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Edited Transcript of MNRL.N earnings conference call or presentation 8-Nov-19 3:00pm GMT

Q3 2019 Brigham Minerals Inc Earnings Call

Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Brigham Minerals Inc earnings conference call or presentation Friday, November 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ben M. Brigham

Brigham Minerals, Inc. - Executive Chairman

* Blake C. Williams

Brigham Minerals, Inc. - CFO

* Robert M. Roosa

Brigham Minerals, Inc. - President, CEO & Director

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Conference Call Participants

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* John Christopher Freeman

Raymond James & Associates, Inc., Research Division - Research Analyst

* Pearce Wheless Hammond

Piper Jaffray Companies, Research Division - Research Analyst

* Wei Jiang

Crédit Suisse AG, Research Division - Research Analyst

* Welles Westfeldt Fitzpatrick

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* William Seabury Thompson

Barclays Bank PLC, Research Division - Research Analyst

* Julie D. Baughman

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Presentation

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Operator [1]

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Good morning, and welcome to Brigham Minerals Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Julie Baughman to cover a few housekeeping items. Please go ahead.

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Julie D. Baughman, [2]

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Thank you, operator, and good morning, everyone. Welcome to the Brigham Minerals Third Quarter 2019 Earnings Conference Call. Joining us today are Bud Brigham, Founder and Executive Chairman; Rob Roosa, Founder and Chief Executive Officer; and Blake Williams, our 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. A couple of administrative items to quickly cover.

We have a new investor presentation titled Third Quarter 2019 Investor Presentation available for download on our website, brighamminerals.com. 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 the home page of our IR website. I would now like to turn the call over to Bud Brigham, Founder and Executive Chairman.

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Ben M. Brigham, Brigham Minerals, Inc. - Executive Chairman [3]

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Good morning, everyone, and thank you for joining us on today's conference call. We're excited to announce another quarter of strong production growth and outstanding rig activity despite commodity price headwinds and a slowdown in industry activity. Our results in the third quarter underscore the high-quality nature of our existing portfolio and the outstanding execution of our fully dedicated mineral acquisition team. Our technical focus has produced an exceptional portfolio of core liquids-focused minerals that are generating industry-leading organic growth and is clearly resilient when broader rig activity falls.

In addition, we continue to work hard to keep aggregating the fragmented mineral space and accretive acquisitions that will continue to drive growth and most importantly, increase value for our shareholders. This quarter is another checkmark for our team in terms of delivering on the promises we made during the IPO.

We are excited to build and reinforce our reputation and the intense focus on doing what we say we're going to do. Some of you have heard me discuss the lifeboat hypothesis. And this quarter, the numbers clearly prove that it is true to this theory. The rig count has dropped 8% since the second quarter following soft and volatile oil prices. Despite that drop, rigs running on our acreage increased. Our asset is well positioned for future growth into 2020 and beyond. We purposefully constructed a portfolio of only the very best minerals underneath the very best and most well-capitalized operators.

In essence, we focused on building a portfolio of the lowest cost and highest return resource in the world, and the proof is demonstrated in our rig activity and the associated growth. Our acquisition team did an outstanding job evaluating and executing during the third quarter. Our deal team is the busiest they've ever been and a roughly $100 million in accretive acquisitions during the quarter backed that up. We see substantial opportunity as we move into the fourth quarter and beyond. We also remain extremely focused on consolidating larger packages, but we will continue to retain our unwavering commitment to our strict underwriting criteria. We are very well positioned in this regard due to our large funnel of targets and our first-mover advantage. We benefit from our unique status as the only diversified Tier 1 core public mineral company. These factors allow us to be patient and wait for the most attractive opportunities that arise when capital providers are forced to demand liquidity for monetizations.

2020 is shaping up to be challenging for operators in the energy space for many reasons. Brigham Minerals is one of the few companies that has visible growth and actually benefits from the macro challenges with plentiful accretive opportunities for furthering our growth. Our historical growth has demonstrated the value of a diversified Tier 1 portfolio. And this coming year may prove it more than any year past.

With that, I will turn the call over to Rob to cover our operational results. Rob?

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [4]

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Thank you, Bud. As Bud mentioned, it's abundantly clear that our diversified portfolio, diversified amongst resource play basins as well as high-quality, well-capitalized operators clearly outperformed in the third quarter and importantly, outperformed in a challenging environment. It's a testament to our superior acquisition model that we've been able to, one, clearly identify the most economic drilling locations through our highly technical, geologic and reservoir engineering analysis; two, source deals via our business development efforts in those areas; and three, continue to remain highly disciplined in our economic underwriting to ensure activity translates to the bottom line and ultimately to our shareholders through regular ongoing dividends.

