Q2 2021 Brigham Minerals Inc Earnings Call
Okay.
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Mary.
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Hello, everyone and welcome to the Brigham minerals second quarter 2021earnings conference call. My name is <unk> and I'll be your operating for the call today.
If you wish to submit a question you can do side by pressing star 1 on your telephone keypad. If you wish to withdraw your question. Please press star 2 I will now hand over to Jacob Saxton manager of finance and Investor Relations.
Thank you operator, and good morning, everyone welcome to the Brigham Minerals second quarter 2021 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, including the answers to your questions.
Contain forward looking statements.
And we refer you to our earnings release for a detailed discussion of these forward looking statements and the associated risks. In addition, during this call we make references to certain non-GAAP financial measures reconciliations to applicable GAAP measures can be found in our earnings release.
We have a new investor presentation, titled Second quarter, 2021, Investor presentation available for download on our website www Brigham minerals Dot com 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 accessible through the audio link on <unk>.
IR website I would like to now I'll turn the call over to Bud Brigham founder and executive Chairman.
Thank you Jacob we appreciate everyone joining us this morning before our second quarter 2021 earnings Conference call.
The second quarter represented Brigham minerals, 2 year anniversary as a publicly traded company from <unk>.
Extremely proud of all that the team has accomplished especially in the face of an extremely challenging 2020, which we all know too well was significantly impacted by both COVID-19, and the OPEC plus production dispute.
As I look ahead to the remainder of 2021 and into 2022.
Brigham minerals is set up extremely well and 3 important respects.
First with strong activity wells in terms of quantity and operator quality inventory as of June 32, dry bulk production results for the upcoming 12 months.
Second with a sound balance sheet that will allow us to continue to acquire minerals in a highly disciplined manner targeting drilling units with activity wells to further enhance production.
And third very importantly, and seeing what looks to be an extremely conducive macro environment for commodities.
In fact this is the best macro setup I've seen in my career and I've lived through numerous cycles.
Benefiting from our diversified portfolio of high quality mineral assets are shareholders are positioned to benefit from what I believe is very likely a long ramp.
<unk> pricing per oil NGL and natural gas prices.
This is particularly true given that unlike some of our peers we are unhedged.
In terms of the overall energy industry. We are pleased to see that more in the industry are acknowledging the importance of return of capital to shareholders.
Since the onset of Covid and the OPEC plus dispute companies across the energy space have responded by paying down debt as well as implementing dividends and share buybacks.
Obviously at Brigham commencing with our IPO, we have returned capital to shareholders consistently over the past 2 years and in total have returned $2.70 to.
To our shareholders.
9 dividends inclusive of the dividend announced last night.
We were even able to distribute our dividend during the most challenging of times the <unk>.
<unk> quarter of 2020 with many companies in the energy space. We're just trying to stay afloat much less return capital.
It is our business model and conservative balance sheet that allows us to continue to pay our dividend and make high quality acquisitions.
To emphasize how strongly we feel about the soundness of our business model and continued ability to pay our dividend through any cycle.
We are implementing a base plus variable dividend structure with a base dividend of <unk> 14 per share this quarter or.
<unk> 56 per share per year.
The <unk> 14 per share is what we were able to pay our shareholders during the very challenging second quarter of 2020.
And we are firmly committed to paying that dividend going forward.
Further this quarter, we are paying a variable dividend of <unk> 21 per share which results in an overall dividend of <unk> 35 per share.
This represents a 9% sequential increase in our total dividend from the first quarter of 2021.
Rob and Blake will cover our base plus favorable dividend in more detail.
We can say that our base dividend represents a step change to other base dividends in the same way our 100% variable dividend was well ahead of the broader energy industries push for return of capital.
Consolidation has also been at the forefront of the industry over the past several quarters.
Our portfolio has benefited as bigger and better capitalized operators have taken over operator ship of our minerals to enable more consistent and disciplined development.
Our focus on the highest rate of return undeveloped locations throughout our history ensures that our mineral position modulates to the top of any operators drilling inventory and as a result, we saw a 16% increase in growth and a 31% increase in net wells spud on our minerals during the second quarter.
