Brigham Minerals, Inc.
Q2 2019 Earnings Call Transcript

Published: 10 Aug 2019

[Operator:]

Good morning and welcome to Brigham Minerals' second-quarter 2019 earnings conference call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Julie Baughman to cover a few housekeeping items. Please go ahead.

[Julie Baughman:]

Thank you, Andrew. Good morning, everyone. Welcome to Brigham Minerals' second-quarter 2019 earnings conference call. Joining us today are Bud Brigham, Founder and Executive Chairman; Rob Roosa, Founder and Chief Executive Officer; and Blake Williams, our Chief Financial Officer. Before we begin I would like to remind you that our remarks, including answers to your questions, contain forward-looking statements and we refer you to our earnings release for a detailed discussion of these forward-looking statements and the associated risks.In addition, during this call we make references to certain non-GAAP financial measures. Reconciliations to applicable GAAP measures can also be found in our earnings release. A couple of administrative items to quickly cover. We have a new investor presentation available for download on our website, BrighamMinerals.com. We will be presenting at the Enercom conference in Denver on August 13 and attending the Seaport Global Energy and Industrials Conference in Chicago on August 27.And lastly, as a reminder, today's call is being webcast and is accessible through the audio link on the homepage of our IR website. I would now like to turn the call over to Bud Brigham, Founder and Executive Chairman.

[Bud Brigham:]

Good morning, everyone, and thank you for joining us today for our first quarterly conference call subsequent to our April IPO. Before we get started I want to thank all of our employees for their tremendous work and commitment. They have made this all possible. Important credit also goes to our early-stage investors, particularly our private equity sponsors, who bought into our sophisticated and highly technical mineral acquisition model at a time when the space was very poorly understood and very underappreciated.Our IPO was one of the first in the energy E&P space since January of 2017, and we stand out for good reason -- as a less risky way to play the best of US shale with growing cash flows and distributions without the risk associated with capital expenditures. We are effectively carried on development costs by a diversified portfolio of elite US operators who generally have very strong balance sheets in the very best of the US shale plays. So, I believe Brigham Minerals is the right business model at the right time. We have an entrepreneurial environment and culture and, as successful former E&P professionals, we're extremely technically sophisticated with a rigorous, disciplined, knowledge-based approach to buying minerals. We are benefiting from six-plus years of fine-tuning our strategy and processes through over 1,400 transactions.When I look at our maps and view our diversified position across 39 counties within the best liquids rich resource plays in the country, I see a portfolio that can't be replicated and is therefore truly special. For those that aren't familiar with Brigham Minerals or the mineral space, I'd like to provide a very brief overview and quickly hit a few key points. Next, Rob will recap the quarter and highlight some of our outstanding operational results. Finally, Blake will review our tremendous second-quarter financial results and then we will wrap up by taking your questions. With that let's get started.First off, Brigham Minerals was founded in 2012 to acquire mineral and royalty interest in the core of Tier 1 liquids rich resource basins across the continental United States. The real start occurred back in 2008 when our prior public company, Brigham Exploration Company, was buying minerals in the Williston basin in and around our drilling units. We recognized back then that the mineral space was relatively unsophisticated technically in terms of both the quality of the geologic and reservoir engineering work and, associated with that, the competitors generally lacked a sophisticated, rigorous and disciplined forward modeling of mineral values. In essence, we saw a very inefficient and rapidly expanding market and thus the opportunity.Fortunately the Brigham Exploration sale to Statoil in late 2011 gave Rob and I and the team the opportunity to capitalize in our investment thesis of using our technical expertise and our experience as an E&P operator to identify and evaluate core Tier 1 minerals. Over the past six-plus years we've assembled a team of 36 individuals whose sole job is to evaluate potential mineral deals and to apply our disciplined technical evaluation approach that has served us so very well in the resource plays.As a result of their efforts, we've assembled an unmatched diversified portfolio of mineral assets in the Permian basin, the SCOOP and STACK plays in the Anadarko basin, the DJ basin in Colorado and Wyoming and the Williston basin in North Dakota. At the end of the second quarter we have acquired more than 74,000 net acres across these four basins. This portfolio will provide us with exciting organic CapEx free growth for years to come. In addition to our existing inventory, we've seen terrific momentum on the acquisition front already in the third quarter. We believe we will invest $175 million to $200 million in our ground game acquisitions this year, the singles and doubles so to speak that we have consistently made for years now. And that is just our ground game; it is not inclusive of the number of quality large-scale transactions we are evaluating.We are in an advantaged position to consolidate in the mineral space given our track record as a public company and given the quality of our assets. And as such we expect to secure large-scale accretive transactions over the next several years. These potential transactions provide us with the opportunity to very accretively scale up our enterprise to the benefit of all of our shareholders. Also and very importantly, I believe minerals are an advantaged asset class within the energy space. Even without additional acquisitions, our existing minerals will continue to produce substantial organic production and cash flow growth through our existing 12,000 gross undeveloped locations in our inventory, with zero development CapEx required from us.On top of that, mineral owners are not subject to lease operating expenses after a well comes on line to production. Therefore, our business has high-margin cash flows relative to a traditional E&P company. And it's important to also note that, because we own minerals under these top-tier operators' very best acreage positions, we are less exposed to the down cycles. Some of you may remember the so-called lifeboat hypothesis. Well, it's true. When the rig count drops in a price down cycle, as it has in the past and will again, the operators move their rigs to the very best acreage so that they can generate the returns they need to be profitable in a challenging environment. And that's where we are generally under their very best acreage. We saw this in 2016 when oil prices dropped to $40 per barrel, but our production and our cash flow continued to grow.Finally, we own our minerals forever and therefore we have what we term around the office as, quote, a perpetual option on the geologic column, unquote. Our shareholders are therefore exposed to incredible upside or optionality over time. This optionality or upside can come from

