Q3 2021 Brigham Minerals Inc Earnings Call

Ladies and gentlemen, thank you for your patience this called as Jude starts in a couple of minutes time.

[music].

Hello, and welcome to the Brigham minerals third quarter 2021 earnings conference call. My name is and I'll be coordinating your call today.

If you'd like to register a question. During your presentation you may do so by pressing star followed by one on your telephone keypad.

I'll now hand over to our host Jacob Sexton Jacob. Please go ahead when you're ready.

Thank you operator, and welcome everyone welcome to the Brigham Minerals third quarter 2021 earnings conference call. Joining us today are Bud Brigham founder and executive Chairman, Rob Routs, our 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 also be found in our earnings release we.

A new investor presentation, titled third quarter, 2021, Investor presentation available for download on our website www dot Brigham minerals dotcom and 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 accessible through the audio link on our IR website I would now like.

I turn the call over to Bud Brigham founder and executive Chairman. Thank you Jacob and thanks to everyone for joining us on our third quarter 2021 earnings conference call on.

On our second quarter call I outlined a number of reasons why I was extremely optimistic about the future outlook for Brigham minerals.

I will quickly recap those thoughts relative to what we've seen transpire since August.

First our third quarter activity, well inventory, our ducks and permits improved from the second quarter as we expected.

Our $10 to net activity wells in inventory at the end of September is in line with our 2019 inventory levels and a recovery of our inventory to pre COVID-19 levels demonstrates the premium quality of the inventory assembled by our team.

Our acreage includes the first locations operators choose to develop.

As a result, we are set up extremely well for continued production and cash flow growth over the next 12 to 24 months as our docks and permits are converted to PDP.

Second.

Our balance sheet continues to remain extremely strong and without a doubt we will keep it that way.

We keep a strong balance sheet. Unlike many of our peers.

We're able to remain unhedged, and therefore fully expose our shareholders to the upside in oil NGL and natural gas prices.

And as a reminder, during the worst of Covid and OPEC plus again, unlike some of our peers Brigham minerals did not execute any hedges and our shareholders. Therefore benefited entirely from the pricing right out of all three product streams during 2021.

Third and most importantly, even with the run up in crude oil prices from the upper sixties in August when we last met to their current mid 80 dollar pricing today I still believe there is upside to oil process, particularly relative to the strip.

In fact in my view, we're in the best macro setup that I've seen in my career.

And I should point out that this is the period in these cycles when we've historically compounded the most value when costs are lowest coming out of the trough of the disruption and now with demand and therefore prices increasing relative to the disrupted supply the.

The margins and rates of return for drillers are in our sweet spot.

In fact today the drilling economics are the best in the Permian that I've ever seen.

Importantly, this cycle is very different from the numerous prior cycles up experience since the 19 eighties.

Primarily because of politics and shareholder pressures are restricting our industry's ability to increase capital investment, thereby constraining supply growth in the.

Pace of rapidly returning demand.

The restricted capital investment therefore should help to dampen the overall cyclicality that we've historically experienced in our industry.

In particular public operators have gotten the message they are being extremely disciplined and are limiting their capex increases in order to distribute capital back to shareholders and pay down their debt.

Without the normal rig and therefore supply response as prices elevate we will benefit from a longer runway of higher prices and higher margins.

I don't see this changing anytime soon at least given the current overall conditions.

I'm also optimistic about our teams ability to consolidate and this positive macro backdrop and generate substantial shareholder returns and I'm proud to announce that we have entered into a purchase and sale agreement for our first large deal as a public company.

Our team's tireless efforts have generated a DJ basin acquisition, the checks multiple boxes for our shareholders.

This includes generating substantial accretion we are buying the deal at a high teens yield on 2022 cash flow and stable cash flow profile of this deal should allow us to further enhance the newly implemented base dividend in the first quarter of 2022, if approved by our board.

Our team underwrote this acquisition almost exclusively to PDP and ducks, thereby reducing reliance on unpermitted locations and minimizing Colorado political risk.

In the past, we've highlighted our ability to look at multiple basins.

And this is a clear example of executing on a great deal that many simply didn't or couldn't look at.

I hope and firmly believe that this is the first of many deals and folks out there up to realize we're going to be a serious consolidator and do so in a way that focuses above all else on creating value for shareholders.

As we get close to wrapping up 2021.

Extremely excited for 2022.

Particularly when you think about the incredibly strong activity well inventory that will be turned in line to production the tremendous balance sheet flexibility to continue to compound value through our ground game the extremely positive macro backdrop, it looks to be a multiyear phenomenon and lastly, the outlook to continue to consolidate.

Right.

With that I'll turn the call over to Rob.

