Brigham Minerals, inc (MNRL) Q2 2021 Earnings Call Transcript

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Brigham Minerals, inc (MNRL)
Q2 2021 Earnings Call
Aug 6, 2021, 10:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to the Brigham Minerals Second Quarter 2021 Earnings Conference Call. My name is Seb, and I'll be your operator for the call today. [Operator Instructions] I will now hand over to Jacob Sexton, Manager of Finance and Investor Relations.

Jacob Sexton -- Manager of Finance and Investor Relations

Thank you, operator, and good morning, everyone. Welcome to the Brigham Minerals Second Quarter 2021 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 be found in our earnings release. We have a new investor presentation titled Second Quarter 2021 Investor Presentation available for download on our website, www.brighamminerals.com.

We recommend downloading the presentation in the event we refer to it during the conference call. Lastly, as a reminder, today's call is being webcast and is accessible through the audio link on our IR website. I would like to now turn the call over to Bud Brigham, Founder and Executive Chairman.

Ben M. Brigham -- Executive Chairman & Director

Thank you, Jacob. We appreciate everyone joining us this morning for our second quarter 2021 earnings conference call. The second quarter represented Brigham Minerals 2-year anniversary as a publicly traded company. I'm extremely proud of all that the team has accomplished, especially in the face of an extremely challenging 2020, which we all know too well was significantly impacted by both COVID-19 and the OPEC+ production dispute. As I look ahead to the remainder of 2021 and into 2022, Brigham Minerals is set up extremely well in three important respects. First, with strong activity wells in terms of quantity and operator quality and inventory as of June 30 to drive our production results for the upcoming 12 months. Second, with a sound balance sheet that will allow us to continue to acquire minerals in a highly disciplined manner, targeting drilling units with activity wells to further enhance production.

And third, very importantly, it's in what looks to be an extremely conducive macro environment for commodities. In fact, this is the best macro setup I've seen in my career, and I've lived through numerous cycles. Benefiting from our diversified portfolio of high-quality mineral assets, our shareholders are positioned to benefit from what I believe is very likely a long ramp of elevated pricing for oil, NGL and natural gas prices. This is particularly true given that unlike some of our peers, we are unhedged. In terms of the overall energy industry, we are pleased to see that more in the industry are acknowledging the importance of return of capital to shareholders. Since the onset of COVID and the OPEC+ dispute, companies across the energy space have responded by paying down debt as well as implementing dividends and share buybacks.

Obviously, at Brigham, commencing with our IPO, we've returned capital to shareholders consistently over the past two years, and in total, have returned $2.72 to our shareholders via our nine dividends, inclusive of the dividend announced last night. We were even able to distribute our dividend during the most challenging of times, the second quarter of 2020, when many companies in the energy space were just trying to stay afloat, much less return capital. It's our business model and conservative balance sheet that allowed us to continue to pay our dividend and make high-quality acquisitions. To emphasize how strongly we feel about the soundness of our business model and continued ability to pay our dividend through any cycle, we are implementing a base plus variable dividend structure with a base dividend of $0.14 per share this quarter or $0.56 per share per year.

The $0.14 per share is what we were able to pay our shareholders during the very challenging second quarter of 2020, and we are firmly committed to paying that dividend going forward. Further, this quarter, we are paying a variable dividend of $0.21 per share, which resulted in an overall dividend of $0.35 per share. This represents a 9% sequential increase in our total dividend from the first quarter of 2021. Rob and Blake will cover our base plus variable dividend in more detail, but suffice it to say that our base dividend represents a step change to other base dividends. In the same way, our 100% variable dividend was well ahead of the broader energy industry's push for return of capital. Consolidation has also been at the forefront of the industry over the past several quarters. Our portfolio has benefited as bigger and better capitalized operators have taken over operatorship of our minerals to enable more consistent and disciplined development. Our focus on the highest rate of return undeveloped locations throughout our history ensures that our mineral position migrates to the top of any operator's drilling inventory.

And as a result, we saw 16 presentation in the mineral space over time. No company is in a better position in the mineral space than Brigham to capitalize given our multi-basin portfolio that gives us a unique ability to pursue a wide range of mineral packages. That said, we will remain disciplined in our processes and we'll ensure that any deal we enter into is accretive from both a cash flow and an NAV perspective. With that, I will turn the call over to Rob.

