Brigham Minerals Inc (MNRL) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Brigham Minerals Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Jacob Sexton, Manager of Finance & Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Brigham Minerals Third Quarter 2020 Earnings Conference Call. Joining us today are Bud Brigham, Founder and Executive Chairman; Rob Roosa, Founder and Chief Executive Officer; and Blake Williams, Chief Financial Officer.

Before we begin, I would like to remind you that our remarks, 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 risk. In addition, during this call, we'll make references to certain non-GAAP financial measures. Reconciliations to applicable GAAP measures can be found in our earnings release.

A couple of administrative items. We have a new investor presentation titled Third Quarter 2020 Investor Presentation available for download on our website, www.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 our IR website.

I would now like to turn the call over to Bud Brigham, Founder and Executive Chairman.

Thank you, Jacob. We appreciate everyone joining us for our third quarter 2020 earnings conference call. Having lived through multiple down cycles in energy, we've learned that you have to build companies that are not only positioned to survive but also to thrive. And if you've done that as we have, the opportunity to differentiate performance is amplified in these cycles. Our team from day 1 worked to position Brigham Minerals in the best geologic areas with premium top-tier assets under top-performing operators. We've also positioned our balance sheet such that in trying times such as these we can: one, continue to return capital to our shareholders; and two, advantageously and in a highly disciplined manner, acquire minerals when much of our competition is on the sidelines.

As such, we are able to compound value when costs were at their cyclical lows, while prices are rising from unsustainable levels, thereby optimizing our shareholder value creation. We've done that in prior cycles, and we're doing it today. We're now starting to see operators in the E&P space, similarly, positioning themselves to survive and thrive by more aggressively consolidating, while also accelerating the evolution of their business models towards our model of more aggressively returning capital to shareholders.

During our August call, we talked quite a bit about the Chevron-Noble Energy merger and pointed to the positives of a much larger entity developing our position. Since then, we've seen Devon and WPX, ConocoPhillips and Concho, and Pioneer and Parsley similarly agree to combine and scale up to benefit from synergies and weather any storm. I, again, think this is a significant positive for Brigham Minerals as well-fortified balance sheets will keep rigs and frac crews active in our basins and, therefore, drilling are well positioned minerals.

Further, in connection with these completed intended consolidation, an increasing number of E&P companies are moving towards our long-standing return of capital to shareholders business model, or Shale 3.0, as many are referring to it today. Most have indicated they plan on reinvesting roughly 75% of free cash flow into the business and, therefore, returning 25% of free cash flow to shareholders. Brigham Minerals has, for the past 4 quarters, returned 100% of distributable cash flow to shareholders in this quarter, as we've indicated all along, moved our dividend to 95% of distributable cash flow, excluding lease bonus.

At the end of the day, we are returning capital faster without exposing our shareholders to ongoing drilling CapEx and lease operating expense. We also lead the pack in terms of corporate governance and executive compensation, pursuant to our compensation plan that has no annual cash bonus and long-term equity grants with vesting tied directly to our absolute total stock return. So we are directly aligned with all of our shareholders. With investors pushing for more alignment between management and shareholders, many of our energy brethren are converting their compensation plans to move towards, at least partially including, an absolute total stock within metric. I believe these efforts by energy company managements are beginning to be noticed by investors and will change attitudes towards investing in energy.

At the end of the day, the global economy needs to be abundant, clean, reliable and affordable energy that hundreds of thousand hard-working Americans work to produce for us every day. I also believe with your investment in Brigham Minerals that you get prudent management, premium top-tier assets, disciplined and accretive mineral acquisitions, a well-capitalized balance sheet, accelerated return of capital and a compensation plan aligned with shareholders.

With that, I'll turn the call over to Rob to cover our operational results.

Thanks, Bud. I'm extremely excited of our strong third quarter operating and financial results as well as continued, highly compelling acquisition opportunities. To start, our strong third quarter performance allowed us to declare a $0.24 per share dividend, which represents a 71% sequential increase from the second quarter. Importantly, we're able to increase our dividend despite having taken our initial steps towards partially funding our mineral acquisitions by moving our payout ratio in the third quarter to 95% of distributable cash flow ex lease bonus. We previously messaged moving our payout ratio on past conference calls, and in particular, on our second quarter conference call, and anticipate that we'll gradually continue to move towards a long-term dividend payout ratio of 75% to 80% of distributable cash flow over the next 3 to 6 quarters. The goal, of course, is to utilize the retained cash flow to provide a source of funding for our ground game acquisition program.

I also wanted to highlight that our dividend does not include $1.5 million of lease bonus revenue that was generated in the Delaware Basin during the third quarter. We have always highlighted the significant optionality in owning minerals that are perpetual in nature. In fact, we refer to it as a perpetual option on the geologic column. That optionality plays out over time through incremental zone development, incremental wells, better technology applied during drilling and completion operations and the ability to lease our minerals again if they become open. That perpetual optionality played out in the third quarter, and it's a real testament to the quality of our asset that an operator chose to part with precious liquidity during challenging times because the rock we acquired provides superior long-term rates of return to the lessee. We retained the $1.5 million in lease bonus to again provide a source of funding for our third quarter ground game acquisition program.

Moving to our ground game mineral acquisition. During the third quarter, we closed $16.2 million of acquisitions, deploying that capital almost exclusively to the Permian Basin and almost entirely to the Delaware Basin and further almost entirely to Loving County, which we've always viewed as encompassing some of the very best rock in the United States. A point I do want to make when you think about the cash retained. By moving to a 95% distribution ratio and retaining the lease bonus, we're able to fund approximately 14% of our third quarter mineral acquisitions via both of these sources of capital, which we believe is a tremendous long-term value creation opportunity for our shareholders.