I believe we will also see consolidation in the minerals space over time No company is in a better position in the minerals space from Brigham to capitalize given our multi basin portfolio that gives us a unique ability to pursue a wide range of mineral packages.
That said, we will remain disciplined in our processes and we will ensure that any day, we enter into is accretive from both a cash flow perspective.
With that I will turn the call over to Rob.
Thanks, Budd as Bud mentioned, we're extremely excited about how the remainder of 2021 and 2020, we're setting up given the strength of our activity well inventory, which continues to push intensely towards a greater Permian emphasis I'm also extremely excited about the portfolio optimization and rationalization actions that our management team has executed since our last call.
<unk> call, which will impact the third quarter, and we believe will drive incremental shareholder value and result in significant portions of our near term mineral acquisition capital to be internally funded first we executed our initial water royalty agreement in the southern Delaware Basin in Reeves County to capitalize on development of the 128 acres out of our 4200.
Surface acres in the basin. Your agreement is essentially the same in nature to our existing oil and gas royalty business, a third party leases our surface acreage and obtained the rights to drill water wells, we have no operations and no capex, while the third party is required to pay us a royalty on each and every barrel of water utilized Inc.
Fortunately the agreement is intended to support the development of our Docs. In addition to other wells in the area and we are therefore, capturing incremental marginality on our surface position as well as helping to turn in lines of sales our activity levels. It's estimated that from this initial deal alone which covers only about 3% of our Delaware surface acres, we will generate 500.
$1 million in royalties beginning in the third quarter with the potential for continued sales in the future.
Next we indicated in prior conference calls the potential to divest assets and we completed our first divestiture of certain noncore, Oklahoma minerals in July for $3.3 million.
Parents for value creation, which we're currently looking to apply across our portfolio.
In total between the water royalty the divestment effort and the partial found leasing during Q3, we're going to generate approximately $6 million in proceeds that together with our retained cash flow will provide for significant portions of our Q3 mineral acquisition capital to be internally funded overall, a tremendous effort by our team.
Turning to our second quarter operating results our production volumes, roughly 80.990 barrels of oil equivalent per day up 1% sequentially from our first quarter driven largely by increased production in the Permian our dust turned in lines production and contributing to Q2 production volumes were strong on a gross well basis with 26% of our gross wells in inventory.
At the end of Q1 converted during the second quarter on a net flow basis debt conversions were slightly below normal with approximately 16% of net DUC inventory at the end of Q1 converted during the quarter as primarily lower interest wells converted during the quarter looking ahead to wells that will be contributed to our production volumes over the next 2 years, our net activity well.
And inventory at the end of the second quarter were strong 9.1 net locations comprised of 5 point out net debt and $4..1 net permits as I've indicated in the past, we anticipate <unk> to contribute to production lines over the next 12 months and permits over the next 12 months to 24 months.
Our net debt and inventory at the end of the second quarter grew by approximately 14% to again 5 net locations driven by the increasing pace of drilling activity on our assets.
Gross spuds on our minerals were up 16% to 153 wells spud during Q2 and net wells spud on our minerals were up 31% to $1.3 net wells. During Q2. This compares to roughly a 9% increase in the rig count in liquids rich basins. So again, you can see how great of a job our acquisition teams are doing in terms of identifying tier.
1 undeveloped locations under active operators reviewing our drilling activity in the Midland Basin, we saw strong activity from pioneer natural resources in both Martin and Midland counties in our QUADRA Rogers and messaging Messenger <unk> units in the Delaware Basin, we saw strong drilling activity largely from private operators, including <unk> burn ALCHEMIST and Patriot.
Our strong activities carried over into the third quarter with additional wells spud by pioneer and Mewbourne, which we which we estimate will further enhance our third quarter ending DUC inventory drilling down into our Q2, DUC inventory balance more than 66% of those ducks are positioned in the Permian basin.
Our Permian net ducks at $3.3 net locations are now at their highest level since mid year 2019 further the majority of our net ducks are anticipated to be converted by Chevron pioneer Exxonmobil PDC Diamondback and Continental resources, we estimate that roughly 1 of our net docs roughly 20% of our net.
