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Edited Transcript of MNRL.N earnings conference call or presentation 28-Feb-20 5:00pm GMT

Mar 24, 2020 (Thomson StreetEvents) — Edited Transcript of Brigham Minerals Inc earnings conference call or presentation Friday, February 28, 2020 at 5:00:00pm GMT

* Ben M. Brigham

Brigham Minerals, Inc. – Executive Chairman

* Blake C. Williams

Brigham Minerals, Inc. – CFO

* Robert M. Roosa

Brigham Minerals, Inc. – President, CEO & Director

Goldman Sachs Group Inc., Research Division – MD & Senior Equity Research Analyst

Good day and welcome to the Brigham Minerals Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Julie Baughman. Please go ahead, ma’am.

Thank you, operator, and good morning, everyone. Welcome to the Brigham Minerals Fourth Quarter 2019 Earnings Conference Call. Joining us today are Bud Brigham, Founder and Executive Chairman; Rob Roosa, Founder and Chief Executive Officer; and Blake Williams, our Chief Financial Officer.

Before we begin, I would like to remind you that our remarks, including the answers to your questions, contain forward-looking statements, and we refer you to our earnings release for a detailed discussion of these forward-looking statements and the associated risks. In addition, during this call, we make references to certain non-GAAP financial measures. Reconciliations to applicable GAAP measures can also be found in our earnings release.

A couple of administrative items to quickly cover. First, we have a new investor presentation titled Fourth Quarter 2019 Investor Presentation available for download on our website, brighamminerals.com. We recommend downloading the presentation in the event we refer to it during the conference call. Second, we will be presenting at the Crédit Suisse Energy Conference on March 3. And lastly, as a reminder, today’s call is being webcast and is accessible through the audio link on the home page of our IR website.

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

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

Good morning, everyone, and thank you for joining us today. We’re excited to announce another quarter of industry-leading production growth, coupled with clear line of sight of continued substantial organic growth in 2020 and a balance sheet that’s prefunded to capitalize on acquisition opportunities.

To quickly recap our performance and how we’ve outperformed every quarter thus far. In my view, the fourth quarter is our best quarter to date. Our results demonstrate significant outperformance relative to both expectations and to our peers and once again evidences our commitment to underpromise and overdeliver. This repeated outperformance should illustrate to the market our differentiated business model and thus our assets relative to our peers. We don’t see anyone achieving the consistent growth we’re delivering. Our team generated a tremendous 23% sequential quarterly production growth relative to our strong third quarter. We produced approximately 9,600 barrels of oil equivalent per day, which was 73% liquids.

Rob and Blake will go into much more detail, but our consistent production growth demonstrates the uniqueness of our premium assets acquired by our highly technical evaluation team, utilizing our consistent, disciplined underwriting approach and our differentiated strategy of pursuing only core Tier 1 geology in liquids-rich basins under a diverse portfolio of high-performing, well-capitalized operators. This strategy and our team’s execution provides us with exposure to approximately 12,700 gross undeveloped locations largely in the Permian Basin under the very best of U.S. shale with no incremental future CapEx exposure. Our exceptional portfolio is generating industry-leading production, cash flow and dividend growth and is clearly resilient despite broader industry volatility. Further, our production growth translated directly to the return of capital to our shareholders via our dividend, which we were able to grow 15% to $0.38 per share despite having grown our share count 12% in December associated with our follow-on offering.

Looking forward, we continue to benefit from quality opportunity flow, accretively aggregating minerals via our ground game acquisitions in a fragmented space. We undertook our December follow-on offering in order to preload the balance sheet to capture those opportunities and deliver further incremental growth and most importantly increase value for shareholders going forward. We’ve been executing our minerals strategy since 2012 and, of course, prior to that, executed in the E&P space through the previous Brigham companies. So we understand the need to have a high-quality, well-capitalized balance sheet to capture deals. This is particularly important during turbulent times when others have to pull back activity due to macro disruptions, their associated impaired balance sheets or the inability to deliver the capital returns that investors are requiring today. Further, we continue to actively pursue larger mineral packages. And while we’re encouraged by many of our conversations, we are still searching for the right deal. We will remain steadfast, disciplined and patient, ensuring that any acquisition we enter into meets or exceeds our strict underwriting criteria and represents an extremely compelling use of capital. As the only public, diversified, high-growth mineral company, we are in a very advantaged position, particularly relative to the numerous privates with quality assets but with the lack of options to provide them with upward mobility or exits. After our successfully executed IPO, our follow-on offering and our consistent strong quarterly results, we feel we’re well ahead of the competition, and we will relentlessly use our advantaged position as a public company to keep extending our lead.

Finally, I wanted to take this opportunity to reinforce that Brigham Minerals has in the past and will continue in the future to align our company and ourselves with our investors to optimize value creation.

Starting with governance. We believe we were the pioneers in the energy space in terms of designing and implementing an executive compensation plan providing for superior investor alignment. As a reminder, this plan was implemented at the beginning of 2019, well before many of our peers announced steps this reporting season that directionally point them towards shareholder alignment but still failed to take the more direct alignment approach we’ve implemented. To recap, my long-term incentive plan compensation that was issued in April of last year is entirely allocated to performance-based stock units, which are calculated based on absolute total stock return. The rest of management team’s long-term incentive plan and compensation is allocated 50% to RSUs and 50% to performance-based stock units that are also calculated entirely based on absolute total stock return. We are aligned with our shareholders and only get compensated when we deliver a return to you.

Furthermore, it’s essential that we add the highest quality individuals available to our leadership positions, individuals that are highly talented and skilled and that provide a wide breadth of perspectives and viewpoints. On that front, we were very fortunate to bring on board Kari Potts as our Vice President, General Counsel and Corporate Secretary in early January. She joins us from Equinor and was with Rob and I as our General Counsel of Brigham Exploration Company, our prior public company.

Second, we’re also very excited with yesterday’s announcement to add Carrie Clark to our Board of Directors. Carrie is an outstanding talent and is the Senior Vice President, Land and General Counsel of University Lands, which is part of the University of Texas system and manages 2.1 million acres of land set aside for the benefit of higher education in the state of Texas. University Lands’ goal is to responsibly steward the lands it manages and maximize the revenue generated from the land. Since Carrie joined University Lands, the organization has delivered approximately $1 billion of net revenue from oil and gas royalties and surplus activities annually to the permanent university fund. It’s a top priority for us to continue to enhance our Board of Directors as well as our executive management team with different perspectives and viewpoints in the future.

To conclude my remarks, I’m extremely proud of our team for delivering on the promises we made during both the IPO and the follow-on offering, further strengthening our reputation for consistently doing what we say we’re going to do.

