentary from operators in terms of cycle times.
Cost of drill per foot you know just highlighting some of them you look at it see Dev and they're saying there's improved cycle times to the almost 20%. So each rig now drilling 20 wells per rig per year do you think about continental resources and in pointing to reductions in costs, both in the Bakken and Oklahoma Devon point.
Two new Mexico, well costs being pretty significantly sub $600 a foot. Similarly, thanks, pointing to you to a much improved cost marathon you know in North Dakota saw well costs decreased 10% from the third quarter Eagle Ford down 19%.
Matadors pointing to what well costs falling 20 per cent and in their areas and then a vintage point to record well costs that they saw here in the fourth quarter, 16% better than the Permian 14 per cent better in Oklahoma. So all of these operators are pointing to much improved efficiencies and cost and so as you think about in this <unk>.
Environment, we're in and operators are trying to maintain volumes flat or capital flat such that volumes are flat from Q4 2020 to keep for 2021. The dollar for same but the efficiencies the cost per well goes down and so you know what we will likely see during 2021 I would estimate is more wells being drilled in 2012.
One for an equivalent amount of dollars because of those efficiency gains which to us.
You know flow is directly through you know where we're at.
As a reminder, not incurring any of the Capex, but were a direct beneficiary of improved activity levels and so you know I'm, particularly encouraged as a red you know all the different reports that you guys have put out that theres going to be some pretty.
Significant efficiency gains and then you know I think you know given operator budgets are constrained and so theres limited dollars to work with you know, Brian Theres still going to focus on the core of the core and so they still need to put up the very best well results. So that's still going to make them focused in the core and probably limit activity in.
The fringes and so I still see them directing disproportionately the activity in the core of the core which you know I think our team has done a tremendous job in terms of making sure we acquire in some of the most economic parts of the basin and so, particularly encouraged given the environment. What we're seeing here, we're gonna see more wells drilled more Tim activity in the core Hey, Robyn and I might just add one thing that.
The improvement in efficiencies and productivity is compounded by we're.
We're seeing particularly in the Permian, some really encouraging well performance production performance from these wells as well so.
Great Great. Thank you for that and then my follow up is with regards to I think a comment that you made with regards to the acquisition strategy.
Net debt, you're also considering and have made acquisitions and out of favor basins base based on our value proposition and I wondered if you could talk a little bit more about how you define that is it that you feel you're paying less in PDP or is it that you have more of a unique view that the operator will ultimately commit can accounts.
And in these areas.
Yeah. So the other basins that we've acquired in outside of the Permian have largely been the D. J, some oklahoma assets as well.
Some in North Dakota, and so what I would say there and some of the basins that had been more challenged in terms of regulatory environments. We're more focused on providing valuation PDP only.
Some of the other environments that are more conducive to oil and gas activity. You know, we will give credit to you permits et cetera, and so that's just kind of a logical extension of what we're trying to do I think the opportunity is such that the returns are significantly higher that the Permian such that you know we feel good about deploying capital.
Although you know in the fourth quarter was about 14% of our asset in the first quarter. Thus far the entirety of our asset is the Permian and so you know those opportunities do come about and our team is set up such that we can still evaluate and capitalize on those and so youll see us selectively add to those areas, but the valuations are largely constrained to P.
D P and ducks in particular in those basins that are more favorably oriented towards oil and gas we will give credit to permits but there is some risking that occurs in in more regulatory heavily heavy environments I would I would indicate it that way.
Great. Thank you.
Yeah. Thanks, Brian.
The next question comes from Jeanine Wai of Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking our questions today.
Morning, Thanks for joining.
Our first question is really just kind of dovetailing on Bryan's question on discipline and efficiencies. So you've guided 'twenty 'twenty, one as a $9 two to 9.7 thousand BOE per day. We know that includes your estimate of weather related downtime in Q1.
Can you talk a little bit more about what determines the range and I guess, specifically what we're asking is does that leave room for operators to increase activity later in the year if oil prices remain constructive or is it just really based on the current plans and I mean, I know capital discipline, it's a huge theme for E&P.
She gains continued as you just mentioned and so operators can really hold the line on discipline, but still do more with less capex dollars.
