Brigham Minerals, Inc.
Q1 2020 Earnings Call Transcript

Published: 14 May 2020

[Operator:]

Good morning, and welcome to the Brigham Minerals First Quarter 2020 Earnings Conference Call. [Operator Instructions].I would now like to turn the conference over to Julie Baughman. Please go ahead.

[Julie Baughman:]

Thank you, Operator, and good morning, everyone. Welcome to the Brigham Minerals First 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, 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. First, since the last conference call, we redesigned our company website, including a redesign of our Investor Relations pages. So I would refer you to our updated website at brighamminerals.com, which we believe further enhances the interactive experience for all of our stakeholders. Second, we have a new investor presentation titled First Quarter 2020 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 our IR website.I would now like to turn the call over to Bud Brigham, Founder and Executive Chairman.

[Ben Brigham:]

Thank you, Julie. We appreciate everyone joining us this morning on our first quarter 2020 earnings conference call. First and foremost, and as I indicated in my comments in yesterday afternoon's press release, our thoughts and prayers go out to individuals worldwide that have been impacted by the COVID pandemic. These are unprecedented challenges to the health of our fellow Americans, and the associated economic challenges are historic. That stated, America will absolutely overcome this, and our efforts to safely reopen America provide hope to employees across the country that jobs and livelihoods can be saved. Rob will get into more detail in his portion of the call, but we are actively targeting reopening our offices on Monday, May 18, as specified by Governor Abbott. I have the utmost confidence in our employees, and for that matter, all Americans, to safely and efficiently get back to work.Our country has excelled for over two centuries by entrusting our great people with individual freedom and its associated responsibilities. As Governor Abbott and other states reduce the restrictions on people and businesses, I believe both our health and economic outcomes will be optimized.While the United States energy industry is facing unprecedented challenges from both the COVID-19 pandemic and the fallout from the Saudi Arabia-Russia production disagreement, we, as a management team, weathered both the 2008, 2009 financial crisis and the oil market downturn in 2015 and '16, and are prepared to weather this storm as well.Please recall that despite those trying times, after both events, our teams at Brigham were able to create substantial shareholder value in 2011 with our sale to Statoil and in 2017, with our sale to Diamondback Energy. I firmly believe that it's in tough times like these, in these down cycles, that we have exceptional opportunities to compound value. As such, we remain committed to our business strategy of consolidating the mineral space in a highly disciplined manner that has served us so well over the past 7 years.Further, I personally believe Brigham Minerals is better positioned to survive and thrive during today's tough market conditions without needing to wait for improved market conditions, given that we completed our December equity offering. And as such, we have cash on our balance sheet and a completely undrawn revolver.As I've discussed in the past, we have no capital expenditures that must be incurred by our shareholders to bring new wells online. And also, we do not incur ongoing lease operating expenses. While no down cycle is ever fun, the difference between minerals and E&P should be clearly appreciated by investors.Finally, our focus on the lowest cost and highest rate of return resource controlled by a diverse set of high-quality operators has never been more important and should continue to drive differentiated outperformance.In my final comments, before turning things over to Rob and to Blake, I believe it is essential in this down cycle to once again highlight the truly differentiated compensation model adopted by Brigham Minerals and our Board. My long-term incentive plan compensation that was issued in April of 2019 is entirely allocated to performance-based stock units, which are calculated based on absolute total stock return. I and the rest of the management team received no annual cash bonuses, and the rest of the management team's long-term incentive plan compensation is allocated 50% to restricted stock units and 50% to performance-based stock units, which are calculated entirely based on absolute total stock return. While many energy companies have announced cuts to their cash compensation, most are still nowhere close to aligning themselves with their shareholders the way we are. We included a very instructive example of this shareholder alignment in our proxy statement and would refer you to that document to review.To conclude my remarks, I'm extremely proud of our team for navigating these stormy waters. We are laser-focused on creating substantial value for our shareholders amidst this chaos.With that, I will turn the call over to Rob to cover our operational results.

[Robert Roosa:]

