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Brigham Minerals, inc (NYSE:MNRL)
Q3 2021 Earnings Call
Nov 6, 2021, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Brigham Minerals' Third Quarter 2021 Earnings Conference Call. My name is Ali, and I will be coordinating your call today. [Operator Instructions]

I will now hand over to our host, Jacob Sexton. Jacob, please go ahead when you're ready.

Jacob Sexton -- Investor Relations

Thank you, operator, and welcome, everyone. Welcome to the Brigham Minerals' Third 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 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 Third Quarter 2021 Investor Presentation available for download on our website, www.brighamminerals.com, and we recommend downloading the presentation in the event we refer to it during the conference call. Lastly, as a reminder, today's call is being webcast and is accessible through the audio link on our IR website.

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

Ben M. "Bud" Brigham -- Executive Chairman And Director

Thank you, Jacob, and thanks to everyone for joining us on our third quarter 2021 earnings conference call. On our second quarter call, I outlined a number of reasons why I was extremely optimistic about the future outlook for Brigham Minerals. I will quickly recap those thoughts relative to what we've seen transpire since August. First, our third quarter activity well inventory, our DUCs and permits improved from the second quarter as we expected. Our activity wells and inventory at the end of September is in line with our 2019 inventory levels and the recovery of our inventory to pre-COVID levels demonstrates the premium quality of the inventory assembled by our team. Our acreage includes the first locations operators choose to develop. As a result, we are set up extremely well for continued production and cash flow growth over the next 12 to 24 months as our DUCs and permits are converted to PDP. Second, our balance sheet continues to remain extremely strong. And without a doubt, we will keep it that way.

Because we keep a strong balance sheet, unlike many of our peers, we are able to remain unhedged and therefore, fully expose our shareholders to the upside in oil, NGL and natural gas prices. And as a reminder, during the worst of COVID and OPEC+, again, unlike some of our peers, Brigham Minerals did not execute any hedges, and our shareholders have therefore benefited entirely from the pricing run-up of all three product streams during 2021. Third, and most importantly, even with the run-up in crude oil prices from the upper 60s in August when we last met to the current mid-$80 pricing today, I still believe there is upside to oil prices, particularly relative to the strip. In fact, in my view, we're in the best macro setup that I've seen in my career. And I should point out that this is a period in these cycles when we've historically compounded the most value, when costs are lowest coming out of the trough of the disruption and now with demand.

And therefore, price is increasing relative to the disrupted supply, the margins and rates of return for drillers are in the sweet spot. In fact, today, the drilling economics are the best in the Permian that I've ever seen. Importantly, this cycle is very different from the numerous prior cycles I've experienced since the 1990s, primarily because of politics and shareholder pressures are restricting our industry's ability to increase capital investment, thereby constraining supply growth in the face of rapidly returning demand. The restricted capital investment, therefore, should help to dampen the overall cyclicality that we've historically experienced in our industry. In particular, public operators have gotten the message. They are being extremely disciplined and are limiting their capex increases in order to distribute capital back to shareholders and pay down their debt. Without the normal rig and therefore supply response as prices elevate, we will benefit from a longer runway of higher prices and higher margins. I don't see this changing anytime soon, at least given the current overall conditions.

I'm also optimistic about our team's ability to consolidate in this positive macro backdrop and generate substantial shareholder returns. And I'm proud to announce that we have entered into a purchase and sale agreement for our first large deal as a public company. Our team's tireless efforts have generated a DJ Basin acquisition that check multiple boxes for our shareholders. This includes generating substantial accretion. We are buying the deal at a high teens yield on 2022 cash flow, and the stable cash flow profile of this deal should allow us to further enhance the newly implemented base dividend in the first quarter of 2022, if approved by our Board. Our team underwrote this acquisition almost exclusively to PDP and DUCs, thereby reducing reliance on unpermitted locations and minimizing Colorado political risk. In the past, we've highlighted our ability to look at multiple basins.

And this is a clear example of executing on a great deal that many simply didn't or couldn't look at. I hope and firmly believe that this is the first of many deals, and folks out there up to realize we're going to be a serious consolidator and do so in a way that focuses, above all else, on creating value for shareholders. As we get close to wrapping up 2021, I'm personally extremely excited for 2022. Particularly when you think about the incredibly strong activity well inventory that will be turned in line to production, the tremendous balance sheet flexibility to continue to compound value through our ground game, the extremely positive macro backdrop that looks to be a multiyear phenomenon. And lastly, the outlook to continue to consolidate.

With that, I'll turn the call over to Rob.

Robert M. Roosa -- Chief Executive Officer And Director

Thanks, Bud. I'll immediately begin by building upon Bud's comments on our extremely compelling DJ Basin acquisition, which encompasses approximately 8,400 net royalty acres, largely in the Greater Wattenberg area than Southern Wells County. As I've indicated, any large deal had to check a number of boxes including providing shareholders with both near-term cash flow accretion as well as NAV accretion. This deal adds a tremendous amount of near-term cash flow accretion via adding an anticipated 1,100 to 1,200 barrels of oil equivalent per day in production in 2022 that's 50% liquids, and therefore, provides our shareholders balanced upside pricing exposure to both liquids and natural gas. This deal also enhances our pro forma activity well inventory to 13.3 net DUCs and permits that will be turned in line to production over the next 12 to 24 months. At 13.3 net DUCs and permits, that provides our shareholders with industry-leading leverage to near-term production and cash flow growth given approximately 94,000 net royalty acres.