Looking ahead, we continue to see strength in our ground game deal flow in the fourth quarter and have approximately $17 million in deals either closed thus far during the quarter or are pending and are in the middle of our title verification process. Note that we constantly evaluate a variety of capital allocation options in their effects on our capital structure. I have to make it clear that our mineral acquisition opportunities currently represent the highest return of our capital allocation options. As the environment changes, we will continue to evaluate our capital allocation options, but we are clearly proving the value of our mineral acquisition capital we are deploying are creating substantial value right now and believe that deploying capital during the trough is optimal for our shareholders.

Turning to a review of our operating results. Our third quarter production volumes were up 5% sequentially to roughly 9,300 barrels of oil equivalent per day. We saw very nice conversions during the third quarter in the DJ, Williston and Midland basins that contributed to our production growth. Although most operators are currently favoring the Permian Basin with their capital allocation, I do want to point out that our assets outside the Permian continue to see these strong conversions, which, again, is a key indicator as rock quality. Additionally, in the SCOOP and Williston Basins, we benefited from the resumption of previously shut-in or curtailed volumes. Our diversified portfolio of the highest quality minerals once again proved its value.

Despite a reduced number of frac spreads during the third quarter, we converted 1.2 net DUCs or 27% of our net DUC inventory available at the end of the second quarter. Conversions were led by Crestone Peak in the DJ, Continental in the Williston and Apache and Parsley in the Midland Basin. These companies are all in extremely different situations, but all have to start DUCs to maintain production. It's important to remember that while we don't have operational control, operators cannot survive without converting DUCs, and we stand to benefit from the coming resurgence in conversions. Our DUC inventory continues to be converted at an extremely rapid clip, again, illustrating the high-quality nature of our assets.

Our DUC inventory at the end of the third quarter was 3.8 net DUCs, of which 74% are positioned in the Permian Basin. Further, the majority of our net DUCs are operated by ExxonMobil, Continental Resources, Chevron, PDC and Shell. The DUC balance declined mainly due to extremely strong DUC conversions in the DJ and Williston Basins. I would note that our Permian Basin DUCs remained flat from the start to the end of the third quarter, remaining at approximately 2.8 net locations. In the second quarter, I indicated that roughly 1/3 of our DUCs in inventory at the end of the quarter have been treated or fracked and were thus waiting to be turned in line to production. We are similarly situated here at the end of the third quarter with approximately 30% of production inventory at the end of the quarter having been treated or fracked and thus, again, waiting to be turned in line to production. The vast majority of these treated DUCs are in the Delaware and Midland Basins, and we, therefore, believe they will be impactful to production over the next 2 quarters.

Our permit inventory also remains strong with 4.3% net permits in inventory at the end of the third quarter. Approximately 50% of our permits are in the DJ Basin and 40% of our permits are in the Permian Basin. Our team delivered strong third quarter results, but the COVID-19 pandemic has unfortunately continued to dampen crude oil demand. And as a result, E&P operators are being cautious. We believe our DUCs being turned in line should result in production volumes for the fourth quarter 2020 and first quarter 2021, averaging in excess of 9,000 barrels of oil equivalent per day.

Looking ahead to 2021, if operators are moving towards maintenance mode capital, there will have to be upward adjustments to those operators lower 48 rigs and frac fleets for those operators to keep production flat. If and when those rig and frac fleet additions happen, we anticipate being a major beneficiary to those increased activity levels. Given the uncertain backdrop, we are attempting to provide as much guidance as possible given data available to us. When the environment hopefully normalizes next year, we plan to provide updated full year 2021 guidance in late February of 2021 with our year-end conference call and an update for the second half of 2021 in early August of 2021 associated with our second quarter conference call.

In closing, while many energy companies are challenged, we are very fortunately surviving and now thriving as a result of the positioning I've mentioned, and we're actively on the hunt for accretive core mineral acquisition opportunities. I'll now turn the call over to Blake so he can summarize for you our financial performance. Blake?

Thank you, Rob. As Rob already alluded to, the majority of our shut-in volumes returned, and operators are beginning to cautiously restart activity. Our daily production for the quarter was roughly 9,300 barrels of oil equivalent per day, up 5% sequentially and up 19% from the same period last year. Product mix increased to 73% liquids, with the oil cut recovering to 53% due to the resumption of shut-in volumes, though lower than our expected run rate of 55%, due to stronger-than-expected growth from our gassier areas in the DJ and SCOOP. Oil cut should trend back towards our normalized run rate of closer to 55% over the coming quarters as Permian Basin DUCs convert to PDP.

Our portfolio generated royalty revenue of $21.6 million for the quarter, up 72% sequentially from the better production volumes and a 62% improvement in realized pricing. Lease bonus of $1.5 million significantly exceeded expectations. As Rob mentioned, we have elected to retain this cash to reinvest in the business in the third quarter through partially funding our ground game acquisitions as we continue to source accretive opportunities. We do not expect significant additional lease bonus for the reminder of the year. However, our portfolio continues to create positive surprises as we are always looking to optimize the cash flow generation from our assets.

Net loss for the quarter was $13 million, including an impairment to oil and gas properties of $18.9 million. Adjusted EBITDA for the quarter was $16.8 million, and adjusted EBITDA excluding lease bonus, was $15.3 million. Adjusted EBITDA was up 184% as a result of a 5% increase to volumes and 62% increase to realized pricing. The much larger increase to EBITDA showcases the uniquely high margins only possible in a minerals business.