Thanks, Bud. Before I get into a review of our operational results, I want to, similar to Bud, express that our entire organization's thoughts and prayers go out to all those affected by the COVID-19 pandemic. I also want to thank and commend our employees on their commitment, diligence and flexibility over the past 8 weeks that we've been working remotely. It's a true testament to our 42 employees that we're able to deliver a quarterly close so efficiently while working entirely remotely as well as to continue the evaluation of potential mineral acquisition opportunities. I want to personally thank each and every one of them on this call.As Bud mentioned, next week, we'll begin the reopening process by transitioning back to the office in a staggered manner prescribed by Governor Abbott. Our primary goal is to maintain a safe working environment for our employees. We have changed how we work based on the best-known protocols to date, and we'll continue to modify our protocols as additional information comes out from the CDC and other governmental authorities.Unfortunately, as a result of the COVID pandemic, we are not currently allowing visitors, and we have elected to convert our Annual Meeting to a virtual meeting. The directions to participating in our virtual Annual Meeting were released on Monday afternoon, May 11, and we hope our shareholders will participate.In summary, the management team at Brigham is taking the transition to a new operating environment extremely seriously for the benefit of all of our stakeholders.Transitioning to a discussion of our operational results. I believe 4 key factors set the foundation upon which we can build upon in 2020. First, we have no debt. While many of our mineral peers are no longer able to make full distributions because of the concerns regarding debt covenants and coverage ratios and E&Ps will see large amounts of their cash pushed towards upcoming debt repayments and are anxiously awaiting borrowing base redeterminations. We sleep soundly here at Brigham knowing no debt stands in front of our shareholders. Second, as Bud mentioned, and it's worth reiterating, as a minerals business, we have 0 capital expenditures required to bring new wells online production and incur no ongoing lease operating expenses. Third, we plan to capture as much value as possible from the anticipated reduction in mineral prices over the near term via the continuation of our minerals consolidation strategy. It's likely that we'll have to be patient as mineral sellers' expectations have to be adjusted, but we believe a potential significant acquisition buying opportunity will present itself later this quarter and into the remainder of 2020, and we stand ready to capture that opportunity. Fourth, we believe our diversified mineral position comprised of the lowest cost and highest rate of return resource, controlled by a diverse set of quality operators will continue to outperform.Now I'd like to turn to a review of our first quarter operating and financial results. Despite incredible changes to the overall operating environment that developed in the latter part of the quarter, our first quarter production volumes were extremely strong with 8% sequential growth to roughly 10,400 barrels of oil equivalent per day.Production growth is anchored by continued strength from the Permian and a solid resurgence in the DJ Basin. In the Permian, production volumes grew by roughly 20% to a record of approximately 6,000 barrels of oil equivalent per day. Although Oklahoma and Williston production declined, again, portfolio diversification went out and our Permian and DJ assets powered the portfolio to sequential growth. Every quarter has shown the value of a diversified asset portfolio, and the first quarter was no different.Unfortunately, given the uncertainty created largely by the COVID-19 pandemic and its impact on demand associated with shutdowns across the globe and the overall resulting lack of clarity regarding operators drilling and completion operations as well as potential curtailments and shut-ins, we're withdrawing our 2020 operational and financial guidance. We will work to incorporate additional information as soon as possible and will release updated information as soon as we deem it prudent to do so regarding our expectations for 2020, but the impacts of decreasing oil prices are obvious to our revenues and distributable cash flow for at least the second quarter as the global markets reconcile the future rebound in the worldwide economies. That being said, we do expect to continue to deploy mineral acquisition capital during 2020. However, we believe it will be prudent to remain extremely patient and disciplined as we wait for mineral sellers to adjust their expectations once they experience the full impact of lower oil prices, which we anticipate will start to happen towards the end of May, as this will largely be the first month in which mineral owners see the impact of March pricing to their mineral checks.Going forward, we are further tightening our underwriting acquisition criteria and will be extremely judicious in deploying capital, staying under the best geology and the best operators. Strong operating momentum was once again the key to our first quarter results, with 28% of our gross DUC locations and 33% of our net DUC locations in inventory at the start of the year converted to prove developed producing locations during Q1. Further, we were able to once again largely reload our DUC inventory during the first quarter despite these high conversion rates, exiting Q1 with 5.7 net DUCs in inventory versus a Q4 2019 net DUC ending inventory of 5.9 net locations.We're able to reload our DUC inventory as a result of the robust drilling activity that occurred on our assets during the first quarter. I'd like to point out that we have updated and replaced our rig count and net royalty acres being drilled in favor of gross and net well spuds. In the pursuit of more accurate data and better transparency, we're happy to push the level of minerals disclosure forward yet again to statistics we believe better reflects actual activity and the potential future impact to our financial statements. The first quarter is a great example of how critically important switching from a number of rigs to gross and net well spud is to giving people a more accurate look under the hood.The first quarter rigs on our acreage averaged 46, a decrease from the 60 in the fourth quarter of 2019. This statistics requires folks to make an assumption about the operating efficiency of each rig and the mineral acres being drilled by each rig. Critically, the divergence between a private operator drilling and HBPing a single well and a major drilling a multi well pad under a manufacturing mode development program has never been greater. We have consistently pointed out that owning under high-quality operators is important, and the data clearly shows that our operators are pursuing extremely efficient and large scale development. Spud activity was 50% Permian weighted, but we saw strong contributions from the DJ, Williston and SCOOP.Drilling activity on our minerals during the first quarter resulted in the conversion of 20% of our gross and 25% of our net permits to DUCs during the quarter. Again, we're able to largely reload permits, maintaining gross permits in inventory at 714 from 715 and keeping net permits at approximately 4.5 net locations.In summary, our portfolio performed extremely well in the first quarter, even while operating conditions changed extremely fast towards the end of the quarter. Our strong operating and financial performance allowed us to declare a roughly flat dividend of $0.37 per Class A share despite a 20% drop in realized pricing. We believe returning capital to shareholders are the right move for 2 reasons. One, in an environment where dividends are being cut left and right and interest rates are at historic lows, we believe demonstrating our business' unique ability to pay dividend will be a rare and increasingly valuable characteristic to investors [indiscernible] for return on capital. Two, we committed to a 100% payout ratio through the first quarter, and we want investors to know that our word is important, and we remain committed to following through and doing what we said we were going to do.I'll now turn the call over to Blake, so he can summarize for you our financial performance. Blake?

[Blake Williams:]