Yeah again, thanks for the question and thanks for joining so when you think about our buildup for guidance, it's largely based on our PDP volumes of course Ducks are that we have in inventory at the end of the year looking at those operators are frac crews et cetera, and historically, how our assets been converted it also includes some perm.
Activity and then also some component of our.
<unk> wedge and so those all of those components are really driven on current activity levels current operation all efficiencies. Our current operating statistics. So you know Janine to the extent there is efficiency enhancements that occurred during the year or do you see incremental upside to acquisitions, you know all of that will benefit us.
In term and will allow us at some point in the future to potentially update guidance further and so you know I think you know to the extent that these efficiency enhancements play out you know on.
On the M&A side. It enhancements play out you know Theres room, there such that we can hopefully outperform the current guidance. So you know I'm, particularly hopeful that as the industry continues to drive these efficiency enhancements will continue to see that flow through to our production and cash flows.
Okay, great. Thank you that's helpful and my second question is just on your cash flow retention.
We'll be increasing the cash flow retention to 20% to 25% over the next several quarters.
Prepared remarks, you indicated this is really for acquisitions. So does this primarily reflect that you see an increased opportunity set this year or are bid ask kind of starting to narrow given higher oil prices and you just need to allocate a little bit more retention for that and I guess the last thing it sounds far less likely given your current portfolio.
Thanks for developing but we just wanted to check if your appetite for acquisitions is changing by basin, meaning expanding due to any increase regulatory uncertainty. So just any further color would be really helpful. Thank you.
Yeah, No definitely appreciate the question and so you know as we see acquisitions and the retention of cash flow to acquire with you know, it's we've historically really since the beginning of our partnership with a private equity guys back in 2012 or early 2013 have retained all of our cash flow are generally by the assets that continue to buy with.
So we have throughout our history seen tremendous opportunity to retain cash flow continued to drive growth through organic acquisitions organic development of the assets. So similarly, we want to capitalize on that opportunity here with our assets by retaining some cash flow. So we just think that there's a tremendous opportunity to take that.
25 to 30% to 20% of our cash flow retain that continue to acquire with because there is just tremendous opportunity out there and so when you think about what we're able to do here thus far in the first quarter for instance, you know we're able to buy.
Assets with 50% activity on them, a good mix of PDP ducks and permits and so we're able to do that 100% Permian that activity. Our ratio is about 2.4 times, what we were able to buy in terms of activity in the fourth quarter. So we just think that there is tremendous upside you know I do think that that as you mentioned the spread the bid ask spread has.
Narrowed as kind of this environment continue to linger, there's pent up I think activity on the in terms of sellers and their desire to sell you know there was a large period of last year. When there wasn't a whole lot of activity and so you know I think also whats playing favorably into our hands as just on the.
The other potential buyers out there in the market that those potential buyers have also been reduced in numbers and that's you know both our public peers have reduced their acquisition levels private equity back to work or private mineral buyers have also reduced their acquisition levels and so the number of potential buyers that are out. There is also reduced so you know I think.
Sellers are moving our way Theres portent tremendous opportunity. We're seeing you know just tremendous opportunity set in terms of the quality of the assets. So that's something we definitely want entertain them the ability to.
Capture and expand upon and so we really that's really the driver behind us wanting to continue to increase our cash retention to acquire with.
Right, Yeah, I think the only thing I would add too as you know with that with that 75% payout allows us to have.
Uh huh.
Energy industry, leading dividend yield while also helping make the portfolio and our management a little bit more self sustaining one funding those acquisitions.
Great. Thanks, gentlemen.
The next request joining income.
The next question comes from Pearce Hammond of Simmons Energy. Please go ahead.
Yeah. Good morning, and thank you for taking my question. When you came public in 2019, you talked about a ground game strategy as well as a potentially like a larger scale acquisitions.
Acquisitions as well you've had tremendous success with the ground game. It seems like larger scale deals had been harder to come by and I think our investors expectations. When you came public where that we'd see a lot more private minerals moving into public hands. So just curious from a high level, what what makes us feel.
Hard to get over the goal line is it just what we went through the past year with Covid and the tremendous volatility.
Volatility with oil prices are conditions, becoming more fortuitous to getting some of those deals not just wanted to get your high level color on that.
