Q4 2020 Falcon Minerals Corp Earnings Call
Ladies and gentlemen, and thank you for your patience. Please remain on the line for your Falcon minerals call.
We will begin momentarily again, we appreciate your patience. Please remain on a line will start shortly thank you.
[music].
Good day, ladies and gentlemen, and welcome to the Falcon minerals fourth quarter earnings call 2020, all lines have been placed on a listen only mode and the floor will be open for questions and comments found a presentation. If you should require assistance throughout the conference. Please press star zero on your telephone keypad.
Speak to a live operator at this time and it's my pleasure to turn the floor over to your host Bryan Gunderson, Chief Financial Officer for some opening remarks, Sir the floor is yours.
Good morning, everyone and thank you for joining today's call day discuss Falcon and fourth quarter 2020 results.
Before we begin I would like to remind everyone that during this call. We will make certain forward looking statements that address our expected future business and financial performance and financial conditions and.
Actual results achieved by the company may differ materially from those made or implied and any forward looking statement due to a wide range of risks and uncertainties, including those set forth and.
Our SEC filings.
I'd also like to caution you not to place undue reliance on these forward looking statements, which reflect managements analysis as of the date hereof.
The company expressly disclaims any obligation to update or revise any forward looking statements.
Additionally, this presentation also includes a non-GAAP measures reconciliations of those measures to the most directly comparable GAAP measures are included in the earnings release, which is posted on our website.
Lastly, the company will be attending several virtual and in person and investor conferences, and the coming weeks, including.
Simmons Energy's 21st annual virtual Energy conference on March 20, and 23rd.
And the minerals and royalties conference in Houston, and on April 19th and 20th.
With that I'll turn the call over in Japan, and as President and Chief Executive Officer, Daniel Herz for his remarks Daniel.
Thanks, Brian and good morning, everyone. Thank you for joining Falcon minerals fourth quarter, and full year, 2020 earnings call.
We have a lot to get through today.
And my remarks, Mike <unk>, our Chief operating officer will discuss specifics of recent permitting and development activities and our position and.
And and the expected favorable impact it will have that and production and resulting cash flow in 2020 one.
And then Bryan Gunderson, our Chief Financial Officer, who you just heard from will give US a financial report and then we will take your questions.
When reflecting on 'twenty, and 'twenty and considering where we are today and Falcon I'm reminded of Red Queen's warning to Alice and Lewis Carroll through the looking glass and I quote. It takes all the running and you can do to keep and the same place, but if you want.
And to get somewhere else you must run at least twice as fast.
And we are back and a running twice as fast today.
We had a solid fourth quarter at Falcon minerals during which we generated $7 $5 million of EBITDA and eight two cents per share a free cash flow, both excluding nonrecurring expenses associated with our strategic review.
Our free cash flow grew by 19% over the third quarter of 2020.
In addition, we announced a dividend of seven and a half says or 30 and annualized which is an increase of 15% from the third quarter of 2020.
A greater importance I believe is where we are headed.
And minerals and a.
Excuse me I will start that over Falcon minerals is in a unique position and the energy space and amongst our peer mineral peer as we are poised for a meaningful production free cash flow and dividend growth, but without having to spend a single dollar on capital.
And insurers or acquisitions.
This is first and foremost driven by a meaningful level of activity on our position and a core of Eagle Ford shale.
And that activity is primarily led by Conoco Phillips, EOG and BP, Devon, who collectively have seven rigs running on our position at this time.
Over a three times a level that existed during the third and fourth quarter 2020, that's right seven rigs today.
Rig activity is back to pre Covid and development levels.
Additionally, as Mike will speak to more specifically this activity has been centered around unit, where we hold a high net revenue interest which for the further buoy, our net wells being turned in line and that is all a happening as we speak specifically.
We had high net revenue interest locations, which were brought online in January and.
And additional high net revenue locations that we are told will come online and the next few weeks, which will meaningfully increase production in the first half of 2020 one.
This coupled with a substantial rise in oil prices settle palca and up to see free cash flow.
And the first quarter up 20% over the fourth quarter, a 2020 and should drive free cash flow and the second quarter, a 2021 to almost double what it was and the fourth quarter a 2020.
I know that the second quarter starts and just a month.
To put this plane, we see potential free cash flow and the second quarter of approximately 60 cents on an annualized basis, implying a roughly 14% free cash flow yield today.
This free cash flow level would be above our 2019 levels of cash flow when our stock was trading at over $7 per share.