[Rob Roosa:]

Thanks, Bud. First and foremost, it is clear our diversified portfolio of both our four operating areas and numerous high-quality well-capitalized operators clearly outperformed in the second quarter, which represented our third consecutive quarter of sequential double-digit production growth. Our diversification strategy literally pays dividends to our shareholders when operating issues impact either a basin or a subset of operators.For example, despite the blowout of natural gas pricing in the Permian basin, we were still able to maintain a realized price of over $2 per MCF on a companywide basis on the strength of our assets in the Anadarko, DJ and Williston basins. Additionally, when issues impact one or a couple of our operators, the overall impact to a company with over 12,000 gross or 100 net undeveloped locations in our inventory is small.To put this into further perspective, when a couple of our operators announced a reduction in activity last week, I know that we are protected from a significant impact on our operating results as our exposure to both of these operators was less than 4% of our DUCs and less than 1% of our permits. Finally, a large diversified ownership position across entire basins allows us to use a statistical approach to our financial forecasting and we therefore believe in those cases it's actually easier for us to consistently deliver results with a diversified ownership position than if we had larger interest tracks in a much smaller subset of drilling spacing units across a basin.Moving into a review of our operating results, we had record daily production volumes of roughly 6,800 barrels of oil equivalent per day, up 26% from the first quarter and up 82% from the second quarter of 2018. As we indicated on our road show, production volume growth in the near-term was driven almost entirely on the back of the conversion of our drilled but uncompleted locations, or DUC, inventory. Given the tremendous growth in our second-quarter production volumes we experienced, as you would expect, significant conversion of our DUC inventory from the end of the first quarter.During the second quarter we converted over 200 gross or 1.8 net of our DUCs to Proved Developed Producing, which represented over 24% of our gross and 32% of our net DUC inventory at the end of the first quarter. Year-to-date we've converted 49% of our gross and 57% of our net DUC inventory as of year-end 2018 to Proved Developed Producing, which puts us well ahead of the pace relative to our 88% of gross DUC conversions that we saw during the entirety of the calendar year 2018. We saw completions from all of our operating basins impact and drive production growth. Some drilling spacing units where we saw strong contributions to production and revenues include a Continental Homsey unit in the STACK, several Continental SpringBoard row 1 units in SCOOP, completions by Anadarko and SRC in the DJ basin, several nice conversions by BP and WPX in the Delaware basin, and, last but not least, conversions by Marathon and Nine Point in the Williston basin.The Nine Point completion, obviously near and dear to Bud and my hearts, as the Erickson wells 155-102 were amongst the leasehold position that Brigham Exploration Company put together in the Williston basin. Despite the strong conversion of DUCs during the second quarter, the average of 62 rigs running on our minerals during the quarter continued to reload our DUC inventory and we ended the quarter with over 940 gross DUCs at the end of the second quarter as compared to 860 DUCs in inventory at the end of the first quarter.Our 5.3 net DUCs in inventory at the end of the second quarter will be converted by high-quality, well-capitalized operators. We estimate that 44% of our net DUCs in inventory at the end of the second quarter will be converted by Exxon Mobil in the Delaware and Williston basins, Continental Resources in the SCOOP/STACK and the Williston basins, and OXY in the Delaware and DJ basin post completion of the Anadarko transaction. The 62 rigs running on our minerals during the second quarter compares highly favorable to the average of 49 rigs running on our minerals the past five quarters. Breaking down the rigs into further detail, 28 of the rigs were running on a Permian assets and 19 of the rigs were running on our SCOOP/STACK assets.During the second quarter we saw nice activity levels across all of our basins. In the Delaware basin we saw good activity by both Anadarko and Exxon Mobil in our Loving County development area. We also saw good activity from a number of other operators in the Delaware including Centennial, Rose Hill, Concho, Patriot, Cimarex, MDC and Matador. In Oklahoma we continue to see good activity from a number of operators including Continental, who on average ran nine rigs for us over the second quarter in their SpringBoard project and STACK plays as well as in Cana, Devon and others.Importantly, in the third quarter we continue to see very active operations on our mineral position and, at the beginning of August, have 64 rigs running drilling approximately 2,900 net royalty acres, which represents a sizable uptick from the average of 2,300 net royalty acres being drilled in the second quarter. In our Delaware basin Loving County development area Occidental Petroleum Corporation had two rigs developing its Silvertip project, and Exxon Mobil Corporation and EOG Resources Inc. were running four rigs just south of Silvertip.Also at the beginning of August in our SCOOP play, which includes Continental Resources' SpringBoard development area in Grady County, Oklahoma, Continental and other operators were running 21 rigs across our mineral position. As I mentioned in our press release, the activity on both our loving County development area and Grady County, Oklahoma positions is very early, but, despite the fact that it's early, production volumes and revenue from these areas already represent 10% of our Company's production in revenues. We believe we are in two of the premier manufacturing mineral projects in the lower 48. Of note, you can see the powerful shifts that occur once operators switch to full scale manufacturing mode development.In addition to the aforementioned strong organic growth in our diversified portfolio, our acquisition teams continue to enhance future growth prospects through our very active mineral acquisition efforts. During the second quarter we deployed $40 million of capital to acquire 2,700 net royalty acres, 71% of which was deployed to the Permian and 23% to the SCOOP/STACK. As of the end of the second quarter we had approximately 74,100 net royalty acres across 39 counties. As Bud mentioned, we are off to a fast start in the third quarter believe we have the ability to deploy $175 million to $200 million via our ground game during the full-year 2019.Furthermore, the pace of internally generated and inbound acquisitions that our teams are evaluating is very strong, quite possibly the highest we've ever seen it. But we've maintained our commitment to our shareholders to be disciplined in our underwriting approach that has served us so well over the past six-plus years. It is important to note that our disciplined capital allocation extends beyond deal evaluation and our commitment to the regular return of capital to shareholders via dividends. That's why we're pleased to initiate a $0.33 per share dividend for the second quarter which we announced last night.I will now turn it over to Blake so he can summarize for you our financial performance and our first dividend. Blake?

