Brigham Minerals Inc (MNRL) Q4 2020 Earnings Call Transcript

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Brigham Minerals Inc (MNRL)
Q4 2020 Earnings Call
Feb 26, 2021, 10:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Brigham Minerals Fourth Quarter and year-end 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jacob Sexton, Manager of Finance and Investor Relations. Please go ahead.

Jacob Sexton -- Manager of Finance and Investor Relations.

Thank you, operator, and good morning, everyone. Welcome to the Brigham Minerals Fourth Quarter and Full year 2020 Earnings Conference Call. Joining us today are Bud Brigham, Founder and Executive Chairman; Rob Roosa, Founder and Chief Executive Officer; and Blake Williams, Chief Financial Officer. Before we begin, I would like to remind you that our remarks, including the answers to your questions, contain forward-looking statements, and we refer you to our earnings release for a detailed discussion of these forward-looking statements and the associated 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. We have a new investor presentation titled Fourth quarter 2020 Investor Presentation available for download on our website, brighamminerals.com. We recommend downloading the presentation in the event we refer to it during the conference call. Lastly, as a reminder, today's call is being webcast and is accessible through the audio link on our IR website. I would now like to turn the call over to Bud Brigham, Founder and Executive Chairman.

Bud Brigham -- Founder and Chairman

Thank you, Jacob. We appreciate everyone joining us this morning for our fourth quarter and year-end 2020 conference call. First, our thoughts and prayers go out to all our fellow Texans and the rest of the United States who are recovering from the winter storms that impacted us last week. The recovery will take some time. We have a great deal to sort out here in Texas. However, the mining is that this was a very educational energy event, demonstrating the remarkable scalability and reliability of natural gas. And that's its very important role in powering our energy grid. I strongly believe that oil and natural gas will be dominant fuels, positively impacting human for decades to come and that Texas will build out more resilient and reliable infrastructure, benefiting from our tremendous natural gas resources. Hopefully, the rest of the country and the world, for that matter, will benefit from our experience. Turning back to the oil markets. The entirety of 2020 was filled with unprecedented volatility, triggered by the COVID-19 pandemic and the OPEC+ crisis from crude oil pricing to rig counts to frac crews as well as individual company performance. We started 2020 with $60 oil. Amazingly, it briefly went negative, and then oil spent most of the year around $40 to $45 per barrel. Markets have been healing. And today, we sit here with oil above $60 per barrel. The price volatility had a dramatic impact on the U.S. rig fleet in our liquids-rich basins. We saw the rig count in those basins in the mid 500s in February of last year and then saw them decrease to around 150 rigs during the third quarter. In the fourth quarter, we saw a 40% rebound in the rig fleet, followed by a further 15% increase so far in the first quarter of 2021. As a result, we sit today up approximately 70% from the low point, but still around 300 rigs short of February a year ago. Frac fleets fared no better with around 170 fleets running in early 2020 and then dropping to as low as 18 fleets in May of last year.

The frac fleet resurgence happened quicker than rigs, really starting in July, as operators started to complete their more capital-efficient DUCs. We now sit closer to 120 frac fleets in the U.S. As a management team, we've lived through many of these cycles. As in prior cycles, service companies and operators are currently driving up efficiencies. We will see more productivity from each rig and frac crew than prior to the disruption. Of course, the significant volatility in 2020 companies in the energy industry flatfooted and with heavy debt loads. When the pandemic and crisis hit, those companies cut staff, shut down capital spending, sliced dividends, hedge due to trough pricing and sold depressed assets. In an entirely differentiated position, Brigham entered this disruption with no debt and flushed with cash. Having lived through tremendous volatility in the past, we were compelled to take bold action to compound value for our shareholders when others could not or did not want to. It's easy to buy when times are good, but much harder to buy at the lows. Our lean organization went into overdrive, looking for accretive mineral deals in a highly disciplined manner. We increased our mineral portfolio by almost 5% during the year and deployed over 90% of our capital to the Permian Basin at highly attractive permit location costs with a very attractive mix of PDP, DUCs, permits and undeveloped locations. We also maintained our peer-leading payout ratio at 100% during the second quarter and, in the third and fourth quarter, we were able to increase our dividend while beginning the process of gradually and thoughtfully stepping down our payout ratio in order to retain cash flow to fund mineral acquisitions. In total, as a result of 2020 operating results, we were able to return over $1 per share of capital to our shareholders via our dividend.

Further, we were able to also return capital via our share repurchase in September and now sit with our stock price at roughly two times the levels where we undertook our repurchase. Looking ahead, I believe the combination of the super majors redirecting capital to renewables, independent E&Ps maintaining capital discipline and returning capital to shareholders, significant monetary innovation by governments across the globe and likely replace that comes with those efforts have us on the precipice of an energy market where there are going to be substantial returns for those that have positioned themselves to capture the opportunity. To further prepare us to capture those anticipated substantial returns and opportunities, yesterday, we announced the appointment of Jon-Al Duplantier to our Board of Directors. Jon-Al has a long history in the energy space, working both on the operator side of the business with a 14-year career at ConocoPhillips and, on the service side, most recently at Parker Drilling, where he was the President of the Rental Tools & Well Service division prior to this retirement. We are extremely excited to announce his appointment and believe this wide-ranging experience will be a valuable contributor to achieving our goal of becoming the leading and premier mineral acquisition company in the United States. Welcome, Jon-Al. I'm personally looking forward to working with you over the coming years. Finally and, in summary, I firmly believe Brigham provides the opportunity to capture value in the coming years and with our view to be a likely highly constructive macro backdrop. With that, I will turn the call over to Rob to cover our operational results.