And the growth trajectory doesn't stop there.
We see further significant growth and production and free cash flow and the second half of 2021.
Again, Mike will get into the production growth, specifically, but just to give you a sense with seven rigs running on our position.
And assuming each rig drills and Eagle Ford shale, well and 10 days that equates to approximately 250 gross wells drilled in 2021.
Which is on a high end of the last six years.
To sum all this up we believe previously discussed 5000 barrels of oil equivalents per day average for 2021 is quite conservative and we expect to exceed that estimate.
Now this is of course, just our base business that does not include any acquisitions.
We have recently seen seen a thawing and the organic or a small acquisition market and are now seeing attractive opportunities in small bites and our core area to grow our base business and long term value from a free cash flow and net asset value per share standard.
We plan to pursue acquisitions and we'll execute on transactions only when they add to the short medium and long term value of a business.
Importantly, even while paying out 90% a free cash flow.
We expect to exit 2021, well below one times levered.
Again, even while paying out over 90% a free cash flow, we expect to exit 2021, well below one times a lot.
Finally.
And I'm pleased to report, we recently took advantage of the run up and oil prices and hedged a portion of our oil production for the second third and fourth quarter of 2021.
These hedges and further security to our cash flow expectations, while leaving a substantial upside from both higher oil prices as well as growing oil production.
In conclusion as I think you can tell or at least I hope you can tell I'm enthusiastic about where we are today, a falcon minerals, where we are headed in 2021 and the investment opportunity that exists for investors.
We have clearly defined growth and our base business that will drive a production free cash flow and dividends throughout the year.
In addition, we will take advantage of opportunities to further increase value per share through growing our asset base when appropriate.
Now I will turn the call over to Mike Jones, who will get into greater detail about the support of our production growth in 2020 one Mike.
Thanks Daniel.
Morning.
And for taking time to join our call today.
And about our results at the end of 2020 and have a strong conviction about our production growth for 2021.
This is driven by our line of sight inventory and a consistent drilling activity you've seen from our operators.
Our core operating as operators continue to run rigs throughout the pandemic with a focus on building DUC inventory with the objective to turn wells and line and a higher pricing environment.
And and value for their shareholders as well as ours.
100% supportive of this plan as we enter 2021, we've seen a rig activity increase over 200% on our Eagle Ford position compared to the fourth quarter.
Increased activity, along with a recent well connections and support a positive production outlook.
And one.
Now, let's get into the details.
During the second half of the fourth quarter, we had a high and our iPad with four gross wells and equate to a net wells turned in line.
And that experience experienced compression issues during the fourth quarter, which impacted production.
Our expectation is this issue has been resolved and production levels will be back in line with a forecast.
Moving into the first quarter, a 2021, we've seen operators begin to turn wells in line to take advantage of a higher pricing environment. We've confirmed at a high and our iPad with five gross wells and 0.5 net wells turned in line in January.
Additionally, we have received communications at another of a high and our ipads with six gross wells and approximately <unk> <unk>.
And for a five net wells are expected to be turned in line during the first quarter.
We have an additional 116 gross and seven four net wells that are considered docs with a majority of these wells forecast and it turned in line during the first half of 2020 one and.
This includes and 18, well pad and approximately one four net wells, where we have been and form that one of our operators is engaged and drilling out plugs and expect this pad will be contributing to Q2 production.
The second half of 2021 will benefit from a significant number of net wells turned in line during the first half plus the robust inventory of permits that are forecasted to turn in line and a second half.
This is supported by the current rig activity and a karnes trough.
A go Philips is running four rigs EOG is running five rigs and BP Devon is running three rigs.
Currently a activity along with the continued drilling efficiencies by our operators with some wells being drilled and under three days give us great confidence that a 109 gross and 137 net permanent wells will be turned in line later this year and into early 2020 two.
This includes fixed growth and approximately <unk> four net hooks ranch wells, where we expect to see production and the fourth quarter a 2021.
As a reminder, we based our forecast and assumptions on a historical development timing by operator. The forecast also includes additional risk factors to account for delays associated with recent activity by operators through the pandemic.
Factoring in everything I have said and including some additional cash.
And including some potential downtime due to the weather in Texas and reflected and Daniel's comments regarding expected free cash flow growth, we see production rising modestly and the first quarter, and then rising meaningfully and the second quarter and the back half of the year with a benefit of a full periods a production from the well discussed.
Thank you for your time today I'll now take that I will now hand, the call after our CFO Bryan Gunderson.
Thanks, Mike.