[Blake Williams:]

Thank you, Rob. Daily production for the quarter was 6,768 Boe per day, up 26% sequentially and comprised of 56% oil and 15% NGLs. Overall production growth was anchored by strong performance in all of our basins. The Delaware led the charge with daily production of 2,600 Boe per day, up 30% from the first quarter, and was complemented by quarter-over-quarter production growth of greater than 20% in the Midland, SCOOP/STACK and the Williston.We remain extremely pleased with our lower risk, broad-based production growth. Also of note, our oil cut ticked higher due to the continued growth out of the Delaware basin and SCOOP play in Oklahoma. Realized pricing for the quarter came in at $37.42 per Boe, up 3% from the first quarter. By commodity type realized pricing was $55.24 per barrel of oil, $2.17 per MCF and $17.42 per barrel of NGL. The strong realizations relative to product benchmarks highlight the benefit of our diversified portfolio that provided insulation from basin specific differential blowouts.Our asset operating expenses for the quarter were in line with expectations including an expected increase in G&A related to the IPO and go-forward public company costs. Gathering, transportation and marketing expenses were $1.5 million or $2.47 per Boe. Severance and ad valorem taxes were $1.5 million or 6.3% of mineral and royalty revenue. Both GTM and production taxes increased in line with the increase in royalty revenue. G&A expense before share-based compensation was $3.3 million. Increases are attributable to the incremental costs of running a public company versus our prior periods that had a lower cost structure while we were operating as a private company. The main drivers of the increase to cash G&A were audit fees, D&O insurance, rent and data providers. We expect the current quarter to be a good run rate to use for the remainder of 2019.Share-based compensation expense was $6.5 million in the quarter, which includes nonrecurring compensation tied to the IPO. Net income for the quarter was a loss of $3.2 million mainly due to a loss on the extinguishment of debt that was incurred in relation to the termination of our term loan. Adjusted net income was $3.7 million after excluding that loss on the extinguishment of debt. Adjusted EBITDA for the quarter was $18.3 million, an increase of 32% over the first quarter. And adjusted EBITDA, excluding lease bonus, was $16.8 million, an increase of 28% over the first quarter.Looking at our balance sheet, we exited the second quarter with $203 million of total liquidity. Our liquidity was comprised of $83 million of cash and cash equivalents as well as $120 million of availability under our new fully undrawn revolving credit facility. We used a portion of the IPO net proceeds to repay and terminate all outstanding term loan debt and then entered into a new revolving credit facility to further enhance liquidity and financial flexibility. We will continue to maintain a conservative capital structure with a goal of keeping leverage at or less than 1.5 times net debt to EBITDA. Further, we are currently in the process of redetermining our borrowing base and should have an update in late August.We are committed to delivering total shareholder return through prudent capital allocation and return of capital. As Rob stated, we will pay our first quarterly dividend this month in the amount of $0.33 per share of Class A common stock. This is based on our operational and financial results for the full quarter beginning April 1, rather than prorated from the April 23 IPO date. It will be payable on August 29 to all shareholders of record as of August 22. Importantly, we are paying out all of our discretionary cash flow this quarter. Lastly, we have not added to our hedge position and do not intend to layer on additional hedges at this time. I will now turn the call back over to Rob to wrap things up.