Rob Roosa -- Chief Executive Officer

Thanks, Bud. The entire Brigham Minerals team would also like to share our thoughts and prayers with those trying to recover from last week's winter storms. We were directly impacted in Austin, including many of our team, as well as many people we know, and they're all struggling to get back to some sense of normal. Brigham Minerals finished 2020 with a strong fourth quarter from our production volumes to our operating statistics, including our ground game mineral acquisition program to our dividend. The team once again showcased the value of diversified asset and operator portfolio and remains laser-focused on acquisitions and capital allocation. Before getting into a recap of our operating performance, I do think it's worthwhile in the face of the numerous potential regulatory changes to remind everyone that our portfolio has been purposely constructed to minimize exposure to federal lands. Our portfolio has less than 5% exposure to federal lands across New Mexico, Oklahoma, the DJ and North Dakota. In particular, only 2.5% of our assets on a net royalty acre basis are located in New Mexico and federal and therefore, potentially subject to federal regulatory changes. The vast majority of our company's assets are in and state units, which we believe could be the beneficiary of regulatory changes that make drilling and federal units problematic, and operators therefore have to think about potentially shifting activity to the Texas side of the Permian. Turning to our operating results. Our fourth quarter production volumes were roughly 9,400 barrels of oil equivalent per day, which is flat sequentially with our third quarter production volumes. In particular, our Permian Basin volumes grew 7% sequentially during the quarter. For the full year in the face of COVID and OPEC+, which negatively impacted oil pricing and also significantly negatively impacted rig and frac fleets. As Bud outlined, we were able to increase our full year production volumes by 28% to roughly 9,500 barrels of oil equivalent per day.

In my mind, another tremendous indicator as to our teams and our assets resiliency that faces some of the most challenging times our industry has seen. During the fourth quarter, we converted one net DUC or greater than 25% of our net DUC inventory available at the end of the third quarter. During the entirety of 2020, we converted 70% of our gross and 79% of our net DUCs despite the historic drop in frac spreads that occurred during the year. That compares to 86% of our gross and 92% of our net DUCs converted in 2019 of our year-end 2018 inventory. I believe the full year 2020 79% conversion ratio is extremely strong, especially since for the period April to June of 2020, the historically low frac fleet levels implied almost no activity for the entire quarter of the year. When operators did come back to work, they preferentially targeted our assets. Our DUC inventory at the end of the fourth quarter was 3.6 net DUCs, of which approximately 2/3 are positioned in the Permian Basin. Further, the majority of our net DUCs are anticipated to be converted by Chevron, ExxonMobil, PDC, Continental Resources and Oxy. As of earlier this month, the top five operators of our DUCs were running approximately 20 of the roughly 120 frac crews operating in liquids-rich basins. As we continue to see the rapid conversion of our DUCs to pre-developed producing locations during the quarter, we were also encouraged to see our well spud increase roughly 40% to 79 wells, up from 57 in the third quarter. And as a result, our net DUC inventory declined only 5% sequentially. Importantly, during the fourth quarter, we saw a significant uptick in overall rig activity from some of our key operators, including Oxy adding six rigs, Chevron adding three rigs and adding seven rigs during the fourth quarter to the Delaware Basin. In the DJ Basin, we saw both Oxy and Chevron restart through drilling programs. In the Midland Basin, we saw Pioneer add six rigs at our Midland Basin fleet. The rig count has continued to improve in the first quarter of this year with Devon restarting their STACK drilling program and are currently running two rigs in Oklahoma. Similarly, PDC restarted their DJ Basin drilling program and are currently running two rigs in Colorado. In the Williston Basin, we've seen a number of operators add to their North Dakota rig count, including Continental, Hess, Ovintiv and Whiting. Our permit inventory also remained strong and relatively flat from the third to fourth quarter with 4.2 net permits in inventory at the end of the fourth quarter. Approximately 50% of our net permits are in the DJ Basin and 30% of our net permits are in the Permian Basin. Increased activity again benefited our portfolio as the number of new permits more than doubled in the fourth quarter versus the third. I did want to highlight some of the drilling activity that restarted at the end of the year and rolled into 2021 as this will help drive our production for the next 12 to 18 months. In particular, we are very excited about Chevron's development of the previously acquired Noble assets in both the Delaware and DJ Basins. In the Delaware Basin, Chevron has completed drilling 10 gross wells, roughly half of a net well to Brigham Minerals in their REV BX pad, the first five-well pad was drilled into the second half of 2020, with the second five-well pad permitted at the end of 2020 and drilled this quarter. In the DJ Basin, Chevron is drilling what Noble referred to as our Wells Ranch area in six North, 64 West in Wells County. Chevron has a rig on location that is drilling 13 gross or 1/3 of a net well to Brigham Minerals in the unit.

These wells were permitted last year, and the rig has been drilling throughout the first quarter. All of this activity directionally points to a falling of the drilling activity on our assets. And only halfway through the first quarter of 2021, we have already exceeded, on a net well basis, the organic drilling activity levels from the fourth quarter of 2020. Our solid operational results in the fourth quarter drove an 8% sequential increase in our dividend from the third quarter to $0.26 per share. That dividend increase comes despite decreasing our payout ratio from 95% to 90%. As we have previously messaged, we plan to continue to gradually move toward a long-term dividend payout ratio of 75% to 80% of distributable cash flow over the next three to six quarters, of course, taking into account the macro environment as the Board contemplates future dividends. As a reminder, our retained cash flow, inclusive of lease bonus that we also retained, funded 14% of our third quarter and 9% of our fourth quarter mineral acquisition programs. As Bud mentioned, based on 2020 operations, we're going to return over $1 per share to our shareholders in dividends for 2020. We didn't stop there. We also returned $4 million in capital in September of last year by buying back our stock at $8 per share. Obviously, our recent trading level volumes have shown that to be an extremely prudent use of capital. In fact, it's only the extremely compelling mineral acquisition returns that have caused us to continue to pursue acquisitions. Those acquisition opportunities are plentiful right now, but I want to be very clear that we are constantly evaluating capital allocation options and will not hesitate to toggle between options should market dynamics change. Moving to our ground game mineral acquisitions. During the fourth quarter, we closed $20.5 million of acquisitions, deploying approximately 86% of that capital to the Permian Basin.