Thank you, Rob. I'd like to start by highlighting the critical actions we have taken to respond to this very challenging macro environment. First, given the rapid deterioration in markets that occurred in March, we took swift and decisive action to preserve liquidity by significantly reducing mineral acquisitions.During the quarter, we closed just $25.4 million in mineral acquisitions, which represents only 50% of our typical quarterly acquisition run rate. Further, given the significant uncertainty regarding both pricing and activity for the remainder of 2020, we tightened our underwriting criteria to ensure that we appropriately price the risk of low activity levels and price realizations into our deal economics. We are also constantly monitoring the financial health of all of the operators of our properties to help guide capital allocation to mineral acquisition opportunities with the best risk-adjusted return in this market.Finally, we have applied significant focus on reducing our cash G&A cost structure, resulting in an updated quarterly cash G&A savings of $550,000, reducing our run rate to $3.15 million per quarter versus our previously disclosed guidance of $3.7 million per quarter, which represents an approximate 15% decrease in cash G&A.While we already run lean, we spent a lot of time with our vendors since March, discussing the need to assist in cost reductions. And in almost all instances, we've seen a very good response and mutual understanding and the need to share the burden of these difficult times.As Rob already mentioned, our daily production for the quarter was approximately 10,400 barrels of oil equivalent per day, up 8% sequentially and comprised of 72% liquids. Our oil cut decreased slightly from the fourth quarter, driven mainly by increased DJ production and gas and NGL type curve outperformance. We continue to expect our oil cut to fluctuate quarter-to-quarter.Our portfolio generated royalty revenue of $28.4 million for the quarter, with the Permian representing 61% of that. In addition, during the quarter, we generated lease bonus revenue of $3.9 million, largely out of the Delaware Basin, displaying the incredible perpetual optionality associated with owning minerals.Net income for the quarter was $8.8 million with a net profit margin of 27%. Adjusted EBITDA for the quarter was $25.1 million, and adjusted EBITDA, excluding lease bonus was $21.2 million. Strong lease bonus enabled adjusted EBITDA to be more stable relative to the fourth quarter despite a 20% drop in realized pricing.Realized pricing for the quarter came in at $29.98 per BOE, down 20% from the fourth quarter. By commodity type, realized pricing was $45.61 per barrel of oil, $1.76 per Mcf and $12.07 per barrel of NGL.On costs, gathering, transportation and marketing expenses were $1.8 million or $1.90 per BOE. Severance and ad valorem taxes were $1.8 million or 6.2% of mineral and royalty revenue. G&A expense before share-based compensation was $3.6 million. G&A includes a couple of nonrecurring items for the quarter from service providers associated with year-end reserves, financial reporting and tax work. And as such, we would expect a lower run rate going forward. Share-based compensation expense was $1.8 million in the quarter, in line with the fourth quarter.Looking at our balance sheet. We had $31 million of cash and an undrawn revolving credit facility of $180 million as of March 31. As a result of our spring redetermination, which is expected to close at the end of May, our administrative agent has given us a preliminary indication of a $135 million borrowing base, giving us total pro forma liquidity of more than $165 million.I would like to reiterate here that we have retained a strong balance sheet through this down market, and we'll continue to protect it as we deploy capital by targeting a net debt to adjusted EBITDA ratio of 1.5 to 2x.Our discretionary cash flow per share of Class A common stock was $0.43 on a pretax basis, down 5% from the fourth quarter, bolstered by lease bonus of roughly $0.07 per share. Federal and state taxes are likely to be minimal the rest of the year to the extent current prices continue for the next couple of quarters. Our $0.37 dividend, Rob mentioned, represents all of our discretionary cash flow for the quarter.I will now turn the call back over to Rob to wrap things up.

[Robert Roosa:]

Okay. Thanks, Blake. We appreciate you joining us for our first quarter 2020 call. Operator, I'll now turn the call back over to you to begin the question-and-answer session of our conference call.

[Operator:]

[Operator Instructions]. The first question today comes from William Thompson of Barclays.

[William Thompson:]

Rob, maybe can you talk about the influence you [indiscernible] continuous drilling obligations and [indiscernible] will have on forcing operators to reactivate rigs and crews and maybe suspend shut-ins, given the risk of terminating leases. I know midstream obligations play a role in their decisions, and it's been interesting to hear them. A number of operators mentioned lease obligations as part of their decision tree about curtailments and future development plans. So just curious to hear your thoughts there.

[Robert Roosa:]

I think it's definitely kick in as you look forward to the third and fourth quarter, in particular. I know of a couple -- several of our leases in Texas that, in particular, have pretty onerous dollar per well penalties if those wells aren't drilled for us, in particular, as we get closer to the October, November time frame. So I think as operators pick up rigs and you have mineral owners that are more sophisticated in the leases that they put in place with operators, those leases, in general, have more highly commercial terms, wherein they require operators to drill wells, drill wells to hold certain zones, drill wells to hold certain portions of the unit within zones themselves. So in particular, leases that we negotiated and put in place are very sophisticated relative to some of the leases that we inherited from other mineral owners.I would tell you, obviously, Blake pointed to a lease that we executed in the first quarter, and I would say that's a sophisticated lease and requires some CDP requirements in terms of holding things. But I'd just keep it at that level just because of that operator having only filed a Memorandum of Understanding as to our lease. But there are drilling commitments that begin to kick in as you look towards the latter part of the year. The other thing that's happening now with some operators are requesting incremental time to drilling -- or sorry, to complete wells to bring online those wells to production. That then affords us the opportunity to go back and renegotiate some of the lease terms to provide them that incremental flexibility.So there are some enhancements that we can make to less sophisticated leases that modernize those leases more favorable to us. So this -- although no one wants to be in these types of circumstances, there are opportunities for us as we look forward to high-grade our leases, to capture incremental value in the event a lease is not held, there could be the opportunity to release certain interests. So that's something that I know Brad Burris, our VP of Land, in particular, is monitoring extremely actively in terms of operators living up to their obligations under leases. So it's one of our critical areas or critical focus areas as we think about the remainder of 2020. So it's very high up on our radar to make sure operators are living up to their commitments.

[William Thompson:]

That's helpful color. And then I believe the plan was to trim the payout ratio about 5% per quarter going forward to build cash for M&A. And just given the downturn, I'm just curious if that -- if there's any change in thinking there? And would you be open to buybacks? I know obviously, the distribution is very important to you guys. I'm just curious on getting your thoughts there.