Robert M. Roosa -- Chief Executive Officer & Director

Thanks, Bud. As Bud mentioned, we are extremely excited about how the remainder of 2021 and 2022 are setting up given the strength of our activity well inventory, which continues to push intentionally toward a greater Permian emphasis. I'm also extremely excited about the portfolio optimization and rationalization actions that our management team has executed since our last conference call, which will impact the third quarter and we believe will drive incremental shareholder value and result in significant portions of our near-term mineral acquisition capital to be internally funded. First, we executed our initial water royalty agreement in the Southern Delaware Basin in Reeves County to capitalize on development of 128 acres out of our 4,200 surface acres in the basin. The agreement is essentially the same in nature to our existing oil and gas royalty business.

A third-party leases our surface acreage and obtain the rights to drill water wells. We have no operations and no capex, while the third party is required to pay us a royalty on each and every barrel of water utilized. Importantly, the agreement is intended to support the development of our DUCs in addition to other wells in the area, and we are, therefore, capturing incremental optionality on our surface position as well as helping to turn in line to sales our activity wells. It's estimated that from this initial deal alone, which covers only about 3% of our Delaware surface acres, we will generate $500,000 to $1 million in royalties beginning in the third quarter, with the potential for continued sales in the future. Next, we indicated in prior conference calls the potential to divest assets, and we completed our first divestiture of certain non-core Oklahoma minerals in July for $3.3 million.

As I previously indicated, we wanted to be patient with our asset rationalization and not sell into the trough, with the rig count now up almost 100% from the lows, we believe it is a great time to monetize noncore assets that are included in the other category in our mineral ownership table in last night's press release and produced approximately 50 barrels of oil equivalent per day at a 27% oil cut. We will redeploy these proceeds into accretive activity well-heavy asset acquisitions in the Permian. We will continue to engage in other potential divestment opportunities and will report back as they are completed. Finally, we are also implementing our first structure to accelerate mineral development. We sold a portion of our minerals in five sections in the stack and merge to a private operator in return for accelerated development of the asset. If the accelerated development does not occur, mineral ownership reverts back to us.

Associated with the partial divestment, we're also able to lease minerals and in total, we're able to generate $1.6 million in proceeds between the partial sale and leasing efforts. Proceeds will again be deployed to the Permian to acquire accretive activity well-heavy drilling spacing units. In summary, we reduce our stack and merge exposure, accelerated development and leased open acreage. This sort of creative effort by our team has resulted in a highly desirable blueprint for value creation, which we are currently looking to apply across our portfolio. In total, between the water royalty, the divestment effort and the partial sale and leasing during Q3, we're going to generate approximately $6 million in proceeds that together with our retained cash flow will provide for significant portions of our Q3 mineral acquisition capital to be internally funded overall, a tremendous effort by our team.

Turning to our second quarter operating results. Our production volumes were roughly 8,990 barrels of oil equivalent per day, up 1% sequentially from our first quarter, driven largely by increased production in the Permian. Our DUCs turned in line to production and contributing to Q2 production volumes were strong on a gross well basis with 26% of our gross wells and inventory at the end of Q1 converted during the second quarter. On a net well basis, DUC conversions are slightly below normal, with approximately 16% of net DUCs in inventory at the end of Q1 converted during the quarter as primarily lower interest wells converted during the quarter. Looking ahead to wells that will be contributory to our production volumes over the next two years, our net activity wells in inventory at the end of the second quarter were strong, 9.1 net locations comprised of 5.0 net DUCs and 4.1 net permits.

As I've indicated in the past, we anticipate DUCs to contribute to production lines over the next 12 months and permits over the next 12 to 24 months. Our net DUCs in inventory at the end of the second quarter grew by approximately 14% to again five net locations driven by the increasing pace of drilling activity on our assets. Gross spuds on our minerals were up 16% to 153 wells spud during Q2, and net well spud on our minerals were up 31% to 1.3 net wells during Q2. This compares to roughly a 9% increase in the rig count in liquids-rich basins. So again, you can see how great of a job our acquisition teams are doing in terms of identifying Tier one undeveloped locations under active operators. Reviewing our drilling activity, in the Midland Basin, we saw strong activity from Pioneer Natural Resources in both Martin and Midland counties in our Quad Rogers and [Indecipherable] units.

In the Delaware Basin, we saw strong drilling activity largely from private operators, including [Indecipherable], Alchemist and Patriot, a strong activities carried over into the third quarter with additional wells spud by Pioneer and [Indecipherable], which we estimate will further enhance our third quarter ending DUC inventory. Drilling down into our Q2 DUC inventory balance, more than 66% of those DUCs are positioned in the Permian Basin. Our Permian net DUCs at 3.3 net locations are now at their highest level since midyear 2019. Further, the majority of our net DUCs are anticipated to be converted by Chevron, Pioneer, ExxonMobil, TDC, Diamondback and Continental Resources. We estimate that roughly one of our net DUCs, roughly 20% of our net DUCs in inventory have either already been turned in line to production and we are awaiting production data or have been fracked and the operators are waiting to turn the wells in line to production.