The output of this process, which have been implemented and executed on the past 6-plus years is a tremendous growth in our production volumes, which have grown on average 20% sequentially over the past 3 quarters, while operators have reduced the rig count by 25% over that very same period.

Our production volumes, which grew sequentially by 16% to roughly 7,800 barrels of oil equivalent per day in the third quarter represent yet another record level of production for us.

Production growth during the third quarter was generated in the Delaware Basin, where we saw volumes grow by over 500 barrels of oil equivalent per day to a record approximate 3,140 barrels of oil equivalent per day and in our SCOOP and STACK plays, where volumes grew by roughly 300 barrels of oil equivalent per day in each play.

As a result of the tremendous growth in our Loving County development area in the Delaware Basin under Oxy and ExxonMobil and our SpringBoard play under Continental and Marathon, our third quarter 2019 volumes in these 2 areas now represent 17% of our company's total production volumes as compared to 10% in the second quarter of 2019. Importantly, we continue to see strong continued permitting and rig activity in those 2 areas, including incremental permitting in our Loving County development area by Oxy and the SilverTip OMP units and by ExxonMobil in their San Antonio unit.

In SpringBoard, we're encouraged by the active ongoing development we are seeing by both Continental and Marathon, with a shift in rigs from STACK to SCOOP, in essence, the shift in rigs from STACK to SCOOP is beneficial to us, as our team has put together a terrific position with a tremendous gross acreage footprint spread as a result of having acquired in this area since 2012, which helps to ensure we are going to be under the majority of the rigs active in the SCOOP.

As we discuss while on the road, our production growth in the next 12 months is largely driven by the conversion of our drilled but uncompleted locations or DUCs. The third quarter of this year was no different. During the quarter, we converted 26% of our gross or 35% of our net DUCs in inventory at the start of the third quarter. That's a tremendous conversion ratio within the quarter.

Conversions in the Delaware Basin were driven by multiple different operators in different parts of the basin. In our Loving County development area, ExxonMobil converted their St. John's unit in their block 76 project area. In Central (inaudible), Diamondback converted long fellow unit and in the Southern Delaware, Occidental converted their state pad. In the SCOOP, Continental's conversion to the SpringBoard project contributed to third quarter growth via their pile, dire and cash units. In the STACK and Merge, we saw conversions from Marathon in their Michael Stroud unit and Chaparral in their Foraker unit.

In summary, third quarter conversions came from a number of operating areas and a number of operators, again, pointing to the importance of a diversified asset portfolio. Over the year-to-date period, we've converted 70% of our gross and 80% of our net DUCs in inventory at the start of 2019. Our 70% gross location conversion ratio through the first 9 months of 2019 is strong in comparison to 2018, when we converted 88% of our gross DUCs in inventory during the entirety of 2018.

Despite our strong DUC conversions during the third quarter, we were able to both reload and increase our DUC inventory by the end of the quarter through the 63 rigs drilling on our permitted locations during the quarter as well as our third quarter acquisitions. We ended the third quarter with close to 1,000 gross DUCs and 6.2 net DUCs, which represents a 17% increase in our net DUC inventory at the end of the third quarter as compared to the end of the second quarter.

Our 6.2 net DUCs in inventory at the end of the third quarter will be converted by high-quality, well-capitalized operators. We estimate that 50% of our net DUCs in inventory at the end of the third quarter will be converted by Royal Dutch Shell, Continental Resources, Oxy, ExxonMobil and Marathon. The 63 rigs running on our minerals during the third quarter stands in stark contrast to the total rig count decline that the industry experienced during the quarter. Our portfolio is the lowest cost, highest return resource and operators dedicated to capital to prove it during the third quarter.

Breaking down the rigs in further detail, 22 rigs are running on our Delaware asset, 6 rigs in the Midland Basin, 20 rigs on our SCOOP asset and 4 rigs in STACK. In particular, during the third quarter, we saw a record rig count and net royalty acres being drilled on our Midland Basin asset, with of note, Parsley Energy drilling with 3 rigs for us.