While the Permian remains our focus, I should point out that while limited, we did see some extremely attractive opportunities outside of the Permian at such attractive rates of return that we simply cannot pass them up. We expect to continue to spend the bulk of our dollars in the Permian, but remain open to scooping up deals in out-of-favor basins at highly attractive prices. Looking ahead, we continue to see strength in our ground game deal flow into the first quarter and have approximately $22 million in deals either closed during the first quarter or are pending and are in the middle of our title verification process. On a net well basis, our potential first quarter acquisitions are comprised of 50% PDP, DUCs and permits, and we anticipate adding 1.6 net Permian DUCs and permits to our quarter end inventory, which is roughly equivalent to approximately 42% of our Permian DUCs and permits and inventory at the end of the fourth quarter 2020. Our acquisition team has been extremely busy on the mineral acquisition front in 2020. And while we made great progress in 2020, we believe we have even more exciting things in store for 2021. We plan to deploy $90 million to $110 million in mineral acquisition capital during 2021, that would generate production and cash flow with a specific focus on near-term activity with clear line of sight to rapid return of capital. We are off to a great start, and I want to reiterate that our acquisition team is finding deals every day that will contribute meaningfully to our production and cash flow for both 2021 and 2022. We are also excited to provide initial full year 2021 production guidance of 9,200 to 9,900 barrels of oil equivalent per day for a midpoint of 9,550 barrels of oil equivalent per day. This production guidance assumes the $90 million to $110 million of mineral acquisition capital. I want to point out that this guidance range includes the impact of the severe weather that I previously mentioned. We currently estimate that the severe weather will impact production volumes during the first quarter for approximately five days and that this downtime will likely result in our full year production volumes running approximately 150 barrels of oil equivalent per day lower during the full year 2021 than we originally envisioned. had our operators not been impacted by the severe winter weather, we estimate that our full year production volumes would have been closer to 9,700 barrels of oil equivalent per day at the midpoint.

As I mentioned, we also intend to continue moving toward our long-term payout ratio of 75% to 80% and believe the retained cash flow will contribute meaningfully to funding a portion of our mineral acquisition capital. As a reminder, we will update guidance for the second half of 2021 in early August of 2021 associated with our second quarter conference call. I think it's worth reiterating Bud's comments that we firmly believe the energy industry will experience a resurgence over the next decade. While there are many ways to get commodity exposure, Brigham Minerals represents an unhedged high-margin business that is poised to reap substantial benefit. Perhaps more importantly, the management team here at Brigham is experienced at creating value, and we believe we will continue to drive our performance beyond the positive changes in commodity prices. As Bud indicated, we've enhanced our overall team depth at Brig and minerals by adding Jon-Al Duplantier to our Board. Jon-Al joins us with terrific wide-ranging experience at both Parker Drilling and ConocoPhillips, and I'm very excited about having the opportunity to work with Jon-Al in driving our performance. I'll now turn the call over to Blake, so he can summarize for you our financial performance. Blake?

Blake Williams -- Chief Financial Officer

Thank you, Rob. Our daily production for the quarter was roughly 9,400 barrels of oil equivalent per day, flat sequentially. Product mix was flat as well at 72% liquids with oil cut at 52%. We expect to remain in the 52% to 55% range as an improved gas curve will bring operator investment to and stronger growth from our lower oil cut areas in the DJ and SCOOP. We anticipate that activity in the Delaware and Midland will continue to drive oil volumes higher, assuming a normalized environment in 2021. Our portfolio generated royalty revenue of $23.8 million for the quarter, up 10% sequentially due mostly to a 10% improvement in realized pricing. Realized pricing for the quarter came in at $25.16 per BOE. Importantly, realized pricing per barrel of oil was $40.40, up 11% sequentially and clearly set to continue to trend higher based on current strip pricing. Given that oil revenue amounted to roughly 76% of our total royalty revenue for the fourth quarter, we are excited about the continued momentum in oil prices given such a large portion of our revenues are derived from oil. Realized pricing for the gas stream was $2.29 per Mcf and $14.11 per barrel of NGL. The forward curves for these commodity types are also trending higher. Net loss for the quarter was roughly $47 million. This included a $49 million impairment, net of tax, largely driven by reserves impacts from reclassifications of PUDs and lower SEC pricing. Adding back the impairments, we have adjusted net income of roughly $2 million. Adjusted EBITDA for the quarter was $17.2 million and adjusted EBITDA excluding lease bonus was the same, given we did not generate lease bonus this quarter. On costs, gathering, transportation and marketing expenses were $1.9 million or $2.18 per BOE, up from the third quarter, though within a normal historical range. Severance and ad valorem taxes were $1.4 million or 6% of mineral and royalty revenue and in line with historical levels. G&A expense before share-based compensation was $3.2 million and in line with the third quarter. I'd like to highlight that full year 2020 cash G&A came in at $14 million, significantly below expectations and showcases the intense efforts carried out by our team during the course of the year to squeeze costs out of the business.

As Rob already stated, we declared a dividend of $0.26 per share of class A common stock. This dividend is payable on March 26 to shareholders of record as of March 19. Moving to our balance sheet. We continue to prudently deploy capital into highly accretive acquisition opportunities. We exited the quarter with $9.1 million of cash and $20 million drawn on our revolving credit facility for net debt of $11 million, leaving us with total liquidity of $124 million. We have $115 million undrawn and have positive pricing as a potential tailwind into our redetermination that will occur in May. We are also constantly evaluating other sources of funds, including potential asset sales, among other options to enhance our liquidity and portfolio. There is no change to our thoughts on capital structure as we continue to reiterate our comfort level at an upper bound on net debt to adjusted EBITDA ratio of less than 1.5 or two times. Lastly, we have been pioneers with our executive compensation plan and have seen other companies in the energy space begin to adopt the more shareholder aligned approach we embraced as a newly public company two years ago. We do not have annual cash bonuses and tie the payout of our long-term equity grants to absolute shareholder returns. We believe that with a properly aligned and consistent compensation plan design, management stands with investors through the commodity cycles and benefits only when we have performed well for our shareholders. I will now turn the call back over to Rob to wrap things up.