[Rob Roosa:]

Thanks, Blake. Our second-quarter results delivered record production, revenues and EBITDA and demonstrated the value of our diversified portfolio and our commitment to return capital to shareholders through our newly initiated dividend. I'm extremely proud of our team and the effort it required to build this business from scratch over the past six-plus years and the intense focus required to operate the business at a high level and, at the same time, complete a successful IPO during the second quarter.Finally, we continue to be very excited about Brigham's future due to the extent of the visible development on our existing organic asset and the long runway of growth opportunities it provides. Minerals are a unique asset class unburdened by development CapEx and lease operating expenses and the highly fragmented ownership that creates significant consolidation opportunities.We think Brigham Minerals is uniquely positioned for success due to our operator background, proven track record, public company experience and highly technical, disciplined approach to evaluating minerals that underpins our constant focus on creating value for shareholders. I will now turn the call over to the operator to open up the line for questions.

[Operator:]

[Operator Instructions]. The first question comes from Betty Jiang of Credit Suisse. Please go ahead.

[Betty Jiang:]

Just a question on the overall basin activity. Among all the top oily resource basins, Anadarko has seen the most drop in rig count this year. Can you give us some color on what's driving that trend and if you are seeing -- what type of activity you are seeing on the core SCOOP and STACK acreage in your portfolio?

[Rob Roosa:]

Thanks, Betty. Appreciate the question. I think when I look at the SCOOP/STACK activity it is very strong in particular for us. When I look at the statistics from the first quarter we were running about 22 rigs on our minerals; in the second quarter about 19. And then by early August, some of the stats we gave in the press release, we had 23 rigs running on our SCOOP/STACK asset. So we continue to seek good growth.In particular there is high quality operators drilling on our position. Of the 21 rigs, 14 were operated by Continental, five by Marathon. So, significant activity by those operators. And in particular, when you look at the SCOOP area itself, Continental -- quite a bit of activity in the northern part of their SpringBoard play. If you look at the most recent rig counts, they've expanded outside of the core SpringBoard area.When I look at the SCOOP play I really see four key townships, 7/5, 7/6, 6/5, 6/6. They've started to move Briggs into the 6/5 area, which we believe is an area where they most recently completed some acreage trades and acquired additional acreage. And so, they've broadened outside their defined SpringBoard play.Also we've seen Marathon come in in the southern part of the SpringBoard play and drill both Sycamore and Woodford wells where Continental does not hold the deeper rights. And so, quite a bit of activity in this area.And then when I look to South SCOOP, the Grady/Garvin area, in particular we noticed over the second quarter Marathon moving quite a number of rigs into the 3/4, 4/4 area, developing that as well. So, we see very strong activity in our core Oklahoma area, and despite the fact Continental talking about reducing the rig count by seven rigs in their southern area, currently at 19, so going to 12. We feel like there's still going to be significant activity on our portfolio.And why is that? Because we have a mineral position that overlaps quite well with their mineral position. So, we actively track all of their acquisitions every week. We currently forecast that we have at least 55% overlap over all their Oklahoma positions. If you then distill that down to the four key townships that I mentioned previously, we have 72% overlap with their mineral position. And then if you look at the SpringBoard play, we have 79% overlap with their mineral position.So, really when you think about what activity levels they're going to have going forward, it's deploying their rig count to their mineral position. So, I feel really good that despite they are reducing the rig count, the 10 rigs they have indicated are going to be drilling in the SCOOP SpringBoard plays; the vast majority of those are going to be drilling on our mineral position.So, operators may be reducing activity, but the key thesis for us has always been to stay in the very best rock under the best well-capitalized operators. And so, hence I think you've seen that rig count stay relatively stable over the first quarter through August. And so, we feel incredibly good about the Oklahoma asset.

[Bud Brigham:]

This is Bud. I'd just to add one thing to that, and I touched on it in the call -- is that we certainly saw in 2016, even though the rig count came up with lower oil prices. Like a magnet the rigs moved to the very best areas. So, that somewhat insulates us from the rig count reductions, at least in the areas they can generate the returns.

[Betty Jiang:]

That's great. I appreciate all that detailed answer. And then Continental has been talking about where they've been increasing their royalty acquisition activity in SCOOP. Just wondering how do you guys think about the competition of acquisition of royalty assets in that area competing with operators that are buying under their own assets.

[Rob Roosa:]

Competition is there in a mineral space regardless of whether it's coming from the operator or other third parties. One of the benefits of having a clearly defined plan and incremental information provided by the operators is our ability then because we know more to offer more and in essence compete with the operators. So, we are still actively acquiring in the SCOOP play under them and also actively targeting that area that I mentioned that Marathon is currently drilling upon.One of the interesting things that we've seen as we've continued to acquire in SCOOP is just there's some mineral owners that absolutely refuse to sell to the operator. They think that that more perfect information that the operator have is a detriment to them, that the operator is in essence going to use that against them. And so, they are more likely to sell that to somebody that they view an independent third party.So, that is kind of an interesting fact pattern that has developed over the past several months is that -- all along for us it's always been negotiate a deal with a party, sign a PSA, and if that party's interest is verified through our due diligence title work we close that deal. We've never walked away from a PSA like we know some third-party brokers do. And so, often times we get repeat business.And so, we've actually been buying in SCOOP -- the very first minerals we ever acquired in October of 2012 were in 7/6 which is today the heart of the SpringBoard play. So, we have been buying in there the past six years, had developed enormous relationships with other sellers. We are borrowing from family members, buying incremental interest that perhaps a party only sold us a third or 50% of their interest.So, we are seeing repeat business. The funnel is large and, if anything, the funnel has actually gotten bigger here since going public. People are reading about us. Geoff Boyd, our VP of Acquisitions, comments on the fact that people have read our S-1, reading our press releases. So if anything, going public has actually increased deal flow to us. And the realization that you are dealing with a solid party that has significant liquidity to work with is a huge benefit to us going forward.