We can't control the ultimate timing of when these wells get turned in line to production, but it is encouraging to see approximately 20% of our net DUCs on the verge of being contributory to our production volumes and, further, the overall stabilization of frac fleets in the basins that we track at greater than 100 fleets. With respect to permits, we did see a 13% sequential decline in net permits to 4.1 net locations but 52% of those net locations are in the Permian and represent one of our higher net permit balances in the Permian since going public. In the third quarter, we do anticipate a sizable addition to our net permits via acquisitions and in particular, in Permian net permits, with deals that have been entered into thus far in Q3 as well as ongoing organic permitting activity. Moving to our ground game mineral acquisitions.

During the second quarter, we closed roughly $14 million in acquisitions, deploying approximately 96% of that capital to the Permian Basin. It's worth highlighting that these acquisitions were comprised of 63% net activity wells across PDP, DUC and permit locations. With crude prices rising above $70, we did see seller expectations creep higher, their reservation prices we've referred to it in the past, as well as increased activity from incremental new buyers, which historically has been transitory. The key is to remain highly disciplined during times like these and to apply consistent underwriting criteria to our acquisitions as markets have always come back to us. Associated with higher seller reservation prices and increased competition, we are moving the midpoint of mineral acquisition capital for Q3 and Q4 from $25 million per quarter to $15 million per quarter.

Therefore, the midpoint of mineral acquisition capital anticipated to be deployed over the entirety of 2021 is $65 million. which reflects first half acquisitions of $35 million plus the remaining two quarters of 2021 at $15 million per quarter. Thus far in Q3, we have approximately $11 million of acquisitions closed or pending. The pending deals are, of course, subject to title due diligence on our part in order to confirm the seller's interest. Looking at other components of our updated guidance for 2021, we are updating our production guidance for the full year 2021 to reflect the midpoint of 9,250 barrels of oil equivalent per day, which largely reflects the slower pace of acquisitions that I just mentioned. We also indicated in my comments in last night's press release that for the next 12 months or for the period from Q3 2021 through and including Q2 2022, we anticipate production volumes to average 9,500 barrels of oil equivalent per day.

We are providing initial guidance for the next 12-month period as this is a time period over which we anticipate the majority of our five net DUCs to be completed and contribute to production. Finally, I'm pleased to announce the second quarter dividend of $0.35 per share, which is a 9% increase over the first quarter. As Bud mentioned, we're rolling out a base plus variable dividend structure and have set the $0.14 quarterly base dividend or $0.56 per year at a level we are extremely comfortable with and firmly believe in our assets' ability to support. The $0.14 per quarter dividend was battle-tested during some of the most trying times our industry saw in the second quarter of last year associated with COVID and OPEC+. Further, we've rigorously tested and sensitized the $0.14 per quarter base dividend and firmly believe it represents a shareholder distribution that can be supported throughout cycles for the foreseeable future, subject, of course, to board approval.

Overall, we believe adding a base dividend should help better illustrate our firm commitment to pay a dividend and shed more light on the resiliency and sustainability of our business model and cash flow stream. This base plus variable dividend represents 80% of our discretionary cash flow ex lease bonus in line with our previous comments. I'll now turn the call over to Blake, so he can summarize for you our financial performance. Blake?

Blake C. Williams -- Chief Financial Officer

Thank you, Rob. Our daily production for the quarter was roughly 9,000 barrels of oil equivalent per day, in line sequentially. With the dust finally settled from Winter Storm Yuri, our first quarter volumes accurately captured the impacts of the operator disruptions, and thus, there is no incremental impact to volumes reflected in the second quarter. Our portfolio generated record royalty revenue of $37 million for the quarter, up 15% sequentially, due mostly to a 13% improvement in realized pricing. Realized pricing for the quarter came in at $45.24 per barrel of oil equivalent. Importantly, realized pricing per barrel of oil was $63.11, up 14% sequentially. Realized gas was impressive with $4.58 per Mcf and as messaged last quarter, benefited from first quarter true-ups from Winter Storm Yuri.