Rob Roosa -- Chief Executive Officer

Thanks, Blake. We appreciate you joining us for our fourth quarter and full year 2020 call. We're extremely excited about our results in 2020 and the actions we took to create value as commodity markets recovered. With oil prices back in the 60s, the value of those efforts is likely to be felt very soon. Further, we have an exciting 2021 business plan that will continue to push Brigham to the next level and our never-ending pursuit to be the best investment in the energy industry. Operator, I'll now turn the call back over to you to begin the question-and-answer portion of our conference call.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Baker of Credit Suisse. Please go ahead.

Christopher Moore Baker -- Credit Suisse -- Analyst

Hey. Good morning, guys. My first question is just on the organic growth profile you guys saw in the Permian last year. It looks like maybe on an exit-to-exit basis, volumes were up 7% to 8% versus the basin, which was maybe down low single digits. Can you just talk about the organic growth profile, underlying that, just in the context of the, call it, 2.5 net PDP wells acquired last year?

Rob Roosa -- Chief Executive Officer

Yes, Chris, thanks for joining. I think our growth relative to kind of that down low single digits growth or decline for the remainder of the Permian clearly points to the outperformance of our portfolio relative to others. And so that's something that we've consistently pointed to. When you think about our asset and what we've tried to do in terms of buying in Loving County and what we in the surrounding area, really what we consider the core under some of the best operators, you're talking about XTO, Shell, EOG and others really points to the ability to continue to drive growth. And so really, we're quite pleased with the growth of the organic portfolio, and we've continued to see that. Some of the comments that I made related to the fourth quarter we saw the rigs activity on our portfolio in the fourth quarter increasing 40%. Here, in the first quarter, we've already seen the net additions to DUCs through just the first half of the first quarter, already exceed the entirety of the fourth quarter. So really, what we're pointing to is the fact that as rigs return to the basin. And really, what Bud and I both mentioned, that started to happen in the fourth quarter and has continued to happen through the first quarter really should drive a resurgence in the organic activity of our portfolio, especially as you consider the second half of 2021 because really, realistically, it takes an operator once they spud a well, go through all the completion processes, put all the infrastructure in place, nine to 12 months for those wells to be additive to production.

So I'm particularly encouraged by the ramps and activity that we've seen in the fourth quarter into the first quarter, especially as you think about some of my commentary, some of the operators adding rigs where they've not been operating to date. In particular, when you think about Devon and STACK, they immediately hit some of our drilling spacing units. You think about PDC. You think in particular about Oxy. They're the single largest component of our undeveloped wedge, rapidly increasing to 12 rigs in the Delaware for in the Midland Basin. And so all of this activity will be, in particular, very constructive to growth for us as we look later this year and into 2022. So we're encouraged from, in particular, the overall industry perspective and what we're seeing out there, Chris.

Christopher Moore Baker -- Credit Suisse -- Analyst

Yes, that's great. And just as a follow-up on the commentary around the potential to optimize the portfolio. Any additional thoughts in terms of where we could see you guys focus? And would that be -- would it be fair to assume that that's areas where there's maybe less development visibility or no current cash flow?

Rob Roosa -- Chief Executive Officer

Yes, that's a great question, Chris. And that's a topic in particular, alluded to in the third quarter conference call. The rationalization of the portfolio is continuing to want to to enhance the portfolio. And so when you think about it, we wanted to make sure the environment was constructive when we undertook that process. And so when you think about that early November period when we had our conference call, crude oil was priced in the $36 to $37 range. Today, where we sit, obviously, in excess of $60, it feels a lot more constructive in terms of getting out there and rationalizing the portfolio. And so in particular, I think what the team did at the end of 2019 in terms of making sure we have plenty of liquidity in hand to work with throughout the period, prevented us from having to take reactions when prices were low and provide the opportunity and instead capitalize when the market rebounded. And so what we're seeing is that market rebound right now.

Pricing activity, etc., which all should be extremely conducive to evaluations that others might undertake as to any type of mineral position that we do want to put out there in the market. And so I do think it could be across the entire spectrum of our asset from the Permian more undeveloped sections because we are having tremendous success, in particular, here in the fourth quarter and the first quarter in terms of buying units with heavy activity. And so you will likely see us do that as well as there's the opportunity to rationalize in Oklahoma, the DJ and Williston Basin. So I think the team is looking forward to potentially capitalizing on the opportunity that we see out there as it relates to improving overall market conditions, provide us flexibility to rationalize the portfolio and continue to enhance the Permian portfolio. And really, what we're seeing there is a big positive. So we're really looking forward to 2021 and the opportunity to redirect some of those more undeveloped sales into high activity sections.

Christopher Moore Baker -- Credit Suisse -- Analyst

Great. Thanks, guys.

Rob Roosa -- Chief Executive Officer

Yup. Appreciate you for joining.

Operator

Next question comes from Brian Singer of Goldman Sachs and Company. Please go ahead.

Brian Arthur Singer -- Goldman Sachs -- Analyst

Thank you. Good morning.

Rob Roosa -- Chief Executive Officer

Good morning, Brian.

Brian Arthur Singer -- Goldman Sachs -- Analyst

My first question is with regards to some of the comments that you made on efficiencies and productivity. It seems like you had an optimistic view there on both of those. And I wondered if you could dig in a little bit deeper. Certainly, we've seen costs come down, which with all else equal, lower the supply cost for some of the operators. But how do you see the push and pull on capital discipline across the areas in which you're focused? And given some of the questions or concerns on the acreage need to be developed being a little bit less than the core of the core and more in underlying areas in some of these plays, how do you think about your -- the outlook for well productivity in 2021 and beyond?

Bud Brigham -- Founder and Chairman

This is Bud. I'll start more generally, and then Rob will probably add to it. But yes, as you know, we've lived through a number of these cycles, and this one was certainly the most extreme, but in every one of these cycles, and we've been on every side of this, from the operator perspective to the -- and the service side as well. And in every one of these cycles, when operators and the service companies are really pressured, it's -- when you see very substantial innovation and improvements and efficiencies, and we're seeing that, of course, again, coming out of this cycle. Just one example is the fracs. So I think no question whether it's drilling the wells, but also in fracking and completing the wells. We're already seeing that on this side of the cycle. And that -- so you can't just look at the rig count relative to prior to the pandemic and the frac count product to the pandemic because each rig and each frac rig is going to be more productive than it was prior and so we're going to benefit from that as we go forward. Rob, maybe you want to add to that?