Ducks in inventory have either already been turned in line production and we are awaiting production data or have been fracked and the operators waiting to turn the wells in line production, we can't control the ultimate timing of when these wells get turned in line to production, but it is encouraging to see approximately 20% of our net docs on the verge of being contributory to our production volumes.
And further the overall stabilization of Frac fleets in the basins that we track at greater than 100 fleets.
With respect to permits we did see a 13% sequential decline in the net and net permits to $4.1 net locations, but 52% of those net locations are in the Permian and represent 1 of our higher net per net balances in the Permian since going public in the third quarter. We do anticipate a sizable addition to our net permits via acquisitions.
And in particular in Permian net permits with deals that had been entered into thus far in Q3 as well as ongoing organic permitting activity moving to our ground game mineral acquisitions. During the second quarter, we closed roughly $14 million in acquisitions deploying approximately 96% of that capital toward the Permian basin.
It's worth highlighting that these acquisitions were comprised of 63% net net activity wells across PDP, DUC and permanent locations with crude prices rising above $70. We did see seller expectations creep higher their reservation price as we've referred to it in the past as well as increased activity from incrementally buyers, which historically.
He has been transitory. The key has remained highly disciplined during times like these and to apply consistent underwriting criteria to our acquisitions as.
As markets have always come back to us.
Associated with higher seller reservation prices and increased competition, we are moving the midpoint of mineral acquisition capital for Q3, and Q4 from $25 million per quarter to $15 million per quarter. Therefore, the midpoint of mineral acquisition capital anticipated to be deployed over the entirety of 2021 is $65 million, which.
Flex first half acquisitions of $35 million plus the remaining 2 quarters of 2021 at $15 million per quarter. Thus far in Q3, we have approximately $11 million of acquisitions closed or pending the pending deals are of course subject to title due diligence on our part in order to confirm the sellers interest.
Looking at other components of our updated guidance for 2021, we are updating our production guidance for the full year 2021 to reflect the midpoint of 90.250 barrels of oil equivalent per day, which largely reflects the slower pace of acquisitions that I just mentioned.
I also indicated in my comments from last Night's press release that for the next 12 months or for the period from Q3.2021 through and including Q2.2022, we anticipate production volumes to average 9500 barrels of oil equivalent per day, we are providing initial guidance for the next 12 month period. As this is a time period over which we anticipate the majority of our 5 net docs.
To be completed and contribute to production.
Finally, I am pleased to announce a second quarter dividend of <unk> 35 per share, which is a 9% increase over the first quarter as Bud mentioned, we're rolling out a base plus variable dividend structure and have set the 14th quarterly base dividend or <unk> 56 per year at a level, we are extremely comfortable with and firmly believe in our assets' ability to <unk>.
The <unk> 14 per quarter dividend with battle tested during some of the most trying times our industry saw in the second quarter of last year associated with Covid and OPEC plus further we've rigorously tested and sensitize the 14th per quarter base dividend and firmly believe that represents a shareholder distribution that can be supported throughout cycle.
For the foreseeable future subject of course to board approval overall, we believe adding a base dividend should help to better illustrate our firm commitment to pay a dividend and shed more light on the resiliency and sustainability of our business model and cash flow stream. This base plus variable dividend represents 80% of our discretionary cash flow ex lease bonus in <unk>.
With our previous comments I'll now turn the call over to Blake. So he can summarize for you our financial performance Blake.
Thank you Rob.
Daily production for the quarter was roughly 9000 barrels of oil equivalent per day in line sequentially.
With the dust finally settles from winter storm here, our first quarter volumes accurately capture the impacts of the operator disruptions and thus there is no incremental impact to volumes reflected in the second quarter.
Our portfolio generated record royalty revenue of $37 million for the quarter up 15% sequentially due mostly to a 13% improvement in realized pricing.
Realized pricing for the quarter came in at $45.24.
Per barrel of oil equivalent.
Importantly realized pricing per barrel of oil was $63.11.
Up 14% sequentially.
Realized gas was impressive with $4.58 per Mcf and his message last quarter benefited from first quarter true ups from winter storm here.
As a quick reminder, when we do not have complete information as was the case with some gas volumes impacted by the winter storm, we use conservative estimates until we receive revenue checks from our operators.
In this case, our conservative pricing estimates were below our actual realized pricing after accounting for the significant regional basis dislocations.