But all neatly begin by building upon buds comments on are extremely compelling D. J basin acquisition, which encompasses approximately 8400 net royalty acres largely in the greater Wattenberg area and southern Weld County, as I've indicated in the past any large deal had to check a number of boxes, including providing shareholders with both near term cash flow accretion as well as <unk>.

<unk>. This deal adds a tremendous amount of near term cash flow accretion via adding an anticipated 1100 to 1200 barrels of oil equivalent per day and production in 2022, that's 50% liquids and therefore provides our shareholders balanced upside pricing exposure to both liquids and natural gas. This deal also enhances our pro forma.

Activity well inventory to $13 three net DUC and permit that we turned in line to production over the next 12 to 24 months at $13 three net ducks and permits that provides our shareholders with industry, leading leverage to near term production and cash flow growth given approximately 94000 net royalty acres associated with the near term.

Cash flow growth I am pleased to announce that post closing, which is likely in mid to late December we will recommend an increase to our base dividend in the first quarter of 2022 from 14 cents per share to <unk> 15 cents per share or 7% increase of course subject to board approval given the April mentioned metrics I think you can clearly understand why we're so excited.

About this transaction.

I wanted to also highlight that we've continued to be extremely active with our portfolio optimization efforts. As a reminder, in August we announced approximately $5 million in divestiture and drilling acceleration proceeds between the portfolio optimization proceeds in our third quarter retained cash flow, we're able to internally fund almost the entirety of our third quarter ground game.

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Keeping up that pace in the fourth quarter and just last week closed on an incremental optimization transaction that journey generated $9 $2 million in proceeds by divesting largely undeveloped minerals in the stack, which are anticipated to produce approximately 30 barrels of oil equivalent per day of production as a result of closing this transaction during the fourth quarter and our.

Paid a fourth quarter retained cash flow, it's likely that our fourth quarter 2021 ground game acquisition Capex will be entirely internally funded given capex spending in line with guidance overall, a terrific effort by the team to internally fund our ground game acquisitions in back to back quarters.

Turning to our third quarter operating results. Our production volumes were 9068 barrels of oil equivalent per day up 1% sequentially from our second quarter, driven largely by increased production in the Midland DJ and Anadarko basins. This is yet another quarter, where our diversified portfolio carried the day activity in those basins is on the rise and operators are drilling and completing wells.

On our asset at an accelerated pace, thereby driving our increased production levels further those basins offer our shareholders exposure to surging natural gas and NGL prices further enhancing our EBITDA and ultimately our distributions to our shareholders. Our docs turned in lines of production and contributing to Q3 production volumes were strong on a rosewall.

Basis, with 25% of our gross wells in inventory at the end of the second quarter converted during the third quarter and 16% on a net basis, our combined net DUC and permit inventory, but already referred to as our activity well inventory at 10, two net locations as of September 30th is now higher than our average activity wealth and.

Tori in the second through fourth quarters of 2019, or the period post IPO, but pre COVID-19. This inventory will positively impact our financial results in the fourth quarter 2021, and throughout 2022 drilling down our net DUC inventory at the end of the third quarter grew by 20% to six net locations up from five net locations.

Second quarter organic drilling activity was a large driver for the growth with gross spuds on our minerals at 10% to 169 wells spud during the third quarter and net well spud honor minerals up 31% to one seven net wells. The one seven net wells spud on our minerals during the third quarter is a record number of net wells spud on their asset.

Across any time period, including 2019 is exactly this type of organic activity that sets the stage for a powerful 2022 and gets our team excited about our future outlook. Our net ducks are now at a record 70% Permian and are largely controlled by the best operators, including pioneer Chevron X T O PDC and Diamondback amongst others.

Our Permian inventory also increased during the third quarter. Despite the incredibly strong April mentioned drilling activity as a result of both organic permitting buyer operators as well as permits acquired through acquisitions.

We saw 0.8 net permits added via organic conversions and 0.9 net permits added via our ground game acquisitions during the quarter. The vast majority of our net permits added via our ground game acquisitions, offset Matadors recently announced third bone line wells and their <unk> unit that average over 3000 barrels of oil equivalent IP 60.

4% oil a really strong result, and we are extremely excited about EOG replicating those results and arguments are current and now comprised of a record approximate 60% net Permian locations move.

Moving to our ground game mineral acquisitions, our team has been extremely busy and engaged and deployed roughly $12 $8 million in capital during the third quarter consistent with prior quarters, approximately 97% of our ground game capital was deployed to the Permian Basin. It's also worth highlighting that these acquisitions were comprised of 78% net PDP DUC and permanent locations.