Rob Roosa -- Chief Executive Officer

No. Brian, I think you're exactly right in that we're going to see enhanced efficiencies in terms of operators, and I pointed to this in either the second or third quarter call that we we had. And it's really during, as Bud mentioned, these extremely tough times that operators really drive efficiencies, and that can come in many forms and fashions. And so when you think about what we've read thus far in the fourth quarter, you've seen a lot of positive commentary from operators in terms of cycle times, cost to drill per foot, just highlighting some of them, you look at CDEV, and they're saying there's improved cycle times to be almost 20%. So each rig now drilling 20 wells per rig per year. You think about Continental Resources and pointing to reductions in costs, both in the Bakken and Oklahoma. Devon is pointing to New Mexico well costs being pretty significantly sub-$600 a foot. Similarly pointing to much improved cost. Marathon in North Dakota saw well cost decrease 10% from the third quarter. Eagle Ford down 19%. Matador's pointing to what well costs falling 20% in their areas. And then Avintiv's point to record well costs that they saw here in the fourth quarter, 16% better in the Permian, 14% better in Oklahoma.

So all these operators are pointing to much improved efficiencies and costs. And so as you think about in this environment wherein operators are trying to maintain volumes flat or capital flat, such that volumes are flat from Q4 2020 to Q4 2021. The dollars are same, but the efficiencies, the cost per well goes down. And so what we will likely see during 2021, I would estimate, is more wells being drilled in 2021 for an equivalent amount of dollars because of those efficiency gains, which to us, flows directly through. We're, as a reminder, not incurring any of the capex, but we're a direct beneficiary of improved activity levels. And so I'm particularly encouraged as I read all the different reports that you guys have put out that there's going to be some pretty significant efficiency gains. And then I think given operator budgets are constrained, and so there's limited dollars to work with. Brian, they're still going to focus on the core of the core. And so they still need to put up the very best well results. So that's still going to make them focus on the core and probably limit activity in the fringes. And so I still see them directing disproportionately of activity in the core of the core, which I think our team has done a tremendous job in terms of making sure we acquire in some of the most economic parts of the basin. And so particularly encouraged given the environment, what we're seeing, we're going to see more wells drilled, more activity in the core.

Bud Brigham -- Founder and Chairman

Hey, Rob. I might just add one thing. The improvement in efficiencies and productivity is compounded by -- we're seeing -- and particularly in the Permian some really encouraging well performance, production performance from these wells as well.

Brian Arthur Singer -- Goldman Sachs -- Analyst

Great. Great. Thank you for that. And then my follow-up is with regard to, I think, a comment that you made with regard to the acquisition strategy that you're also considering and have made acquisitions in out-of-favor basins based on a value proposition. I wondered if you could talk a little bit more about how you define that. Is it that you feel you're paying less than PDP? Or is it that you have more of a unique view that the operator will ultimately commit capital in these areas?

Rob Roosa -- Chief Executive Officer

Yes. So the other basins that we've acquired in outside of the Permian have largely been the DJ, some Oklahoma assets as well as some in North Dakota. And so what I would say there in some of the basins that have been more challenged in terms of regulatory environments, we're more focused on providing valuation PDP only in some of the other environments that are more conducive to oil and gas activity. We will give credit to permits, etc.. And so that's just kind of a logical extension of what we're trying to do. I think the opportunity is such is that the returns are significantly higher than the Permian such that we feel good about deploying capital, although in the fourth quarter, it was about 14% of our asset. In the first quarter, thus far, the entirety of our asset is the Permian. And so the opportunities do come about, and our team is set up such that we can still evaluate and capitalize on those. And so you'll see us selectively add to those areas. But the valuations are largely constrained to PDP and DUCs. And in particular, in those basins that are more favorably oriented toward oil and gas, we will give credit to permits. But there is some risking that occur in more regulatory heavy environments, I would indicate it that way.

Brian Arthur Singer -- Goldman Sachs -- Analyst

Great. Thank you.

Rob Roosa -- Chief Executive Officer

Yup. Thanks, Brian.

Operator

The next question comes from Jeanine Wai of Barclays. Please go ahead.

Jeanine Wai -- Barclays -- Analyst

Hi. Good morning, everyone. Thanks for taking our questions today.

Rob Roosa -- Chief Executive Officer

Good morning. Thanks for joining.

Jeanine Wai -- Barclays -- Analyst

Good morning. Our first question is really just kind of dovetailing on Brian's question on discipline and efficiencies. So you've guided 2021 as a 9,200 to 9,700 BOE per day. We know that includes your estimate of weather-related downtime in Q1. Can you talk a little bit more about what determines the range? And just specifically, what we're asking is, does it leave room for operators to increase activity later in the year if oil prices remain constructive? Or is it just really based on the current plans? And I mean I know capital discipline, it's a huge theme for E&P, but efficiency gains continued, as you just mentioned. And so operators can really hold the line on discipline, but still do more with less capex dollars.

Rob Roosa -- Chief Executive Officer

Yes. Again, thanks for the question, and thanks for joining. So when you think about our buildup for guidance, it's largely based on our PDP volumes, of course, DUCs that we have in inventory at the end of the year, looking at those operators, frac crews, etc., and historically, how our asset has been converted, it also includes some permit activity and then also some component of our acquisition wedge. And so those -- all those components are really driven on current activity levels, current operational efficiencies or current operating statistics. So Jeanine, to the extent there is efficiency enhancements that occurred during the year or do you see incremental upside to acquisitions, all that will benefit us and will allow us at some point in the future to potentially update guidance further. And so I think to the extent that these efficiency enhancements play out, on the M&A side, if enhancements play out, there's room there such that we can hopefully outperform the current guidance. So I'm particularly hopeful that as the industry continues to drive these efficiency enhancements, we'll continue to see that flow through to our production and cash flows.