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

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

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Thanks, Bud. First, I’d like to thank the Brigham Minerals team for their tremendous efforts during 2019. Our 42-person team here in Austin has, since 2012, been assembling what I believe to be the preeminent mineral position in the United States. Our record full year 2019 operating and financial results that we announced yesterday clearly are supportive of that thesis. Our team has built an over 82,000 net royalty acre position across the Permian, SCOOP/STACK, DJ and Williston basins that generate 91% year-over-year growth in production volumes from an average of approximately 3,900 barrels of oil equivalent per day for the full year 2018 to 7,400 barrels of oil equivalent per day for the full year 2019. Our production growth, despite a 14% reduction in pricing, was able to deliver 64% growth in our royalty revenue from 2018 to 2019. And inclusive of our lease bonus, we’re able to surpass $100 million in revenues during 2019.

In fact, from the second quarter to the fourth quarters of 2019, we will have returned back to our shareholders $1.04 in cumulative dividends per share. Importantly, as Bud mentioned, but it’s worth reiterating, we were able to grow our dividend 15% in the fourth quarter to $0.38 per share despite the 12% dilution associated with our December follow-on offering. That offering now provides the basis for us to continue to execute upon our accretive ground game acquisitions in 2020, which we anticipate will largely be concentrated in the Permian Basin and execute upon the approximately $200 million 2020 mineral acquisition budget that we announced yesterday.

I believe it’s important to review the key drivers behind our outperformance. First, I believe a significant portion of our outperformance is attributable to our unique and deliberate strategy of building a diversified mineral portfolio in terms of both diversification across multiple resource play basins and diversification across high-quality, well-capitalized operators. Application of our fundamental financial principles such as portfolio theory to our mineral business makes us much less susceptible to issues experienced in any one basin or to any one operator.

Second, our deliberate strategy includes using our technical expertise and experience as an E&P operator to identify core Tier 1 geology across basins not restricted by area but instead focused on the very best rock to ensure we are acquiring the most economic locations that will continue to see development activity even in downcycles. We believe this strategy has generated and will continue to generate tremendous organic growth for our shareholders.

To put this in perspective, in the fourth quarter of 2018, our mineral portfolio produced approximately 4,600 barrels of oil equivalent per day. And if we’ve done absolutely nothing, not acquired even a single mineral acre, our portfolio would have produced via organic growth alone approximately 8,100 barrels of oil equivalent per day in the fourth quarter of 2019, representing approximately 80% organic growth over those 4 quarters. As I just mentioned, we think there’s still tremendous organic growth in the years ahead of us through the 12,700 gross undeveloped locations or 112 net undeveloped locations, of which 52% are located in the Permian Basin and 35% of which are Wolfcamp A and Wolfcamp B locations.

Of course, one of the primary reasons for going public was the opportunity to consolidate a highly fragmented mineral space and use liquidity provided by our IPO and follow-on offering and our team’s technical capabilities to continue to acquire minerals accretively. Our team performed spectacularly in 2019, deploying close to $220 million in mineral acquisition capital. Those 2019 acquisitions contributed approximately 1,500 barrels of oil equivalent per day of production to our fourth quarter production volumes. The portfolio that we took public in April of last year and our 2019 acquisitions now serve as the foundation for our 2020 production guidance. If you recall, in November of last year, we were able to issue preliminary production guidance for 2020 that was approximately 1,000 barrels of oil equivalent per day higher than research analysts’ expectations. And last night, we further updated our production guidance such that we’re increasing the midpoint from 10,000 barrels of oil equivalent per day to 10,500 barrels of oil equivalent per day. When you look at the 2 guidance announcements combined, we have, in essence, been able to increase our guidance for the full year 2020 by roughly 1,500 barrels of oil equivalent per day.

We believe our results in 2019 and the foundation they create for 2020 clearly demonstrate that our portfolio has inherent organic growth and that our acquisition team is creating substantial value through consolidation, which again, for 2020, has already been prefunded, and we are already starting to execute upon. Again, looking at the entirety of 2019, our team exceeded all of Bud’s and my expectations, and we are extremely thankful for their impressive efforts.

Now I’d like to turn to a detailed look at our record fourth quarter operating and financial results. Our record fourth quarter production volumes grew sequentially by 23% to roughly 9,600 barrels of oil equivalent per day and were up 110% from the fourth quarter of 2018. Production growth volumes across all of our basins, except for STACK, contributed to our outperformance. Although STACK production declined by roughly 20%, again, portfolio diversification went out, and our remaining assets fueled our exceptional growth for the fourth quarter. In particular, our Permian volumes grew by roughly 45% to a record 5,050 barrels of oil equivalent per day. Importantly, the development of our Permian assets in SCOOP, which saw a 22% increase in volumes, helped improve our liquids content from 69% as of the third quarter to approximately 73% in the fourth quarter.

As we mentioned in the past, our production growth over the next year is largely driven by the conversion of our drilled but uncompleted locations, or DUCs. The fourth quarter was no different, and we saw extremely strong conversions during the quarter. I know some people were surprised by my November conference call comments alluding to strong conversions that we were seeing. And they clearly played out during the quarter, as we converted 38% of our gross DUC locations and 42% of our net DUC locations in inventory at the start of the third quarter to proved developed producing locations. For the full year 2019, we converted 86% of our gross and 92% of our net DUCs in inventory at the start of 2019 as compared to converting 88% of our gross and 84% of our net DUCs in inventory at the start of 2018.

Conversions occurred across all of our operating areas with notable turn-in lines, including our ExxonMobil St. John’s pad and Shell Kudu pad in Loving County. In the Midland Basin, several pads were converted by Parsley and Pioneer. In SCOOP, Continental Resources converted our [Gans], [Catherine] and [Chester] pads, and Marathon converted our Starfox pad. In the Williston Basin, Continental converted their Carus pad in Dunn County for us, which was comprised of 9 wells. In the DJ Basin, PDC converted their [Bachmeier] pad consisting of 13 wells, and Noble completed their Harper pad consisting of 11 wells, both of which are proximate to Wells Ranch. Despite the strong DUC to PDP conversions in the fourth quarter, we were able to once again reload our DUC inventory during the quarter, replacing 95% of our converted net DUCs and exiting 2019 with 5.9 net DUCs in inventory, which will now, in turn, drive 2020 production growth.

I want to reiterate that we reloaded almost all of our net DUC inventory despite converting 42% of our net DUCs to PDP during the fourth quarter. Clearly, that’s a testament to our team’s technical ability to identify the most economic locations across multiple basins. Our 892 gross or 5.9 net DUCs in inventory as of year-end 2019 are anticipated to be completed by high quality, well-capitalized operators, including Continental Resources, Royal Dutch Shell, Occidental Petroleum and ExxonMobil. We’re able to reload our DUC inventory as a result of the strong drilling activity that occurred on our assets during the fourth quarter. We saw operators on average deploy 60 rigs to our mineral position, drilling approximately 2,500 net royalty acres as compared to 63 rigs and 2,800 net royalty acres in the third quarter. As we’ve indicated many times, you cannot look at rig counts in isolation but also must look at net royalty acres being drilled, as at the end of the day, the decimal interest in each of our wells being drilled for us is very important.