As a quick reminder, when we do not have complete information, as was the case with some gas volumes impacted by the winter storm, we used conservative estimates until we receive revenue checks from our operators. In this case, our conservative pricing estimates were below our actual realized pricing after accounting for the significant regional basis dislocations. Realized NGLs came in at $23.77 per barrel of NGL. We continue to be pleased with our portfolio of optionality with lease bonus revenue of $0.8 million this quarter. Net income for the quarter was roughly $15.3 million. Record adjusted EBITDA for the quarter was $30.8 million, and adjusted EBITDA, excluding lease bonus was $30 million and up 18% sequentially on the back of continued strength in realized pricing. On costs, gathering, transportation and marketing expenses were $1.6 million or $1.95 per BOE and closer to the midpoint of our 2021 guidance.

Severance and ad valorem taxes were $2.3 million or 6.2% of mineral and royalty revenue and in line with historical levels. Cash G&A expense was $3.1 million, representing another quarter of continued record low levels. As Rob mentioned, we are pleased to reduce our guidance range by $2 million and believe these savings should translate into immediate and sustainable value for shareholders. Moving to our balance sheet. We remain disciplined in our capital allocation as we pursue highly accretive acquisition opportunities. We exited the quarter with $6.4 million of cash and $43 million drawn on our revolving credit facility for net debt of $36.6 million. Our leverage is conservative with net debt to last quarter annualized adjusted EBITDA at just 0.3 times. We currently have total liquidity of $128 million. And with our borrowing base stepping up to $165 million, we now have $122 million undrawn. Importantly, we have not raised additional equity from the market in 20 months.

And outside of large M&A opportunities, we believe we have ample liquidity to execute on our strategy. 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 2 times. Transitioning to the base dividend, I'm going to quickly walk through some high-level thoughts regarding its sustainability as I think it's a vitally important concept. At $0.56 per share, the base dividend would run roughly $32 million per year. For reference, we had EBITDA of $75 million in 2019, $65 million in 2020 and $58 million through the first half of 2021. Given that EBITDA provided 2 times coverage of the dividend during a historical low for activity and prices in 2020, I believe this should help illustrate why we have confidence in our ability to pay this base dividend through the cycle and in any environment.

Further, we believe the $0.56 per year base dividend compares extremely favorably to other investment opportunities given this yield and return-starved environment. At $19 per share, our base dividend is equivalent to a 2.9% yield, our E&P peers base dividends are 1.6% to 2%. The S&P is roughly 1.3%, and the 10-year treasury is sub-1.5%. As our PDP reserves per share increase and our decline rate moderates, management and the Board will evaluate future increases to the base dividend. I will now turn the call back over to Rob to wrap things up.

Robert M. Roosa -- Chief Executive Officer & Director

We appreciate you joining our second quarter 2021 conference call. We believe that the implementation of our base plus variable dividend represents tremendous value to our shareholders and are extremely pleased to announce its rollout. 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

Thank you. [Operator Instructions] The first question today comes from Kyle May from Capital One Securities. Please go ahead.

Kyle May -- Capital One Securities. -- Analyst

Hi. Good morning everyone. Maybe [Indecipherable] dividend -- yes, certainly. Maybe to start out, a question on the new dividend policy. Can you walk us through how the variable component will be determined going forward?

Robert M. Roosa -- Chief Executive Officer & Director

Yes. Kyle, you know we're very pleased to announce the rollout of the base plus variable dividend concept. I think it really is -- as both Bud and myself and Blake spoke to, really speaks to the sustainability of the business model. Blake went through it. But again, there's some really great slides included in the presentation deck on three and four that outlined our thought process as it relates to the dividend. So basically, the dividend -- base dividend at $0.14 per share roughly equates to that 3% dividend yield that Blake talked about, which far exceeds our competitors, other investment opportunities available to the general market. So -- and it's a base dividend that we, again, believe has been very battle tested. It's the second quarter 2020 base dividend. Obviously, in the very heart of COVID, crude oil pricing, very negative.

And so we believe that it's a base dividend that we firmly are committed to maintaining throughout time. And further to that, and as Blake alluded to, as we continue to grow as a company, we continue to see the PDP base expand. There's a potential to further increase that base dividend over time, obviously, subject to Board approval. But what we've talked about in terms of the variable component or our overall dividend conceptually is kind of a 75% to 80% distribution of our cash flow, retaining the other 20% to 25% to help fund mineral acquisitions. And so we'll consistently apply that 75% to 80% dividend distribution. And basically, the difference between that 75% to 80% dividend distribution relative to our base dividend of $0.14 per share will represent the variable dividend. So Blake, any other comments there?