Jeanine Wai -- Barclays -- Analyst

Okay. Great. Thank you. That's helpful. My second question is just on your cash flow retention. You'll be increasing the cash flow retention to 20% to 25% over the next several quarters. And in your prepared remarks, you indicated this is really for acquisitions. So does this primarily reflect that you see an increased opportunity set this year? Or are bid/ask kind of starting to narrow given higher oil prices and you just need to allocate a little bit more retention for that? And I guess the last thing, it sounds far less likely given your current portfolio and how things are developing, but we just wanted to check if your appetite for acquisitions is changing by basin, meaning expanding due to any increased regulatory uncertainty? So just any further color would be really helpful. Thank you.

Rob Roosa -- Chief Executive Officer

Yes. No, definitely appreciate the question. And so as we see acquisitions and the retention of cash flow to acquire with is we've historically really since beginning our partnership with our private equity guys back in 2012, early 2013 have retained all of our cash flow generated by the assets that continue to buy with. So we've, throughout our history, seen tremendous opportunity to retain cash flow continue to drive growth through organic acquisitions, organic development of the asset. So similarly, we want to capitalize on that opportunity here with our assets by retaining some cash flow. So we just think that there's a tremendous opportunity to take that 25% to 30% -- to 20% of our cash flow, retain that. Continue to acquire with because there is just tremendous opportunity out there. And so when you think about what we're able to do here thus far in the first quarter, for instance, we're able to buy assets with 50% activity on them, a good mix of PDP, DUCs and permits. And so we're able to do that 100% Permian. That activity ratio is about 2.4 times what we were able to buy in terms of activity in the fourth quarter. So we just think that there's tremendous upside.

I do think that, as you mentioned, the spread, the bid/ask spread has narrowed as kind of this environments continue to linger. There's pent-up. I think, activity on the -- in terms of sellers and their desire to sell, there was a large period of last year when there wasn't a whole lot of activity. And so I think also what's playing favorably into our hands is just on the other potential buyers out there in the market that those potential buyers have also been reduced in numbers, and that's both public peers have reduced their acquisition levels, private equity-backed or private mineral buyers have also reduced their acquisition levels. And so the number of potential buyers that are out there also reduced. So I think sellers are moving our way. There's tremendous opportunity. We're seeing just tremendous opportunity set in terms of the quality of the assets. So that's something we definitely want to retain the ability to capture and expand upon. And so that's really the driver behind us, why you continue to increase cash retention to acquire what.

Jeanine Wai -- Barclays -- Analyst

Great. Thank you.

Blake Williams -- Chief Financial Officer

I think the only thing I would add, too, is with that 75% payout, it allows us to have an energy industry-leading dividend yield while also helping make the portfolio and our management a little bit more self-sustaining when funding those acquisitions.

Jeanine Wai -- Barclays -- Analyst

Great. Thanks, John.

Operator

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

Pearce Wheless Hammond -- Simmons & Company -- Analyst

Yes. Good morning. And thanks for taking my question. When you came public in 2019, you talked about a ground game strategy as well as potentially like a larger scale acquisitions as well. And you've had tremendous success with the ground game. It seems like larger scale deals have been harder to come by. And I think investors' expectations when you became public were that we'd see a lot more private minerals moving into public hands. So just curious from a high level, what makes those deals hard to get over the goal line? Is it just what we went through the past year with COVID and the tremendous volatility with oil prices? Are conditions becoming more fortuitous to getting some of those deals done? Just love to get your high-level color on that.

Rob Roosa -- Chief Executive Officer

Yes, pearce. Appreciate the question. So I think we definitely want to be patient. We're very disciplined in our underwriting process. So that naturally creates kind of a high bar, in which a larger deal has to cross such that we want to execute upon it. And so it's that patience and discipline that really create the environment that we want these deals to be accretive. We want to, on a large deal, be able to immediately point to the market that it's going to be accretive in terms of production and cash flow. When you think about the Pioneer-Parsley deal, a lot of people are pointing to 2021 as an important benchmark as to the performance of that M&A activity and how the overall company performs. And so we're very cognizant of the fact that any larger deal that we do is going to undertake -- there's going to be a lot of scrutiny of it. And so we want the best chance, the best probability to succeed because we want to do another deal into the future. And so really, that's what we see is that these deals need to be accretive from our perspective in terms of production, cash flow, NAV. We're Being very disciplined and patient through the process. And so I do think that there's -- when you think about private sellers, and the realization of -- in some instances, us competing against those individuals and knowing what they pay for that asset.

There's probably some instances where there's reluctance in terms of selling that asset in terms of what we would pay relative to what they paid for that asset. I think our patience plays out to the positive for us and that some of these private equity back firms have a limited runway in terms of fund life, etc., that naturally continues to wind itself down as you think in terms of pretty typical fund life versus when they've acquired these assets. So as you mentioned, Pearce, we've had tremendous success on the ground game. So the team is fully engaged in terms of looking at those everyday deals. So we think we can still be very successful undertaking the ground game acquisitions, while being very patient and very disciplined in underwriting of large deals such that we do the best deal for our shareholders.

Bud Brigham -- Founder and Chairman

And Pearce, as you alluded to in your question, clearly, the volatility is an impediment. When you look at the buyer and the seller, we you had an unsustainable, for example, commodity price period, it makes it more difficult for either the buyer or the seller to transact. And so that has been an impediment, but I think coming out on the other side of that cycle, having being at a more -- a less volatile environment at a more constructive macro environment should be beneficial.

Pearce Wheless Hammond -- Simmons & Company -- Analyst

Thank you, Bob. And thank you, Rob for the answers.

Rob Roosa -- Chief Executive Officer

Yup. Appreciate you for joining. Thanks.

Operator

The next question comes from Derrick Whitfield of Stifel. Please go ahead.

Derrick Lee Whitfield -- Stifel -- Analyst

Hi. Good morning, all.

Rob Roosa -- Chief Executive Officer

Good morning, Derrick. Thanks for joining.

Derrick Lee Whitfield -- Stifel -- Analyst

Picking up on Jeanine's first question. Given the material weather impacts you're projecting for Q1, the midpoint of your 2021 guidance would similarly suggest a higher 2021 exit rate than previously thought by consensus. Could you share with us the shape of your production trajectory and where you'd expect to exit the year?