Also, during the third quarter, we saw a notable shift in activity by operators at the STACK play and a redeployment of those rigs to our SCOOP asset, where we acquired our company's first mineral position in late 2012 and where we have a tremendous gross acres footprint spread. In particular, we saw Continental and Marathon shipped almost the entirety of their rig fleets to SCOOP. And as I mentioned previously, saw 20 rigs running across our position, 13 of which were operated by Continental and 4 of which were operated by Marathon. We also saw continued strong activity by Oxy during the third quarter, who on average ran 3 rigs for us in the Delaware Basin, 2 of which were in our Loving County development area in their SilverTip project and 2 rigs in our DJ Basin asset, primarily in the southern part of Wells County in the highly prolific greater Wattenberg area.

Importantly, our October data continues to point to active operations on our mineral position. And in October, we had 65 rigs running, drilling approximately 2,740 net royalty acres. Activity across the board was strong, with Continental with 11 rigs, ExxonMobil also with 11 rigs, Oxy with 4 and Diamondback, EOG, Hess, Marathon and Crestone Peak, each with 3 rigs running across our assets during the month.

We saw an uptick in our Permian Basin activity with a total of 35 rigs drilling across our asset, 25 of which were drilling for us in the Delaware Basin and 10 of which were drilling for us in our Midland Basin position.

Despite the significant aforementioned drilling activity that drew upon our permitted locations, we were also able to reload to increase our net permit inventory, largely through operators permitting our organic undeveloped inventory as well as through the acquisitions of permanent locations via our active third quarter mineral acquisition program. While our gross permits were flat from the end of the second quarter to the end of the third quarter at roughly 680 gross locations, we importantly saw a 25% increase in our net permitted locations with our net permitted locations increasing from 3.6 net locations at the end of the second quarter to 4.5 net locations in inventory at the end of the third quarter.

In summary, as a result of both the strong ongoing organic development of our diversified portfolio and our accretive mineral acquisition program, we've seen substantial growth in our DUC inventory, which should largely drive production growth during 2020. We believe this inventory will be converted by high-quality, well-capitalized operators, including Shell, Continental Resources, ExxonMobil, Oxy and Marathon. Further, we've continued to generate substantial growth in our net-permitted locations due to permitting of our organic inventory of highly economic undeveloped locations in inventory as well as through our acquisition program.

Finally, operators have continued to actively drill on their mineral positions through the first 10 months of 2019, enabling us to maintain a flat rig count during this period despite the industry-wide pullback in drilling activity that has resulted in a 25% reduction in the horizontal rig fleet.

We believe the continued deployment of DUCs and drilling of our permits by high-quality, well-capitalized active operators will drive full year 2020 production volumes to average 9,500 to 10,500 barrels of oil equivalent per day during the upcoming year. I want to reiterate our 2020 guidance is almost entirely underwritten by our current proved developed producing volumes and the anticipated conversion of our DUC inventory. As you can tell from my comments, we monitored the additions into and conversions out of our DUC inventory closely, and we are not seeing a slowdown in our conversions, as evidenced by the conversion of 35% of our net DUCs during the third quarter and by the conversion of 80% of our net DUCs during the first 3 quarters of 2019.

Further, these are flash numbers as we're just starting to compile October data, but we saw good conversions out of DUCs into PDP during October, and we were yet again able to slightly increase our overall net DUC inventory by the end of October through the drilling of our permitted locations. The remaining much smaller piece of our 2020 guidance is driven by the drilling and conversion of our permit inventory and our drilling wedge or our undeveloped locations. We believe, as it relates to the drilling activity on our permits and on our undeveloped locations, we've been conservative as we've modeled activity in our operating basins using current real-time rig activity levels, which is meant to capture lower activity levels our operators are currently utilizing. But importantly, these rates do not capture upside potential via operators utilizing their equipment more efficiently, which many have spoken to during this quarter's conference call season.

Going forward, we anticipate issuing formal full year guidance in February associated with our year-end conference call and updating that guidance in August associated with our second quarter conference call.

I'll now turn the call over to Blake, so he can summarize for you our financial performance. Blake?

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Blake C. Williams, Brigham Minerals, Inc. - CFO [5]

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Thank you, Rob. As Rob already mentioned, our daily production for the quarter was 7,828 BOE per day, up 16% sequentially and comprised of 54% oil and 15% NGLs. This production increase allowed us to generate royalty revenue of $24.1 million, which was up 5% despite a 10% drop in realized prices. Lease bonus revenue added about another $1 million this quarter. As a reminder, lease bonus will vary quarter-to-quarter as operators aren't able to get to every section before the primary term expires, which offers us an opportunity to capture more value from our mineral position as we re-lease those interests. I'll also note that this embedded option value is unique to pure minerals and does not apply to overrides.