Our assets generated a $10.2 million and royalty revenue during the fourth corner and 2020, we recognize a cash loss of $17000 from a commodity derivative instruments during the period.
As a full year, 2020, our assets generated $41 million and royalty revenue and recognized a cash loss of <unk> 3 million from a commodity derivative instruments during the period.
Falcon net realized price for oil during the fourth quarter was 42 one.
$40.21 per barrel average realized price for natural gas was $2.42 per Mcf and NGL realizations average $14.99 per barrel.
For the full year, 2020 Falcon net realized price for oil was $35 84 per barrel and.
Average realized price for natural gas was $2.01 per Mcf and our NGL realizations average $12 and 28 per barrel.
During the fourth quarter, we did not enter into any new hedge contracts as Daniel mentioned subsequent to in a corner and Falcon and entered into crude swaps for Q2 through Q4, 2021 exact volumes and the associated pricing for all hedged volumes.
Are laid out and the company's updated investor presentation that is available and Falcons website.
And it all cash operating costs for the fourth quarter, 2020 were $3 5 million inclusive of <unk> 8 million of expenses attributable to our strategic review process.
On the tax side AD valorem and production taxes were approximately <unk> 6 million for the quarter AD valorem and production expenses for the full year were $2 8 million, representing a 34% reduction from full year 2019 levels.
Marketing and transportation expenses were a point 4 million for a quarter or $1.10 per barrel. This expense represents a decrease on a dollar per barrel basis from the one dollar and 37 per barrel.
The expense that we reported and the third quarter 2020.
Marketing and transportation expenses were two one.
And for the full year or $1 19 per barrel.
Cash G&A expense was approximately $1 7 million for the fourth quarter, excluding $8 million a expenses associated with the strategic review process.
These expenses are associated with a use of third party experts and the increased time and Falcons Board of directors spent considering all potential options.
Full year cash G&A in 2020, excluding expenses associated with a strategic review was $7 6 million, which represents an approximately 18% reduction over 2019.
Fourth quarter cash G&A excludes approximately <unk> 9 million of non cash stock based compensation expense recognized in the period.
Adjusted EBITDA for the fourth corner was $7 $5 million, including $8 million a expenses associated with a strategic review. This represents an increase of one point.
Your $1 million from the $6 $5 million reported and the third quarter 2020. The increase was largely attributable to a 9% increase and average realized oil prices compared to the third quarter.
Adjusted EBITDA for the full year 2020 inclusive of expenses associated with a strategic review was $26 7 million.
At the end of the fourth quarter Falcon had $39 8 million outstanding on its revolving credit facility and $2 $7 million a cash on hand, resulting in a net debt of approximately $37 1 million and at the end of the 40 corner.
Falcon net debt to LTM EBITDA ratio at the end of the fourth quarter was 1.39 times.
And again reported a fourth quarter net income of point 4 million on a standalone basis, and <unk> 8 million net income inclusive of non controlling interests.
On a GAAP income tax expense a point $2 million for the quarter is mostly attributable to the utilization of our deferred tax asset.
Similar to the last three quarters the company incurred no amounts related to the current period income tax expense and incurred no cash taxes and got.
Cash income taxes, and the fourth quarter 2020.
This is primarily due to the tax benefit of a basis step up related to the assets that Falcon acquired as part of the transaction with Royal resources and 2018 as a result, a has stepped up basis, we expect a benefit from a cash tag price tax perspective for the foreseeable future as I meant.
And on previous earnings calls, 80% of dividends paid to class a shareholders. During 2019 were classified and non dividend distributions and therefore represent a reduction of basis rather than ordinary income.
Falcon expects and substantially all of the dividends paid to class a shareholders. During 2020 will be classified as non dividend distributions in 2020.
This treatment and will generally result, and a nontaxable reduction to the tax basis, a shareholders' common shares.
As a reminder, non dividend distributions are treated as a reduction a basis until the time when a investor's basis has fully recovered a reduced tax basis will increase shareholders' capital gain or a degree shareholders' capital loss with a shareholder sells their common shares.
On February 11th 2021, Falcon declared a fourth quarter dividend of seven and a half cents per share. This dividend is payable on March eight 2021 to shareholders of record adds a February 'twenty five 2021 day.
700, and this half and dividend payment reflects a payout ratio of 93% a pro forma free cash flow excluding expenses associated with a strategic review process.
Pro forma free cash flow per share was approximately 8.2 cents per share for the for a quarter excluding expenses associated with a strategic review process or 7.3 cents per share inclusive of the expenses associated with a strategic review process.