Yeah, Peter I. Appreciate the question. So you know I think you know we definitely want to be patient. We are very disciplined in our underwriting process. So that naturally creates kind of a high bar in which a larger deal has to you you know cross such that we want to execute upon it and so you know it's that patience and discipline that really create the environment that you know.
We want these deals to be accretive we want to you on a large deal will be able to immediately point to the market that it's gonna be accrue.
Accretive in terms of production and cash flow you know when you think about the pioneer partially deal a lot of people are pointing to 2021 is an important benchmark as to you know the performance of that M&A activity and how the overall company performance. So we're very cognizant of the fact that you know any larger deal that we do is going to undertake theres going.
A lot of scrutiny of it and so we want the best chance the best probability to succeed because we want to do another deal into the future and so really that's that's what we see is that you know these deals need to be accretive from our perspective in terms of production cash flow N V for being very disciplined and patient through the process and so I do think that there is when you think about private sellers.
And the realization of you know in some instances us competing against those individuals and knowing what they paid for that asset there's probably some instances where there's reluctance in terms of selling that asset in terms of what we would pay relative to what they paid for that asset.
Thank our patients plays out from a positive for us and that you know some of these private equity backed firms have unlimited runway in terms of fund life et cetera that naturally continues to wind itself down as you think in terms of you know pretty typical fund life versus when they acquire these assets. So you know as.
As you mentioned Pierce you know we've had tremendous success on the ground game. So the teams fully engaged in terms of looking at those everyday deal. So we think we can still be very successful undertaking the ground game acquisition acquisitions, while being very patient and very disciplined underwriting underwriting of large deals such that we do the best deal for our shareholders.
So as you alluded to in your question.
Clearly the volatility is an impediment.
When you look at the buyer and the seller would you or the unsustainable.
For example, commodity price period, it makes it more difficult for either the buyer or the sale seller to transact and so that has been an impediment I think coming out on the other side of that cycle.
[noise] having.
Being at a more a less volatile.
Environment, and a more constructive macro environment should be beneficial.
Thank you Budd Thank you Rob for the answer.
I appreciate it thanks.
The next question comes from Derek Bell, what field of Stifel. Please go ahead.
Hi, good morning, all.
Eric Thanks for joining.
Picking up on journeys first question given the material weather impacts you are projecting for Q1, the midpoint of your 2021 guidance would seemingly suggest a higher 2021 exit rate than previously thought by consensus.
Could you share with us the shape of your production trajectory and where you would expect to exit the year.
Yeah Derrick I. Appreciate the question you know I think in terms of the overall trajectory of production. We think Q1 will be the low point given you know the probably.
The impact of the weather that we've incorporated into our full year guidance and then you know really at that point, you know Q2 seen volumes uplift and then in Q3 and Q4.
There's some really strong response. So you know we think that you know the weather will impact the first quarter and then as you know shortly thereafter, you'll see positive response positive improvements to production volumes Q2, Q3, Q4, and you know as I mentioned.
Organic activity picked up in Q4, and Q1, you'll see that impact probably around summer time, just given the timeline that it takes for those wells get turned in line to production, so and particularly as you see a really nice response in Q3 and Q4 as we think about the entirety of 2021.
Great and then as my follow up perhaps for yourself or by your acquisition strategy has historically yielded strong returns relative to your cost of capital in light of your elevated ground game capital plan could you help us frame the type of returns you're expecting.
Yeah typically you know we've got in our press release, you know that we were typically targeting.
You know asset level returns that are.
Two times, our cost of capital so high teens low twenty's rates of return on an unlevered basis.
Very helpful. Great update guys. Thanks for your time.
Yes, I appreciate there thank you.
The next question comes from Leo P. Mariani with Keybanc. Please go ahead.
Hey, guys just wanted to ask a question on G&A I guess at a very good job of.
You know getting those numbers down significantly in 2020 see G&A now starting to trend up based on your guide for.
For 'twenty, one just any color you have there.
And then again on the guide.
Yeah.
So I was asking about your G&A guidance.
Like you guys are expecting G&A to rise here in 'twenty, one versus 'twenty 'twenty.
Yes, certainly some of the some of the G&A savings initiatives that we undertook in 2020.
We're somewhat relegated to the environment. So you know a lot of it was us pushing back on our service providers.