Net income for the quarter was $8.5 million. Positive net income is a rarity in the energy space and one that highlights the high-margin attributes that minerals offer. Adjusted EBITDA for the quarter was $19.3 million, an increase of 5% over the second quarter, especially relevant this quarter was adjusted EBITDA, excluding lease bonus of $18.3 million, an increase of 9% over the second quarter. By excluding lease bonus, we isolate the drilling and completion activity on our position and provide a much better representation of the performance of the underlying business. Realized pricing for the quarter came in at $33.51 per BOE, down 10% from the second quarter. By commodity type, realized pricing was $53.61 per barrel of oil, $1.60 per MCF and $10.96 per barrel of NGL. As I highlighted last quarter, we continue to see the benefits of a diversified asset base as it gives us access to various price points and helps to mitigate some of the price volatility, driven by regional basis differentials.

On costs, gathering, transportation and marketing expenses were $1.1 million or $1.55 per BOE. Changing production mix and decreasing prices contributed to the decrease and should revert back towards historical averages per BOE in future periods. Severance and ad valorem taxes were $1.4 million or 5.7% of mineral and royalty revenue. G&A expense before share-based compensation was $3.3 million and in line with the second quarter on an absolute basis. On a per-barrel basis, it was $4.63 per BOE, a decrease of 13% from the second quarter, which highlights both the scalable nature of minerals and the value of the substantial investment in infrastructure already made.

Share-based compensation expense was $1.7 million in the quarter, down $4.8 million from last quarter due to the roll-off of nonrecurring compensation. Looking at our balance sheet, we exited the third quarter with $116 million of total liquidity, which was comprised of $26 million of cash as well as $90 million of availability under our revolving credit facility. We had $45 million of revolver debt drawn and the net-debt-to-adjusted EBITDA ratio of 0.25x when annualizing this quarter's results. After the end of the quarter, the RBL was increased to $150 million, providing us with an additional $15 million of undrawn revolver capacity. As I've said in the past, we are committed to retaining a strong balance sheet in order to have ample liquidity to be opportunistic with our acquisition dollars in any commodity price environment. If we had fully drawn and deployed $150 million of revolver debt, we still would have a net debt-to-EBITDA ratio of less than 2x. Our primary focus is on delivering total shareholder return through prudent capital allocation and return of capital. As we have already stated, our underlying business performed extremely well, especially in comparison to broader industry results. Our discretionary cash flow per share of Class A common stock was $0.37 on a pretax basis, which was up 9% from the second quarter and $0.33 per share on a post-tax basis. This dividend is flat despite significant production and EBITDA growth, primarily due to two items: one, less lease bonus revenue relative to the second quarter; and two, the return of expected cash taxes. We paid minimal taxes in the second quarter due to a nonrecurring loss on extinguishment of debt, as a reminder. This dividend represents all of our discretionary cash flow for the quarter and underscores our commitment to returning capital to investors.

Finally, the dividend will be payable on November 27 to all shareholders of record as of November 20. Lastly, we have not added to our hedge position and do not intend to layer on additional hedges at this time.

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

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [6]

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Thanks, Blake. Our team has delivered another quarter of record production, revenues and EBITDA and demonstrated the value of our diversified portfolio in the face of commodity headwinds. Bud, Blake and I, thank them for their tremendous disciplined efforts. Now that we've reported as a public company for the past 3 quarters and have continued to deliver consistent outstanding financial results, we believe it's just a matter of time before a much wider range of institutions and generalists realize the benefits of owning core Tier 1 minerals across diversified basins under high-performing, well-capitalized active operators and that understanding will meaningfully translate in share price appreciation for our current shareholders.

I will now turn the call over to the operator to open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Welles Fitzpatrick with SunTrust.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [2]

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Congrats on the strong guide.

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [3]

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Thanks, appreciate it. It was a tremendous quarter and we're very happy with the results.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [4]

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On the permit conversion rate, you guys mentioned the 70%. Can you talk about how that differs from the Delaware and Midland versus maybe the SCOOP/STACK or even the DJ, where, obviously, we know we had a lot of -- we had a big run at permits ahead of 181.