Realized Ngls came in at $23.77 per barrel of NGL.
We continue to be pleased with our portfolio of Optionality with lease bonus revenue of $8 million this quarter.
Net income for the quarter was roughly $15.3 million.
Record adjusted EBITDA for the quarter was $30.8 million and adjusted EBITDA, excluding lease bonus was $30 million and up 18% sequentially on the back of continued strength in realized pricing.
On costs.
Gathering transportation and marketing expenses were $1.6 million or $1.95 per Boe and closer to the midpoint of our 2021 guidance.
Severance and AD valorem taxes were $2.3 million or 6.2% of mineral and royalty revenue and in line with historical levels.
Cash G&A expense was $3.1 million, representing another quarter of continued record low levels.
As Rob mentioned, we are pleased to reduce our guidance range by $2 million I believe these savings should translate into immediate and sustainable value for shareholders.
Moving to our balance sheet, we remained disciplined in our capital allocation as we pursue highly accretive acquisition opportunities.
We exited the quarter was $6.4 million of cash and $43 million drawn on our revolving credit facility for net debt of $36.6 million or.
<unk> Leverages conservative with net debt to last quarter annualized adjusted EBITDA at just <unk> 3 times.
We currently have total liquidity of $128 million and with our borrowing base stepping up to $165 million, we now have $122 million undrawn.
Importantly, we have not raised additional equity from the market in 20 months and outside of large M&A opportunities. We believe we have ample liquidity to execute on our strategy.
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 152 times.
Transitioning to the base dividend I'm going to quickly walk through some high level thoughts regarding its sustainability as I think it's a vitally important concepts at.
<unk> 56 per share the base dividend would run roughly $32 million per year.
For reference we had EBITDA of $75 million in $2019.65 million in 2020 and $58 million through the first half of 2021.
Given the EBITDA provided 2 times coverage of the dividend during a historical low for activity and prices in 2020 I believe this should help illustrate why we have confidence in our ability to pay the space dividend through the cycle and in any environment.
Further we believe the 56.
<unk> year base dividend compares extremely favorably to other investment opportunities given this yield and returns starved environment at $19 per share our base dividend is equivalent to.
So a 2.9% yield our E&P peers based dividends.
1.6% to 2% the S&P is roughly 1.3% and the 10 year Treasury is sub 1.5%.
As our PDP reserves per share increase in our decline rate moderates management and the board will evaluate future increases to the base dividend.
I will now turn the call back over to Rob to wrap things up.
We appreciate you joining our second quarter 2021 conference call. We believe the implementation of our base plus variable dividend represents tremendous value to our shareholders and are extremely pleased to announce its rollout operator I'll now turn the call back over to you to begin the question and answer portion of our conference call.
Yes.
Thank you as a reminder to submit a question. Please press star 1 on your telephone keypad you changed your mind on wish to withdraw your question. Please press star 2.
First question today comes from Kyle May from capital 1 Securities. Please go ahead.
Hey, good morning, everyone.
Maybe moving colleagues for joining new dividend.
Yes, certainly.
Maybe to start out.
Question on the new dividend policy can you walk us through how the variable component will be determined going forward.
Yes, Kyle we're very pleased to announce the rollout of the base plus variable dividend concept I think it really is both Bob and myself and Blake spoke to really speaks to the sustainability of the business model.
Blake went through it but again there is some really great slides included in the presentation deck on 3 and before that outline our thought processes as it relates to the dividend. So basically the dividend base dividend at <unk> 14 per share roughly equates to that 3% dividend yield that Blake talked about which far exceeds our competitors other investment.
Opportunities available to the general market so.
And it's a base dividend that we again believe it's been very battle tested as the second quarter 2020 based dividend obviously in the very heart of Covid crude oil pricing very negative and so we believe that it could be.
This dividend that we firmly are committed to maintaining.
Throughout time and.
Further to that Blake alluded to you as we continue to grow as a company. We continue to see the PDP base expand there is a potential to further increase that base dividend over time, obviously subject to board approval.
But what we've talked about in terms of the variable component or our overall dividend conceptually as kind of a 75% to 80% distribution.