And more specifically, 71% net ducks and permits which will likely be contributory to our production volumes over the next 12 to 24 months of note over the past month, we have begun to see increased levels of interaction of interest from sellers and feel like the bid ask spread is narrowing and potentially leading to increased levels of ground game deal flow regard.

Our approach is disciplined and we will not change it will remain consistent in our underwriting of potential acquisitions I'll now turn the call over to Blake. So he can summarize for you our financial performance Blake.

Thank you Rob.

Our daily production for the quarter was roughly 9070 barrels of oil equivalent per day in line sequentially, our oil cut decreased slightly to 49%, but this change was due to outstanding performance out of our gassy or areas, including the D J scoop and stack.

Our portfolio generated record royalty revenue of $40 $5 million for the quarter up 9% sequentially due mostly to a 7% improvement in realized pricing.

Realized pricing for the quarter came in at $48 51 per Boe.

Importantly realized pricing per barrel of oil was $69 37 up.

10% sequentially.

Realized gas was $4 79 per Mcf and benefited from the impressive increase in the gas strip.

Realized Ngls came in at $27 64 per barrel of NGL NGL prices have increased substantially during the back half of the year and we expect that strength to become manifest during the fourth quarter.

Our portfolio delivered $1 $5 million of lease bonus this quarter, which I have to say is well above our expectations.

Our team has done a phenomenal job of extracting top dollar and ensuring we optimize lease terms across the portfolio through these lease bonus opportunities.

Net income for the quarter was almost $19 million.

Record adjusted EBITDA for the quarter was $34 9 million and adjusted EBITDA, excluding lease bonus was $33 4 million and up 12% sequentially on the back of continued strength in realized pricing.

On costs gathering transportation and marketing expenses were $1 6 million or $1 97 per Boe.

Severance and AD valorem taxes were $2 4 million or five 9% of mineral and royalty revenue and in line with historical levels.

Cash G&A expense was $3 $5 million, representing another quarter of continued record low levels. We are extremely proud of all the hard work our team put in to streamline our business and are pleased to see those efforts continue to bear fruit.

Moving to our balance sheet, we remain disciplined in our capital allocation as we pursue highly accretive acquisition opportunities.

We exited the quarter with $14 million of cash and $53 million drawn on our revolving credit facility for net debt of $39 million only $3 million above our two <unk> net debt number despite $12 million in mineral acquisitions.

Lastly, with respect to our DJ acquisition.

We were able to utilize our platform to consolidate a highly accretive mineral position that emphasizes return of capital while maintaining balance sheet flexibility roughly half of the consideration will be in stock to the seller with the other half in cash that will be funded with cash on hand, and borrowings under our revolving credit facility.

We estimate an increase in the borrowing base to $230 million, leaving us with nearly $150 million on liquidity pro forma for this transaction.

Our current leverage is conservative with net debt to last quarter annualized adjusted EBITDA remaining at roughly three times. After the transaction our pro forma leverage is expected to be less than seven times, which allows us to continue to retain the necessary flexibility to execute on our corporate strategy going forward.

I will now turn the call over to Rob to wrap things up.

We appreciate you joining our third quarter 2021 call. We believe Brigham offers a tremendous value to investors and we have are heads down solely focused on executing our business plan and demonstrating the value of our portfolio and our team operator, I'll now turn the call back over to you to begin the question and answer portion of our conference call.

Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one telephone keypad.

When preparing to ask your questions. Please ensure your devices and muted locally.

Yeah.

Our first question comes from Jeanine Wai from Barclays Jeanine. Your line is now open.

Hi, good morning, everyone. Thanks for taking our questions.

Good morning, Thanks for joining.

Our first question, maybe just a little bit of color here.

Acquisition, that's the largest deal you've executed as a public company and you mentioned that the company is going to be a serious consolidator and so the bid ask spreads that you're seeing can you just provide us a little bit more color on your view of end market opportunities for larger deals versus smaller deals and specifically any color on how you characterize opportunity.

EPS for larger mineral bracket packages in the Permian would be really helpful.

Yeah, So just to recap Janine thanks for dialing in and I just think that this truly was a really compelling opportunities for us to consolidate in the D. J a tremendous opportunity to add 1100 200 barrels a day of production in 2022 that will drain generate that high teens EBITDA yield that we've talked about in the introductory comments.

So really it really terrific opportunity in fact, we've added a couple of incremental slides to the presentation deck related to it.

I would say, though.

Such a compelling opportunity was still largely focused on the Permian there have been a significant number of larger packages brought forward in the Permian basin of late and I think a lot of that is relates to the recent rise run that Bud mentioned in crude oil pricing. There was a lot of groups, whose backers are looking for liquidation events and hence taken.

Our packages to market.