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [5]

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Yes. I think, actually, that 70% conversion ratio related to the conversion of our DUCs in inventory and so just to kind of recap for everybody or level set. During the third quarter on the DUCs, we converted about 26% of our gross, 35% of our net during the quarter, and then year-to-date, converted about 70% of our gross, 80% of our net. And so my comments during the introductory piece of the conference call with the fact that, that is very good relative to what we experienced in 2018. So when we benchmarked our DUC inventory at the end of 2017 and looked at how those -- that inventory of locations converted during 2018, we converted about 83% of our net locations during the entirety of 2018. So you can see how favorably our DUC conversion thus far in 2019, having only gone through 9 months so far compared to a full year of conversions in 2018. And so I think in general, we've seen terrific conversions across all of our basins. And when you look at it in particular, DUCs remain strong in the portfolio. When you look at the Delaware Basin or Permian -- Delaware Basin asset, our DUCs were up about 38%, in the Midland Basin, up about 100% from the second quarter. And then we did see a small drawdown in DUCs in the STACK as those assets were brought online and the rig activity had slowed. But across the board, we've seen just good, consistent conversion of our DUC portfolio. And then you probably noticed in some of my introductory comments also, in October -- conversions in October look strong as well with a decent amount of DUCs being converted to PDP and then us being able to fully backload that DUC inventory through the strong drilling, where we had 65 rigs running in October, and we were able to actually increase our DUC inventory. So we've seen some good conversions throughout. Very happy about how the portfolio has performed throughout 2019 thus far.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [6]

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Okay, great. And then for my follow-up, it looks like Noble dropped out of the top operators ranking on Slide 15. Is that just a function of the fact that their '20 plans are a little bit more up in the air? Or is there something else going on there?

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [7]

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No. I think what probably what's happened is, overall, when you look at the entirety of their portfolio, it manages to be a large number, but their allocation within each of the basins probably has been reduced. But when you add up the entirety across all the plays, they're still a significant piece of the portfolio.

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Operator [8]

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The next question is from William Thompson with Barclays.

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William Seabury Thompson, Barclays Bank PLC, Research Division - Research Analyst [9]

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Maybe in terms of the 2020 guide, can you give us a sense on the potential oil mix? And I'm not sure I want to raise the bar for you guys, but I know you guys are quite conservative in terms of type curves versus those reported by the underlying operators. On average, what do you think the discount is for maybe baked into the 2020 guidance. If I recall it correctly, I think you guys internally were assuming about 20%, 25% discount to Continental's initial Springer type curve. So just curious to get some thoughts there.

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Blake C. Williams, Brigham Minerals, Inc. - CFO [10]

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Yes, this is Blake. On your first question, as we're thinking about that oil cut guidance, we expect it to just be in line with what our past results have been. So 54% to 56% is kind of where we've been over the last couple of quarters on an oil-cut basis. So we don't really see any difference there. As far as type curves go, I mean, we've always been conservative. Obviously, we do all of our own work in-house with the technical staff so comparing versus different operators, obviously, it kind of depends based on that particular area. But I would say, obviously, we're doing all that work and then trying to be conservative so that we're never surprised by any one operator or any one area where we've kind of gotten out over our skis.

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William Seabury Thompson, Barclays Bank PLC, Research Division - Research Analyst [11]

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Okay. And then during the third quarter, as you guys highlighted, you converted about 1.8 net DUCs to the PDPs. My math suggests organic DUC replacement was about 1.1 net DUCs. Can you maybe just talk about the organic growth nature of the portfolio? I think we can all appreciate the M&A opportunity in front of you, given the inefficient nature of the mineral space, but curious to get some insight into the recent organic growth of the portfolio net of the recent acquisitions?

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [12]

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I think that's a terrific point regarding the organic portfolio, when you look at it at the end of the third quarter, we had 107 net locations that were undeveloped. That will feed into the permitting, into DUCs, into PDP over time. And so the vast majority are -- about 50% of those locations are Permian locations, 35% of those further are Wolfcamp locations. So these are, as I've indicated in the past, some of the most highly economic locations in the United States. So you can continue to believe that these high quality, highly economic locations are going to continue to feed into the permitting bucket. Get drilled by operators via the rigs deployed in the Delaware and Midland Basins and then further get converted to DUCs and then later into PDP. So we feel very good regarding the continued organic conversion of our asset. We did have a good organic additions to the permitting bucket in the third quarter. If you looked, we had about -- if you looked at our beginning inventory of permits, we had about 3.6 net permits at the start of the third quarter. We moved about 0.8 of those net locations into either DUC or PDP, and then we were able to backfill those with almost 2 full net locations in addition, which resulted in us having about a 4.5 net locations in inventory at the end of the third quarter. And so when I look at the breakout, it was roughly 75% of those were organic locations that were being permitted and about half a location in terms of acquired. When you kind of look at the DUC balance, we started the quarter with about 5.3 net locations at the start of the third quarter. We rolled about 1.8 of those net locations into PDP. So hence, we backfilled that roughly about 2.8 net locations, either via acquired organic locations, and those were slightly more weighted towards -- on the acquired side, but still had significant organic growth in the portfolio.