Rob Roosa -- Chief Executive Officer

Yes, Derrick, appreciate the question. I think in terms of the overall trajectory of production, we think Q1 will be the low point, given the probably the impact of the weather that we've incorporated into our full year guidance. And then really, at that point, Q2 seeing volumes uplift. And then in Q3 and Q4 some really strong response. So we think that the weather will impact the first quarter. And then shortly thereafter, you'll see positive response, positive improvements to production volumes in Q2, Q3, Q4. And as I mentioned, as organic activity picked up in Q4 and Q1, you'll see that impact probably around summertime, just given the time line that it takes for those wells get turned in line to production. So in particular, you see a really nice response in Q3 and Q4 as we think about the entirety of 2021.

Derrick Lee Whitfield -- Stifel -- Analyst

Great. And then as my follow-up, perhaps for yourself or Bud, your acquisition strategy has historically yielded strong returns relative to your cost of capital in light of your elevated ground game capital plan. Could you help us frame the type of returns you're expecting?

Bud Brigham -- Founder and Chairman

Yes. Typically, we've got in our press release that we were typically targeting asset level returns that are 2 times our cost of capital, so high teens, low 20s rates of return on an unlevered basis.

Derrick Lee Whitfield -- Stifel -- Analyst

Very helpful. Great update, guys. Thanks for your time.

Rob Roosa -- Chief Executive Officer

Yup. Appreciate you, Derrick. Thank you.

Operator

The next question comes from Leo P. Mariani with KeyBanc. Please go ahead.

Leo Paul Mariani -- KeyBanc -- Analyst

Hey, guys. I just wanted to ask a question on G&A. I guess we did a very good job of getting those numbers down significantly in 2020. The SG&A is now starting to trend up based on your guide for '21. Just any color you have there?

Rob Roosa -- Chief Executive Officer

Say it again, on the guide?

Leo Paul Mariani -- KeyBanc -- Analyst

So I was asking about your G&A guidance, it looks like you guys are expecting G&A to rise in 2021 versus 2020?

Blake Williams -- Chief Financial Officer

Yes. Certainly, some of the G&A savings initiatives that we undertook in 2010 were somewhat relevated to the environment. So a lot of it was us pushing back on our service providers. Now with a little bit higher price environment, those are kind of -- we're still able to save some there and keep those out of the system, so to speak, but some of those are trending a little bit higher this year given the more normalized environment going forward. But I still think we were able to to keep some of that cost out of the business going forward. So we've got SG&A expense in our guidance numbers of $14.4 million to $16.4 million, so midpoint of about $15 million for the year.

Leo Paul Mariani -- KeyBanc -- Analyst

Okay. Helpful. And I guess I want to touch base on stock buybacks. You guys obviously mentioned the fact that you're able to do a very smart buyback late last year. And how do you think about buybacks in this environment now that the stocks are a lot better versus, say, your ground game acquisitions?

Rob Roosa -- Chief Executive Officer

Yes. No, stock buybacks or potential option acquisitions. So whenever we undertake our capital allocation decisions, we're looking at the entire portfolio of opportunities, options available to us. And so the finance team does a tremendous job evaluating each of those and making sure each and every dollar of capital that we deploy is the the highest rate of return asset. And so that's something that we are constantly monitoring and undertaking. And so I believe one of my comments in the transcript -- or sorry, in my earlier comments was the fact that as events unfold, we continue to monitor and evaluate in the beauty of it is we can toggle between all the different opportunities. And so we'll continue to monitor and evaluate. But I think obviously, as you indicated, Leo, one of the things post that September buyback that we undertook, you've seen, in essence, the stock double. And so obviously, that lessens the desire to undertake a buyback.

Blake Williams -- Chief Financial Officer

Yes. I think I would go back to Derrick's question about our acquisitions being kind of high-teens, low 20s rates of return. We're able to achieve on those acquisitions, yields in excess of 20% for multiple years. So as we continue to see options through the ground game that are that compelling, we'll always be comparing those back to a buyback and what adds the most value per share.

Leo Paul Mariani -- KeyBanc -- Analyst

Okay. That's helpful. And just on the M&A side. Prior to pandemic, I think you guys were talking about doing roughly $50 million of sort of ground game deals a quarter. And now just looking to guide, you kind of half that at sort of 25%. Are you guys just kind of sort of trying to tell everybody that look, it's -- you still don't have maybe the same level of deal flow that was pre pandemic? Or has anything changed about the way Brigham looks at M&A, where you want to be maybe more conservative due to sort of less availability of capital, I guess, in the sector these days?

Rob Roosa -- Chief Executive Officer

Yes. So when I think about it and a lot of the statistics we provide are kind of on a dollar per net location basis. And so seen a pretty substantial raining in of the dollar per net location basis in terms of how we're able to acquire. So when I think about the $25 million per quarter that we're now targeting, you're able to buy on equivalent basis relative to what we were doing pre pandemic, pretty close to that on a dollar per net location basis. So for us the acquisitions that become more efficient. And so that's allowed us to spend less dollars, but yet acquire at almost the same rate on a dollar per net location basis. So -- and what we're able to acquire today, again, to recap, Leo is some really nice near-term activity, kind of focusing in on activity levels that have PDP, DUC and permit composition of 50% of the overall dollar per net location. So if you look back, and I think compare today's acquisitions relative to historic acquisitions, it's less on a dollar per net location basis. And then also, we've seen upside in terms of activity levels that we're able to buy. So there's a lot of benefits that we're seeing in today's ground game acquisitions relative to in the past.

Leo Paul Mariani -- KeyBanc -- Analyst

Okay. Thanks for the color.

Rob Roosa -- Chief Executive Officer

Yup.

Operator

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

Kyle May -- Capital One -- Analyst

Hey. Good morning, everyone. And thanks for squeezing me in. Going along with some of your commentary about rationalizing the portfolio and then also looking at slide eight of the presentation, which shows the percentage of PDP locations increased quarter-over-quarter. Just wondering if you're actively targeting a higher PDP percentage in your ground game acquisitions? Or if the mix is more reflective of just the opportunity set that's in front of you?