The significant drilling activity on our minerals during the fourth quarter resulted in the conversion of 14% of our gross and 22% of our net permits to DUCs during the quarter. Again, despite the tremendous permit conversion pace, we’re able to reload, increasing our gross permits and inventory from 681 to 715 and maintaining a relatively flat net permit inventory count of approximately 4.4 net locations. As a reminder, permits typically are additive to production and cash flow 9 to 18 months out, as it takes time to drill and frac the well, build facilities and turn in line the well.

In January, we did see a downtick in rig activity during the month to 46 rigs running across our mineral interest, but our net royalty acres being drilled increased 10% to almost 3,000 net royalty acres being drilled during the month. During January, operators were drilling approximately 2,200 net royalty acres for us in the Permian, up from 1,400 net royalty acres in Q4 2019. The largest transition in terms of rigs running that occurred was in SCOOP, where we saw Continental move rigs from what we refer to as central SCOOP in the 7 North 6 West area to both south SCOOP in the 3 North 4 West area in what we refer to as the extended Woodford play in Carter, Stephens and Love counties. In our extended Woodford play, which is in our other net royalty acre bucket, we have acquired 2,900 net royalty acres, of which we believe Continental will operate 1,700 net royalty acres, and ExxonMobil will operate 600 net royalty acres. We’re excited about this area potentially becoming a more meaningful contributor to our production growth over the next several years. For reference, Continental and ExxonMobil currently have 6 and 2 rigs running, respectively, in this area.

As we are coming to the end of the earnings season, it’s always instructed to review some of the more recent developments on our position. In our Loving County development area, where we have approximately 3,400 net royalty acres, we continue to see both tremendous development and well results. Oxy, ExxonMobil, Shell and EOG are all highly active in the area and are testing up to 7 zones of development. EOG and their McGregor unit is drilling 2 Avalon zones, a third Bone Spring carbonate and has drilled record Delaware Basin Wolfcamp results. For us, Oxy continues to deploy 2 rigs to Silvertip and permit incremental locations. ExxonMobil also has deployed 2 rigs to our position and recently has permitted incremental locations in the Bone Spring, which they will develop for us in their San Antonio unit. Shell has generated substantial well results for us in their Nyala and Sable units and just recently completed drilling on our Kudu unit. Of note, Shell recently completed what we believe to be on their first Wolfcamp B wells in the area and retrieved an oil IP24 of 1,500 barrels of oil per day.

In our SCOOP development area, despite Continental’s transition away, Marathon and Ovintiv looked to be on the verge of initiating the second wave of SCOOP drilling for us. On their fourth quarter call, Marathon announced 9 Springer wells that achieved an average IP30 of 2,100 barrels of oil equivalent per day at 79% oil. We have an interest in all 9 of these Springer wells, and we have a total of approximately 1,300 net royalty acres within a 6-mile radius of these top-performing oily wells. Further, Ovintiv has indicated they will be transitioning activity to the SCOOP and south SCOOP areas and have indicated approximately 70 undeveloped DSUs that they will begin drilling in 2020. We have an interest in greater than 50% of these DSUs and, as a result, believe we’ll have approximately 3,000 net royalty acres that we anticipate Ovintiv will drill for us over the next several years.

In summary, our outstanding fourth quarter results and our strong DUC inventory lays the foundation for our 2020 production guidance. As I indicated previously, we’re increasing the midpoint of our 2020 production guidance from 10,000 barrels of oil equivalent per day to 10,500 barrels of oil equivalent per day, up 5% or 500 barrels of oil equivalent per day from the initial guidance we provided in November. I want to reiterate that our 2020 guidance is almost entirely underwritten by our current proved developed producing volumes and the anticipated conversion of our DUC inventory. As demonstrated by our fourth quarter production growth, we continue to see strong conversions of DUCs into proved developed producing wells. The remaining volumes come from our converted permits and unpermitted locations.

Consistent with our historical modeling methodology, we’ve been conservative on all the assumptions surrounding activity, including timing, rig levels and operating efficiencies. It’s also instructive to note that this guidance only incorporates production volumes from our existing asset base and, hence, represents only an organic development of our mineral position.

No 2020 acquisitions volumes are incorporated in our guidance. However, we fully intend to deploy $40 million to $60 million a quarter and anticipate those acquisitions to contribute to production and cash flow in an accretive manner within 12 to 18 months of being closed. Given our fully funded 2020 mineral acquisition budget, we believe we will have the opportunity to create substantial value as we continue to add to our mineral position.

Bud, Blake and I as well as the entire management team believe we are uniquely positioned for another year of outstanding organic production growth of greater than 40% at the 10,500 barrel of oil equivalent per day midpoint of our production guidance relative to our full year 2019 production volumes of 7,400 barrels of oil equivalent per day with further incremental upside to our 2020 volumes via our ground game acquisitions. We believe our pre-funded 2020 mineral acquisition budget is a significantly underappreciated element to our value creation story.

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

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

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Thank you, Rob. I’d like to begin by highlighting another outstanding quarter of ground game mineral acquisitions with our team deploying $38 million across our focus areas. This quarter, in particular, highlighted our unique advantage in evaluating and capturing opportunities across multiple oily resource plays, with 61% of our acquired NRA in the fourth quarter coming outside the Permian. Many mineral buyers, both public and private, are restricted to an exclusive focus on highly competitive Permian assets. However, our disciplined team seeks out the best risk-adjusted value opportunities regardless of location. With that said, we will continue to focus on deploying capital to the Permian in a prudent and disciplined manner, ensuring our capital allocation decisions are in line with our growth and return expectations.

As Rob already mentioned, our daily production for the quarter was 9,627 BOE per day, up 23% sequentially and comprised of 58% oil and 15% NGLs. Our rapid growth was driven by our Delaware Basin position, which also delivered a significant increase in oil cut to 58% from 54% in the third quarter. We expect oil cut to remain in this range for the full year 2020.

Our portfolio generated record royalty revenue of $33.1 million, up 37% sequentially, aided by asset outperformance and increased realized prices. Lease bonus revenue contributed about $0.5 million. Net income for the quarter was $12.4 million, up 46% sequentially with a net profit margin of 37%. Adjusted EBITDA for the quarter was $26.8 million, an increase of 40% over the third quarter. And adjusted EBITDA excluding lease bonus was $26.3 million, an increase of 44% over the third quarter. Realized pricing for the quarter came in at $37.39 per BOE, up 12% from the third quarter. By commodity type, realized pricing was $55.55 per barrel of oil, $1.88 per MCF and $14.22 per barrel of NGL. As expected, our diversified asset base continues to deliver consistent higher realized pricing versus peers with single basin exposure.