You know there are a number of groups engaged in those processes.

I think for US we've structured the teams such that we can evaluate a large number of deals and cycled those through and so with that we're going to maintenance maintain.

<unk> maintained discipline throughout the process as we look at these deals and make sure we use consistent underwriting to consolidate so we'll look at all these different deals that come to us in the Permian, but the underlying principle as the main maintain discipline.

As we go through that process as we think about the ground game opportunity. We have seen that increase of late I would say over the past four to six weeks, we have seen an increase in the rate of interaction with sellers out there in the basin I think some of that is due to the fact that you're getting towards year end. We did pre typically see an increase in activity as you approach year end.

And some of that also is we've undertaken some incremental efforts to target potential sellers, so not going to get into those exact details, but the teams approaching interaction with sellers a little bit differently, such that we gain broader market share and interact with more sellers. So.

It feels to me like the market for the smaller deals is it is enhanced up late so I think it's a really tremendous opportunity one that we were able to capitalize on the DJ opportunity, but a lot of our focus is still on the Permian as you think about those larger packages that are out there the opportunity to consolidate and I think this really speaks to our opportunity going forward that utilization.

Nation of equity here for the first time, the salary or taking back roughly 50% of the deal and equity and we look forward to doing that again into the future.

Okay, great that all sounds pretty positive.

How do we square that.

Youre going to be disciplined.

But you do intend on being a more serious consolidator at least in the near term given the opportunity set.

How should we view the trajectory of the payout ratio in the near term given the rich opportunity set.

Does it really warrant maybe a lower payout than 75%, 80% in the near term while you kind of take some of these deals and then it would increase over time.

I think as we've mentioned messaged to the market, we've seen kind of a 75% to 80% payout payout ratios, where we want to be going forward.

I think you know the opportunity there is to continue those regular consistent upward trajectory distributions to our shareholders.

Instill confidence I think.

The key thing I want to point out is one we have not had to go back to.

The market for a primary equity offering since December of 19. So now we're two years plus into this cycle in terms of being able to continue to consolidate and not have to go back to the market I think the realization that we have undertaken a lot of these optimization efforts and continuing to utilize those to fund near term accretive deals is highly.

That's beneficial for shareholders. So just again to recap in the third quarter, we undertook about $5 million of optimizations and that's a combination of divestments in Oklahoma and what I'd also referred to as acceleration sales, where we're selling down of a part of an interest in the middle attract for an operator to accelerate development, we generate about $5 million.

Proceeds that along with our retained cash flow allowed us to fund the almost the entirety of our capex for the third quarter and as we look here into the fourth quarter, we undertook the stack transaction generating about $9 2 million in proceeds and that again combined with our retained cash flow isn't going to allow us to fund the entirety of likely and fund the entirety.

You have a ground game capex and so really when you look at the mechanics, there, it's a tremendous opportunity for our shareholders because we're transitioning divesting about 30, sorry intra.

Interest was about 30 barrels of production per day four tracks that I mentioned have about 78% composition of PDP ducks and permits so really a tremendous opportunity to recycle that cash for tracks with significant near term cash flow over the next 12 to 18 months.

Very interesting thank you very much.

Yes, I appreciate you joining thank you.

Our next question is from Chris Baker from CES FB, Chris Your line is now open.

Hey, good morning, guys.

<unk> on the DJ announcement.

I guess my first question is just given that transaction and other.

<unk> increasing activity backlog could you maybe just share an update on how youre thinking about the first half of 'twenty two volumes I know the prior comment was second half of this year and first half of next year, averaging nine to 10000 barrels a day.

I think we're set up really nicely for the fourth quarter and into 2020 to increase as you mentioned a lot of that's driven by the significant activity well backlog that we have currently even excluding the EJ deal. So just to recap for people. We have about 10, two net activity wells in inventory at the end of the third quarter about six of them.

Our DUC locations about a 20% increase in <unk> driven by really that tremendous response that we've seen on the drilling side we're in.

Drilling activity added about $1 seven net locations to our DUC inventory and as I mentioned in the introductory comments really a record level of drilling on our asset again, even exceeding what we saw in 2019, that's complemented by the $4. Two net permits that we have in inventory and so when I think about that those were really the main drivers for production.

<unk> cash flow goes over the next.

12 to 24 months when you think about conversions in the second and third quarter, we averaged about <unk> eight net conversions in the second and third quarter of this year. If you then think about our six net ducks that we have in inventory and you assume that those are going to be converted over kind of a four quarter period as you've mentioned and some.

Your research note that's about one five net ducks per quarter that can be turned in line over the next year or so you can see roughly doubling the net number of net ducks or can be brought online production over the next quarter. So really an interesting opportunity I'd also tell you that we pretty regularly track are consistently track activity on.