So when I look at it, it's at about 12,000 gross, the 107 net locations, just the high-quality nature of those. We're going to continue to see significant organic growth in the portfolio, and then that's then going to feed into our permits and DUCs.

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William Seabury Thompson, Barclays Bank PLC, Research Division - Research Analyst [13]

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Excellent. And if I could sneak one more quick one in. Just in terms of how we should think about modeling cash taxes and the potential for future tax shield?

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Blake C. Williams, Brigham Minerals, Inc. - CFO [14]

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Yes. So as our tax consultants have modeled it, it's about a 50% tax shield. So I think you can kind of use a 10%, 11% as an effective tax rate going forward.

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Operator [15]

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The next question is from John Freeman with Raymond James.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [16]

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In the presentation, on Slide 12, your detail sort of the third quarter acquisitions, how they had a dramatically higher percentage of net DUCs and permits relative to the total wells, 24% versus first half of the year closer to sort of 8%. Is that -- are you highlighting that is something that maybe on a -- from a strategy perspective going forward, that's going to be like an increased point of emphasis?

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [17]

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No, John, I think it was more of an aspect of trying to identify the increase in the net location cost this quarter versus last. So when you looked at our acquisitions for the first half of the year, we averaged about $15,000 per net royalty acre, the third quarter, we were at about $19,000 per net royalty acre. And when I think about the cost of a net royalty acre, it's largely or almost entirely driven by the location where those minerals are located and then probably secondly, the development mix. So meaning, what's the breakout between PDP, DUCs, permits and undeveloped. And so really, when we think about the location mix of the net royalty acres that we purchased in the third quarter, 70% of those acres we acquired were in the Permian Basin. So the breakout there, roughly about 31.50 in the Delaware Basin, 300 in the Midland Basin. So we're deploying significant amount of capital to the most economic basins. And then further distilling this down for you guys, about 1,650 of those net royalty acres were acquired in our Loving County development area. So when you think about that area, you're thinking about 6 to 7 zones of development, tremendous well results right in the area where we previously acquired under Oxy and the SilverTip under ExxonMobil in their St. John, St. Kitts, St. Lucia units and then their recently permitted, San Antonio area. And then if you were listening to the EOG conference call yesterday, you noticed that they made mention of their McGregor unit, 3 wells that they drilled in the upper A, about 700 feet apart, where in the first 30 days of production, those wells cumed about 445,000 barrels of oil, 1.2 BCF over those 3 wells. So just tremendous well results. So when I think about what we're acquiring is largely driven by location, but then also to give you guys some guidance as to the PDP, DUC, permit and undeveloped location. And one of the things that we've also talked about on the road is the fact that we can't skew ourselves too heavily to PDP and DUCs because then, in essence, you put yourself on a treadmill that's hard to recover from. So we want to see as we go forward, a good mix between allocation of all 4 of those buckets. So we want a good mix of PDP, DUCs, permits undeveloped. And so when you look at our third quarter acquisitions, roughly the 9 net wells we added, 5 of those fell into our undeveloped bucket. So importantly, John, when you think about our inventory going forward, and looking at how it performs, one of the slides in the deck that's important to me is the slide where we talk about -- on Slide 16, where we talk about the inventory life going forward. And so when I look at that, we're targeting, trying to keep a 12- to 13-year inventory life going forward just so we keep off that treadmill. In essence, to have plenty of organic locations that are going to continue to backfill permits, DUCs and then into PDP.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [18]

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That's great. I appreciate the detail. And then just my follow-up question. You went into detail, Rob, that you all are well ahead of sort of the historical rate on the conversion of DUCs so far this year. And on the 2020 guidance, you said, basically, it's based off PDP and then anticipated conversion to DUCs. What's -- what are you assuming for the conversion rate of DUCs in 2020 in that guidance relative to what you did this year?

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Blake C. Williams, Brigham Minerals, Inc. - CFO [19]

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Yes. So it's going to be basically in line with what we saw. I think that's what Rob's point was that it's going to be in line with what we've seen in the past. So year-end '17, DUCs being converted across the entire year of 2018 was that 83% number. We're already at 80%. So we're using that same kind of conversion rate to kind of underscore -- underpin our 2020 guidance. So it will be the same type of conversion. Obviously, we've risked -- we've done plenty of modeling on our side to risk, what would happen in slowdown situations versus rigs, along getting some of the timing on conversions of DUCs, and we feel really comfortable about where we are guided with all those things taken into account.