On costs, gathering, transportation and marketing expenses were $1.2 million or $1.40 per BOE. Strong growth out of the Delaware and SCOOP drove a further decrease in GTM costs versus higher costs at DJ and Williston basins. By aligning our portfolio with operators who focus on the full market chain for their product, we directly benefit from their planning and investments.

Severance and ad valorem taxes were $2.2 million or 6.7% of mineral and royalty revenue. G&A expense before share-based compensation was $3.4 million and in line with the third quarter. On a per barrel basis, it was $3.80 per BOE, a decrease of 18% from the third quarter, a trend that we expect to continue as our asset grows. Share-based compensation expense was $1.8 million for the quarter, in line with the previous one.

Looking at our balance sheet. Our follow-on offering in December positions us well to continue to execute on consolidation opportunities with our ground game budget fully funded. We had $51 million in cash and undrawn revolving credit facility that was redetermined higher to $180 million this week, giving us total pro forma liquidity of more than $230 million.

Our discretionary cash flow per share of Class A common stock was $0.45 on a pretax basis, which was up 22% from the third quarter and $0.38 per share on a post-tax basis. Federal and state taxes in the third quarter were in line with expectations. This dividend represents all of our discretionary cash flow for the quarter. As a reminder, we intend to begin gradually retaining some of our cash flow in 2020 to help fund our acquisition budget, which we anticipate will allow us to capture more value per share.

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

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

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Thanks, Blake. We appreciate you joining our fourth quarter 2019 call. Obviously, everyone is wondering when the generalist investor will return to energy, a critical question and one that likely will only be answered when energy companies demonstrate a combination of execution, returns and investor alignment. We believe that combination exists right now with Brigham Minerals. And though we may be biased, we have the results to back it up: 37% profit margins, 23% sequential production growth, next 12 months growth at our guidance midpoint of 40%, 10% annualized current dividend yield. Only a small handful of companies possess greater than 20% profit margin, double-digit projected growth and a 10% dividend yield. On top of this, Brigham Minerals has a fully funded 2020 mineral acquisition budget actively being deployed by a highly technical acquisition team with a proven history of value creation and clearly aligned incentives. We look forward to sharing our first quarter 2020 results with you in early May.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Brian Singer with Goldman Sachs and Company.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division – MD & Senior Equity Research Analyst [2]

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The resiliency and the activity in your acreage is certainly noted and continuing after the call from the last quarter. In January, the rig count is down pretty decently, but the net acreage being drilled is still robust. How much of a signal is the rig count reduction in January in terms of the potential impact for late year or 2021 production? And can you characterize a bit more where rigs were dropped versus where rigs are active today?

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

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Yes. So Brian, thanks for the question. Just kind of starting at the latter part there. So if you just look at the fourth quarter, 2019 rig count versus the rig count in January, that’s the 60 rigs that we have running on average in the fourth quarter relative to the 46 in January. Importantly, in the Permian Basin, that rig count’s maintained relatively stable, 32 rigs in the Permian in the fourth quarter, 30 in January. The drop that did occur was in the SCOOP, where we went from 16 rigs to 8 rigs. A lot of that, as I mentioned in the conference call transcripts, relates to kind of the reallocation of Continental’s rig fleet from the central SCOOP area in what we’ve termed the 7 North 6 West area. It’s a south SCOOP and the extended Woodford play. So we did see that happen. The DJ activity remained flat. Williston activity also remained relatively flat.

I think importantly, what did happen from the fourth quarter to January was that substantial increase in the net acres — net royalty acres being drilled. So if you look at that, we went from roughly 2,500 acres being drilled for us on average in the fourth quarter to 3,000 acres being drilled in January. So importantly, it gets to more of a question of how many wells are being drilled for you as well as the net revenue interest of each of those wells because ultimately, at the end of the day, that activity translates to DUC replenishment and then further once those DUCs are completed to PDP. And so I think really, what we saw happening was — and continue to see happening is a strong DUC replenishment based on what we’re seeing and also further of what we’re seeing really nice permitting activity in January. So I am not necessarily concerned by drop in the rig fleet when you see an increase in the net royalty acres being drilled. And so as you mentioned, Brian, that tends to more impact — or drilling activity will more impact the latter part of 2020, early 2021.

But based on the activity that we’re still seeing, we still see robust activity going forward for us and, in particular, where it matters most, in the Permian Basin, strong activity for us by Oxy, ExxonMobil, others who are all drilling some really nice performing wells. And in particular, strong performance for us in our Loving County development area, which we, in particular, tried to highlight in one of the slides for us. And of note, you noticed Oxy, within a page of their presentation, point out in particular that Silvertip area. So that’s an area that we’ve been talking about since 2018 that’s going to drive production growth for us for the next several years in concert with our ExxonMobil position just to the south as well as the Shell positions for us just south of that a little bit further through one of the third quarter of 2019 acquisitions. So we still think that there’s substantial organic growth, and we’re seeing that happen. And we’re not concerned about late ’20, early ’21.

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Ben M. Brigham, Brigham Minerals, Inc. – Executive Chairman [4]

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And benefiting from our diversified portfolio in that regard.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division – MD & Senior Equity Research Analyst [5]

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Great. And then my follow-up is with regards to dividend distribution policy. Any changes in terms of how you’re thinking about the percent of cash flow you expect to return to shareholders and how that varies as the year progresses and into 2021.

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

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Yes. So Brian, just kind of — I’ll jump in here to start and then hand it over to Blake. But one of the things that we’ve talked about in the past is why we have cash on the balance sheet. We mentioned this both on the — during the IPO road show as well as the follow-on road show. We’ve continued to distribute 100% of the cash available to us to distribute to shareholders. So obviously, us wanting to consistently deliver on objectives we’ve set for ourselves is one that’s critical to us. So while we still have that cash on the balance sheet, and we anticipate, subject to a larger deal coming to us here in the first kind of 4 to 5 months of the year still fully distributing, having 100% distribution rate through the first quarter, probably into a portion of the second quarter, and so at that point, we’d start to gradually lower the distribution rate kind of at that 5% per quarter rate that Blake’s talked about. But I’ll now turn it over to Blake so he can provide some further detail. But most importantly for us is to continue to deliver upon what we’ve indicated to investors our approach.

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Blake C. Williams, Brigham Minerals, Inc. – CFO [7]

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Yes. And so the — we haven’t changed our long-term target of 75%, 80% payout. The only thing that would change is what Rob just mentioned. With cash on balance sheet, we’ll continue pushing 100% of that discretionary cash flow out the door. Obviously, we’re also — should note that we’re cognizant of the dividend and the desire to have a growing dividend over time. So we’ll take that as another variable into our decision-making process on pushing that discretionary cash out the door.

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Operator [8]

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And our next question will come from Pearce Hammond with Simmons Energy.