Realized pricing for the quarter came in $25.16 per BOE, up 62% from the second quarter. By commodity type, realized pricing was $36.34 per barrel of oil, $2.02 per Mcf and $12.84 per barrel of NGL. On costs, gathering, transportation and marketing expenses were $1.7 million or $1.99 per BOE and in line with the second quarter.

Severance and ad valorem taxes were $1.4 million or 6.5% of mineral and oils revenue and back closer to our first quarter levels. G&A expense before share-based compensation was $3.2 million. G&A includes approximately $0.3 million nonrecurring expenses associated with our September secondary offering. Excluding these costs brings G&A to $2.9 million. During the first quarter, we laid out a plan to reduce cash G&A by 15%, and I am pleased to report back that we have achieved this goal and in fact, exceeded our initial goal. We expect fourth quarter to be at least in line with our initial $3.2 million run rate.

As a result of our resilient business model, we declared a dividend of $0.24 per share of Class A common stock, up 71% from the second quarter. This dividend represents a 95% payout ratio on our discretionary cash flow, excluding lease bonus. The $0.24 dividend is payable on December 7 to shareholders of record as of November 30.

Finally, moving to our balance sheet, which is very important during these times. We continue to have an industry-leading liquidity position. We exited the quarter with $8.2 million of cash and $5 million drawn on our revolving credit facility, leaving us in a net cash position with $138 million of liquidity. Further, as a result of our fall redetermination, which is expected to be finalized at the end of November, our administrative agents has given us a recommendation of a reaffirmation of our borrowing base at $135 million. Initially, they indicated an increase with several changes to the terms of our credit event. However, we elected to maintain our current borrowing base amounts and along with it, the flexibility and lower interest rate outlined in our existing agreements.

Capital structure remains important in our highly cyclical industry, and we will remain mindful of that as we deploy capital to acquisitions by ensuring we limit our net debt to adjusted EBITDA ratio to less than 1.5 or 2x.

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

Thanks, Blake. We appreciate you joining our third quarter 2020 call. To wrap it up, I would like to reiterate good comments about the Brigham Minerals business model, aka Shale 3.0. Investors want energy exposure from companies with clean balance sheets and a demonstrated commitment to return capital to shareholders, and Brigham Minerals checks both of those boxes. We believe that as investors return to the energy space, Brigham Minerals represents an extremely compelling investment opportunity and will be one of the most efficient ways to own exposure to the recovery.

Operator, I'll now turn the call back over to you to begin the question-and-answer portion of our conference call.

(Operator Instructions) Our first question comes from Brian Singer with Goldman Sachs & Company.

I wanted to follow-up on the comments with regards to all the consolidation that we're seeing. You highlighted that you view that as a positive. And I wondered if you could dig a little bit more into your level of confidence in the volumetric implications there. You have a couple of companies that have been part of consolidation that arguably had strong balance sheets and would have potentially done quite fine on a stand-alone basis. What's giving you the confidence that the combined companies from the consolidation that we've been seeing that the activity levels will be at or better than what they would have been on a stand-alone basis?

So Brian, to me, the key factor here, and a lot of people have alluded to this, is just the uplift in terms of scale, although these companies are large, such as a Pioneer or Conoco, just that further improved level of scale, in my mind, provides additional cushion, additional buffer such that when there are down cycles like we've experienced here this year, as it relates to COVID and then the OPEC+ disagreement that happened, that it just gives incremental cushion. They can feel better about maintaining recent frac fleets in basins. And so as I see it, the peaks and troughs that we'll have with respect to either frac fleets or rigs becomes much lower in terms of the highs and the lows. And so what we saw here was post February kind of a 70% reduction in rigs, almost a 90-plus percent reduction in frac fleets is that you'll see a much more consistent rig and frac fleet deployment such that you won't have these massive peaks and troughs, the amplitudes of the waves will be much less. And so that makes me feel good.

And right now, you're starting to see a really nice reaction to some of our operators in terms of bringing rigs back to the field. If you look kind of in the basins we monitor, you had about 150 rigs running at the low point. Now we're kind of in the mid- to upper 170s, and that's with ExxonMobil having reduced their rig count in the Delaware Basin from 26 to 10 rigs. So offsetting that, you've seen a really nice increase in rigs. And so in many instances, in particular, as it relates to us, we're seeing some really nice response by operators. Just yesterday, we saw that Oxy now has 3 rigs running in the Delaware Basin, which is very much a positive for us. One of the rates that showed up yesterday is now in our silvertip area drilling for us. You have Oxy now running 2 rigs in the DJ Basin, again, very much a positive. Other positives that I saw was Cimarex picking up a rig and deploying that to the STACK, where they haven't a rig since September of 2019. Devon is now talking about deploying rigs to the STACK as a result of the Dow JV.

So I just think that it gives incrementally operators a lot more comfort, much more running room, flexibility as it relates to being able to maintain rigs and frac fleets in the field, primarily as it relates to scale. And so to me -- and also, it gives you leverage as it relates to your negotiating power with service providers, enhancing your ability to reduce costs. I think a huge positive for us as we've digested and go on through the different materials here in the third quarter or the significant 10-plus percent reductions that we're seeing in costs. Many operators appoint the sub $600 per foot D&C costs, which at the end of the day, with operators talking about their capital budgets, meaning with reduced cost, you can do more with less. And so I think at the end of the day, what becomes important to us is Brigham Minerals is the number of wells that are drilled by each operator each and every quarter. And so we see that, and many operators point to these reductions in costs being structural in nature, enhances our ability to see an uplift in terms of rigs and frac fleets.