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [20]

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Yes. As Blake mentioned, both under the base case and then under its downside case, we feel good that both of those outcomes were encapsulated within that guidance range that we provided to you guys yesterday.

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Operator [21]

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The next question is from Betty Jiang with Crédit Suisse.

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Wei Jiang, Crédit Suisse AG, Research Division - Research Analyst [22]

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Rob, so thinking about looking at 2020 outlook, relative to your initial IPO expectations, how much of the increase is coming from acquisitions year-to-date versus the improvement in the underlying organic development? And then just what's the best way for us to think about the value accretion from these acquisitions to your near- and medium-term cash flow?

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Blake C. Williams, Brigham Minerals, Inc. - CFO [23]

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Yes, Betty. So I think the reason that we didn't guide on fourth quarter, just to answer your question, a bit of a different way, is we think the asset that we went public with is still performing in line with exactly how we thought it would. Given the amount of acquisitions we made this year, especially in the third quarter, we think there's a sizable step up to 2020, which is why we introduced kind of this preliminary guidance number. As far as kind of how acquisitions contributed to third quarter, about 150 barrels or things that we acquired that we're currently producing, so a lot of the stuff that we're buying and how we think about accretion is on a 12- to 15-month yield basis. So we are looking farther out on these assets. We have to hit a couple of things. As I kind of covered last quarter, we're looking at both our growth rates, do the assets that we're acquiring, are they -- do they -- can they sustain the growth, not only in 2020, but '21? Are they immediately accretive across that next 12 months yield basis? And then as Rob already talked about, on the NAV side, trying to manage the number of undeveloped locations that we're purchasing such that reserve life and the inventory life continues to stay consistent.

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [24]

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Yes, Betty, when I looked at your research note this morning, one of the things I noticed was kind of your implied yield calculations based on the -- or increase in guidance relative to the capital deployed, and that's exactly the math that I was running even before your note came out, which I think indicated kind of a 14% yield on the capital that we deployed kind of over the 2020 period. And like mentioned, we look at that longer period because we are buying a host of DUCs and permits. And so naturally, those kind of take 12 to 18 months to come online to production. So you've got to give it some time for the asset to mature for it to convert itself from the permit bucket to DUC to PDP.

And so we do have a little bit longer timeline horizon in terms of how we look at yield accretion.

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Blake C. Williams, Brigham Minerals, Inc. - CFO [25]

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And we think that's what differentiates us because we have the ability to analyze the subsurface there. And so we find the most value in capturing ahead of the drill but -- as we've always done.

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Wei Jiang, Crédit Suisse AG, Research Division - Research Analyst [26]

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Got it. No, that's helpful. And then separately, just can you elaborate on the prepared remarks earlier that the current market environment is beneficial to bring them on the M&A front. Is it better from a more attractive pricing perspective or better from the opportunity and scale perspective, where bigger packages could be coming to the market?

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Ben M. Brigham, Brigham Minerals, Inc. - Executive Chairman [27]

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I think it's better in both regards. I mean, the industry, whether it's private equity and public markets, it's -- there's less capital availability, and there's a lot of minerals that have been acquired, and they don't have a lot of upward mobility. And so I think we provide the most attractive option. And the supply of those opportunities is pretty remarkable. So I just think we're in a really special position to make accretive transactions and achieve scale over the next several years, that will certainly be extremely beneficial to our shareholders. Rob, I don't...

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [28]