Blake C. Williams -- Chief Financial Officer

No. I just wanted to reiterate that there is no change to the overall when we were looking at distributing 75% to 80% of our subscription to cash flow ex lease loans, just like we have in previous quarters. This is really just planting the flag and fixing a component of that, which is just a firmer commitment in our mind to focusing on capital returns to shareholders, we've done throughout our history.

Kyle May -- Capital One Securities. -- Analyst

Got it. Okay. That makes sense. So just maintaining that total 75% to 80% payout ratio. Got it. And then maybe one other question. You touched on the new water royalty business, and this is something that seems to be new for Brigham. Can you go into more detail about kind of where this opportunity set lies, kind of how big this could be from an acreage position and a revenue perspective?

Robert M. Roosa -- Chief Executive Officer & Director

Yes. Kyle, glad you brought that question up. It's really a tremendous job by the entirety of the team throughout the second quarter to really the three initiatives that we talked about in the press release last night to really continue to extract value across the entirety of our asset base. So to recap for everybody. It was one, the water deal that you alluded to. Second, the mineral divestment there of non-core minerals in Oklahoma. And then, three, the partial sale and leasing of minerals. So again, it's our team looking across the entirety of the asset base determining where we can extract value and really enhance shareholder returns. So as it relates in particular to the water deal, these are surface acres that we've already acquired and own. And so just a little bit of history as it relates to that. So especially within the State of Texas, there are what are called mineral classified lands where the surface owner, of course, opens the -- owns surface, but then the State of Texas owns the mineral interest.

But as a result of the surface owner, in essence, managing those minerals for the State of Texas, any of the lease bonus or mineral royalties are split 50-50 between the surface owner and the state. And so as we've acquired minerals in the Delaware Basin, we have, of course, acquired middle classified lands, which then provide access to the minerals. And then there are also times wherein the mineral owner owns the minerals and also own surface acres. And so instances, that surface owner or that mineral owner wants to dispense of both the surface acres and the minerals and we'll buy those in combination. So in total, so far throughout the history, we've acquired about 4,200 surface acres to date, about 2,300 of those are mineral classified lands, 1,900 are surface acres.

And so within this area in the Southern Delaware Basin, there's four blocks really that are being very developed that this operator is looking to continue to develop. We have about 1,500 surface acres. And so the lease that we're talking about today is roughly about 128 of those 1,500 acres, or on a much broader scale, about 3% of the 4,200 acres. And so there is opportunity to continue to expand that relationship over time as that operator continues to develop that asset. I think from the positives, some very high-level comments that we heard from the midstream company originally, there were plans to put in place four water wells on that -- on our section. Instead, they only had to put two in place because of the high-quality water flow that was achieved. And so I think that's a positive in terms of potential coming back to us to seek incremental optionality to lease.

And so I think over time, you'll continue to extract value via this optionality. And this is just, I'm hopeful, is the first of many different deals to happen over time. But obviously, that would require continued development of the asset. But I think consistent with what we've always talked about in the past, there's tremendous optionality in terms of owning minerals, owning surface. And so this is just one of many forms that optionality play out. And pretty much each and every quarter, you see that playing out with lease bonus, additional horizons being developed, additional wellbores, new technology. And I think what's interesting of late are just some of the operational efficiencies that operators are undertaking. So I think this is hopefully just the start of us engaging in the water business, and it's something, given our desire to continue to extract and maximize value, you see us continue to try to implement and progress and try to really further this business further.

Kyle May -- Capital One Securities. -- Analyst

Okay. That's great. I appreciated. Thanks. Have a great day.

Robert M. Roosa -- Chief Executive Officer & Director

Okay. Appreciated your joining.

Operator

[Operator Instructions] The next question is from Chris Baker at Credit Suisse. Please go ahead.

Chris Baker -- Credit Suisse. -- Analyst

Hi. Good morning, guys. Hoping you could talk a bit about the activity building blocks behind the next four quarter guidance of 9,000 to 10,000 barrels a day. I realize the timing is a factor, but it does look somewhat conservative. And just maybe hoping you could frame up how many of those 9.1 net wells in the backlog need to come online to maybe hit the high end of that guidance range? And then just how that compares to what you've seen historically?