So Brian, sorry, it's a rather long-winded answer, but I think it's an important one that I think a lot of it just relates to scale, comfort being able to deploy rigs in the field consistently over time. And you feel much better about that with that improved scale.

I might just add just to amplify that. We already see that. We already see that with, for example, majors that are more stable through the troughs, whereas the independents that don't have the scale and the balance sheet really tend to really shut down the activity. It's a matter if they're more stable to the troughs and benefit from the stronger balance sheet and the synergies associated with that scale.

Great. And then my follow-up is with regards to the balance sheet. You talked about 1.5 to 2 turns net debt-to-EBITDA as kind of your tolerance level. And I wonder, given the volatility that we see in commodity prices, a, if you view that at a certain price deck or price range; and b, to the degree you do take on debt to help fund more acquisitions, what your thought process is on hedging.

Yes, sure. This is Blake. So I think on -- I'll kind of answer in reverse order there. On hedging, we do believe those 2 go hand-in-hand. So we're currently unhedged or obviously encouraged by macro backdrop and do offer our investors direct exposure to the commodity, but we do believe that as a part of that policy that we have to keep a prudent balance sheet. And obviously, we've done that as we've talked about today and in the past. So I think as we start to layer in more debt, we'll start to look at it more and more. As you think about kind of some of the improvements we've seen in the gas curve we -- it might make sense to add some winter hedges on, for example. But as far as going to your initial question on the 1.5 to 2x, we're -- we obviously run sensitivities on our capital needs and our capital structure all the time. I would say that, that governor is kind of a LQA basis, maybe looking back a little bit more and then sensitizing it with forward curve and some downside scenarios. So we sort of -- we believe that and have said this in the past, the only way to screw up a good mineral story is to over lever it. So that's kind of top of mind for us as we make sure that's always in check.

our next question comes from Derrick Whitfield with Stifel.

A great update. Perhaps for Bud or Rob. Your acquisition strategy is historically focused on oilier plays, but clearly your technical team and evaluation process like all trends. In light of the increasingly constructive gas macro environment, how motivated, if at all, are you to pursuing gas weighted opportunities within or outside of your focused basins to amplify your production on and cash flow profile?

Yes. I'll start off, Derrick, and then Bud or Blake can layer on. But I do think having a diversified portfolio such that you have offers upside the gas, so I think when you think about Brigham Minerals and there's a really nice summary of our portfolio on Page 8 of the investor presentation that we updated and put out yesterday evening on a basin-by-basin basis in terms of what our assets look like. I think there is significant gas exposure already embedded within our portfolio. So if you were to look at the STACK play, roughly 42% of our production there is gas. And with the DJ Basin, that's 40% gas. So we do have gas embedded within our portfolio.

Like also, when you think about the Delaware Basin and the western Side Basin is gassier, we do have exposure there. If you then think about, as you move east, in particular, as you get into Block 4 and then into Ward County, there's kind of a gassier area there that we do have exposure to. So I'd say, one, that we do have exposure to the gas within the portfolio. And we're -- as I mentioned in my earlier comments, to Brian, as it relates to the uplift in operator activity, we're already starting to see and hear some of that activity in the gas play start to ramp up. When you think about Cimarex running their first rig since September of '19, Devon now talking about ramping up their activity in STACK because of the Dow JV and then seeing increased gas performance as it relates to gas. Continental last night talked about deploying incremental capital to the gassier plays. And so we are seeing that. I would say, we've talked many times about having that exposure to the gas through still being liquids resource plays. We're still hopeful that, and we're still evaluating a lot of deals in the Eagle Ford. I would tell you that if you think about the gassier plays as it relates to Appalachia in that area, we did work on that several years ago. There were just some inherent issues there that not as connected to the ground game, whether you're in or out of the unit, even if you buy a mineral interest because of how irregularly shaped those units can be and whether or not part of the interest you have is spoilage. It's also a much more complicated environment in terms of title verification and being able to run the title and feel good about what you're buying. And so all kind of that consistently pushes us to the Delaware Basin, SCOOP, STACK, DJ Basins, Williston Basin and then layering on the Eagle Ford, hopefully, at some point here in the near future. And so I think there is nice gas exposure within the portfolio. And one of the things that Blake and I have talked about as we continue to monitor the draws here and go through the winter season is when we get to the point, do we want to start hedging some of those gas volumes. So that's something that we'll be looking at. Bud, do you like anything else to add?

No, I think you covered it pretty well. Thank you.

Very good.

Go ahead, Blake.

Nothing to add.

Okay. Sorry about that. And then you kind of stand on the ground game acquisition. Thought process and referencing Page 10, your recent acquisitions have certainly been attractively priced relative to historical measures. In your prepared comments, I think you guys noted several opportunities that are in process. More broadly, how would you characterize the competitive landscape, both in deal flow and competitors at the table and your ability to source similar opportunities as ones you've highlighted in Q3 and Q4 as you look out into next year?

So yes, it's a great question, and appreciate you pointing to the increased levels of acquisitions. First and foremost, I want to just reiterate that the key for us has been, always will be to be very disciplined in our underwriting process. It does no good for you to get out over your skis and enter into deals lean in too far. What served us so well over the past 7 years having built this company to be very disciplined, underwriting deals consistently, being very diligent in our processes. If a multi-section deal comes in, each of the sections have worked up separately because the valuations are quite different on a section by section basis. So first and foremost, I want to -- our shareholders, feel rest assured that we're undertaking those disciplined processes throughout. I would say that in terms of overall deal flow, we're seeing a tremendous amount of deal flow. If anything, our deal teams are busier now than they ever have. And that really mentioned this in our August call, really seem to start to ramp up in July, after 4th of July. What I would say is that the competition today isn't necessarily with other mineral companies, but in often instances, we refer to kind of reservation price, and that's the seller's willingness to part with those minerals. And so where I would have said that historically, we might have had a 10% or so success rate in terms of the deals we've evaluated and being able to sign and close those deals, we're probably more in a 5% to 10% success rate. But a large amount of that change or volatility or reduction in success relates to just kind of that reservation price on the part of the seller.