Now with a little bit higher price environments. You know those are kind of you know, we're still able to save some there and keep those out of the out of the system so to speak.
But some of those are trending a little bit higher this year, given the more normalized environment.
Going going forward, but I still think we were able to keep some of that cost out of the business going forward. So.
Yeah, we've got.
Cash G&A expenses in our guidance numbers of 14 point for a 16 point for so a midpoint of about $15 million for.
For the year.
Yeah.
Okay helpful. I, just wanted to touch base on stock buybacks you guys. Obviously mentioned the fact that you're able to do a very smart buyback are you know late last year.
And how do you think about buybacks in this environment, the stock's up a lot better.
Versus say your ground game acquisitions.
Yeah, I know you know stock buybacks or a potential option our acquisition. So whenever we undertake our capital allocation decisions. We're looking at the entire portfolio of opportunities options available to us and so you know the finance team does a tremendous job evaluating each of those and making sure each and every dollar of capital that we.
Deploy is to the highest rate of return asset and so that's something that we we're constantly monitoring and an undertaking and so you know I mean I believe one of my comments in the transcript or sorry in my earlier comments was the fact that you know as as events unfold, we continue to monitor and evaluate and the beauty of it is we can toggle between all the different opportunities.
And so you know, we'll continue to monitor and evaluate but I think you know obviously as you indicated one of the things you know post that September buyback that we undertook you've seen in essence, the stock double and so obviously.
Obviously at that lessens the desire to undertake a buyback like anything else. Yeah, I think I'll go back to Derek's question about our acquisitions being kind of a.
High teens low twenty's rates of return and you were able to achieve on those acquisitions.
Yields in excess of 20 per cent for multiple years. So you know as we continue to see.
Options through the ground game that or the other that compelling.
We'll always be comparing those back to the buyback.
What adds the most value per share.
Okay. That's that's helpful and just on the M&A side, you know part of the pandemic I think you guys were talking about doing 50.
$50 million, a sort of ground game deals a quarter now we're just looking to guide you kind of have at it at sort of 25.
Are you guys just kind of what are you trying to tell everybody that.
Look it's we still don't have maybe the same level of deal flow there was pre pandemic.
Or has anything changed about the way.
It looks at M&A, what do you want to be maybe more conservative due to sort of less availability of capital I guess in the sector. These days.
Yeah, you know so when I think about it in a lot of the specifics we provide are kind of on a dollar per net location basis, and so we've seen a pretty substantial reining in of the dollar per net location base basis in terms of how we're able to acquire so when I think about the $25 million per quarter that we're now targeting youre able to buy an equivalent base.
Relative to what we were doing pre pandemic price, it's pretty close to that on a dollar per net location basis. So you know.
For us the acquisitions have become more efficient and so that's allowed us to spend less dollars, but yet acquire at almost the same rate on a dollar per net location basis. So and you know what we're able to acquire a day again to recap.
<unk> has some really nice near term activity kind of focusing in on.
Activity levels that have you know PDP DUC and permit a composition of 50% of the overall dollar per net locations. So if you look back and I think compare todays acquisitions relative to historic acquisitions, it's less on a dollar per net location basis, and then also we've seen upside in terms of activity levels that we're able to buy so theres a.
Lot of benefits that we're seeing in today's ground game acquisitions relative to in the past.
Okay. Thanks for the color.
Yeah.
The next question comes from Kyle May of capital One Securities. Please go ahead.
Hey, good morning, everyone and thanks for squeezing me in.
Going along with some of your commentary about rationalizing the portfolio and then also looking at slide eight of the presentation, which shows the percentage of PDP locations increased quarter over quarter. Just wondering if you're actively targeting a higher PDP percentage in your ground game acquisitions or if the mix.
As more reflective of just the opportunity set that's in front of me.
So I think it's a combination of both and so I would not say, it's necessarily focused on just PDP alone and by itself and so really what we're focused on is the overall mix of PDP ducks and permits in terms of activity level. So we're really thinking about it more in terms of an activity wedge so what's gonna be contributory to.
Over the next 12 18 24 months such that you know we were undertaking deals that are highly highly accretive to our shareholders. Both near term and in terms of production and cash flow. But then you know by buying kind of acquisitions that are in the 50 per cent activity range. You know the other by definition other 50 per cent of that wedge is undeveloped.