Docks monitoring satellite <unk> for one Frac crew show up and we've had a really nice response in terms of Frac crews showing up on those DUC locations, which further bolsters our belief that we're going to see regular consistent.

Conversion of our docs to PDP here over the next five five quarters, so really feel good about what the trajectory looks like going forward I would tell you as we've talked about in August.

We're going to be providing kind of a production guidance update in February of this year and at that point, we will update for the full year 2022 and so.

As we mentioned in the past kind of the game plan going forward is update in February and August of each year, but again to recap just really tremendous opportunity ahead with the number of docs and permits that we have in inventory and then when you layer on the incremental docs. The three one net ducks that we've added through the DJ transaction $1 six incremental docs.

Taking us to seven six net ducks and then another $1 five net permits taking us up to $5 seven that permits you really start to feel good about what production and cash flow look like into 2022.

Great I appreciate that and just as a follow up just wanted to touch on the portfolio rationalization effort I think that makes a lot of sense could you maybe just frame up how much more work. There are there is to do there as we head into next year and any color in terms of where youre seeing opportunities.

For you know on the sell side in terms of yields.

Myers are willing to underwrite versus where you see these acquisition opportunities.

Like the DJ would be would be great. Thanks.

Yes, so anything that we're interested in potentially divesting is largely undeveloped sections that you've had a largely a private owner of private company interested in acquiring.

So it's really I think interesting opportunity for us to divest eight as I mentioned, a low production tracks in different areas for tracks with much higher components of Ducks and permits are going to be immediately contributory to production and cash flow. So I think real interestingly for us probably we are going to focus.

<unk> focus on here in the near term what I referred to previously as those acceleration opportunities with operators, so opportunities where and we have tracks. There is an operator that we know has been interested in acquiring minerals. They can increase their net revenue interest in these wells by acquiring minerals and make the utilization of their drilling.

Rigs and Frac crews that much more efficient and so I think there's ample opportunity here as we go throughout the remainder of 2021 into 2022 to undertake some of these additional opportunities and so I challenge the team to be pretty regularly I tried to bring one of those deals per quarter.

Do you.

In the fold. So we can further enhance the the retained cash flow and fund pretty significant portions of our capex budget internally and thereby reduce the reliance on the capital markets for funding of our Capex budgets and so it's something that we're acutely focused on want to continue to generate and create shareholder value. So it's.

Something that we're going to be managing and looking forward to executing upon for the next five quarters if not longer.

Our next question comes from John Freeman from Raymond James John Your line is now open.

Hey, guys.

Morning, John Thanks for joining us.

Sure.

I wanted to follow up on a really successful the DJ acquisition I mean, it was yeah. It was just last quarter that you all had to.

Reduce the acquisition capital guidance and kind of talked about how seller expectations. It just gotten too elevated EMEA and a strong commodity backdrop and so I'm just trying to get a sense of.

Did the market just changed that that rapidly or was it more a nature of maybe previously there was a lot of focus on the Permian alone.

So as you kind of look at some of the other bolson where.

There were there were better opportunities at least in the current environment, just a little bit more background on how the deal sort of came together because it is quite a big divergence from some of the commentary last quarter on how competitive everything lives.

Yeah No I appreciate the question so really when I think about the acquisition market that we really need to bifurcate those two markets between the ground game opportunity set and then the larger deal opportunity set and so John we categorize the DJ deal into larger bucket opportunity set and so really when we reduced the capex budget in August for the remainder of <unk>.

'twenty one it was really a result of the ground game, where the smaller deal opportunities that becoming that much more competitive.

And the bid ask spread they are being pretty wide. So when we make an offer to a seller those sellers expectations, given where crude oil pricing was at that point, where.

In many instances exceeded what were willing to buy or pay for that asset and so that hence the kind of the slowdown in activity that we saw on the ground game and reducing our ground game acquisition budget from about $25 million per quarter to $15 million per quarter. So really then the different subset of the acquisition opportunity are these are these larger deals and thats. This DJ deal.

And so really the opportunity set there as I mentioned earlier is you've got a whole host of investors private equity firms even.

Individuals.

Family offices et cetera that over seven multiple years has invested in and acquired minerals in different basins and now.

With with market, where it is crude oil pricing where it is.

We're seeing a nice opportunity to divest those minerals and so it's our job to cycle through as many of those opportunities as possible. When we approach a pretty similar as to what we do in the ground game. There's a lot of initial scoping that's undertaking for each on large opportunity that comes in identifying where those deals are in the basin, who the operators are what is the cash flow Judy.