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Pearce Wheless Hammond, Piper Sandler & Co., Research Division – Research Analyst [9]

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Congrats on an excellent quarter. My first question pertains to the acquisition market for minerals. And just curious, in the environment we’re in right now, are you seeing better package quality? Are you seeing less — a less competitive market, more seller motivation? Have prices come down? Just frame up for us how you see that market. You must feel confident about it because of the guidance that you’ve outlined as far as what you want to spend on minerals this year.

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [10]

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No. I mean Peter, thanks for joining the call and appreciate the question. We’re excited as a management team about 2020. We think having been at the mineral game for quite a while now, some of us going back even to 2008, 2009, if you remember, being involved in the Williston Basin, it’s opportunities like this that only present themselves every 3 to 4 years in terms of being able to consolidate and take advantage of this type of situation where people are concerned about crude oil prices. And so thinking back to 2008, 2009, the opportunity that presented itself, Geoff Boyd, our VP of Acquisitions, was active in the Williston Basin at that point. And he has many times told us that, that period, during 2009, there’s never been a better opportunity to buy minerals when crude prices retreat and people start to see that negatively impact the checks that they see. Typically, there’s a lag there because these — this rapid decrease in February pricing really won’t be felt until end of March, April checks. So there’s some time that has to go by. But I think our message is if people are panicky, we can be patient and picky in terms of what we buy.

I think another kind of data point that really comes to mind and, in particular, since forming Brigham Minerals is that time period in 2014, 2015, where there was, again, turbulence in the market, as Bud referred to. Looking back in ’15’ and ’16, we deployed about $80 million in capital. Thinking back to that time period, we should have been more aggressive. It was a tremendous opportunity at that point to buy and consolidate in the mineral space. And so I think opportunities like this present themselves infrequently.

And so I think the beauty of this, as we mentioned on the call, on the remarks here at the start, that we’re differentiated from almost every other mineral company in that we prefunded the 2020 budget. Different than anybody else in the energy space, we’re having our borrowing base redetermined up. And so we have the capacity to work with. And so then we kind of layer in the competition. When you think about some of the other publicly traded mineral companies that are out there, there are a couple that, for unfortunate reasons, just don’t look to be in the market acquiring minerals at this point just because of some things that have happened. And so that presents opportunities. Another of the larger mineral companies that’s out there hasn’t publicly indicated that they’re more focused on continuing to aggregate minerals under their operator. And so that presents opportunity. You got to think that some — on some of the smaller deals that we’ve participated in, people will get panicky. And so I think that us maintaining that consistent, disciplined approach to buying deals is important. And so you can be rest assured that we’ll do that.

When I kind of think about it, stepping back, our goal as a company is to be very EOG-like in terms of the technical approach that we take to underwriting locations, finding those core locations but yet kind of — when you think back to some of Berkshire Hathaway’s kind of activities that they undertook after the financial crisis in 2008, where they were very disciplined and had capacity to work with, they made the tremendous investments in GE and Goldman Sachs, that they were there and ready when the opportunity presents itself. And so that’s what we’re striving to do here in 2020 and take advantage of that situation. So we’re in particular excited about 2020 and the potential to continue to consolidate.

As Bud mentioned, I think an important point beyond that is just for some of the private equity-backed firms that are out there, that clock continues to tick in terms of their waterfalls, the cost of capital that’s charged to them. So they’re increasingly under pressure, forced to deliver. The private equity-backed firms are going to be forced to have distributions through LPs. So in that regard, the clock’s in our favor. So I don’t know, Bud or Blake, if there’s anything else to add to that.

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Ben M. Brigham, Brigham Minerals, Inc. – Executive Chairman [11]

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No. That’s great. Well done.

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Pearce Wheless Hammond, Piper Sandler & Co., Research Division – Research Analyst [12]

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Yes. No, thank you, Rob. And I love the Warren Buffett’s reference. So then as my follow-up, you increased your position in net royalty acre position in the SCOOP and the STACK in Q4, slightly in both of them. Investors have a more negative view of that area. So I’m just curious what’s your differentiated view. What do the people not fully appreciate about the SCOOP and the STACK?

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [13]

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I think in terms of SCOOP and STACK, again, it gets to kind of my previous point, Pearce, in terms of making sure when you’re underwriting deals, you underwrite them appropriately in terms of the number of wells per bench that we’re giving credit for as to how many we believe are being drilled, the number of the EURs per location. So we’re very conservative in the utilization of all those underwriting criteria. When you look at the price per acre that we paid, I think, roughly about $7,000 per net royalty acre, we’re factoring in those. And you can see how differentiated that is relative to some instances, you’re paying $15,000 to $20,000 per acre in the Delaware Basin and the Midland Basin.

And so what we’re trying to do is, as Blake mentioned, on a risk-adjusted basis, still buying assets. And so one of the things that you probably also noticed was during the fourth quarter, deployed about 19% of the dollars or so to the Williston Basin. There were some really nice opportunities in kind of the southern part of Williams County that we really wanted to attack and felt were very interesting to us, especially given our history there as Brigham Exploration Company. And so the key all along has been to underwrite to the correct number of horizons, the correct number of wells per horizon. And so when you see some of the commentary by WPX and others in terms of upspacing, more typically than not, you’re seeing these operators upspace to our number of locations. So when you think about our reserve report and how we include those volumes in those 12,700 locations that I referred to, they’re underwriting to kind of the 4 wells per Wolfcamp A and upper and lower locations that we have booked on our 3P reserve report. So we’re very careful underwriting deals, booking deals for reserves, so being very conservative, very consistent in our methodology.

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Operator [14]

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Our next question will come from Leo Mariani of KeyBanc.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division – Analyst [15]

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I wanted to ask a question around fourth quarter production. It was obviously substantially (inaudible) your guidance there in 4Q. I just wanted to get a sense, was that 100% organic in terms of the beat there? Was there any maybe volumes that showed up from some acquisitions in the prior quarter? Or maybe any prior period-type adjustments where maybe you guys had underbooked some of the production in the previous quarters and didn’t realize you had it until 4Q? Just trying to get a handle on how 4Q was so incredibly strong here.

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [16]

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No. I think when you break it down by area, so in particular, if you were to reference Slide 10 in the deck, and we provide, as we’ve indicated in the past, this portfolio area overview, breaking down kind of those 6 key areas for us, you can see the production by area. And really, the production outperformance was driven by the Delaware Basin. So if you looked at those — the roughly 4,600 barrels a day relative to what we did in the third quarter, I think we’re up in terms of production volumes, upper 40s percent in terms of production increases, 48%, I think, in terms of exact numbers. And so really, it’s just that outperformance that we’re seeing, in particular, in the Loving County development area, kind of organic growth there via what we’re seeing Oxy view for us, what we’re seeing XTO and how we’re seeing Shell perform. When you look at just the tremendous well results that EOG has talked about in their McGregor unit, that area, if you kind of think about 8- to 10-mile radius around there, where we have about 3,400 net royalty acres, there are just some tremendous wells, 7 wells being developed — sorry, 7 horizons being developed for us across that area. It’s just tremendous, that asset.