We define pro forma free cash flow as adjusted EBITDA inclusive of Noncontrolling interests less interest expense and pro forma cash income taxes are estimate for pro forma free cash flow for the fourth quarter of 2020 did not include an amount for a pro forma cash income taxes with that.
I will now turn the call back over to Daniel.
Thanks, Brian and thanks, Mike CATT, we're ready to open the call up for questions.
Thank you. The floor is now opened for questions. If you do have a question you May press star one on your telephone keypad.
And state your question if you're a question has been a answered you can press one to remove yourself from the queue again, ladies and gentlemen, and star one to ask a question one moment, while we hold for a call for questions.
It looks like.
Yeah.
And a fast first question comes from Kyle May from capital One Securities go ahead Kyle.
Hi, Good morning, everyone. Kyle your line of sight.
And Kyle a Daniel a nice to talk to you.
And Kyle.
Hey, guys a.
Wanted to start with a maybe the outlook for 2020, one as we look back and activity in 2020. There were about $1 nine wells that were turned in line compared to the three and a half net wells that were a line of site development back in January of 2020. So.
That works out to around 54%, a those wells were converted and understanding that 2020 was an abnormal year, how should we think about the conversion of your line of sight wells in 2020 one.
Thanks, Kyle I think it's a great question, and a and Mike feel free to supplement and when I get done with a answering.
Yeah, I think 2020 was definitely a.
And abnormal years, we all know I think the best way to think about it is actually to look back and our third quarter earnings call.
In early November a we had 313 net line of sight wells at that time and.
And I think we talked about at that time looking at our a.
2021 or.
Number is and that I think when we started talking about 5000 BOE a day only based on a subset of that line of sight getting us to that 5000 Boe per day, a number. So that's obviously a 14 months, we've seen a significant progression.
Moving wells from waiting on and connection to in line and waiting on completion into a both being connected as well as a a waiting to be connected and then permit moved in the Doc. So I really would reflect back to that November call and where we were and when we look at the.
The number we've talked about which we think is conservative.
And I is quite conservative.
It's really based on a subset of that line of sight coming on line and then when we see the increased activity, whether it's the seven rigs running across our position, which is pre COVID-19 levels or the completion activity et cetera.
We're in a very very good positioned a nicely exceed that 5000 Boe per day number I guess, the second aspect Kyle that I'd point out is really this high net revenue interest.
Location. So we can really identify very very clearly, which wells and which units are coming on line as we sat and a release we've already had <unk> five net wells come in line and January we have pulled for a five net wells coming online this month.
So you already have a point and 95 wells that will be in line and the first quarter. When you look back at that 313, and you can just continue to move through the progression of the of the completions and.
The docks as well as the permitted wells.
Into a production this year.
Got it that's that's really.
I'm sorry, he dropped out.
Sorry about that.
Our next question comes from Pearce Hammond from Simons and Archie go ahead.
Yeah. Thank you for taking my questions and good morning.
And in the past, we've talked about maybe a falcon 2.0, and it sounds like the strategic review process has been complete and I was wondering if you kind a put a bow on it and let us know what she decided from that process and.
How that effects or impacts your forward outlook.
Thanks, Peter and good morning, Kyle we will be.
And be sure to follow up with you unless you re queue.
Sorry for the technical glitch here a peer.
<unk> stands for your question.
The strategic review continues.
So not putting it in a bowl yet we're continuing to.
Turn over every stone every rock and make sure that we are a we are pursuing every avenue to maximize value from shareholders.
Okay, Great and then when we think about the quarterly progression of production. This year would you expect your high watermark to be and Q2 or a Q3, given the huge number of wells being turned in line and the first half a year or just any color on that quarterly progression would be helpful.
Sure.
And again, please Mike or Brian.
Jumping after I get done if there's anything to add a.
But we actually we see a very a.
Well, we've seen upward progression throughout each quarter of this year, just as we're seeing the numbers play out and so.
For example, in the first quarter, Mike mentioned in his remarks.
We see a.
A modest increase in production as compared to the fourth quarter and that's taking into account the.
And the storms and any impact of that then we see a.
Really a pretty nice step function change in the second quarter as we have the benefit of a full quarter of production from the big pad that came online in January plus the <unk>.
Additional pad a point.
For a five net wells that will come on line late this month plus a portion of a.
The.
The additional wells that are docs being completed.