And so our game plan is to just be very active in terms of getting out there, mailing, calling, working with brokers, et cetera, such that, that deal flow is at an ever-increasing number in that we prosecute the deals, our response get deal -- offers out to people expeditiously such that we're still able to see a good amount of closures on a dollar basis. And I think it is important to point out that your point as it relates to the metrics here looking better than they have in the past because I see this as very equivalent to what the operators are doing in terms of reducing their per well cost. When you think about us kind of being at that 67% of the cost of prior amounts that we've seen. And if you think of kind of a $30 million, $35 million run rate, if you look at that, that's pretty much equivalent to kind of the $50 million per quarter run rate we were operating at the past. So much the same as what the hurdle is doing, doing more with less. We're seeing kind of an equivalent additions to our portfolios in terms of net well locations added, even at these lower prices because of what we're able to achieve here with a different environment. Our key is just to structure our teams such that we're able to be able to handle that ever-increasing deal flow and being responsive to the seller.

I might just add real quick. I mean we have seen so many of these cycles, and this is why we've positioned our company like we have. I mean this is the sweet spot of the cycle. It is particularly so in this cycle because there's less capital, there's a dose of capital in the industry. So it's much less competitive in prior cycles that we're experiencing. So as when we acquire interest, as you pointed out, at the lowest cost, while prices will be rising from the unsustainable level. So the this are going to be, as they have been in our prior cycles, the most accretive acquisitions that will make as a company.

Our next question comes from Pearce Hammond with Simmons Energy.

Congrats on the success of the ground game. On the ground game and just in acquisitions in general. Just curious what do you target as far as how much inventory at minerals do you want to have. Is there a certain amount of years that you'd like to see? And essentially, besides capital, what defines the ceiling on your appetite for acquisitions?

Pierce, I think one of the key things for us is being able to point to transactions that are accretive immediately, I would say, immediately being kind of an 18-month period relative to our yield that we trade at. Also important is just the overall IRR of a project. So I think the beauty of it that we have as we think about our deals is that we can amalgamate a number of deals together within any 1 quarter and synthetically create deals that meet those overall metrics. And so we're always targeting, making sure we're yield accretive, NAV accretive, and we're able to do that by mixing together perhaps a more PDP heavy deal or a more DUC heavy deal with an undeveloped deal. And so throughout the quarter, we're constantly monitoring each and every deal that's been signed up, monitoring those various metrics and seeing how we want to synthetically create an overall portfolio of deals such that it meets all these criteria. So I think that's the terrific part for us is that we're able to do that pretty efficiently and effectively. We've really refined these processes over the past 18 months having gone public. In the past, we would probably have been on the more undeveloped side, given the longer runway. Now today, obviously, we're trying to meet the near-term cash flow yield hurdles. And so -- but the great part is we're just seeing such increased levels of deal flow, we're able to then kind of mix all these deals together. But as it comes down to our ways, it's that making sure we're very disciplined in those processes because I can't just iterate that enough that our deal teams approach each and every deal the same way, such that at the end of the day, when we've integrated the deal for the quarter, we know exactly what we bought. We feel good about what we paid. We feel good about those dollar per net location cost. So it's a number -- numerous number of things that we're looking at each and every quarter in terms of deals and trying to bring those together.

That's helpful. And then my follow-up, wanted the attributes about Brigham is the diversification amongst various basins, which can certainly be helpful if there's a problem in a basin or capital gets dramatically allocated away from a basin. But clearly, in the environment we're in right now, like you're focusing your efforts on acquisitions in the Permian and producers are centered around the Permian. Does it make sense to maybe get rid of some of the minerals and some of the other basins and focus even more on the Permian? Or is there just not really much of a market for recycling capital and selling minerals?

I think we're always monitoring the portfolio and trying to identify is there a way that we can achieve good results in terms of potential divestiture and then being able to redirect that capital to perhaps higher-performing areas. So that's one of the key metrics that we're always looking at, I would say, sometimes assets are out of favor, and it's better to hold and live and fight for another day and perhaps into the future of those assets, the thought processes, the feelings towards those areas rebound. And then later next year, maybe mid-year next year, sort of looked at it, activities rebounded, there's been the opportunity to divest an area and redirect that capital to an area we like and perhaps a little bit better. So that's something that we're always constantly looking at, much like the capital allocation decisions that we mentioned in our transcript. It's just something that we're always monitoring, making sure we're trying to make those optimal decisions for our shareholders across a number of different spectrums. So I would say that to the extent an opportunity presents itself to divest and redirect that capital to a different area, yes, we undertake that effort and try to make that happen. It's just I think we've probably got a little bit of a runway ahead of us, where we can -- we're seeing the rigs and frac fleets respond. It's probably beneficial to wait couple or 3 more quarters to see that continue before doing anything. And so I think the great part is, as Blake mentioned, we have significant liquidity in place. We have been disciplined. And we're still able to distribute 95-plus percent of our distributable cash flow ex lease bonus and still able to return capital to shareholders expeditiously. And so all those things I feel good about, oftentimes, it's just better to be patient, be ready and strike while the iron is hot.

Our next question comes from John Freeman with Raymond James.