And importantly, also, we’ve consistently messaged this that we’ve stayed on the eastern side of the Delaware Basin in terms of our allocation of capital, which has tended to be the more oily part of the basin relative to some of the far western Reeves or the Culberson position. And so because of that and concerns regarding gas and NGLs, you’ve had people redeploy capital to the eastern portion of the basin where we’ve been more heavy. And you saw that kind of play out in terms of the rig allocation or the net royalty acres being drilled for us here in January, where the net royalty acres being drilled for us is about 1,800 in January relative to about 1,000 acres being drilled for us on average in the fourth quarter. So it’s the technical team undertaking the work to understand where those operators are going to be allocating capital and rigs to you. And so that’s the fundamental differentiator, and we’ve kind of consistently alluded to that in some of the prior comments. But…

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Blake C. Williams, Brigham Minerals, Inc. – CFO [17]

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Yes. I’d also add to that. When we put together all of our projections, typically, we’ve got DUCs coming on line a good 6 to 9 months out. So to the extent some of our operators, specifically in the areas that Rob just mentioned, bring wells on line faster than that, we saw a good bit of that happen in the fourth quarter.

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [18]

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But I think the important point to that is having the 40% conversion rate of our DUCs, we’re still able to reload the — almost the entirety of the DUC balance. As I mentioned, 95% of those net DUCs were replenished, which is key for us. And so when you think about it and in my comments, that foundation is set for 2020 in terms of hitting that 10,500 barrel a day midpoint because it’s operators like Continental, Shell, Oxy, ExxonMobil that are going to continue to bring on line those wells to production for us.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division – Analyst [19]

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Okay. So just to be crystal clear on this point here. So basically, it was all organic, and there was no prior period adjustments to maybe production that wasn’t accounted for in the second quarter or third quarter that was pulled into 4Q.

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

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Well, I don’t think we’ll consistently have prior period adjustments just because we are conservative in terms of our bookings of our production and revenue volumes. So just to level set so everyone understands, and Blake can get into this in more detail of how we book revenues, we don’t book revenues if there’s just an IP report, an IP24 report recorded by — with the state of Texas or the state of Oklahoma. What we want to do is to make sure that those wells are performing, that there’s longer-term history. So we will not book revenues to the income statement until there’s state-reported monthly production data or we have a check in the door. And so those are kind of a couple of the key caveats. So we consistently have prior period adjustments rolling through our books.

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Blake C. Williams, Brigham Minerals, Inc. – CFO [21]

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But nothing out of the ordinary.

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [22]

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But nothing out of the ordinary in the fourth quarter relative. So I think the point which Blake made in terms of some of the DUCs hitting the income statement faster than we had planned or modeled was — is a significant one. But yet, the key point to take beyond that is the activity on our portfolio reloaded those DUCs. So we’re still in really great shape for 2020.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division – Analyst [23]

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Okay. That’s great color. And I guess, just with respect to the 46 rigs that you’ve got in January, obviously, a step-down from Q4. Do you guys have visibility on maybe that rig count starting to climb back up in the near term? Do you view this as maybe just a temporary blip on the drop to 46 and that can change in the next few months? How should we think about that?

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

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Yes. February, it’s still too early to tell. We’re still integrating all the permitted locations that we have on our positions. So we’ll have to wait on that. But I think the key for us is that we’ve always tried to stay in those Tier 1 core areas where the most economic locations that operators have. So we’re hopeful at the end of the day that, that rig count is going to inch up, and we’re going to be more towards that kind of level that we’re at before. But we’ll just — we’ll have to see over time how that goes. I mean the rig count’s going to bounce around over time. But I think the positive takeaway from the January number is the net royalty acres being drilled for us at that time.

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Ben M. Brigham, Brigham Minerals, Inc. – Executive Chairman [25]

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Yes. As Rob pointed out, there was movement in the SCOOP/STACK, which created a little bit of noise in essence in January on the rig count.

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [26]

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Yes. But I think a key kind of counterpoint to that is despite Continental deploying some rigs to maybe some areas where we don’t have as much coverage with them and the [MRC and C] that’s buying minerals from them. Really, what we see happening is kind of that second wave of drilling in SCOOP and south SCOOP that I alluded to in my remarks, that you’ve got Marathon, which has some tremendous Springer results. Those 9 wells averaged in the IP30 of 2,100 barrels a day, almost an 80% oil cut, then in their conference — in their remarks in their conference call indicating that running the 2 to 3 rigs and attacking this oily area, where we have those 1,300 acres in that 6-mile radius and then also Ovintiv talking about redeploying activity from the STACK to SCOOP where we have greater than 50% overlap with them in SCOOP and south SCOOP also is very positive in my mind for the next 2, 3 years as we have almost 3,000 net royalty acres that we think that they’re going to drill to us. So I think when you think about it longer term, we’re set up well to capitalize upon activity as it’s redirected just because of the portfolio of assets that we put together under a number of diverse operators.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division – Analyst [27]

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Okay. That’s helpful for sure. And I guess, just with respect to the M&A side of things. Obviously, we’ve had a lot of volatility here recently. And unfortunately, it’s been to the downside. I know that the minerals positions are pretty resilient. But you guys talked about kind of looking for the right larger-sized deal to do. Do you think that, that gets delayed a bit in this type of environment that we’re currently experiencing? And maybe could you give us just kind of some high-level characteristics around what that optimal sort of deal would look like for Brigham here?

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

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Well, I think similar to kind of my comments regarding the ground game and then taking a couple of months for smaller mineral sellers around the readjusted expectations, it’s probably going to take some of that in terms of some of the larger packages that are out there in terms of people that were hoping for bigger numbers in terms of readjusting expectations and readjusting kind of to a new normal. And so that might delay us a couple of months. But I think in terms of what, in my mind, of that optimal opportunity, it’s integrating a Delaware position, a Midland Basin-specific position into the fold.

That being said, there are deals out there with Williston Basin positions that are attractive that we’re looking at right now as well. And so given our long-standing history in the Williston, we’re very positively inclined to potentially looking there. I’d say on the DJ Basin, we’re very careful just because of the continuing kind of regulatory uncertainty that will be resolved over kind of the next 12 months as those rules continue to get implemented. And so in terms of where I see — and then also in terms of a larger deal, we’re also, as we’ve indicated in the past, looking to branch out to new areas. And so I think one that we continue to monitor is the Eagle Ford and look at transactions there. And so in terms of a new area that we’re looking at, it’s the Eagle Ford. We’ve always been kind of hesitant on the Powder River, just wide basin area, a lot of fed acreage, rig count not tremendously high. And then what you’ve seen in terms of some recent commentary regarding some of the down — infill testing results haven’t necessarily indicated that those wells are economic, sub kind of upper 60s, low 70s pricing, so obviously cautious there. So in terms of where I see a larger deal being deployed the capital to, it’s the Delaware, Midland, Williston basins, Eagle Ford, and these guys can jump in with further comments.