We see that happening throughout the second quarter those additional wells and ended the third quarter, but the third quarter, then benefiting from fourth quarter is a production from those smaller wells, but a lot of them coming online during the second quarter and then a fourth quarter is a is buoyed by production from the point.
Four net wells coming from hooks ranch, which is expected to come online.
Okay. That's very helpful. Thank you Daniel and then last one from me and I apologize if I missed this and the prepared remarks, but but Brian regarding a hedging did you say, how many barrels had been hedged and at what price.
Thanks, Greg and thanks for your questions and so it's laid out on page nine of our Investor day, which we posted this morning.
Or I can lay it out here.
We in Q2, we did a 1096 barrels a day Q3, and 940 barrels a day and Q4 a.
836 barrels a day and a prices are laid out.
Office down there and sat.
As a around $56 a barrel and average.
Excellent. Thanks, so much.
Yeah.
And our next question comes from Derrick Whitfield from Stifel Go ahead Sir.
Thank you and good morning all.
Hey, there.
Perhaps for Daniel shifting back to your strategic review process could you share with us and any insight and the process to date and how we should think about the timing of the next steps.
Sure.
And I'm going to be I.
I mean pretty narrow in and how I respond to that we have.
And are looking at.
Every aspect we have been it's obviously been an environment, where we've seen a hour.
A stock price increase by call it 75% from early August.
I think we're still meaningfully undervalued.
That's my opinion.
We have a lot of options available to us to maximize value and so we've been a thorough and.
And in going through all of that and so I look forward to coming back to everybody just as soon as possible with the outcome and a.
Stay tuned.
Thanks, Daniel for the added color and then as my follow up regarding your comments on M&A.
And you speak to the depth and size of the micro opportunities you're seeing.
Sure and I mean, when we say micro a I don't know a price.
Deals, we look at deals $50000.
Up to $5 million as far as what we consider to be small acquisitions or organic acquisitions and as a as a reminder, we have a as a team and.
And then through <unk>.
Got it out of a predecessor over a decade of experience in the Eagle Ford and specifically and the karnes trough acquiring minerals actually through our some of our history operating E&P assets. So we have a long history and the.
In our area a.
And I think that affords us and has afforded us a great relationships on the ground and so we've maintained very close contact and strong dialogue with a.
With our with our mineral owners and a.
And brokers and others and we're seeing opportunities in and I think quantity really really come to us and us to begin to go to them and so a.
The transaction values are are appealing.
Relative to what they had been at other points I'd say late 2019 was it got extremely expensive and the mineral space and that's when we put a pause because we were I mean, we're frankly, a pretty disciplined when it comes to capital allocation and we see the value we have and I think this year demonstrates the value of our.
Business without having to buy anything.
And we see attractive opportunities relative to our cost of capital and where there can be value added we'll do that but I think the biggest takeaway there is for us at Falcon, we're not going to run around like chickens with a head cut off trying to just buy assets to grow scale. It actually has to add value.
And that short medium and long term value.
Understood. That's very helpful. Thanks for your time.
Thanks Derek.
And our next question comes from Brian Downey from Citigroup go ahead, Brian.
Martin and thanks for taking the questions Daniel just a quick follow up on the prior question should we anticipate any of those asset opportunity comments, a contemplating anything beyond the Eagle Ford or just within that basin.
[laughter].
And that's you know a its.
It's a very fair question so.
We've kept a tight to our core by area, which is karnes trough.
I think and you can see based on the drilling and and level of activity. We've got probably the best operators or certainly some of the best operators and the world on a position, they're allocating a substantial capital with a seven rigs running across our position that completion activity.
It's a <unk>.
Hi, Lee likely to assume that we would very much day focused on our position because it is as good as it is.
Great and then Brian maybe a follow up on the oil hedge question I'm curious your strategy of using swaps versus would you ever think about potentially colors on the oil side of the ledger, a and how should we think about the prices above which you are you layered on those additional hedges for two Q through <unk>. How did you decide those were the right price.
Levels as Youre thinking about your 2021 expectations.
Yeah. Thanks for the question and.
I'll take the first cut at it and that day and I'm going to jump in if he has other things to add.
And answering your first question, we certainly look at all types of ways are protected and cash flow.
And in this case it really the swaps really made more sense and the caller is just based on the pricing.
Got.
To remind you we did place a natural gas collars.
At the end of 2020, So we're not averse to using collars.
And this particular and it's based on the pricing.
And the swaps made the most sense.
And maybe Dan and you can jump in on how do we think about a go forward yeah I think it's.