So I know that in the past, obviously, you've telegraphed for quite a while the long-term sort of payout ratio you want to get to, that 75% to 80% level. And obviously, this quarter being kind of the first step in that direction. And I think right now, all of us are sort of just assuming kind of that -- kind of a 5% reduction in the payout kind of each quarter to get you to about that level of long-term run rate a year from now, but maybe you can just remind everybody sort of what potentially could either cause that to accelerate or either -- or take longer, just depending on the environment, just some of the metrics that you are looking at to keep taking that down to get to that long-term target.

Yes, sure. Thanks, John. So we're going to always consider the macro trends as well as what our capital needs for the business are. We're discussing how much cash flow to retain and when do we keep stepping that down. So we'll be looking at prices. We'll be looking at we'll be looking at the past dividend amounts, obviously, we'd like it to continue to grow. And so with that said, we do have a desire to invest our cash flow back in our business, as we've talked about in the past. And I think Bud already mentioned on this call, we think that we can compound value right now really well in the trough of the cycle by buying up deals for cash. So we'll step down over time down to that payout ratio, but just kind of always making sure that we're taking all the variables into account.

Yes. John, I think the important point for me. And just to reiterate, again, as we did multiple times during the earlier part of the comments at the start was just 14% of our cash flow, we were able to reinvest that and utilize that to help us with ground game acquisitions. I think that's a huge differentiator for us. It allows us to compound value. If you think about the early history of the company and our great relationship with our private equity guys, Warburg, Prime Brook and Yorktown, all the cash flow that was generated as a part of our portfolio we have reinvested back in the business, and we're able to really compound value, continue to buy assets. So ICS is traditionally going that way. I do think though, as Blake mentioned, that this is more of kind of an art than a science, and that's why also during the earlier comments, I indicated we'd be looking to go to that 75% to 80% payout ratio of over kind of a 3- to 6-quarter period because we do want to be cognizant of the environment that we're in, the macro, et cetera. And so we understand how important the distribution is to shareholders. So again, being very disciplined, diligent, thoughtful in our processes as we think about future distributions. We'll be very careful and be -- make sure we take into account all these different factors, much as we do with deals.

I might just add briefly. In my view, this is a perfect time for us to be doing that, stepping down. I mean, we're coming out of a trough with unsustainable low oil prices and unsustainable low activity and over time to be transitioning towards a 75%, 80% payout because we expect -- and I'm very optimistic that given the unsustainability of prices and activity to meet worldwide demand in a normalized environment, we're going to see, again, prices aggressively step-up, which will enable us to continue to grow our distributions.

That's great. I appreciate the color. And then just my one follow-up question. Was the lease bonus that you all received this quarter, was that concentrated heavily in any one area?

John, I don't want to directionally point to any one area because we're constantly evaluating, potentially -- or leasing minerals again to operators. So I don't want to point to any one area because I think competitively, we want to make sure we're extracting the most lease bonus, putting in place the most favorable terms in terms of our leases, meaning cue clauses, et cetera, drilling commitments, cost releases. And so don't want to directionally point to any one area, but I would say that we do put a lease out there, it's very competitively bid. We know exactly whose operators are in what areas. And so -- and who might be most interested in those minerals. So we're running very competitive processes in those areas. So I hesitated to defer because I think there's going to be incremental opportunities into the future. So I don't want to get way too much, but much the same as kind of the earlier question regarding potentially divesting assets. I see this as we can really achieve some of that optionality here by being very patient, very disciplined in our processes as it relates to leasing our minerals again. So for competitive reason, of course, I really don't want to give away too much. But rest assured that we're doing everything possible to extract as much value as possible each and every time we lease the minerals again.

Our next question comes from Leo P. Mariani with KeyBanc.

I just wanted to follow-up along your production here for the quarter. Obviously, there's been significant shut-ins by the industry, mostly in 2Q, but also some in 3Q. Just trying to get a sense if you guys were to kind of back out all the shut-ins that you saw, were you able to see any organic sequential production growth between third quarter and second quarter?

Yes, we were. So certainly, I think the way that we characterize these shut-ins is that they came back throughout the quarter. They weren't all back online July 1, but I think that they should be back in full force for the fourth quarter. We did have some burdens that we -- that Rob already spoke about. Nice DUC conversions across the portfolio. So we did see some organic adds that helps push our production higher beyond just the shut-in volumes coming back, for sure.

Yes. In particular, Leo, I'd point to within the Williston Basin, had some nice additions by Continental. So this is above and beyond them, bringing back online, either shut-in or curtailed volumes had some nice wells brought online by them on their Sefolosha and Durant pads. So some really nice activity kind of in the Williams County area, pretty proximate to the position that the old Brigham exploration company had there, just a little bit east of that, but some really nice wells brought on there for us. So nice organic activity for us there.

Okay. That's helpful. And I guess just to kind of carry that forward a little bit. Obviously, with activity starting to pick back up, as you guys pointed out in Brigham's premium inventory, is it pretty reasonable that we should expect to see sequential production growth again in the fourth quarter, and then again, into early next year as well as you guys look at the landscape?