[Betty Jiang:]

Great. Appreciate all the details. Thank you.

[Operator:]

The next question comes from Brian Singer of Goldman Sachs. Please go ahead.

[Brian Singer:]

Thank you. Good morning and wanted to start by following up on Betty's last question there. You highlighted the potential advantage of acquiring relative to an operator. As we see more capital come into the mineral space, can you talk to the more broader competitive landscape you are seeing, the impact that is having or could have on acquisition of valuations, and then the key assumptions you use to evaluate whether to or to not to move forward?

[Rob Roosa:]

The key for us, and we mentioned it several times on the initial remarks, was just to maintain our disciplined underwriting approach that has served us so well for the past six-plus years. So, despite their -- competition in the space, as I mentioned, there's plentiful deal flow. And so, it's always been a numbers game for us. If you have made 100 offers, maybe you are able to close on 10% to 15% of those. That's why it's important to have your deal team set up to efficiently evaluate deals when they come in the door. And so, our process in its entirety when we evaluate a deal is always to understand

[Bud Brigham:]

Yes, this is Bud. I might just add one macro comment because there's no question there are more competitors in the market. But we entered this business way back in 2012 because we saw this is an asset class that's going to grow exponentially and it's doing that. So, I think the liquidity of this market, the growth in opportunities to capture is -- really exceeds the increase in competition. So, as Rob said, we are seeing excellent deal flow and making very attractive acquisitions.

[Brian Singer:]

Great, thanks. And then two small follow-ups. The first is on the DUCs, if you have any seasonal expectations for how DUCs will evolve over the next three to four quarters. And then any comment on how you see transportation costs and your transportation costs moving over the next three to four quarters as well. Thank you.

[Rob Roosa:]

I'll take the first part related to DUCs. When you look at our 943 DUCs and just kind of digging into that, when you look at that DUC balance, our 943 DUCs relative to the EIA reports on DUCs as of June 19 of 8,200 DUCs, we are in 11% of all the DUCs in the United States. And then further distilling back down to our key operating areas, there's about 6,100 DUCs in Oklahoma, the Williston basin, DJ and Permian. So, we are in 15% of all the DUCs in our key operating areas. So, I think that that should tell people that we are making the right decision as to where we are acquiring our assets, because people continue to deploy significant amounts of capital to our position to increase that DUC count.And then in terms of the seasoning, we pretty well over the last several years have noticed less than 10% of our DUCs are greater than a year old. A different way to think about that is 90% of our DUCs we anticipate are going to be completed on a year in/year out basis. So, that's also consistent with the statistics we saw in 2018 wherein about 88% of our net DUCs were completed this year. And so, when I think about the 57% of our net DUCs that have been completed that were on hand at the beginning of the year already to date, that tells you that our operators are actively completing our DUCs this year at a faster pace relative to 2018. So, it makes me feel really good about the activity that we are undertaking.And in particular we are doing a lot to understand when frac crews arrive, when they've moved off locations. And so, there's a lot of monitoring that we can do via increases and technical capabilities that we've taken about or implemented here in the past couple of months to better monitor when frac crews are showing up, when they've left. So, it gives us better signals to what production looks like going forward.

[Blake Williams:]

And then to answer your question on the transportation, our thesis all along has been to buy under operators that are well-capitalized, your larger guys that tend to put the plumbing in place, have those agreements in place and that just accrues to our benefit. So, we don't really see, over the next three or four quarters, as you said, any real difference in what we're seeing on GTM.

[Rob Roosa:]

Yes, and so when you think about that DUC balance we have ahead of us I, mentioned on the call 44%-ish of that is going to be converted by Exxon, Mobil, Continental, OXY. So, very high quality operators that are going to have -- put in place those midstream systems. And one of the things that we talked about back in April was the fact Anadarko, now OXY, in that Silvertip area, we were -- when there was blowouts earlier this year in terms of pricing differentials, we really weren't as impacted by that because Anadarko was shipping those volumes to the Gulf Coast. So, our differentials for Silvertip area and that Eastern Reeves area was significantly different relative to the other parts of the basin.

[Operator:]

The next question comes from Welles Fitzpatrick of SunTrust. Please go ahead.

[Welles Fitzpatrick:]

So, your location count has always been conservative, and I realize people aren't using much of an NAV approach these days. But that conservatism, maybe it still makes sense in the STACK. But is there any thought to increasing your three deeper DSU well count, especially in the Midland and DJ basins where it's well below existing development plans?