Rob Roosa -- Chief Executive Officer

So I think it's a combination of both. And so I would not say it's necessarily focused on just PDP alone and by itself. And so really, what we're focused on is the overall mix of PDP, DUCs and permits in terms of activity levels. So we're really thinking about it more in terms of an activity wedge. So what's going to be contributory to production over the next 12, 18, 24 months, such that we are undertaking deals that are highly accretive to our shareholders, both near term in terms of production and cash flow. But then by buying kind of acquisitions that are in the 50% activity range. The other -- by definition, another 50% of that wedge is undeveloped locations, which allow us to be NAV accretive. And as those wells are drilled and turned in line, meaning the DUCs and permits, then you have the backfilling of those unpermitted locations that naturally help to keep us off an unsustainable treadmill. So really, that's the beauty of what we're doing in terms of -- on a quarterly basis, able to bundle together synthetically create a portfolio of deals. So if one deal is more PDP heavy or one deal is more DUC or permit heavy, all that gets blended together throughout the quarter. And so when we're doing 30 to 40 deals a quarter, our team is evaluating the entirety of all those deals and kind of monitoring and evaluating performance of the acquisition team relative to benchmarks when we start the quarter.

Bud Brigham -- Founder and Chairman

Yes, I think what you get with us as an active manager of a passive asset. So we're not going to just do a deal to do a deal. We're looking for a certain profile, that's obviously going to add value per share.

Kyle May -- Capital One -- Analyst

Got it. Thanks for that. And as my follow-up, last quarter, you mentioned potentially expanding into the Eagle Ford. Can you give us an update on M&A activity in the basin and your latest thinking about expanding the portfolio in that direction?

Rob Roosa -- Chief Executive Officer

Yes. Again, it's us being patient, very disciplined in our underwriting process. And so to the extent there's more attractive Permian deals than an Eagle Ford deal, we're going to naturally deploy that. So we look at these deals every day almost here internally as an organization. And so we're evaluating deals relative to each other. And so we're going to make sure we do the best deals for shareholders. And to the extent there's more favorable Permian deals, we're going to naturally weigh the allocation of capital to those areas. So we're still actively monitoring working up Eagle Ford deals, but I would put it that in terms of the allocation of dollars, we're seeing much better returns, NAV accretion for shareholders in the Permian then available through an Eagle Ford deal.

Bud Brigham -- Founder and Chairman

Yes. We've been in the Eagle Ford deals. Just haven't got one across the finish line because we haven't found one that's appropriate value for us.

Kyle May -- Capital One -- Analyst

Understood. That's helpful. Rob and Blake, appreciate it. Thanks, guys.

Rob Roosa -- Chief Executive Officer

Yup. Thanks, Kyle. Appreciate you for joining.

Operator

The last questioner today will be John Freeman with Raymond James. Please go ahead.

John Christopher Freeman -- Raymond James -- Analyst

Good morning, guys. Thanks for sticking me in.

Rob Roosa -- Chief Executive Officer

Good morning, John. Thanks for joining.

John Christopher Freeman -- Raymond James -- Analyst

Absolutely. Just a quick follow-up, Rob, on what you were discussing sort of the makeup of some of these acquisitions recently where you're taking advantage of these sort of out-of-favor basins. You're getting a little bit more heavier PDP mix. Just for like an apples-to-apples comparison on the -- on what you've bought in the first quarter, I realize you said 50% so far has been PDP plus dds post, but what you've done in the first quarter so far, can you give me just the PDP breakout of that compare to the fourth quarter?

Rob Roosa -- Chief Executive Officer

Yes. So if you compare it to the 37% PDP component in the fourth quarter, that's about 6% in the first quarter thus far, 5% to 6% to 7%, I would say. And so it's down on a PDP basis. But I would say, as such, the DUC and permit component are very much more heavily weighted than in the fourth quarter. So if you think about that, we're almost running 44% in terms of on a net well basis, the composition of DUCs and permits. So when I think about that, that's almost 2.4 times the composition of DUCs and permits relative to the fourth quarter. So really the driver or the benefit of that, John, is the fact that the pretty substantial contribution that you're going to have throughout this year and to early next year in terms of those DUCs and permits being contributory to production and cash flow accretive for us as we go forward. And so I'm really excited, especially as you think about the DUC and permit bucket, those locations being about 44% of our overall net locations because that will add about 1.6 net DUCs and permits to our inventory in the Permian, and that's relative to the 3.8 net Permian DUCs and permits that we had in inventory at the end of the year. So we're almost adding about 40% of our DUCs and permits to our inventory in the Permian just in one quarter alone relative to the inventory that we had on hand at the end of the fourth quarter. So I'm extremely excited about the quality of the assets that we're finding and putting under contract thus far in the first quarter.

John Christopher Freeman -- Raymond James -- Analyst

Yup. That's great. I appreciate all of the detail. That's super helpful. That's it for me. And all the best to you all.

Rob Roosa -- Chief Executive Officer

Yup. Great, John. Appreciate you for joining. Thanks a lot.

Bud Brigham -- Founder and Chairman

Thank you, John.

Operator

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

Rob Roosa -- Chief Executive Officer

Again, appreciate everybody joining us here on our fourth quarter and year-end 2020 conference call and look forward to speaking with you again in May related to our first quarter results. So thanks again, everyone. Appreciate your time. [Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Jacob Sexton -- Manager of Finance and Investor Relations.

Bud Brigham -- Founder and Chairman

Rob Roosa -- Chief Executive Officer

Blake Williams -- Chief Financial Officer

Christopher Moore Baker -- Credit Suisse -- Analyst

Brian Arthur Singer -- Goldman Sachs -- Analyst

Jeanine Wai -- Barclays -- Analyst

Pearce Wheless Hammond -- Simmons & Company -- Analyst

Derrick Lee Whitfield -- Stifel -- Analyst

Leo Paul Mariani -- KeyBanc -- Analyst

Kyle May -- Capital One -- Analyst

John Christopher Freeman -- Raymond James -- Analyst

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