I think one of the key things for us is just we're being non-operated, in essence, position as we can't control the timing of when wells come online production or even if they're fracked and then ultimately, when an operator turns those wells online to production. And so I think we've got to be more cautious. Instead, we've kind of talked about this approach of how we talk about volumes over kind of the next 6-month period because you could have -- an operator could defer a well brought online to the second 3 months of the 6-month period or a wells brought online towards the end of the quarter and therefore, maybe not as impactful. You're seeing a lot of operators reference that here this year without speaking to you about our wells brought online in the fourth quarter. So we'll just have to monitor it. I think what makes us feel really good about how we're dialoguing with you is much the same as what we had at the end of the second quarter, where we had 33% or so of our DUCs treated. We're entering here in the fourth quarter with 30% of our DUCs treated. So I think we feel good about that. We feel good about the fact that a lot of the DUCs are located in the Permian Basin. We feel good of the fact that if you look at our DUCs, it's largely encompassed by ExxonMobil, Chevron, Shell, Continental, PDC and others. So people that are getting active getting back in the field, fracking wells, turning those wells online to production. So I think we just want to be cautious because we don't control when wells come online. So that naturally leads us to kind of point to more of a 6-month guidance period than a near-term quarter-to-quarter period because activity can fluctuate.

Our next question comes from TJ Schultz with RBC Capital Market.

Okay. So I think the lockup from the September secondary has expired at this point. So can you just comment on your view of the intent for the remaining original owners that still have meaningful positions? And then I also hear the comments on acquisitions offering the best economics on capital allocation. But given your stock repurchase on that last secondary, how should we think about capital allocation moving forward as you consider acquisitions versus any potential levers you may have on repurchases?

Yes. Sure. I appreciate you joining, TJ. So just a couple of thoughts, and then we'll let Blake join in. But I think as it relates to the stock repurchases, we did view kind of the September offering as unique opportunity to get in there and buy a block at the point that we felt like that deal did provide -- or acquisition provided good metrics. I think in my comments, we indicated that we're going to continue to monitor the situation. So we will be very thoughtful as we move over the next 12 months and continually evaluate acquisitions versus other potential opportunities. So rest assured, we're continually monitoring that. I think as it relates to private equity sponsors that we've had that, obviously, alluded to this earlier, is we've had a terrific relationship with, they're a much lesser percentage of the overall company now. I think it's 17%, 18% ownership. And so I think we feel really good that they are much lesser percentage of the company. Therefore, there's much more float up there. There's much more liquidity. And so I can't comment as to their intentions going forward. Obviously, they're very independent as it relates to that. But I would point to you directionally them being much less a percentage of the company, and therefore, being much less impactful into the future in terms of any actions they do take or don't take.

Yes. And I think the sponsors, I mean, they had fee back rights, and they did both their fleet this last secondary offering that we had. So just to reiterate Rob's point, I mean, I think on the buyback front, certainly, we think our stock is too cheap relative to the underlying assets. So I think that we're very excited about the private to public arm that we're able to capture through the ground game. So we elected to push our capital that way as we're really seeing some attractive opportunities on that front.

Okay. Got it. Just quickly on the lease bonus. Is the path forward to retain lease bonus revenue to help fund acquisitions versus including as part of the payout? Or just how will you make that decision going forward?

Yes. Thanks, TJ. I think much as it relates to kind of the comments earlier, it's kind of more of an art than a science. And so we're going to be just overall cognizance of the overall environment. And I think the great part is, we have a lot of optionality going forward for us in terms of adjusting the payout ratio, including excluding lease bonus. So there's a number of toggles that we can take to be productive and monitor the distribution going forward. And so I think, as Blake mentioned, we're just seeing some really nice opportunities here in the third quarter as it related to ground game acquisitions, the ability to really put in place some highly accretive acquisitions. And this quarter, in particular, allowed us to retain that lease bonus to help those acquisitions and, in essence, the 14% of our deals that we did in the third quarter. So again, there's a lot of dialogue that goes along with our Board of Directors each and every quarter as it relates to the dividend and planning. And so, again, rest assured that all those discussions are being had as it relates to modifying the payout ratio, including -- excluding lease bonus. So I know I'm not being very definitive, but there's a number of different levers that we have as it relates to optionality and how we look at it each and every quarter independently. So I think the great part is, is that we've provided a lot of optionality, a lot of flexibility as we think about the dividend going forward.

Our next question comes from Kyle May with Capital One Securities.

I wanted to follow-up on your comments about the Eagle Ford and see if you could talk more about your interest there and how you're thinking about potentially entering the basin.

Yes. I think the Eagle Ford is a tremendous play. In particular, there are some operators that you can follow that still have pretty undeveloped units, in particular, some of these operators are beginning now to co-develop the upper and lower Eagle Ford together. And these operators, related to some of our earlier discussions, do have the scale to continue drilling. And so I think our entry into the Eagle Ford will probably be here in the beginning, kind of on a ground game basis, with the singles and doubles looking for triples, et cetera, into the future. And so that's something we're doing. But as I've indicated, just being very disciplined in our underwriting when we do look at transactions. So we are monitoring and working up Eagle Ford deals. But I'm highly encouraged as to what we're seeing there. If you look at the Eagle Ford in particular, and it's a basin that we monitor probably more so than anywhere. You've seen kind of a rapid increase in rig crews going forward, almost a doubling of the rate fleet there in the Eagle Ford. So you are seeing a positive response from operators in terms of their ability to rapidly ramp up and deploy capital to the area. So we are looking at that. We view the Eagle Ford favorably and definitely want to get our ground game up and running there and to buy assets. So encouraged about the Eagle Ford.

Got it. That's very helpful. And also on Slide 10 of the presentation, it shows a dollar amount per location increasing in the fourth quarter versus the third quarter. Can you talk a little bit more about what's driving the change? Just trying to get a feel if this is market-driven or composition of well type? Or just any more color you have there.