Patients, which allow us to be NAV accretive and you know as those wells are drilled and turned in line, meaning the ducks and permit then you have the back filling of those unpermitted locations that naturally helped to keep us often unsustainable treadmill. So really that's the beauty of what we're doing in terms of you know on a quarterly basis able to bundle together.
In fact, we create a portfolio deal. So if one deal is more PDP heavy or one deals more darker permit heavy all of that gets blended together throughout the quarter and so when we're doing 30 to 40 deals a quarter you know our team is evaluating the entirety of those all of those deals and kind of mark monitoring and evaluating our performance of the acquisition team.
The benchmark when we start the quarter so.
Yeah, I think what you do with us as an active manager of a passive assets. So we're not going to just do a deal to do a deal.
Looking for for a certain profile, that's obviously going to add value per share.
Got it thanks for that and as my follow up last quarter, you mentioned potentially expanding into the Eagle Ford can.
Can you give us an update on M&A activity in the basin and your latest thinking about expanding the portfolio of that direction.
Yeah, again, it's us being patient and very disciplined in our underwriting process and so you know to the extent you know there's more attractive Permian deals in an Eagle Ford deal, we're going to naturally deploy that so you know we we look at these deals every every day almost here internally as an organization and so we're evaluating deals relative to each other and so you know we're going to make sure we do the best deals.
For shareholders and to the extent theres more favorable Permian deals, we're gonna naturally wait the allocation of capital to those areas. So you know we're still actively monitoring working up our Eagle Ford deals, but I would put it that you know in terms of the allocation of dollars, we're seeing much better returns.
Accretion for our shareholders in the Permian than available through an equal for deal Yeah. We've been in the Eagle Ford deals just haven't gotten one across the finish line because we haven't found one that are appropriate value for us.
Understood that's helpful.
Rob and Blake I appreciate it thanks guys.
I appreciate you joining.
The last questioner today will be John Freeman with Raymond James. Please go ahead.
Good morning, guys. Thanks for sneaking me in.
Morning, Jonathan Thanks for joining.
Absolutely just a quick follow up Robert when you were discussing I'll share. The makeup from these acquisitions recently, where you're taking advantage of these.
Sort of out of favor basins that you're getting a little bit more heavier PDP mix just for like an apples to apples comparison on.
On what you've bought in the first quarter I realized you said, 50%. So far has been PDP plus tax plus products, but oh, what you've done in the first quarter. So far can you give me just the PDP break out of that to compare to the fourth quarter.
Yes, so if you compare it to the 37% PDP component in the fourth quarter, that's about 6% in the first quarter, thus far five to six 7% I would say and so you know it it's down on a PDP basis, but I would say you know as such you know the DUC and permit component are very much more.
More heavily weighted than in the fourth quarter. So if you think about that you know, we're all almost running 44% in terms of on a net well basis, the composition of ducks and permit so when I think about that that's almost 2.4 times you know the composition of ducks and permits relative to the fourth quarter, So really the driver or the benefit of bad jobs.
One is the fact that you know the pre substantial contribution that youre going to have throughout this year into early next year in terms of those docs and permits being contributory to production and cash flow accretive for us as we go forward and so I'm really excited especially as you think about the DUC permit bucket you know that those locations being about 44% of our overall net loan.
Patients because that will add about 1.6, net ducks and permits to our inventory in the Permian and that in and that's relative to the $3 eight net Permian Ducks and permits that we had in inventory at the end of the year. So we're almost adding about 40% of our ducks and permits to our inventory in the Permian just in <unk>.
One quarter alone you know relative to the inventory that we had on hand at the end of the fourth quarter. So I'm extremely excited about the quality of the assets that we're finding and putting under contract thus far in the first quarter.
Yeah, that's great I appreciate all the detail it's a super helpful. That's it for me and all the best deal.
Oh, great John I appreciate you joining thanks a lot.
This concludes our question and answer session I would like to turn the conference back over to Rob Roosa for any closing remarks.
Again, I appreciate everybody joining us here on our fourth quarter and year end 2020 conference call and look forward to speaking with you again in May are related to our first quarter results. So thanks again, everyone I appreciate your time.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Good job.
[music].
Yeah.
Okay.
[music].
No.
[music].