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Ben M. Brigham, Brigham Minerals, Inc. – Executive Chairman [29]

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Yes. And I’ll just make a general comment. I mean we’ve been through a lot of these cycles. And the — it’s these troughs, these downcycles are when we have the opportunity to compound to accrete the most value. It’s — particularly given that our strong balance sheet and in an environment where, as we mentioned on the call that a lot of the companies that have been accumulating minerals or either have terminal capital, private equity capital or high net worth, and they don’t have the upward mobility and the options. So we’re just in — as a premier public high-growth mineral company with a larger funnel than anybody else and the Tier 1 areas, we’re in a very advantaged position to make some very accretive acquisitions during 2020. So it really could not be set up better for us in that regard.

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Operator [30]

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And our next question will come from Kyle May of Capital One Securities.

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Kyle May, Capital One Securities, Inc., Research Division – Associate [31]

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Just wondering, as we’re thinking about your guidance for 2020, can you provide any additional details about the cadence of wells turned in line or your thoughts around production growth that are baked into your assumptions this year?

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Blake C. Williams, Brigham Minerals, Inc. – CFO [32]

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Yes. It’s pretty consistent with where we see rigs right now. So when we put that guidance together, it’s — as Rob already said, it’s mostly PDP and DUC conversions. So I would say that, for sure, think about it, it’s really mostly those 2 buckets. As we’ve seen over the last 2 years, we’ve had about a 90% conversion rate of those DUCs within that year. So that’s going to be the vast majority of it. And as you think about the back half of the year and into ’21, it’s a pretty consistent rig count and hit rates versus what we saw kind of in the fourth quarter. So you can kind of take that 55, 60 rig number and run that through.

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Kyle May, Capital One Securities, Inc., Research Division – Associate [33]

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Got it. Okay. That’s helpful. And you’ve often talked about the diversity of your assets. But looking at kind of the, I guess, the M&A activity in the last year and kind of you’ve been focusing on — really on the Delaware, is there any consideration to sell any of your other assets or maybe change the focus of the portfolio?

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [34]

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We’re always looking to optimize the portfolio. So you’ll see us here in the first quarter announce a smaller-ish divestiture from one of the areas that — a gassier area that we’ve put together a small position. I think roughly 400 to 500 net royalty acres that we’re divesting and just — we think the — that capital is better to be redeployed to one of the oily areas that we’re, in particular, find very attractive opportunities such as the Delaware and Midland basins, the Williston Basin. So we’re constantly rationalizing the portfolio, and we’ll do so into the future. It’s just something that we think inherently we’ll always look to and then try to determine if there’s a potential source of capital that can be redirected elsewhere. So that’s always at the top of the mind for us and the guys on the finance team.

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Operator [35]

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And our next question will come from John Freeman of Raymond James.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division – Research Analyst [36]

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Yes. First question I had, just to make sure I understood, sort of Blake, when you were talking about how sort of the long-term payout ratio targeting doesn’t really change given sort of the overall kind of market conditions. But am I right in understanding, at least based at the current strip and based on the current 2020 guidance, and I realize there’s a lot of moving parts to this because this is not assuming acquisitions and any changes on the strip, but should we think of like the initial step-down in the payout ratio maybe being pushed back maybe 1 quarter or 2 quarters from what I think most of us were thinking, that it would start around prior to all this second quarter?

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Blake C. Williams, Brigham Minerals, Inc. – CFO [37]

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Yes. That’s essentially the comment that I was making, is a variable in our decision-making on peeling some of that cash flow back and holding it back for acquisition funding is looking at the dividend and where the level sits today because obviously, one of our key tenets is that we’re trying to have an increasing dividend over time. So obviously, we’ve got activity that continues to backfill. So even in the face of reduced prices like we’re seeing here in the first quarter, we think the portfolio can continue to combat some of that. And so that just goes into our calculus there. So sure, you could definitely see us push 100% out in the second quarter, if it’s going to make sense for the — to keep that dividend steady or growing.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division – Research Analyst [38]

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Great. And then just my follow-up question, obviously, you said that you’re still going to be largely concentrated on the Permian in terms of acquisitions. But given what you all were seeing in the market with some of these less competitive basins, especially in the Williston, the big increase in activity there and then just based on the commentary, you’re continuing, it sounds like, to see a lot of opportunities in these other basins and mentioned about possibly the Eagle Ford being a new area. Is there anything from a personnel, technical or otherwise, any additions that need to be made to the organization as you sort of think about getting more active in some of these other basins and potentially even stepping into a newer area like the Eagle Ford?

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [39]

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Well, John, just to kind of remind everybody how the organization’s set up. So roughly the 42 people that I talked about on the call when we first started and just talking about how a tremendous job they’ve done over the entirety of 2019 is the fact that probably half the staff is on what I’d call the acquisition side, the technical teams. So that’s the group of geologists, reservoir engineers, analysts that are evaluating each of the deals. We’re set up to execute upon a high level of deal flow because if you remember some of the comments that probably have been made in the previous second, third quarters, we probably have a 10% or so success rate in terms of ultimately closing a transaction that’s bought — brought to us to review. So the teams have to be set up to handle a significant amount of deal flow. As well we’ve, throughout 2019, set up the deal teams such that we can handle larger deals as they come in and evaluate those. So we think that, that work’s been done.

So subject to continuing on with the ground game as is and no larger deal, if you think about kind of the G&A and positions that we might need to add into 2020, as you continue to add PDP locations and build out — increase the number of checks that come in the door, it’s really some incremental additions on the reservoir engineering staff because of the monthly accrual process that we go through, the reserves process, the deal integration. It’s on the accounting side to process transactions, in particular on the revenue accounting side. And so it’s — we think the team’s built out, especially on the management side, to handle those situations. And so more — it’s going to be on some of those type of positions. We’re kind of thinking 5 to — 5 or so, 5 to 6 positions that we might need to add in 2020 to handle kind of that ground game going forward. So we don’t see a big increase in the G&A budget during 2020. But I’ll qualify that in the event that there is a much larger transaction that we’re enable — able to effect into 2020, we’ll have to reevaluate that. But I think the big plus for us is the scale that’s going to happen. So as you think about us ramping up from roughly the 7,400 barrels a day that we did in 2019 relative to the 10,500 barrels a day in guidance that we mentioned, that you’re going to see that dollar per BOE go down. And that’s the beauty of the business.

And so the other thing that as you think about a much larger transaction, it just makes a lot of sense from our side, from private equity side, that in essence, you’re saving significant amounts of G&A by integrating 2 larger positions together. You’re probably talking about $15 million a year just on cash G&A, probably an equal amount on equity compensation per year. And so there’s significant savings that can be achieved. So much of the same as what people are talking to oil and gas companies in the small, small and mid-cap space that they need to integrate their operations to save on G&A savings. That’s no different here than what we’re seeing on the middle space so that we can achieve significant savings by integrating a larger transaction together with us.