Yes. So Kyle, I think if you look at Page 10, 1 of the key data points we try to include. So if you're looking at the upper right part of that slide, you see the third quarter acquisitions. And that's $4.2 million in the third quarter. And so that 5% that's next to it relates to DUCs and permits. If you look at the fourth quarter acquisitions, the dollar per net location cost was $5.9 million. That 19% next to it relates to the composition of DUCs and permits during the quarter or thus far we've experienced during the quarter. So you can see you have almost 4x more visibility as it relates to either wells that will be turned in line soon, permits that will be drilled. And so when you think about how we model transactions and work up each and every section, improved visibility as it relates to DUCs and permits does drive higher pricing. In essence, it's a much less riskier proposition, and so less risky situations obviously increase the pricing. And so that's been the reason for us, including the dollar per net location, but then also indicating to everyone what the composition of DUCs and permits are for that synthetic blend of deals that we brought together for the quarter either thus far or when a quarter is closed because then I think it gives our investors and research analysts the ability to understand how contributory those deals are going to be to the company over kind of that next 12- to 18-month period, which obviously is very important to all of you all.

Our last question comes from Chris Baker with Crédit Suisse.

Most of my questions have been asked, but just wanted to follow-up on some of the comments you made earlier around needing to see rigs and crews increase. Should we see production held flat next year? Just curious where you see that shaking out in terms of maybe completions year-over-year in the Permian?

Yes. Sorry, Chris. It kind of broke up there a little bit for me anyway. Could you repeat the question? Sorry about that.

Yes. I think it's my headphones. Yes, I was just -- I was saying that most of my questions have been asked, but just wanted to follow-up on the earlier comments around needing to see an increase in rigs and crews next year for production to remain flat. And I was just curious if you had any sort of directional color you could share in terms of where that might shake out in terms of gross completions in the Permian year-over-year.

I do think given that flat -- keep flat dialogue relative to the fourth quarter that operators are alluding to, I think a lot of people have written about, it's going to take a pretty rapid increase in rigs and frac crews to keep volumes flat. I think what a lot of people are struggling with is how many rigs or frac lease does that take because the cost part of the equation is changing so rapidly, but rapidly in our favor. So again, it gets back to the -- do more with less. And I think we're going to be encouraged as you look forward to 2021 and the potential for operators to ramp up our activity on our asset, just given what we've seen here in the last 6 weeks sort or so. In particular, I'd highlight, again, kind of Oxy having rapidly increased the rigs running in Loving County. In particular, all -- they're at 3 rigs right now. Yesterday, added the rig to the Silvertip area, even within the Delaware Basin, you're starting to see the private operators add back rigs. You're seeing OnCore and Jetta add rigs. And so -- and then you're starting to see people add rigs to SCOOP/STACK. So I'm encouraged that as we've always talked about, the key for us is to have a good gross acreage footprint within a basin because that gross acreage footprint, if it's widespread enough, and there is an increasing level of activity within the basins that inherently means that you're going to have a higher probability of those rigs and frac fleets hitting your position because of that tremendous gross acreage footprint. So I'm encouraged that as we move throughout 2021, when you think about the rigs that are going to be deployed in 2021 and moving forward, you're going to see some nice improvement in the gross and net spuds in our acreage as these operators ramp up that activity. I think it's just too early to call what that rig and frac fleet activity levels might be for 2021, just because there are so many moving pieces for these operators and how much of their cost improvements are structural relative to temporary. That being said, I do think a lot of people are pointing to 60%, 70% of the improvement of cost being structural. So it looks very positive for the industry in general. And so I'm encouraged that you're going to see some nice response to rigs and frac fleets in 2021. And then as a result of our good gross acreage footprint spread, that being beneficial to us.

Yes, Rob, I can add just briefly. And I don't -- we don't have the modeling in front of it. When you look at -- in the big picture, what happened with the substantial drop-off in rigs and completion activity in '20, that's going to be more apparent, and you see it in the modeling of '21 in terms of the decline rate that -- and so it really steps up, in my view, a very, very bullish scenario frac activity in order, as Rob said earlier, in order for us to provide the supply and meet the demand here at some point. Just going to take a meaningful uplift in activity. And given that our minerals located in the premier acreage are best of the best, these are going to be the first areas that the rigs are going to move to. So it sets up very well for us in '21.

Yes. And I think the only thing I would add is the one trend that we're seeing is we're seeing upspacing and a lot of operators starting to talk about upspacing in the lower price environment. So I think that that's actually going to be upside relative to how we have -- even how we have analyzed our own portfolio and continue to analyze acquisitions, given that we've never lain down over the years and the number of locations that we're underwriting to. So as operators sort of converge, but end up with better well results than we have assumed. I think that's just upside for us going into '21.

And in particular, you think about operators directionally pointing to co-development of Oxy, Upper Wolfcamp, et cetera, that whole zone there, you're going to get much more efficient development and much more recoverable reserves produced from these DSUs into the future. So I'm particularly encouraged, like if you were to look at how WPX here has recently talked about their development of their areas. And Clay Gaspar is tremendous. And so he's really going to take the reins there at Devon really lead them going forward. And so I think as you think about their development plans for all the different zones you're seeing in particular, the Third Bone line through the A, you're going to see some tremendous results there as those wells are co-developed and brought online. And at the end of the day, see much better total EURs on a DSU by DSU basis by these operators drilling kind of the 12-plus wells that once relative to the single one-offs that we've seen in the past.

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

Yes. Again, we appreciate you joining us on the third quarter conference call this morning. Looking forward to getting back with you guys on the phone after -- when we post our fourth quarter results and anticipate that, that's going to be late February of next year. So in the interim, take care, and thanks again for joining us. Appreciate your time.

This concludes our conference today. Thank you very much for joining. You may now disconnect.