I think it's a.
It's.
We're opportunistic in reality, we looked at the value proposition that exists and the amount of cash flow. We can lock in at the time were locking it in and you know obviously, our balance sheet Super strong with.
And $38 million a net debt.
We're locking in when we see yeah, I think it resolved and it was like 60, plus tens of free cash flow, which was representing north of a 15% free cash flow yield.
And just it's hard to ignore that type of economics.
From our perspective, as a board and as large shareholders and so I would think of it as opportunistic but really you're also.
Putting it in the context and how much we're hedging given the substantial growth, we see and production we have a substantial portion of that unhedged as well. So we have we feel like very comfortable that we're capturing a ton of upside to the extent prices continue to rally and <unk>.
So we look at it as and a term I've used before heads we win tails. We win scenario with this type of hedging at $57. When you think about where prices were on average 2020, it's a fantastic outcome.
Great I appreciate the comments.
Yeah.
And our next question comes from Chris Baker from Credit Suisse Go ahead, Chris.
Hey, good morning, guys and.
My first question is just on the new Marcellus slide and the deck and so a nice detailed there I was wondering if you could maybe just reflect on how that a portion of the portfolio performed last year.
And then just any sort of color on how you expect it to contribute to the outlook, you've kind of outlined for 2020 one.
Yeah.
Sure.
Good morning, Chris.
So.
I think you know or many people know we have a.
A long history, and Pennsylvania, and specifically in the Marcellus and Utica.
Through our prior experience and that.
And its energy, which was sold to Chevron and now is a recently sold again.
That position out a chevron.
There's.
And there's a fantastic asset for us we've always called it a.
A.
Call on natural gas prices. This covers 80000 gross unit acres.
Roughly a 1500 net net acres a.
And it really has been the ultimate call on natural gas and prices head.
Rebounded and natural gas we have seen activity.
The increase in rig count increase.
Yeah.
It will not be.
A material portion of our production and business as we see it but you know it's a.
A nice add and when prices rebound and we saw prices three plus dollars that obviously drives higher revenue.
From a natural gas and we will take it.
Right now it's.
It's helpful. And then just in terms of the the current rig count I think you know certainly some well deserved enthusiasm there.
Could you share a breakdown of rigs by operator, and then just how you're thinking about.
It looks like the capture rate of rigs on your position versus the overall, you know sort of activity and do it and karnes, how should we think about that capture rate for for the rest of the year.
Sure so.
Yeah, I mean, frankly, I would've been enthusiastic with.
Four rigs running on our position.
I think four rigs twice the level of a.
The third and fourth quarter would be great and Thats, a great yeah, a sustained level, but it just continues to creep up and I mean, if you were not going to break it down by operator, because it is as I think you know a fluid ebbing and flowing across our 250000 acres.
To which rigs come on and which rigs come off.
But I think the best way to think about chronic.
Conoco Phillips. Good example is and.
And we cover roughly between 40 and 50% of their core position. So if you want to think about rig capture for them.
Thank <unk>.
40% to 50% a I think yeah, if you think about.
And the BP, Devon joint venture and we've been obviously.
And we surprised by the activity level there.
And we knew there was a complete.
Completion activity that was coming but they picked up nicely on the rig side and I think there.
And what.
And Youre seeing and this price environment is and this energy investing environment as capital goes to the highest returning plays and that's our position. So a great activity from BP, Devon, and and you can probably assume 75% type capture in the karnes trough for BP, Devon and on our position being conservative.
And then the EOG I think you could assume.
I think you can assume.
30% tight capture.
And I think thats, 30% and captures probably on the medium to aggressive side, maybe it should be more like 20% to 30% capture.
We've consistently seen no 30% capture but we don't hold 30% of their position.
It's just I'm, giving you what we've seen.
And historically and valley you know over the last year or so so okay. Great. Yeah, no. That's super helpful and I guess, just where I'm trying to go with this is you.
Given the higher rig count.
You know, it's a nice growth that you've kind of outlined in terms of expectations for this year.
And if we think about maybe you know 10% year over year growth and 21, and then the benefit of.
You know the rig activity flowing through as well as you know that next hooks ranch pad and the you know.
And fourth corner of the year, just curious you know directionally, where that kind of shakes out for 2020 two.
Realizing it's still early days.
Yeah.
That I think it just goes back to kind of what Kyle had asked at the beginning which is relative to our line of sight and it's Super important and Mike said this in his comments, but it's super important to note that a nice slice of our line of sight is actually.