[Robert Roosa:]

I think, first and foremost, -- glad you asked this related to the dividend because as we think about it, we wanted to maintain the 100% dividend, given the cash that's on our balance sheet, there's no debt. We -- there has been a reduced amount of deal flow, so we didn't feel the need to retain cash in this environment, given kind of a slowing down of the deal flow at this point. But I think most importantly, and Bud and Blake can weigh in further, in both the April 2019 IPO and then December follow-on offering, we indicated that as long as there was cash on the balance sheet, we'd return capital to our shareholders via the 100% payout. And so we still have that cash on the balance sheet. I think we're going to have that through the second quarter.So we're likely to still have 100% distributions subject to Board approval, of course, through the second quarter. But as we are -- as the M&A market or the seller market does fall, you can expect us to deploy capital. And so I would anticipate probably in the third, fourth quarter that we'd continue on with the strategy that we've discussed with folks in the past, that kind of 5%-ish per quarter reduction in the dividend and ultimately wind out -- wind up at a 80% to 75% payout ratio on the dividend.When you think about it, you hear everything that Warren Buffett recently talked about, there's really almost no better use of our -- of capital than retaining some of the capital and redeploying that to the business. It's just a tremendous opportunity for us to compound value. When I think back through the period 2013 to 2019 as a private company and operating with our private equity guys, they allowed us to retain all of our capital and redeploy that to assets and continuing to buy minerals. And at the end of the day, you can see how productive that was for us. And so our goal is to get to that kind of 80% to 75% payout ratio and thereby, utilizing that 20% to 25% of our cash flow to continue to buy assets that are accretive to all shareholders.We've had some discussions. It's kind of a mixed bag response as to shareholders and their thoughts as to whether we should buy back shares or not, deploy the dividends. But I think kind of the consensus around our discussions with our shareholders and how they view the opportunities set ahead of us, most of them, I think, would point us towards that 75% to 80% distribution rate and then retaining the remainder of the cash flow to buy incremental assets. But I'll turn it over to Blake for incremental thoughts at this point.

[Blake Williams:]

Yes. I think Rob covered on the dividend policy, on the buybacks. We've got a lot of opportunity in front of us as far as assets that we think we can buy. So having that liquidity and that extra dry powder in order to do that is key for us. As far as just commenting on the bank facility, the bank facility allows us to use it for general corporate purposes and for buying assets, not for share buybacks.

[Operator:]

The next question comes from Pearce Hammond of Simmons Energy.

[Pearce Hammond:]

My first question is what is your base decline if there were no new activity completed on your mineral acreage?

[Blake Williams:]

Yes. Sure. Thanks, Pearce. So the Q2 '20 to Q2 '21, the base decline would be 36% on a BOE basis and it's a touch higher on an oil basis.

[Pearce Hammond:]

Okay. And then my follow-up is, has the oil price downturn changed the types of mineral packages that you want to acquire? And how has the downturn changed your underwriting standards?

[Robert Roosa:]

As Blake mentioned in his portion of the transcript, we have tightened our underwriting transcripts. So when you think about some of the primary inputs, when we look at how we buy deals, the primary ones that have changed, of course, are price. And I would say that as prices unfortunately declined rapidly beginning kind of February through the March period, we're almost weekly adjusting the price decks we use. I think interestingly, a major question mark becomes how you handle 2020 and kind of the point at which the tanks become full and what impact that has to pricing. So I would indicate to you that we've been very cautious in terms of the credit we're willing to give for 2020 production. I would say the other major input that's changed as you think about now versus prior periods is the timing of future development wells.Obviously, that has a huge impact. We've extended the timing for all of our operators as we look at their potential to develop future locations. One of the things Blake mentioned in his call is we are pretty regularly updating our financial analysis of the operators that we buy under -- are willing to buy under, looking at their debt walls that are approaching them and the realization that they might have to slow production -- or slow -- sorry, activity as we look forward as a result of the debt ahead of them. And so I think it's a really concerted effort on part of all of our teams to address the underwriting criteria. And that goes from our reservoir engineering team who have used this kind of interim time in which the deal flow is slow to go back and relook at all the EURs in all of our basins to looking at all, and this is Blake, myself, Bud and the finance team, looking at all the transcripts here, all the earnings press releases that have come out over the past 10 days or so and looking at where people are deploying capital.Again, it's the finance team undertaking that financial analysis. So really, it's a team effort to come up with our very best estimates as to the inputs into our underwriting criteria, but I think we've lived through this before, as Bud mentioned in his portion of the conference call transcript in the period of 2015 through 2016, there was an obvious kind of 3- to 4-month slowdown in buying activity when that shock happened. And I think it's nothing different than we're seeing today. It's almost like the reset button has been set on the computer, and we're rebooting and waiting kind of for things to fall. And as we mentioned in the call, I think that, that will start to happen kind of later this month as mineral sellers or mineral owners start to see the initial impacts of that March pricing decrease to those checks. Because pretty typically, operators checks lag about 2 months in terms of when that's distributed to the mineral owner. And so that March pricing impact isn't going to be felt until later this month.

[Operator:]

The next question comes from Brian Singer of Goldman Sachs.

[Brian Singer:]

I wanted to pick up on a couple of points that you mentioned, and I thought the point you've just made on that you've been taking some of the time to do an analysis on EURs is interesting. And I wondered if you could talk about any takeaways and whether that's increased or decreased your views on supply cost and opportunity sets in the Delaware versus the Midland versus the Mid-Con versus the DJ and any regional implications that may have come about from doing that analysis?