[Rob Roosa:]

I think that just speaks to the conservatism we use when we are underwriting deals. But our reservoir engineering team that is headed up by Hal Hogsett, constantly looking at the wells that are being drilled as well as Dax McDavid on the exploration side in terms of the landing of the zones and evaluating. So, we are evaluating almost all these spacing units where there is density testing ongoing. You had a lot of talk of that in particular here recently. You had Jagged Peak here recently talking about the Coriander unit with where they are testing the third bone, the upper and lower A, the B. You have Carrizo talking about their Dorothy Sampson unit there in Block 4 in Reeves where they are testing five different zones. And to give you some perspective, that is two more zones relative to what we currently model in our transactions.So, our teams are constantly modeling or evaluating the activity that operators undertake when they are drilling these density units. The one thing we are kind of beholden to is the SEC guidelines in terms of bookings.So, I think over time, as more of these density tests are completed by operators and there's more data, you are going to see an uplift to that well count that currently stands at roughly about 12,000 undeveloped gross locations, around 104 net locations. And so, I think that happens over time. It's just going to take time for operators to prove up and have well results, a sufficient amount of data that Cawley Gillespie who audits our reserves can then give us credit for on a 3P basis.And so, we are monitoring that all the time. But yes, I think that's a very valid question that when you look at our Delaware basin bookings, we have about 14.5 wells per DSU. We think that is very conservative given a lot of the basin -- as I mentioned, people are talking about four to five zones of development.But you can tell by that 14.5 wells per unit, if you assume on average three zones being developed, you're talking about 1,000 foot plus spacing in our wellbore. And so, that's what makes us feel good about our results when we underwrite deals is that we are overreaching when we make offers to people to buy their minerals.So, I do think there is quite a bit of optionality. And what Bud mentioned was that perpetual option on the geologic column. So, I think you'll see that play out and that 12,000 gross location well count will go up over time as operators further delineate the plays.

[Welles Fitzpatrick:]

Okay, that makes sense. So, if I'm hearing you right, when you analyze transactions you do use something close to the numbers outlined on slide 13. Is that accurate?

[Rob Roosa:]

Yes, that would be the case. Obviously as you move across the Delaware basin east to west, north to south it changes. Loving County, when you think about doing deals there, that's the most prolific rock in the United States. So, in some instances you are talking about six to seven zones being developed by operators. We analyze each of those zones, the well results from the zones and only give credit to zones that we think an operator is going to drill over time. And so, you've just got to be very cognizant of where you are in the basin; north to south, east to west the oil cut changes quite a bit. So, that's just what you're getting with your investment in us is the technical team that can analyze the differences, understand how the rock changes and how we need to evaluate deals.

[Welles Fitzpatrick:]

Okay, that makes total sense. And then if I could ask a follow-up. On mineral obviously you talked about pricing for a lot of the call. But can you talk to acquisition pricing? Are there any basins in particular that have gotten softer with the rig count drifting down? And are there any that stand out as firm?

[Rob Roosa:]

I think on the softer side of things, a little bit softer, we've seen some softness in Oklahoma in the STACK play as the rig count has gone down. Equally, I think the DJ basin, just because the political situation is still planning out, obviously it's much better today than October/November when the uncertainty related to the election was still there. But we are very cautious in doing deals there. Every deal has pretty much got to be permitted if there are DUCs in the DJ outside of city limits. So, it's just part of the technical due diligence we look at when we do deals. But there has been some softening in pricing in Oklahoma and the DJ.But equally on the other side of things, pricing in the Permian, the Delaware and Midland basins has not softened. SCOOP assets, obviously given the activity by Anadarko -- sorry, Continental and Marathon that I alluded to previously, pricing is pretty firm there.

[Welles Fitzpatrick:]

Okay, makes total sense. Thank you so much.

[Operator:]

The next question comes from William Thompson of Barclays. Please go ahead.

[William Thompson:]

Good morning my first question is Bud willing to adopt me? I want to be part of the grandkids that gets -- just following up on Brian's--

[Bud Brigham:]

I already have too many kids.

[William Thompson:]

Following up on Brian's question, you know in the release that 49% of your DUCs at year-end 2018 have been converted to production year to date, which is ahead of pace versus last year. A common trend we're seeing this year is E&P CapEx budgets being front-end loaded with production more second half weighted. Just curious on how you guys think about the production cadence going into 2020 given the recent completion cadence and whether DUC builds related to E&P budget exhaustion could reaccelerate momentum in 2020.

[Rob Roosa:]