Coming online and our models in 2022.
So everything like we're.
We're already building a very nice line of sight for 2022, and that's only going to grow rallied because of that drilling activity. So we mentioned at seven rigs. That's 250 wells, we only have a 109 wells permitted so that would build.
That 250 wells and other 140 wells right, which I think is a point that you're making.
And I guess our models yeah.
We tried it and we've tried to become and Brian has done a great job at a very conservative pushing out our timing pushing back timing Mike's down on the production side, a very good job with with his team and further risking we see a.
Growing and production this year and pretty.
Nice stable to growing production next year with one caveat that is if we again have the benefit of having high net revenue units as a <unk>.
And one that are drilled we really can see nice further growth in 2022.
But that's a net.
No great and I appreciate the additional color there thanks guys.
Thanks, Chris.
Yeah.
And our next question comes from T. J Schultz from RBC capital markets go ahead.
Hey, good morning.
And so on the hedges and I understand a the hedges are opportunistic, but having those in place or if you.
I think maybe extend hedge a blogger opportunities arise and does that give you.
Any more comfort to maybe use a little more of a balance sheet. As you think about acquisition opportunities are outside of that just your view on enhancing and M&A.
If you're trading and within that a mid.
A mid teen free cash flow yoga and thanks.
Yeah totally a T J, a nice to talk to you.
I don't we don't really see sitting here today, any interest and hedging into 2022.
At this point and we'll see if prices go to $80 will obviously reassess.
And the environment is changing you know a.
We're constantly reassessing I think more importantly.
We see our balance sheet as.
Something that should be absolutely protected at all cost. We are yes, we are going to be below and nicely below one times levered exiting this year, just by the sheer ramp and free cash flow and net paying out 90 plus percent of our free cash flow and the form of a dividend we're going to do that.
I think I just have a strong view just having been in <unk> and <unk>.
Running energy companies for 17 years now protect the balance sheet protect our balance sheet protect our balance sheet and be.
And under one times Levered as a great approach and we're going to we're going to continue to do that as far as acquisitions.
We have a number of options available to us a.
Which will allow us not to a law.
<unk> are up the balance sheet.
Okay perfect. That's all I had I appreciate it.
Thanks P J.
And our next question comes from Noel Parks from tissue Brothers go ahead Sir.
Good morning.
Good morning.
I just had a couple quick ones I apologize if you addressed this already but.
And on the Reserve report was the revision category nearly all price space or were there any other components and there.
Mike why don't we give you some airtime.
Good morning.
Thanks for the question and.
Majority of it was price driven however, there's one other item was just the timing of the.
Development associated with the SEC rules.
Development time was adjusted a little bit based on a <unk>.
2019, I'm, sorry, 2020 activity.
But the majority of it was price driven.
Great. Thanks, and I was wondering.
Uh huh.
The reserve category.
And isn't broken out kind of everything fits in there I was wondering if there were any type curve revisions.
From a wells brought online last year or from.
In this most recent set of wells that have come on line have.
Have you seen any upside to well performance versus expectations for a while.
I was just completed I know and Austin.
And that hasn't been on terribly wrong so far.
Sure So I'll jump in and Mike and you can you can.
And correct, and then where I'm wrong.
The beauty of our position is well understood and so there is a.
And within reserves there is effectively no adjustments we the results are.
As far as new wells coming on line exceeding expectations, there and a very tight band.
And so there I mean, I wouldn't say day exceed our expectations were below our expectations, we have a very clear view within our and it.
Across our position as to what the wells are going to produce and I think it's a.
It's been.
<unk> been very much on trend with that well, what I would say and the real pricing benefit.
Devon has talked about Conoco has talked about and EOG has talked about and that's the re completion and redevelopment activity and we've seen our operators consistently.
Right.
Re completing wells and Redeveloped and wells and that's just added benefit to us and and we don't model for any of that that upside and then of course, EOG and others on a.
A D enhanced oil recovery, which again, we're seeing and we get the benefit of a.
It was a really nice surprises quarter in a quarter out.
Mike would you add anything.
I would now.
Great. Thanks, a lot that's all from me.
Thanks Noel.
And our next question comes from gas.
And from Stephens go ahead cow.
And good morning, everybody.
And to talk about when you guys look at the uptick in rig activity. Once the current inventory levels that you see today I know hooks ranch is about 75% undeveloped and I was just curious on kind of how the rest of a position look and then Daniel you talked about the re fracs in the E R potential and any given quarter or do you I mean, how much as a <unk> been a benefit.