[Robert Roosa:]

At a high level, I think our economic analysis as to the returns of wells still directionally points us to in terms of overall ranking of the opportunity set would be, one, to the Delaware Basin; two, to the Midland Basin. The DJ assets performed very well. And so that's why you saw us, in essence, in the first quarter, deploy 90-plus percent of our capital to the Permian Basin. If you think about the future ahead of us, it's really the continued development of those assets. And so it's really year-over-year haven't seen much of a positive increase in well results in terms of EURs.We, at least for the interim have probably hit that technological wall. That's not to say that we won't see incremental positive improvements in EURs happen into the future. I would tell you probably when times are tough like this, us having the operator background realize that people continue to refine and update their completion techniques, their drilling techniques. And so you're likely to see, I think, sizable efficiency gains. As we think about using -- utilizing every dollar that you have of your liquidity most effectively. And so a lot of that will transpire over the next kind of 6 months as people reset, refine their completion techniques, much the same as kind of, I would say, we are using this time to refine our EURs. You'll see operators slow down, and then they can refine instead of that really ragged pace of development. They can kind of use this time to relook at how they drill and complete wells.So I think all that will happen over time as well. So to me, when you think about operators in the E&P space, they're some of the most innovative folks that we know. And so they're highly likely to become much more efficient in the future. But in terms of where we look at deploying capital, I think there's great opportunity for us in the Permian. When you think about, I think, the Texas independent petroleum and royalty owner report indicates there's over 600,000 mineral owners in Texas for us to reach out to you and potentially acquire deals from. There's a huge opportunity set in Texas. That being said, there's still opportunity in the DJ, the Williston Basins in Oklahoma, they just have to be priced accordingly. So I think our shareholders, other people looking at investing in us should realize that we've been doing this modeling transactions for the past 7 years, and we're going to deploy capital effectively via our very stringent underwriting criteria. So any deal that we enter into is obviously going to clear all of our hurdles.

[Ben Brigham:]

Yes, this is Bud. I might just add, just in general, we view this really as -- it's a really difficult period. We're in a really the sweet part of the cycle because this is when we can make the most attractive acquisitions and investments. And then as Rob said, as operators, we're going to be much more efficient and benefit from a low-cost structure and coming out of this with the very best crews and equipment, innovating and producing out as prices rise. So this is the time that companies such as ours have lived through these cycles are really -- real fortunate to be positioned like we are to accrete a lot of value for our shareholders and which will benefit us over the upcoming years.

[Brian Singer:]

Great. And then my follow-up is with regards to both the shut-ins that you're seeing. And then a follow-up to the question on leases and drilling commitments. Are you seeing evidence now? Or do you expect that if prices of today hold that you'll see a reversal of some of the shut-in production on the areas in which you've got mineral rights? And -- but the producers that -- or the operators that are facing, giving up some of the leases due to production for drilling commitments. Do you see it more likely that those leases will be renegotiated as you talked about previously? Or will be given up entirely? Or you'll just see the company start to bring back activity?

[Robert Roosa:]

I think it's most advantageous for an operator to start to slowly bring those wells online to production as long as there's economically -- economic production they can continue to hold those leases. So I think pretty typically, there's, I would say, 2- to 3-month periods in which an operator can shut in a well without penalty. After that time, largely leases require you to bring those wells online to production. So you've heard a lot of people talk about April, May, June, shut-ins. Realistically, when you think kind of about a 2- to 3-month window, that logically leads you to believe that, kind of, say, in the July time frame, predominantly in the third quarter. Therefore, you're going to see a reversal of those shutdowns just so operators can maintain the leases without having to go back to a mineral owner and renegotiate those leases.I mean, as you think about mineral owners and the leases that have been negotiated, there's probably no more sophisticated mineral owner than in the state of Texas. And so when you think about those leases being very sophisticated and probably the shut-in requirements being the most punitive there, I would think -- when you think about all the states, and this is just a generalization that you're probably going to see production come online quicker in Texas just because of the highly sophisticated nature of those leases going forward.

[Blake Williams:]

Yes. The other thing I'd mention from a high level, I know we've talked about this on previous calls, but we're 95% minerals. So to us, that's a different risk profile than an override, an override is just carved out of the lease. So to the extent a lease is subject to falling apart, that override would disappear. Whereas a mineral right, it's somewhat of an opportunity for us to renegotiate with an operator and either get a lease bonus again or negotiate some more stringent or more rig and minerals friendly clauses as a part of that process.

[Robert Roosa:]

Yes. And just to kind of build on what Blake said, just to kind of recap, we're probably 95%-ish true mineral rights and NPRIs, which are into perpetuity. Another kind of, say, 2% of our portfolio are mineral classified lands in the state of Texas. And so these are lands in which we own the surface, but then share 50-50 with the state of Texas in terms of the royalties. And then the remainder kind of 2% is override. So always been very cognizant of the fact that overrides have to be well held because those are contractual obligations that only last as long as the lease contract is enforceable. And so there's obviously a higher risk profile with an override relative to pure mineral rights or owning the surface. So just a point of clarification. I think Blake made a good one, but just to kind of expand on it further.

[Operator:]

The next question comes from Kyle May of Capital One Securities.

[Kyle May:]

So it sounds like the M&A activity's on the back burner for now, but wondering if you can talk a little bit more about what you're seeing on the ground in the current environment and going to a little bit more detail on how you're thinking about the landscape changing later in the year?

[Robert Roosa:]

I think M&A isn't totally on the back burner. We're still talking to folks about larger deals. And so that I don't think will slow entirely. And I think one of the things that will happen unfortunately as to what this current environment in is it's going to place continued pressure on private equity-backed mineral firms to look for exits. Because, as we all know, the clock ticks, they've got their cost of capital that they're facing. And obviously, for most folks, that's over the past 6 months have largely been able to not do anything because of the capital markets being shut. So obviously, that's in continuation to today. So I think there is going to be opportunity that we're hopeful that we'll see this year.I think in terms of our ground game acquisitions that we've talked about, kind of that $200 million prior to withdrawing guidance of ground game that we thought we could do, we are seeing that start to thaw. We are working up deals, providing offers. I would tell you, the one thing is we've been kind of close on executing on a couple of offers. But to us, kind of when we go back and do a reevaluation on the offer, it looks like to us, people are being a little bit more aggressive in terms of 2020 pricing than we're being, just us being cautious as to what actually pricing we're going to see in 2020 and the impact of that production and pricing to our cash flows. But I think we think that there's going to be a large opportunity, as we mentioned in the conference call transcript, beginning in June and through the remainder of 2020 similar to what we saw in 2016 and the opportunity set there, in which we're able to capture value. Because I think it's worth reiterating the point that Bud made, it's really us continuing to reach out to mineral sellers throughout this period and try to engage them because it's in these periods, it really provides us the opportunity to compound significant value.