I think again it comes down to being the very best parts of the basin in these operators' premier areas of development. And so, given -- I think one of the beautiful parts about being in the mineral business is when we look at a deal, we are not beholden to acquiring leasehold in areas where we already have leaseholds. So, it's more efficient in terms of your drilling and midstream. And instead we can evaluate deals across the entirety of the basins and selectively pick off the best rock under the best operators with the best most well-capitalized budgets. So, when I alluded to the fact that 44%-odd of our DUCs are going to be converted by Exxon Mobil 18%, Continental 15%, Oxy 10%, I don't really foresee any slowdown there.So, almost half of our DUCs inventory is going to be converted by operators who are full throttle going ahead full speed. You've got Exxon Mobil with 50-odd rigs drilling currently I think 12-plus frac crews. So, there's obviously no slowdown there. So, we feel really good about -- our investment thesis about buying the very best rock under the best, most well-capitalized operators has always served us well.And so, when you look at in our slide deck and in particular one we spent a lot of time talking to folks about on the road was pro forma. If you were to go back and look at historical activity on our portfolio, assuming we had owned those assets since really we started the business in January 2013, that would be page 8 in the current investor deck.That you can see -- even when you had significant downturns in crude oil pricing and really beginning in 2015 into 2016, you can see the inflection in our production volumes that really happened in August -- July/August of 2016 through today. And really that's a result of staying under the very best rock under the very best operator.So, I think one of the things is to go back and look at that chart can see that over the past six-plus years plus on a pro forma basis, assuming we owned those asset since January 2013, production volumes in the drilling space units where we currently own has grown on a 54% compound annual growth rate basis over that period.So, I think that is a clear indicator as to the strength of the portfolio that we've put together. And that's why we feel good about our volumes in the latter part of this year into 2020.

[William Thompson:]

Okay, that's helpful. And then the release also alluded to maybe potential high-quality large-scale acquisitions. Historically Brigham's focused more on NAV accretion as a private company. But I assume some of these larger private mineral portfolios could be fairly cash flow accretive with the existing production. Maybe comment on what you guys are seeing in the marketplace in terms of those larger transactions and the presumption related to that.

[Rob Roosa:]

We are seeing quite a few larger opportunities and so one of the things we actively monitor when a deal comes in, obviously who those operators are, the PDP, the Proved Developed Producing wells associated with the deal. What are the DUCs -- what do the DUCs, the Drilled But Uncompleted locations look like on their portfolio? What do the permitting activity, what does the rig count look like?So, all that -- we are extremely cognizant of that because, obviously, with the yield base valuation we need to ensure that our deals are accretive to the shareholders. So, that's something we are actively monitoring. And one of the things that we've talked about and talked about on the road was we have the opportunity through smaller deals to blend more PDP heavy deals with more undeveloped deals.And so, even -- we try to look at large risk deals that might be more PDP heavy combined with an undeveloped portion to synthetically create an overall accretive deal. So, these are all the kind of analytics that we are undertaking when we're looking at deals going forward. And I will let Blake jump in here as well.

[Blake Williams:]

Yes, this is Blake. As far as how we think about accretion, it's a couple things. We are looking at cash flow, obviously immediate cash flow as well as the next 12 months. But then we are also cognizant of our high-growth rate in our existing asset. So, we are looking several years out on our projections of the DUCs when they come online, of the permits when they come online, and then a hit rate basis on the undeveloped.So, every deal that comes in the door, but especially the larger deals, we are looking at accretion dilution across multiple years to make sure that we're able to transact at a valuation that's going to capture value for our shareholders.

[Bud Brigham:]

I might add -- one thing that we did talk about on the road show is that there is a lot of opportunity at this scale because there's a lot of private -- some private equity backed, for example, mineral buyers that don't have exits or don't have upward mobility. And we are fortunate that our funnel acquiring in multiple Tier 1 plays and the best of these best areas we have a larger funnel than some of our competitors. So, that was -- one of the obvious attractions to going public was we already have a good reputation in our history as a public company and doing what we say we are going to do. I think that's a real positive in transacting with these folks that are looking for upward mobility. So, we are excited about the prospects on that going forward.

[William Thompson:]

Okay, that's great color. Thank you.

[Operator:]

The next question comes from Pearce Hammond of Simmons Energy. Please go ahead.

[Pearce Hammond:]

Good morning and thanks for taking my questions. My first question -- appreciate the helpful color in the release regarding the Loving County development area and Grady County production volumes and how that's essentially representing about 10% of your production revenues. Has the success in this area surprised you? And then secondarily, are there any other areas in your portfolio that you can -- think can have a similar impact?

[Rob Roosa:]

One of the great things about our operator background is this is an area that Bud and Kevin Labbe, our EVP of Exploration for Oklahoma and the DJ, have worked the entirety of their career. And so, when you think about that area of Oklahoma, it's not called the Golden Trend for -- I mean, it is called the Golden Trend because it has been one of the most prolific producing areas forever. And so, there's a lot of adages in the oil and gas industry. The best place to find oil is where it's been found before, and so it is an incredible area.That speaks -- when I mentioned us acquiring and today's SpringBoard play going back to our very first mineral deal in November 2012 speaks to the technical discipline, the technical expertise of our team. And so, that's evaluating these deals to such a degree.But we think all the areas that we've purchased, and you can look at the buyout lines from our S-1, the cover art. I mean, all these areas are Tier 1 rock under great operators that eventually have the opportunity to turn themselves into manufacturing [indiscernible] projects.And so, I think that's the part of the beauty of this 12,000 net -- or gross location inventory that we have that eventually is going to turn into manufacturing mode and be converted. And that's part of the organic CapEx free growth we have ahead of us.And so, I think in particular when you think about the Delaware basin, the river tracks along the river going up into Reeves and other areas of Loving are equally capable of being turned into manufacturing mode projects. It's just the operators have now largely completed their HBP exercise. And so, you're starting to see that happen now and probably happen more often.All these operators are attempting to increase operational efficiencies whether that's time to drill or cost. And so, that then makes you go towards the manufacturing route. And so, you're going to see more and more operators undertake projects like Silvertip, like SpringBoard. And so, you are just going to see more and more of that. But our key has always been to stay under the very best rock. And so, almost all the areas we purchased have the ability to convert themselves into a Silvertip or a SpringBoard.