Rectory look like in terms of the composition of PDP ducks and permits in undeveloped locations and so all of that done and as we cycle through these larger deals ranking them. One through 10, how we want to evaluate them and working them up and deploying our team.

The valuation process, so really John it was that bifurcation of deals that reduction in the Capex budget was more related to the smaller ground game deals, but I would say is that as I mentioned towards the end of my comments it looks like that ground game acquisition budget maybe.

Up again here in the near term as I mentioned, we're seeing a lot more interaction with sellers a lot more interest from sellers a lot more responses to our offers and so it feels like at least initially we could potentially have a small if not maybe a little bit larger ramp up in ground game acquisitions, I would say as we think about that.

The availability on the credit facility and liquidity that we have to work with as Blake mentioned, we had $150 million of liquidity to work with.

When the borrowing base redetermination in the fall and incorporates a DJ asset so even at a $20 million per quarter ground game acquisition budget Youre looking at two years of runway to work with and Thats not even factoring in the potential to supplement that with the optimization effort. So we think we have a lot of runway here to work with to continue to consolidate and utilize that liquidity for.

Both ground game in larger deals.

That's very helpful. Rob I appreciate all the color on that and then my other question.

In conjunction of the deal.

So youre going to increase the quarterly base dividend, another 7% and maybe just some additional color on how you are thinking about.

The base dividend going forward I know that initially it was it was set at the same is that that <unk> 20 dividend level, which obviously was the absolute.

Trough period of the pandemic and so that obviously makes sense, but just as you know increasing EBITDA just pulling forward just sort of.

Just any additional color on kind of what I don't know commodity assumption or just any other detail on how you are setting that that base dividend going forward.

Yeah, John it's the same methodology that we used when we announced the base dividend. So obviously, the 14th central sort of symbolic because it was in line with what we paid out in <unk> of 2020, but we run multiple sensitivities on the PDP and duck reserves and our abilities to sustain that.

Dividend in low price environments with trough level type activity.

And so with this DJ deal having consistent.

Consistent abundant near term cash flow from the PDP and duck reserves.

It's obviously a meaningful to the base dividend and that's why we were signaling that we're expecting to recommend to the board of a 7% increase going from 14 to 15.

So you know I.

I think that we've got plenty of deals in the Hopper and are always looking for things with our with near term cash flow accretion.

It will be accretive to that base dividend.

Thanks, Blake Congrats polyol on the acquisition.

I appreciate it thank you.

Okay.

Our next question comes from Steven <unk> from Keybanc, Steven Your line is now open.

Hey, guys just want to get a understanding of why the oil production was down again in the third quarter in particular in the Delaware Basin.

So I think a lot of that Stephen points to the strength of the asset and some of the other is Blake mentioned in his introductory comments.

Reduction was up about 5% in each of the DJ basin and the Scoop stack place. So as you think about the composition of the product stream there in the DJ Basin and Scoop stack, then those tend to be more NGL gas focused and so the uptick there.

Is related or the uptick in <unk>.

Gas and NGL production as a result of increasing levels of production in those two basins.

The Delaware Basin was down slightly from the from the second quarter largely as a result of the continued build in the DUC inventory. So as we think about production volumes going forward, we're going to see an upward trajectory in both the Midland Basin and the Delaware Basin as our docks and permits are brought online to production. So when you think about that six net ducks that we have in inventory.

About 70% of those docs are in the Permian basin, which is a record level. So we should see ever increasing production volumes in both the Delaware and Midland basins, which tend to be more oily and so you'd expect those oil volumes to tick up and then the permits also are heavily weighted towards the Permian. When you look at the permits about 60% of those R. R.

Permian basin weighted and so again oily focus, though should help the oil volumes and on aggregate basis about two thirds of our activity wells are in the Permian. So.

As we look forward into 'twenty, the remainder of 'twenty, one and into 'twenty, two and 2020, we should see some pretty solid growth in production volumes in the Permian as those activity wells are turned in line to production.

Okay. Thanks, and then just.

With the really strong gas price in the third quarter was there anything unusual in there or is that just a just from higher prices.

No nothing unusual obviously the gas strip has had quite a run here.

And as I said in my introductory comments.

Reflected here NGL pricing.

It could be a little bit of a lag so a tailwind on NGL pricing into the fourth quarter. I think is something too to note as a lot of operators are announcing pretty significant increases in those NGL realizations, but.

Are those of the realized prices that that we were paid from our operators. This quarter. Yeah, I think Stephen that's one of the real interesting opportunity set as it relates to the DJ asset about 50% of that stream is natural gas. So as you think about entering the winter and the potential for cold weather. There. There is really the opportunity to enhance our cash flows as you think about that component being more gas.