[Ben Brigham:]

Yes. Just to amplify that just a little bit. I mean I think we provide a very attractive option for the premier mineral owners out there right now that otherwise do not have attractive options. And that is, again, why it's so important for us to continue to do what we've said we're going to do and not change our stripes because we're that shiny little object that people like to own and will want to continue to own. So it's set up really well for us.

[Kyle May:]

Okay. That's very helpful. And one other thing I wanted to follow up on. You talked about the lease bonus uplift in the first quarter. Just wondering with the current environment and kind of your comments about lease activity and resuming renegotiations, do you think lease bonuses for Brigham this year could be higher than you previously expected when you gave prior guidance?

[Robert Roosa:]

I think the issue, as you think about lease bonuses going forward is, it's obviously a bonus per -- bonus dollar per acre times the number of acres that you own. And so obviously, the number of acres that we own is not going to change, but the lease bonus per acre that an operator is able to pay is obviously reduced relative to before. So when you think about the P x the Q equaling your lease bonus, the P, I think. The price has been impacted going forward. I would tell you, though, that, that could be somewhat offset by incremental lease bonus opportunities coming -- or sorry, lease incremental leasing opportunities ahead of us that wouldn't have presented themselves if this current environment had not transpired.And so I think on an overall basis, though, the opportunity for us ahead in terms of lease bonus is going to be reduced relative to probably initial thoughts just because the bonus dollars per acre are going to be less going forward. But that being said, the opportunities for us to sophisticate our lease, making it much more commercial, much more mineral-owner friendly, I think, ahead of us in terms of other potential items and whether that CDP clauses, Pugh clauses, et cetera, gross margin -- or, gross values in terms of the products instead of netting. So there's a lot of different variables that we can toggle to on an overall basis to make that lease more favorable to us. So as I said, that's something really that Brad and his group are, in particular, are going to be extremely diligent on looking at going forward because I think there is opportunity for us to enhance the overall value to us.

[Operator:]

The next question comes from Leo P Mariani of KeyBanc.

[Leo Mariani:]

Just wanted to follow-up a little bit on shut-ins. Obviously, you guys aren't the operator here. So as a result, just trying to get a sense. Do you have any visibility on current shut-ins on your properties? Right now, any thoughts on where those could occur as we work our way through the second quarter?

[Robert Roosa:]

One of the issues that when you think about shut-ins and how they apply to us is just the very high level generalized manner in which operators have talked about shut-ins. And so when you think about companies like ExxonMobil or Chevron making highly generalized statements about shutting in 250,000 barrels a day to 400,000 barrels a day, there's really no way for us to determine how they've decided to allocate those shut-ins on a well-by-well basis. And so much the same as my prior point as it relates to mineral sellers not seeing the impact of pricing until June of this year for March volumes. Really, when you think about shut-ins that are happening this month in May, we're really not going to see those on our checks until July on an individualized well-by-well basis.So it's difficult at this time unless an operator points to a specific area in which they have decided to shut-in production that how it necessarily impacts us. I do know that from reading the Diamondback portion of the transcript, they referred to, in particular, an area kind of in Western [indiscernible] that they had shut-in production. We don't really have a lot under them in that area. So when you think about that instance, we're not likely to be very impacted by their shut-ins. But I think -- on an overall basis, when you think about our asset quality and you look at the maps and things like that, our goal has always been to stay under the very best geo, which naturally leads you to the most economic locations. And when you think about -- when you look at our slide deck and you see 50-plus percent of our net locations being in the Permian, 35% of those being Wolfcamp A locations, those are some of the most economic locations in the U.S. So I'm hopeful that potentially that the shut-ins may not be as impactful to us as others. But at the end of the day, we just won't have that clarity until later this year.

[Leo Mariani:]

Okay. I guess just with respect to rig count, I think you guys said it was kind of 46 rigs on average in the quarter. Just wanted to see if you can maybe walk us through how that changed on your minerals during the course of the quarter? So kind of where did you start the quarter, kind of where did you end the quarter? And any visibility on how that's changed subsequently, say, through April or into early May here?

[Robert Roosa:]

I would say, again, kind of with the understanding that we're trying to high grade the quality of the data that we provide you guys. And again, that's kind of moving away from the rigs and net royalty acres being drilled to that metric of gross and net spuds. When I think about kind of the fourth quarter to first quarter activity, we did see a good uptick in Delaware Basin drilling activity in 4Q versus 1Q. So when I think about 4Q activity, we drilled or had drilled for us about 0.6 net wells in the Delaware. In the first quarter, that was 0.9 wells. The DJ Basin was slightly lower. But when I think about the activity levels, a lot of that was driven by the fact that we did have a nice uptick in net locations in the Delaware, offset by some reductions elsewhere. So on a net basis, we went from 1.7 net wells drilled for us in 4Q to 1.6.So that was an increase in Delaware Basin drilling, offset by lower activity levels in other basins. And so kind of to give you a little bit further sense about the net activity on our assets, when we looked at kind of that 1.6 net wells, about 40% of those net locations for us were drilled by ExxonMobil and Chevron. So 2 very high-quality operators drilling a significant portion of our first quarter net locations. So again, kind of given -- even -- this is even going back to the fourth quarter, we indicated we'd be moving to these metrics. And so hence providing you the clarity in terms of net locations rather than number of rigs. So hopefully, you find that beneficial.