[Blake Williams:]

I would add to that. Obviously to achieve that 26% sequential growth in production didn't come from just that one -- those two areas. We did achieve double-digit growth in every basin that we own. And so, it was very broad-based, no one operator, one unit is really going to -- they're all working in concert together to deliver that growth.

[Pearce Hammond:]

Thanks for that detailed response. And then my follow-up question is if you could remind me what your big picture thoughts are on hedges and hedging strategy.

[Blake Williams:]

Yes, sure. On hedges, I think one of the things we offer investors is exposure to the underlying commodity, as well as CapEx free exposure to the operations of the E&P companies that are drilling and completing our wells. We believe that we are somewhat of a marriage of an ETF of the best acreage in the XOP index and in oil price ETF. Also given that we are a royalty model we don't really have a cost structure. Further, we target a long-term mid-cycle oil price in all of our acquisitions. So, by keeping a conservative capital structure, it allows us to capture opportunities and value across cycles. So, we don't really anticipate adding -- as I said my prepared remarks, we don't anticipate adding to that hedging position at this time.

[Operator:]

The next question comes from John Freeman of Raymond James. Please go ahead.

[John Freeman:]

You all mentioned earlier on the call the improving oil mix you've been seeing. And what jumped out at me was specifically what you've seen in the SCOOP where it went from a 39% oil mix last year to 56% oil mix this quarter, which I assume was predominantly driven by the huge exposure you had to Continental's massive SpringBoard project. And I was just thinking along those lines, since Continental is your largest operator in the Bakken as well, do you all happen to have exposure to the project they just announced, the Long Creek project in the Bakken?

[Rob Roosa:]

We probably -- not within that unit itself. We probably have almost 300 net royalty acres just on the other side of the river in McKenzie County. That is a project that's largely in Williams County and one of the very first large deals we did incorporated acquiring about 200 or so acres right in that area. But Continental has -- are currently drilling in that area and we've seen some really, really nice well results right in that area. And so, not direct exposure to Long Creek itself, but we are literally the next section over and we have about eight sections of ownership there under Continental, Hess and others.And so, that's really approximate to historic -- John, you know the Brigham Exploration position that we had in Williams and McKenzie counties. So, obviously it's an area that we've targeted. But more than anything we've seen some tremendous well results in Williams and McKenzie counties from Nine Point, Cracken, Whiting and others. And so, if anything, one of the things we noticed, the rock in the Williston basin was largely under-stimulated going back into 2009-2010, 300 pounds per foot. So you can now come back in, complete wells with -- I've seen a lot of operators talk about completing wells with 700 to 1,000 pounds per foot. And so, you aren't seeing the interference or development -- potential issues that other folks are talking about. And so, we think the Williston basin is just a great play and that's why we continue to actively try to acquire there.

[John Freeman:]

That's helpful. And then just following up on some comments that Bud made earlier given you all being public now. Should we anticipate starting to see a more meaningful shift in the counterparties and the deals you do accepting Brigham's shares in these deals as opposed to just cash?

[Rob Roosa:]

I think that's going to be a bigger component for these large deals that we think about. So, when you think about a potential mineral owner or family having owned this position for -- sometimes some of the folks we're talking to 50 to 80 years it has been passed down amongst generations, there is zero basis for that seller. And so, there's the opportunity to take back a stock that is instead -- within a tight area under one operator to then diversify their position amongst our 74,000 acres amongst some of the best operators in the US. And potentially take back our LLC units, which enables you to defer tax until they want to convert up into the A shares.So, I think we are actively engaged and always talking to potential larger sellers about the opportunity to take back stock and in essence defer 20% to 24% of the tax liability until they eventually want to sell. But still in the interim they can collect the dividends, that $0.33 a share, from the LLC units over time until they make the decision to convert. So, the bigger deals always take longer to get across the finish line. But I think having the up fee structure we do provides us an incremental opportunity to get deals across the finish line by being able to offer people deferral of tax into the future when they are ready to sell.

[Bud Brigham:]

Just another quick plus. For the seller on those potential transactions, when you think about their situation, they can think about it in terms of as far as the stock component, they are taking a concentrated mineral position and trading that for a diversified portfolio of elite operators in the top-tier play. So, there's a lot of pluses for these mineral owners in these plays and -- on top of our track record and history in the plays where they all know us.

[Operator:]

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Rob Russo for closing remarks.

[Rob Roosa:]

We appreciate everyone joining us for the second quarter conference call. Obviously, again, reiterating the fact that the team has done a tremendous job in the second quarter executing upon both the IPO and our operational results. So thank you to everybody here on the team for just the terrific job. And we look forward to reporting back to you on our third-quarter results here in November later this year. Thank you again for joining us.

[Operator:]

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