Re-entered so theres a lot of Optionality there as we think about moving forward in gas pricing and Thats something that Ive mentioned in the past that within these basins, even though you'd consider them more liquids rich theres opportunities to deploy capital within these basins to be more gas focused and hence you don't really necessarily have to take the step to get into the haynesville or Marcellus starting.

Increase your gas opportunity set.

Alright. Thanks.

I appreciate it.

Yeah.

Our next question comes from pass Hammond from Piper Sandler.

Your line is now open.

Yes, good morning, and thanks for taking my questions.

So as we look at 'twenty, two and just sort of following up on some of these earlier questions. So as we look at 'twenty two given what's happened with the gas strip do you expect to have higher gas mix on your acreage.

Even before the DJ acquisition. So that's my first question.

No you know I think if.

If you just look at the base asset excluding the Doj deal you'd see an increasing rate of oil production related to the asset and again that relates to you. The vast majority of the ducks and inventory being Permian focused so about 70% of those ducks are in the Permian.

And then when you then factor in or layer and the permits on top of that about 60% of that was in the Permian, we think that youre going to see the oil percentage rebound as you look at into the future and so we'd expect that to reverse itself in more of the contributory.

Reduction coming from the oil side and the.

The liquids in particular, yes, they come back in line with with where it has been in the past in the low <unk> range.

Obviously on the revenue side, certainly as we've seen gas run pretty significantly we could we could see an increased share of revenue come from gas.

But echo Rob's comments on the.

The product mix from a volumetric standpoint.

Okay. Thanks, Blake Blake and Rob and then my follow up question.

I think the portfolio optimization is really sensible smart move to do how hard is it to do them and could you do is it is it possible to even do a chunkier deal mirror mirroring what you did today in the DJ with the chunky acquisition, but to do say a chunky divestiture.

I do think there's opportunity to need more chunkier divestitures, but I think the approach that we've taken on that acquisition side is similar to how we approach the divestment side and that we've floated to other assets out there, but we're still very judicious when we look at divesting an asset and so economic.

Lee that Hal so has to make sense for shareholders. We are very I would say disciplined and consistent in that process as well and so if an asset is put out there to the market for evaluation for other folks we're going to apply those same that same consistent disciplined approach to make sure we're maximizing value for shareholders and so one of the things that we did when you think back to 2002.

And I've mentioned this previously is there were a lot of people out there in the market looking to divest assets or put hedges on in 2020 at the depths of Covid and OPEC plus we were patient realize that the market was likely to rebound and hence waited until this year to capitalize on that opportunity set and much shareholder much better.

By being a little bit patient waiting for the opportunity set to improve and enhance capitalized capitalizing both in the second and third quarter, but I do think there is opportunity for chunkier asset deals and it's something we've tasked the team with to continue to evaluate the portfolio look at what opportunities are out there identify potential buyers and then working with them.

Two.

To evaluate those assets and so that that is something we are going to regularly look at.

Yeah, and I think it was a little bank color one other thing.

<unk> added about about that's divestitures, we basically sold things that were yielding 3% or 4% and redeploy them into the DJ acquisition, yielding high teens. So.

A very exciting kind of rotation of the asset.

Thanks, guys.

I appreciate it thank you.

As a reminder to ask any further questions. Please press star followed by one on your telephone keypad now.

Our next question comes from Derrick Whitfield from Stifel. Erik Your line is now open.

Good morning, all and congrats on your transaction update.

I appreciate gerrick, thanks for doing it.

Absolutely so with the understanding that your focus has been on oil basins in the past has the improvement in gas macro change your perspective on how you view gas opportunities and predominantly gas basins.

Yes, Derrick I still think there is a lot of opportunity within the basins. We currently operate and in particular, the D. J basin and parts of the Delaware basin to integrate gas weighted assets and so on.

Our familiarity with those assets, having bought really in those basins for since 2013 naturally lends us to participating more in those basins I do think there's opportunities in the Haynesville and.

Marcellus, but I do think our focus our strategy has been to focus on the Permian Scoop stack DJ and Williston basins. So youll see us be consistent with that strategy of deploying capital to those basins because I do think there is ample opportunity to you.

Add assets that have or gasior component within those basins themselves rather than extending the strategy going and entering into new basins.

Great.

Most of my questions have been asked and answered all in with a fun question for bi.

But with regard to your comments on the macro environment and it being as constructive as you've seen would.

Would you care to share your view on where oil is headed.

[laughter].

Well.

Thanks for asking.

You know.

This is a unique time I think the math is easier now than it typically is I mean the underinvestment.

And our oil and natural gas over.

Recent years and what the the biases against investment.

In our resource it's just.

While demand is increasing.

As the economies kind of.