Our cash flow retaining the other 20% to 25% to help fund mineral acquisitions, and so we will consistently apply that 75% to 80%.
Dividend distribution and basically the difference between that 75% to 80% dividend distribution relative to our base dividend of <unk> 14 per share will represent the variable dividend.
So like any other comments there.
No I just wanted to reiterate that there is no change to the overall when we're looking at distributing.
75% to 80% of our discretionary cash flow ex lease bonus just like we have in previous quarters. This was really just planting the flag in fixing a component of that.
Which is just a firmer commitment in our mind to focusing on.
Capital returns to shareholders, we've done throughout our history.
Got it okay that makes sense I guess, maintaining net debt totaled <unk>, 75% to 80% payout ratio got it.
And then.
Maybe 1 other question.
You touched on the new water royalty business and this is something that seems to be new from Brigham.
Can you go into more detail about kind of where.
This opportunity set lies kind of how big this could be from an acreage position and revenue perspective.
Yes, I'm glad you brought that question up it's really tremendous job by the entirety of the team throughout the second quarter to really the 3 initiatives that we talked about in the press release last night to really continue to extract value across the entirety of our asset base. So to recap for everybody. It was 1 the water deal that you alluded to use second day mineral.
There are non core minerals in Oklahoma, and then 3 the partial sale and leasing of minerals. So again, it's our team looking across the entirety of the asset base determining where we can extract value and really enhance shareholder return. So as it relates in particular to the water deal. These are surface acres that we've already acquired and owned.
And so just a little bit of history as it relates to that so, especially within the state of Texas. There are what are called mineral classified lands, where the surface owner of course opens that owns the surface, but then the state of Texas owns the mineral interest, but as a result of the surface owner, mainly in essence, managing those minerals for the state of Texas any of the lease bonus.
From mineral royalties are split 50.50 between the surface owner in the state and so as we've acquired minerals from the Delaware Basin. We have of course acquired mineral classified lands, which then provide access to the minerals and then there are also times where in the mineral owner owns the minerals and also own surface acres in so many instances that surface.
Owner or that mineral owner wants to dispense the both the surface acres and the minerals and will buy those in combination. So in total so far throughout the history that we've acquired about 4200 surface acres to date about 'twenty 300 of those are mineral classify lands 1900 or surface acres and so within this area in the southern Delaware Bay.
And there's 4 blocks really that are being very developed that this operator is looking to continue to develop we have about 1500 surface acres and so the lease that we're talking about today is roughly about 128 of those 500 acres or on a much broader scale about 3% of the 4200 acres and so there is opportunity to continue.
To expand that relationship over time as that operator continues to develop that asset I think from the positive some very high level comments that we heard from the midstream company. Originally there were plans to put in place for.
Water well.
On that on our section instead, they only had to put 2 in place because of the high quality water flow that was achieved and so I think thats a positive in terms of coming back to us to seek incremental optionality to lease and so I think over time Youll continue to extract value via this optionality and this is just.
I'm hopeful as the first of many different deals to happen over time, but obviously that would require continued development of the asset.
I think consistent with what we've always talked about in the past theres tremendous optionality in terms of owning minerals owning surface and so this is just 181 of many forms that optionality play out and pretty much each and every quarter you see that playing out with lease bonus.
Additional horizons being developed additional well bores, new technology, and I think what's interesting of rate or just some of the operational efficiencies that operators are undertaking. So I think this is hopefully just the start of us engaging in the water business and it's something given our desire to continue to extract and maximize value you'll see us continue to try to implement.
<unk> progressed and try to really.
Further this business further.
Okay. That's great I appreciate the additional color, thanks and have a good day.
Yes, I appreciate you joining us.
As a reminder for any further questions. Please press star 1 on your telephone keypad the net.
Question is from Chris Baker at Credit Suisse. Please go ahead.
Hey, good morning, guys.
Hoping you could talk a bit about the activity building blocks behind the next 4 quarter guidance of 9 to 10000 barrels a day.
The timing is a factor, but it does look somewhat conservative and just maybe hoping you could frame up how many of those 9.1 net well.
And the backlog, we need to come online maybe at the high end of that guidance range.
And then just how that compares to what you've seen historically.
Yeah.