And you guys see kind of that benefit potentially also adding to shareholder value and a theater.
A.
Great questions as always thank you so our undeveloped position.
Is I mean.
Just under 3000.
Locations, so you're talking about and 250 wells a year, a 12 year inventory. The last several years, we're closer to a 200 wells a year. So you were talking about a 12 to 15 year inventory of tier one location and those are all.
A tier one there's additional locations that.
Our below a 100% type returns, but then a tier one locations youre basically a 3000 undeveloped locations and we're in a very good position from.
And undeveloped standpoint, remember conocophillips, which represents.
Yeah, 60%, where several of our net asset value. They have taken a very methodical position and methodical approach where it did historically in really.
Developing their expertise as to how to maximize recovery and maximize results from the wells and that then led them and do that was 19 and moving into full manufacturing mode that is in and in large part what really drives. The fact that we have such a great undeveloped position is a.
And is the work that they've done and continue to do.
A great company.
And as far as impact a quarter in and quarter out on a.
And re fracs.
And enhanced oil recovery.
As a historical impacts had been on a quarterly basis relatively low. So you might see 50 barrels of oil equivalents per day impact on one given quarter its been small.
But I think we may see and I think well I think it's.
This will see that increase over time and.
And not in the next year, but in the next 2345 years, because our position was developed heavily.
On the earlier side of Eagle Ford life by some of the developers that provides examples Devin and 700 redevelopment and re <unk> locations. So I think we'll see that activity.
Pick up in the coming years.
Alright, and then that would be a dead horse on that had a question I know you guys opportunistically hedge, but when we look at the volatility that we saw and 'twenty with an oil price environment.
When you guys look on a go forward basis is there a certain amount of cash flow that you a baseline that you want to protect and any given year.
You know our operating costs per barrel are $9 or less.
So it's an extremely low price I think 2020 was like the perfect year to really understand one's business and energy are you. The real deal or are you not and I think what we showed and what our business and our and the minerals businesses generally showed us.
These are highly resilient businesses too severe downturns in commodity prices and so I think we as a sub sector with and energy Falcon and being.
The same show that there is not if you have a strong balance sheet there is not.
Some minimal level that you need to lock in and its rather for us at least locking in attractive price is in and.
Leaving plenty of upside and I would also say.
Gail we talk to our shareholders on a regular basis and.
And some daily some weekly some monthly.
And we also tried to be Super responsive to what we're hearing from our shareholders. Many of whom were saying take advantage take advantage take advantage and we like that type of daily weekly and monthly interaction to try to come up with the best answer.
Great. Thank you.
Thank you.
And our last question comes from Jon Evans from SG Capital go ahead John.
Hey, Daniel and the press release, you basically alluded to and in Q2, you'd thought you could double the a fourth quarter cash flow per share and you know so that roughly get you about 16 cents. What I'm curious is you know the markets are backward dated and so if all else stays relatively equal just as you.
A roll down that curve, because you have a production coming on strong and Q3 and Q4.
I mean could you keep that net free cash flow pretty flat.
Or.
Can you give us any kind of insights into that.
100 per se.
And.
Thank you yeah, the and I'm looking at our model right now.
So I mean from me and from our numbers, even with the backwardation and we have growing cash flow per share.
Throughout the year.
Yeah, Okay. That's a model that just yes, that's where we have a today, we that with Mike and Brian and teams.
Hair cutting and conservative nature so.
Yeah, we feel pretty good about that to say the least.
So if I could just ask you one more question just relative to kind of you know he obviously has a tremendous asset you're not very small from a market cap you did this to point out and I guess.
But it seems like it's a pretty high bar to find something that's accretive and that's attractive and mean basically you've got a free cash flow yield a 15, you know a 15 plus percent et cetera. So a.
If you buy something it will be accretive immediately right, you're not going to waste our time with.
And not making it accretive.
Yes.
And we will not okay.
We're a large shareholders, we pride ourselves on alignment and.
And we have zero interest in doing anything that's not going to meaningfully add value to the enterprise and the short medium and long term.
Awesome, Hey, Thanks, Daniel I appreciate you answering my questions.
Thank you.
And at this time, ladies and gentlemen, I would like to turn the floor back to management for any closing remarks.
Great. Thank you. Thank you everyone for joining the call today, we look forward to seeing many of you at the upcoming conferences, a we're always available to speak if you have any follow up questions have a nice day.
Yeah.
Thank you. This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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