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No, I think that's exactly the case. We are actively searching for those larger transactions and working with those, dialoguing with individuals. And so I think what's going to happen is over time and then whether that's in the next, say, 3 to 12 months or so, we'll find that larger transaction, be able to use our equity to acquire with. And so I think as a result of having these 3 really nice consistent data points in terms of our performance relative to expectations that helps us utilize the equity pre-use, us as a management team, the quality of the asset. And so when you think about who might be taking the equity back, they should feel really good that they have a tremendous portfolio of a diversified number of basins, a diversified number of operators and the ability to take back the B shares to mitigate some of the tax impact of that. And so we're still very active, as Bud mentioned, in our ground game. So the singles and doubles, clipping off, say, $40 million to $60 million of acquisitions a quarter there, but there is the potential to more triples and doubles as we go forward. And we always found, if you think about going back into the '15-ish period when the last big kind of commodity price correction that happened kind of after 2 to 3 months of really the market being frozen up as sellers adjusted to new price expectations. 2015 was a tremendous time to buy. And so, hence, our wanting to keep ample liquidity to work with and to deploy in those tougher times because we do think that, that's some of the best times to acquire minerals when the sellers feel pressure in terms of those checks being cut. In some instance, 30% to 40% relative to what they've been used to and used to living on. And so where they are then able to step in. And I can't mention enough the importance of reputation and us doing what we said we did in terms of signing a PSA, executing upon that PSA. And if that owner owns that interest, closing that deal, there's a whole host of individuals out there in the market that signed PSAs and walk away from them, and that's not us as a public company and the Brigham reputation is important to maintain that. And so it's critical for us to continue with that.

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Operator [29]

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(Operator Instructions) The next question is from Pearce Hammond with Simmons Energy.

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Pearce Wheless Hammond, Piper Jaffray Companies, Research Division - Research Analyst [30]

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Just one question today. Investors are soured on the Anadarko Basin and operators to drop rigs. Does this create an opportunity for you to acquire minerals in the basin at a good value? Or are you more focused on other basins at this point regarding future opportunities? And then lastly, as it relates to that, what do you think people do not fully appreciate or understand about the Anadarko Basin?

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [31]

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We really love the Anadarko Basin. Pearce, as I indicated in the opening remarks, we've been acquiring in there since 2012. Those were the first minerals that we acquired in Grady County and 7 North, 6 West, us, again, having that operator background, where we work the Anadarko and Brigham Exploration Company have really terrific knowledge, experience, buying -- operating in that basin, and hence, that then translates into buying minerals. To us, there has been some really nice data points in terms of activity, recent well results. Obviously, we were pleased with Continental in their third quarter conference call where they came back and said their road 2 and road 3 results look like they're going to be able to achieve that average 1.3 million barrel type curve that they talked about previously at kind of a high 70s, 80% oil cut. Also you had Marathon during the quarter in their Smith & (inaudible) pads, talked about some really nice Springer results in more of the 3 North, 4 West area, where -- which we call South SCOOP. Some really nice wells averaged close to 1,500 barrels of oil equivalent a day. When I look at our maps, we have about 1,350 net royalty acres right around that position. Interestingly, it's not just a Marathon and Continental, that would move rigs down from STACK to SCOOP. We've also seen Encana here recently in the past month or so, move some of their rig fleet. They've actually got 3 rigs operating now in 2 North, 4 West. In -- drilling in the same unit, about 13 wells. It's a really interesting area for us. We have about 1,000 acres proximate to that drilling activity. And then you've got still some really nice well results announced in the STACK itself. So when I go and look at Continental, they're talking about their Sheltie and Reba Jo Pads and Blaine County, in 1510, Devon, and similarly in their (inaudible), some really nice well reserves there. In 1510, we've got just about 1,300 acres close to that. There's just some really nice continued activity. And I think the nice part, as it relates to Oklahoma, is the pricing has come down. And so there's a lot less competition. And so we're being able to even here recently acquire some really nice attractively priced minerals relative to in the past. And so I would say our success rate might be higher in the Anadarko than it had been in 6 or 9 months ago, when the competition was much more intense. And so we're going to be, as I've always said, very disciplined in our underwriting approach. Number of zones, number of wells per zone, our EURs, and hence, still only buying minerals that make sense economically. But I think we might see a higher hit rate, a higher success rate in Oklahoma than we've had in the past. And in able to acquiring these really nice areas where there's -- operators are still pointing to really nice activity and results.

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Operator [32]

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This concludes our question-and-answer session. I would like to turn the conference back over to Rob Roosa for closing remarks.

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Robert M. Roosa, Brigham Minerals, Inc. - President, CEO & Director [33]

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We appreciate you guys joining us. Obviously, there will be a little bit of time here before we report results back to you again with the fourth quarter, anticipate putting those results out at the end of February in the conference call at that point. We'll obviously provide incremental data as to that timing as we get closer to that point, but I appreciate you guys joining us. And again, as always, I want to thank the employees here at Brigham. They've done a tremendous job in the past. And here in the third quarter, really a stellar quarter in terms of acquisitions, the development of the portfolio. And so obviously, Bud, Blake and I want to thank them for their tremendous efforts here this quarter and look forward to speaking with you again in the fourth quarter.

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Operator [34]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.