Chris I appreciate you joining thanks for the question just to kind of recast or Cisco everybody's level set in terms of how we think about and build out our modeling spent a lot of time talking about that from my opening comments, but obviously most contributory over the near term 12 months, we're going to be our docs the drilled but uncompleted locations that we have in inventory.
We've seen some very nice growth in docs, especially over the last quarter from the end of Q1 to Q2, we saw as I mentioned, 14% growth in our docs from 4.4 net <unk> to 5 <unk> net ducks in particular, we saw the Permian debt increased to $3.3 net locations. So in terms of my mind, that's a very solid building blocks upon which.
We can.
Look at build out debt.
Production estimate for the next 12 months basically that period, beginning from Q3 of this year through Q2 of next year and so obviously, we are going to be conservative in terms of when we bring online those wells to production.
We do regularly try to interact with operators understand what the timing may be obviously plans can change and things like that and so on.
US having live prior lives as operators, both the Brigham exploration company and Brigham resources understand the highly flexible nature of operators plans and so we are naturally therefore conservative when we bring on lines wells to production. When you think about historically, what we've seen we pretty much have seen.
80% to 90% conversion rate in our docs from year to year. If you were to go back and look I think 2019, the conversion ratio with 90% a little bit lower in 2020 at 80%, obviously as a result of Covid and so.
We historically kind of target that ratio I would tell you, though that we are seeing some really nice continued DUC build here in the third quarter I alluded to that in my opening comments and that continued to see some really nice drilling activity by pioneer and Mewbourne in both the Midland Basin, and Delaware basins, which we.
Think it is going to continue to add to the debt balance continuing to provide incremental upside to production volumes as we as we go.
Into say net months 9 through 15.
Obviously that then drives down the permit bucket, but 1 of the things that hasn't been really excited about the acquisitions that we did undertake thus far is we've really entered into some nice acquisitions here in the third quarter roughly $11 million that I referred to so far that will enhance the permit bucket and provided back filling of that bucket.
In addition to just the regular ongoing organic conversion of our undeveloped locations to permits and so we feel really good about the overall activity wells that we have in inventory currently benign 1 and I'm hopeful that that balance continues to grow.
Into the third quarter, given some of the activity that we're seeing but obviously.
But as mentioned this on many other conference calls that we want to under promise and over deliver and so hence our desire to be conservative when we bring online those ducks to completion or <unk>.
Bring them in line.
Okay now Thats helpful. And then just as a follow up can you guys talk about like how you think about the optimal level of inventory it looks like on that.
New site for you're talking about 20, plus years based on <unk> activity run rate.
Just curious debt, maybe kind of frame up that further portfolio optimization opportunity.
I think that that 20 year marker is a sweet spot and so what you'll see US do is to continue to optimize as you'd mentioned and migrate that inventory from probably other areas, meaning we will look at opportunities as they present themselves in the Anadarko basin and the DJ basins, Williston basins and basically see if we can.
Can extract value from others, that's in excess of what we model and then the game plan, there and would be to use largely redeploy that capital to opportunities in the Permian basin and so again.
1 of the 3 major kind of optimizations that we've undertaken here in second quarter into third quarter that will.
Really positively impact us so I think.
As it relates to the positive impact in terms of the mineral acquisition Capex, we think about our retained cash flow plus.
The divestitures and optimizations that we undertook or will hit the income statement and balance sheet here in the third quarter Youre looking at 75% to 80% of our mineral acquisition capital being internally funded via those 2 different.
<unk>, 1 being obviously the retained cash flow the second being optimization. So we're looking to you and in essence.
Fund significant portions of our mineral acquisition capital via those efforts. So I think another very positive outcome for shareholders.
Great appreciate the answers.
Yeah. Thanks, Ross I appreciate you joining us.
1 last reminder, for any further questions. Please press star 1 on your telephone keypad.
Sure.
We have 90 day the questions on the call. So I will hand, the flow back to brokerage side.
I appreciate everybody joining this morning, Thanks, again, and we look forward day reporting back to you in early November related to our Q3 earnings again I appreciate everybody joining thanks a lot.
This concludes today's conference call. Thank you for joining and you may now disconnect.
Okay.
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Right.
Okay.