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Operator [40]

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Our next question will come from Welles Fitzpatrick of SunTrust.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division – Analyst [41]

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Obviously, the kind of go-anywhere strategy is a big advantage, given that so many of your peers are pure plays. And you guys obviously also have a deep desire to kind of make money in the bus to go after stuff that’s maybe a little bit cheaper, whether that’s Oklahoma or what not. Is there any interest in going after some of these larger overriding gas packages in the Northeast, if they’re at the right price? Or is that just completely outside of the corporate strategy?

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [42]

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Well, it’s kind of one, just starting off from formation. And this even goes back to Brigham Exploration and the time there that we’ve always been oily liquids-focused. So when Bud and everybody else in 2005, 2006 was redirecting the company’s focus from the South Texas, Gulf Coast kind of conventional asset play to resource play, they screen — we screened a lot of different opportunities. There was opportunities in the Barnett Shale at that time. And then — but the Williston kept coming to the top because of the economics, the superior economics, we believe, were inherent there with the oily play and just the supply-demand balance economics. And so we were, post the sale of that asset to Statoil, now Equinor, had the same philosophy in that we wanted to focus on the oily, liquids-rich plays because that’s where we feel that the capital is going to be deployed, where it’s significantly tougher to bring on line those wells to production. And so you’re going to have significantly better economics there. Thus, kind of staying consistent with that, really not as interested into venturing into a pure gas play.

The other counterpoint to that is people are having to peel off these positions and create these overrides because there are issues to begin with inherently. They’re trying to find methods to capitalize and find capital to work with to continue to drill. And so our other key tenet is always to be under high-quality, well-capitalized operators because we think that, that enhances the probability of development occurring. And so all those key facets of our business strategy and approach steer us away from that type of investment override in getting those gas assets and instead direct us — keep directing us back towards Delaware Basin, Midland Basin, Williston basins, looking at the Eagle Ford. And so you’ll see us continue to focus on those areas.

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Blake C. Williams, Brigham Minerals, Inc. – CFO [43]

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We also think that overrides are a different risk profile than pure minerals. So we’ve kept the portfolio essentially 98%, 99% mineral interests or mineral-like interest. And so we don’t have that much in overrides. It’s more of a financial contract. It’s a contract out of the lease as opposed to owning the asset in perpetuity, like we have with all of our mineral interests.

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Operator [44]

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And our next question will come from William Thompson of Barclays.

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William Seabury Thompson, Barclays Bank PLC, Research Division – Research Analyst [45]

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Rob or Blake, I appreciate the color on the organic growth. And if I heard you correctly, you said 80% organic growth in ’19 from the year-end ’18 portfolio. So if I can ask about maintenance CapEx, where is your current net DUC and permit count relative to sort of maintenance levels to hold production flat exit ’20 — I guess, exit ’21 to exit 2021? I don’t know — I know it’s not an easy question. I’m just curious to get your thoughts to help us understand sort of the underlying organic potential of your reported 14 years of inventory.

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [46]

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Yes. We probably — I’ll start off and Blake can chime in. But I think we probably need to work through that math because you’ve got to, one, take into account the base decline of the asset and then factoring the DUCs, the time line and such. And so I think something we probably have the finance and the reservoir engineering teams work on and report back to you in May of this year. But everything that we’re pointing to and what we’re seeing is that given that kind of 5.9 DUCs that we ended 2019 with and that are kind of — we anticipate, as Blake mentioned, 90% of those likely given our historic conversions in 2018 and 2019 to be converted for us, we’re anticipating 40% organic growth in 2020 relative to 29 so — sorry, 2019. So that’s the jump from 7,400 barrels a day to the 10,500 barrels a day at the midpoint. But that’s definitely something we can work on. But instead, we’re focused on delivering, kind of consolidating and making sure we deliver organic growth and then growth through our acquisitions because as we’ve mentioned in some of the earlier comments, we think that, that acquisition budget, which, again, to reiterate, acquisitions for 2020 aren’t included in that guidance number, so there’s significant upside there. That’s been prefunded. And so we think it’s an underappreciated part of the story. And so that’s going to drive growth late 2020 into 2021.

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William Seabury Thompson, Barclays Bank PLC, Research Division – Research Analyst [47]

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I guess the follow-up on that is part of the pushback on minerals are the risk to production growth from E&P capital discipline and upstream spending declines. Obviously, you guys are levered to some of the best capitalized E&Ps and some of the best acreage. So curious to get your perspective, given the increase in purchasing power to E&Ps from the cost inflation and efficiencies, should we look to like footage drilled or completed relative to like the rig count? Just curious on whether we could still see footage drilled increase or footage completed increase relative to another year in declining upstream spending.

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [48]

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One of the things that we’ve talked about is visiting and revisiting whether the number of rigs operating on our properties and acres being drilled are the correct metrics to look at and instead maybe transitioning to a gross well spud, net well spud for us on a quarterly basis because we think that then more meaningfully depicts the manufacturing mode development that’s happening on our properties. So I think we’re going to do a lot of work around that, centered around that, whether we change the metrics in which we kind of divulge activity that’s happening on our portfolio because net at the end of the day, it’s that net decimal interest that then feeds into the DUC balances, which then feed into production volumes and cash flow. So really, I think we’re going to do some work here in March. Now that the 10-K is filed, we can put our first annual reporting cycle behind us. We have time for that type of analysis. So that’s something I think we’re going to work on and evaluate. But I would think a consistent message is, from what we’ve heard from operators, is that perhaps there’s kind of a 7% to 10% decrease in CapEx budgets. But as you mentioned, there’s been cost deflation. I think an underappreciated part of the story is also the efficiencies on the drilling side that are happening.

And so in particular, when you think in just one, not because I’m looking at the page because it’s the Silvertip page, Oxy is obviously pointing to reduced drilling times. As people get more efficient, more of the drilling activity goes to manufacturing mill projects. So I think it’s — at the end of the day, [Betty] kind of alluded to this on her comment yesterday that although we’re seeing these CapEx budgets decrease, probably the gross number of wells perhaps might stay flat from 2019 to 2020 because of the cost deflation in the rig and drilling — drilling and completion efficiencies operators are seeing and attempting to implement. So I think there’s some solid work there that’s been done that looks to point to perhaps flat overall gross spuds in 2020 relative to 2019.

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Operator [49]

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

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Robert M. Roosa, Brigham Minerals, Inc. – President, CEO & Director [50]

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We appreciate everybody joining us on the call this morning and to this afternoon. So thanks for joining us. And again, just want to reiterate the management team’s thanks to the entirety of the team here for the tremendous results that they’ve put up in 2019, very thankful for their efforts and also just look forward to getting together with everybody in early May to discuss and review with you our first quarter 2020 results. So thanks again for everybody joining.

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Operator [51]

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

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