[Leo Mariani:]

Okay. And just a follow-up on the M&A side of the equation here. You guys are obviously very well positioned to capitalize here during the course of the year, given the strength of the balance sheet. But do you think that there's a high probability that some of these chunkier deals apart from the crown game are actually going to shake loose in 2020 here? How are you sort of doing that market? Do you think there's enough stress on the holders of those larger pieces and the PE shops to where they're getting a little bit more forced to start negotiating with you here this year, say, versus last year?

[Ben Brigham:]

Yes. I mean, this is Bud. I mean, no question about it. As Rob touched on, we've had this period of lack of capital flow to the industry and private equity with less capital, just less upward mobility for some terrific assets that have been acquired. And now, of course, entering this cycle, they have just fewer and fewer options. And so we had very productive discussions last year. I'm anticipating that here -- that we're just going to be -- we're in a very good spot that we provide, I think, easily the most attractive option for those with quality mineral assets to move into a more liquid and long-term better position. So I'm very optimistic. I'll let Rob and Blake if they may want to add to it. But I do think this is a sweet spot for us, and we're positioned better than our enterprise has ever have been before.

[Robert Roosa:]

Yes. And so when I think about those larger deals, there's obviously going to be preferentially for us to have them take back a fair amount of equity in return. And so that's one of the things that we see happening going forward. I'd say the other point to make is, and we've made this on the road in the past that if you're the first person to join forces with us in terms of doing a deal initially and taking back equity, you're in an advantage position relative to guy #4 or 5 that comes along and seeing us accrete value on deals 1, 2 and 3, you're better off in that position relative to deals 4, 5 and 6. So if I'm logically a potential seller, I'd like to be that first person in line taking back that equity, you're able to compound value and see incremental deals transpire and come to us in the future.

[Ben Brigham:]

It's likely coming out of this cycle.

[Robert Roosa:]

Yes. Yes. And so I think for that first guy that's thinking about doing a deal with us, I'd urge them to consider that relative to being person 4 or 5.

[Blake Williams:]

Yes. And then one thing I want to touch on before we leave this point is the balance sheet. So obviously, to date, we've been really conservative in our approach to how we manage our financial policies, and we'll continue to do that in the future. So you probably saw in the press release that longer term, our target of debt to EBITDA, our leverage ratios are no greater than 1.5 to 2x. That's by no means a mandate, I would say. We'll lean on the balance sheet where it makes sense to capture some attractive value. But that's just kind of a limiter, a pretty hard governor for us.

[Operator:]

The next question comes from Welles Fitzpatrick of SunTrust.

[Welles Fitzpatrick:]

You guys have always had a really nice balanced approach of PDP and undeveloped acreage. And -- I just want to ask, how does that calculus change given what's happening to the rig count? Are you guys more focused on PDP? Or is it undeveloped stuff, especially in the basins that have held up like the Permian, is that still pretty high on your to do list?

[Robert Roosa:]

No, preferentially, we as a team have spent a lot of time talking about this, which direction we think we're going to be headed in 2020. And I think as a team, we preferentially kind of migrated to more undeveloped transactions ahead of us, wanting to secure those going forward. We can, as a mineral acquirer know based on our technical teams that the geology is great, we're buying under good operators. And when things turn around, they're preferentially going to direct their activity to these higher quality assets. I think there's just a lot of uncertainty today as you think about PDP or even DUCs when those are going to come online, what price you're going to receive into 2020 for those production volumes. So I think as we think about it as a team, and you think about deals that we might be doing later this year, there probably would be more biased towards undeveloped locations.And so I think when you look at some of our deals that we had done last year, I think our portfolio was probably 27% or so, PDP, DUC and permits on a net basis. I would think that, that mix might go down going forward just because of us preferentially seeking more undeveloped deals, but it's something that we spend a lot of time talking about as a management team about what type of assets we want to target. And I think our preference is giving our superior -- as to what we view are superior technical abilities, we can use those technical abilities to identify that Tier 1 geo under the good operators, and those wells are going to get drilled for us. It's nothing different than we were doing in 2013, 2014 when these mineral efforts kicked off, and we're using those same technical abilities to identify those undeveloped locations that are now getting drilled for us today. We know we have the technical team in place, the employees here that can identify that rock that's going to get drilled for us into the future.

[Welles Fitzpatrick:]

Interesting, interesting. So to zig while others are zagging. On -- just a quick one on that. Is the lack of valid initiatives in Colorado, does that kind of reinvigorate your desire to be leasing up in the DJ in this environment? Or is that still maybe a little bit lowered here?

[Robert Roosa:]

I would probably rank the DJ behind the Permian, of course. I mean, just the assets in the Permian are stellar. That being said, I mean, there are some tremendous wells being drilled in the DJ. When I think about in the first quarter of this year, we had some really nice wells brought online for us by Oxy in their OJB pad by extraction in the Coyote Trails. We've seen some really nice incredible well results by Noble in their Wells Ranch area drilled for us over time and brought online to production. And so in particular, they just drilled for us in the first quarter, [indiscernible] don't know how much I like that name, but it is what it is. But I think the DJ -- again, it comes down to the capabilities of your technical team in being able to integrate the appropriate variables into your model in undertaking your model such that you're comfortable. So again, it's our 42 people on staff, half of which are on the technical side, executing upon that acquisition strategy that use our technical capabilities to identify the very best rock under the best operator. So it's a recipe we've been building on for 7-plus years. And so I'm very comfortable that our team is going to be able to continue to identify those superior opportunities for us into the future and really compound value the remainder of this year.