Come back online post pandemic.

Thank you.

As I stated, it's a very bullish setup.

And normally we would see if you look at the rig count relative to oil prices pre pandemic.

I can't remember exactly 50, or 60% of where they were at this pricing.

So we're not getting the normal supply response.

So.

That's going to mean higher prices.

I think it's inevitable I am concerned personally that.

It could get to high clearly, it's going to be not be beneficial for the consumer and for the overall economy.

Certainly inflationary.

I think we're in a great spot, it's a goldilocks period in my view for oil and natural gas with with.

With a lower cost structure coming out of the down cycle, while process of elevated and and and.

We're not getting a supply response, so it does give us a longer runway for value creation for the industry. So.

I can't give you.

Suddenly a projection on where it goes but I am concerned that it could go.

Meaningfully higher from where it is.

Hope that helps I agree but.

Alright, great Bud and great update again goes.

Yes. Thank you. Thanks, Terry I appreciate you joining us.

Our final question is from TJ Schultz from RBC capital markets.

Your line is now open.

Great. Thanks.

Maybe just to stay on that.

Macro.

Backdrop, with but I don't think we take it lightly when you say, it's the best set up you've seen in your career, but just kind of thinking as the public operators remain.

Constrained from ramping rig activity given.

Really the current capital allocation preferences that are out there right now.

Do you think there is an oil price where the script is flipped a bit and we see activity levels increase or is the view that the public e&ps really hold the line here and that's giving you all pretty high conviction on oil prices.

That's helping you potentially underwrite more deals here.

Well I I have.

Answering I have been very impressed with our friends in the C suites of the public companies held disciplined they've been in and it's obviously, it's a function of a couple of things. One of course is the fact that the investors have sent a very clear message that.

<unk>.

Too much focus on growth.

Our focus on value creation, particularly recycling capital back to investors. So my sense is that that the executive said the public companies are.

Got to remain disciplined and until the investors.

Beg them.

Significantly elevate capex now I do think with the expanding cash flows.

We will see elevated capex in 2022, but when you look at but not commensurate with the rate of return on drilling projects. The rate of return on Permian drilling projects is easily the best I've ever seen it's really remarkable. So so you are seeing the other factor is with the public.

A lot of pressures on ESG, and and the negative biases against oil and natural gas.

And so that has more of an effect on the public companies the private companies.

Certainly more rational.

In my view.

I'd say the rate of return on drilling projects is just exceptional and so we will see I think continued to see the privates.

Pick up some of the slack.

An increasing activity to deliver somewhat supply response, but.

That's not going to be enough in my view.

To meet the growing demand yeah, I think one of the issues that people forget is even is potential rig activity might be forecast to increase the lag there sufficient I mean, you really can't expect wells to come online for 12 months or so.

And then you have a whole host of other issues in terms of truck drivers et cetera, and the labor force and so.

I'd Echo <unk> sentiment that this could potentially be a much longer than normal run and positive outlook for crude oil prices and natural gas as well as we think about moving into even 2023 and 2024.

In one of the interesting comments I think Bud made was the potential reduction in the cyclicality of the industry not having maybe reducing the risk towards a negative event that we've seen multiple times in the past just given the muted supply response relative to increasing demand and many people now talking about demand being in excess of 100 million barrels a day.

Again, so it's really an interesting dynamic that's going to play out over the next 12 to 18 months.

Great I appreciate all that and maybe just to end with that kind of financial question into that that set up as you guys.

Think about a pretty constructive.

Grow environment, how much debt leverage.

Would you be willing to take carry on a short term basis if there's.

More of a meaningful acquisition opportunity set in and Youre seeing better bid asked that would give you maybe an opportunity to act on more now thanks.

Yeah, I mean, we've always said that we're going to keep the capital structure Conservative and so we still stand behind that one five to two times net debt to EBITDA is kind of our internal governor wouldn't wouldn't take on more debt than that I never want to get caught flat footed and I think what what we've seen throughout our.

The last couple of years, certainly last year's that are.

Lack of leverage actually allowed us to play offense is kind of in any environment. So we always want to be able to.

To pursue these opportunities, especially in times when others are not able to do so.

So I think we'll still keep keep.

Keep leverage certainly under control really in any environment.

Perfect. Thank you.

As a final reminder to ask any further questions. Please press star followed by one on your telephone keypad now.

We have no further questions I will now hand back to Rob Roosa for any closing remarks.

Again I appreciate everybody joining us this morning for our third quarter conference call and looking forward to get backing back in touch with you guys in February related to the fourth quarter. So we'll talk to you then.

This concludes today's call you may now disconnect your lines and we thank you for joining.

Yeah.

Okay.

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