Robert M. Roosa -- Chief Executive Officer & Director

Chris, I appreciate you joining. Thanks for the question. Just to kind of recast or just so everybody's level set in terms of how we think about and build out our modeling, I spent a lot of time talking about that in some of my opening comments. But obviously, most contributory over the near term 12 months are going to be our DUCs, the drilled but uncompleted locations that we have in inventory. We've seen some very nice growth in DUCs, especially over the last quarter from the end of Q1 to Q2. We saw, as I mentioned, 14% growth in our DUCs from 4.4 net DUCs to 5.0 net DUCs. In particular, we saw the Permian DUCs increase to 3.3 net locations. So in terms of my mind, that's a very solid building block upon which we can look at and build out the production estimate for the next 12 months, basically that period beginning from Q3 of this year Through Q2 of next year.

And so obviously, we are going to be conservative in terms of when we bring online those wells to production. We do regularly try to interact with operators, understand what the timing may be. Obviously, plans can change and things like that. And so us having lived prior lives as operators, both the Brigham exploration company and Brigham Resources understand the highly flexible nature of operators' plans. And so we are naturally, therefore, conservative when we bring online wells to production. When you think about historically what we've seen, we pretty much have seen an 80% to 90% conversion rate in our DUCs from year to year. If you were to go back and look, I think 2019, the conversion ratio was 90%, a little bit lower in 2020 at 80%, obviously, as a result of COVID.

And so we historically kind of target that ratio. I would tell you, though, that we are seeing some really nice continued DUC build here in the third quarter. I alluded to that in some of my opening comments in that continue to see some really nice drilling activity by Pioneer and [Indecipherable] in both the Midland Basin and Delaware Basins, which we think is going to continue to add to the DUC balance, continue to provide incremental upside to production volumes as we go into, say, months nine through 15. Obviously, that then draws down the permit bucket. But one of the things that has me really excited about the acquisitions that we did undertake thus far is we've really entered into some nice acquisitions here in the third quarter, roughly the $11 million that I referred to so far, that will enhance the permit bucket and provide a backfilling of that permit bucket in addition to just the regular ongoing organic conversion of our undeveloped locations to permits.

And so we feel really good about the overall activity wells that we have in inventory currently to 9.1. And I'm hopeful that, that balance continues to grow into the third quarter, given some of the activity that we're seeing. But obviously, Bud mentioned this on many other conference calls that we want to underpromise and overdeliver. And so hence, our desire to be conservative when we bring online those DUCs to completion or turn them in line.

Chris Baker -- Credit Suisse. -- Analyst

Great. No, that's helpful. And then just as a follow-up, can you guys talk about like how you think about the optimal level of inventory. It looks like on that new slide four, you're talking about 20-plus years based on 2Q activity run rate. Just curious if that maybe kind of frames up the further portfolio optimization opportunity?

Robert M. Roosa -- Chief Executive Officer & Director

You know. I think that 20-year marker is a sweet spot. And so what you'll see us do is to continue to optimize, as you've mentioned, and migrate that inventory from probably other areas, meaning we'll look at opportunities as they present themselves and the Anadarko Basin, the DJ Basins, Williston Basins and basically see if we can extract value from others that's in excess of what we model. And then game plan therein would be to largely redeploy that capital to opportunities in the Permian Basin. And so again, one of the three major kind of optimizations that we've undertaken here in second quarter into third quarter, that will really positively impact us.

And so I think as it relates to the positive impact in terms of the mineral acquisition capex, when you think about our retained cash flow plus the divestitures and optimizations that we undertook or will hit the income statement and the balance sheet here in the third quarter, you're looking at 75% to 80% of our mineral acquisition capital being internally funded via those two different prongs. One being, obviously, the retained cash flow, the second being optimization. So we're looking to, in essence, fund significant portions of our mineral acquisition capital via those efforts. So I think another very positive outcome for shareholders.

Chris Baker -- Credit Suisse. -- Analyst

Great. Appreciated your answers.

Robert M. Roosa -- Chief Executive Officer & Director

Yes. Thanks Chris. Thanks for joining.

Operator

Operator Instructions] We have no further questions on the call, so I will hand the floor back to Rob Roosa.

Robert M. Roosa -- Chief Executive Officer & Director

I appreciate everybody joining this morning. Thanks again, and we look forward to reporting back to you in early November related to our Q3 earnings. Again, I appreciate everybody joining. Thanks a lot.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Jacob Sexton -- Manager of Finance and Investor Relations

Ben M. Brigham -- Executive Chairman & Director

Robert M. Roosa -- Chief Executive Officer & Director

Blake C. Williams -- Chief Financial Officer

Kyle May -- Capital One Securities. -- Analyst

Chris Baker -- Credit Suisse. -- Analyst

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