[Welles Fitzpatrick:]

Okay. And then for my follow-up, have you guys seen -- obviously, as operators programs slow down, have you seen any of them try and use that lower cadence to try and renegotiate their royalty rates in exchange for a near-term drilling slot? And is that something you would even entertain?

[Robert Roosa:]

No, I think there's other ways to toggle the lease to achieve benefits. And really, what we've seen thus far is operators come to us and ask for incremental time to bring wells online to production. So pretty typically, we've seen operators ask for kind of 3 to 6 months extensions to a lease to be able to have incremental time to frac and bring a well online, turn it in line to production. And so we are looking at or thinking about continuous development clauses, Pugh clauses, gross proceeds in terms of our leases. So the great part is, Brad and his team have done a tremendous amount of work, and we're very sophisticated in terms of our leases and being able to try to maximize our value. So we'll be doing that going forward.

[Operator:]

The next question comes from John Freeman of Raymond James.

[John Freeman:]

I just had just one question. I wanted to follow-up on the payout ratio. You've been very clear since [indiscernible] originally went public on that. That long-term desire to be around 75%, 80%. And Rob, I appreciate what you said about the cash on the balance sheet. So we still are right now forecasting maintaining that 100% payout in 2Q. I'm trying to think about, given sort of the challenging environment we're in, in terms of the desire in either 3Q, 4Q to start reducing that payout ratio to when I look out to maybe a more normalized environment in '21. If we'll go back to those prior sort of thoughts on the payout ratio, which had been -- you'd really only pare back the ratio when doing so would still allow dividend growth. In other words, if EBITDA didn't grow, you don't pay back the dividend. I understand that's not possible in the current sort of unprecedented environment we're in. But just maybe how to think about that sort of balancing act of the long term 75%, 80% payout with maybe some of the prior thoughts on the payout ratio when we get to a more normalized environment?

[Ben Brigham:]

Yes. Maybe I'll just set up, Rob or Blake with more detailed discussion. But as you said, we've been consistent at the appropriate time as we're growing the enterprise and growing our cash flows, we'll be moving towards that goal. This is not that time. I think coming on the other side of this trough, we're going to see, in my view, a really significant and nice expansion of our cash flows and nice growth, and that will be an optimal time to start transitioning. Blake, you want to add to that?

[Blake Williams:]

Yes. I mean I would just say that we do put a high value on doing what we say we're going to do, which is why we stand by our desire to continue to return capital to our shareholders. But at this point, as Bud and Rob both already said, there is a desire on our front to make the business a little bit more self-funding and compound that value. That's why we've got the team we've got in place that can evaluate all the deals at such a high level and perform at such a high level. So it's really going to ascribe a lot of value, I think, to our ability to capture those transactions in the future. So I mean, at this point, we're still discussing it with the Board on a go-forward basis. It's still subject to their approval. But right now, there aren't any changes to that policy.

[Operator:]

The next question today comes from Jeffrey Campbell of Tuohy Brothers.

[Jeffrey Campbell:]

You mentioned closely analyzing operator health repertory to making any acquisitions. I was just wondering if you're running the same analysis on the existing portfolio and if that is motivating any tweaking within the current assets?

[Robert Roosa:]

When I think about the current portfolio and operators, when I think about, we kind of have a green, yellow, red light schedule put together in terms of our operators and who we want and invest under. The vast majority of our portfolio is green. And so we feel really good about the operators that we're under. And so historically -- but I think the key metric for me is always staying under the best rock. Because even if you have an operator that's currently underperforming, but the rock is terrific, eventually, operatorship of those sections is going to change hands, and so you're more than likely going to have a more sophisticated, better capitalized operator coming in and drilling that position for you.So the key tenants of staying under the very best rock our number one checkmark still apply and are probably the most valid when you think about deals and where our position is located. I think if you look at our maps that we have on our website, our buyout lines are on there. You can see how well positioned our assets are within each of the basins, how diligent our technical teams have been in terms of making sure we stay under the best rock. And so that's always -- as long as you check that box, a lot of -- any other issues that you have tend to go away.

[Jeffrey Campbell:]

I appreciate that insight. My other question was, I was wondering if you're keeping an eye on the improving nat gas market into 2021? And if that will have any influence on your leasing?

[Robert Roosa:]

In terms of our acquisition criteria and where we buy, you can get a higher gas cut, in particular, in the Delaware Basin as you move to the West. And so that is one of the interesting things we've been thinking about. Historically, you won't see us play in the Marcellus. We tried to get in -- we bought some assets there, relatively small amount. There's just a lot of issues when you think about some of the gas plays in terms of the structure of the units, how they are formed. The title tend to be very difficult in those areas. And so you won't see us enter the Marcellus or the Utica, areas like that. And so I think when you think about optimization and maybe switching the portfolio slightly to gas, you can do that in the Delaware Basin, you can also do that in the DJ Basin. That provides you opportunity to get a higher gas cut going forward. And so there -- I think there's opportunities and our geologic and reservoir engineering teams have clearly identified gas cuts within each of the townships or blocks, and so we know where those more gassy areas are within the basins that we already play in. And so directionally if we feel like that we want a little bit more gas exposure, we can find that in our current basins that we acquire in.

[Blake Williams:]

Yes, especially if that offers attractive value.

[Robert Roosa:]

Again, I think that probably -- operator, are there any further questions?

[Operator:]

At this time, there are no further questions. So this does conclude our question-and-answer session, and I'd like to turn the conference back over to Robert Roosa for any closing remarks.

[Robert Roosa:]

We greatly appreciate everybody joining us this morning. Again, it's obviously tough times, but diligently, the team is working ahead, and we think that there's opportunity ahead of us for the remainder of 2020, especially on the acquisition side, and look forward to reporting back to you guys in August with our second quarter results. Again, thanks for joining us. Appreciate it.

[Operator:]

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