Associated with the near-term cash flow growth, I'm pleased to announce that post closing, which is likely in mid- to late December, we will recommend an increase to our base dividend in the first quarter of 2022 from $0.14 per share to $0.15 per share or a 7% increase, of course, subject to Board approval. Given the aforementioned metrics, I think you can clearly understand why we're so excited about this transaction. I wanted to also highlight that we've continued to be extremely active with our portfolio optimization efforts. As a reminder, in August, we announced approximately $5 million in divestiture and drilling acceleration proceeds. Between the portfolio optimization proceeds and our third quarter retained cash flow, we're able to internally fund almost the entirety of our third quarter ground game acquisitions. We're keeping up that pace in the fourth quarter.

And just last week, closed on an incremental optimistic transaction that generated $9.2 million in proceeds by divesting largely undeveloped minerals in the STACK, which were anticipated to produce approximately 30 barrels of oil equivalent per day of production. As a result of closing this transaction during the fourth quarter and our anticipated fourth quarter retained cash flow, it's likely that our fourth quarter 2021 ground game acquisition effects will be entirely internally funded given capex spending in line with guidance. Overall, a terrific effort by the team to internally fund our ground game acquisitions in quarters. Turning to our third quarter operating results. Our production volumes were 9,068 barrels of oil equivalent per day, up 1% sequentially from our second quarter, driven largely by increased production in the Midland, DJ and Anadarko basins. This is yet another quarter where our diversified portfolio carried the day, activities in those basins is on the rise and operators are drilling and completing wells on our asset at an accelerated pace, thereby driving our increased production levels.

Further, those basins offer our shareholders exposure to surging natural gas and NGL prices, further enhancing our EBITDA and ultimately our distributions to our shareholders. Our DUCs turned in line to production and contributing to Q3 production volumes were strong on a gross well basis, with 25% of our gross wells in inventory at the end of the second quarter converted during the third quarter and 16% on a net basis. Our combined net DUC and permit inventory, what Bud already referred to as our activity well inventory, at 10.2 net locations as of September 30 is now higher than our average activity wells in inventory in the second through fourth quarters of 2019 or the period post IPO, but pre-COVID. This inventory will positively impact our financial results in the fourth quarter of 2021 and throughout 2022. Drilling down, our net DUCs in inventory at the end of the third quarter grew by 20% to six net locations, up from five net locations in the second quarter. Organic drilling activity was a large driver for the growth with gross spuds on our minerals up 10% to 169 wells spud during the third quarter, and net well spud on our minerals up 31% to 1.7 net wells. The 1.7 net well spud on our minerals during the third quarter is a record number of net well spud on our assets across any time period, including 2019.

It's exactly this type of organic activity that sets the stage for a powerful '22 and gets our team excited about our future outlook. Our net DUCs are now at a record 70% Permian and are largely controlled by the best operators, including Pioneer, Chevron, XTO, PDC and Diamondback, among others. Our permit inventory also increased during the third quarter despite the incredibly strong aforementioned drilling activity as a result of both organic permitting by our operators as well as permits acquired through acquisitions. We saw 0.8 net permits added via organic conversions [Indecipherable] added via our ground game acquisitions during the quarter. The vast majority of our net permits added via our ground em acquisitions offset Matador's recently announced Third Bone line wells in our Boros unit that averaged over 3,000 barrels of oil equivalent, IP at 64% oil. A really strong result, and we're extremely excited about EOG replicating those results in our units. Our currents are now comprised of a record approximate 60% net Permian locations.

Moving to our ground game mineral acquisitions. Our team has been extremely busy and engaged and deployed roughly $12.8 million in capital during the third quarter. Consistent with prior quarters, approximately 97% of our ground game capital was deployed to the Permian Basin. It's also worth highlighting that these acquisitions were comprised of 78% net PDP, DUC and permit locations, and more specifically, 71% net DUCs and permits, which will likely be contributory to our production volumes over the next 12 to 24 months. Of note, over the past month, we have begun to see increased levels of interaction and interest from sellers and feel like the bid-ask spread is narrowing and potentially leading to increased levels of ground game deal flow. Regardless, our approach is disciplined, and we will not change it. We will remain consistent in our underwriting of potential acquisitions.

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 9,070 barrels of oil equivalent per day in line sequentially. Our oil cut decreased slightly to 49%, but this change was due to outstanding performance out of our gassier areas, including the DJ, SCOOP and STACK. Our portfolio generated record royalty revenue of $40.5 million for the quarter, up 9% sequentially, due mostly to a 7% improvement in realized pricing. Realized pricing for the quarter came in at $48.51 per Boe. Importantly, realized pricing per barrel of oil was $69.37, up 10% sequentially. Realized gas was $4.79 per Mcf and benefited from the impressive increase in the gas strip. Realized NGLs came in at $27.64 per barrel of NGL. NGL prices have increased substantially during the back half of the year, and we expect that strength to become manifest during the fourth quarter. Our portfolio delivered $1.5 million of lease funds this quarter, which I have to say is well above our expectations.

Our team has done a phenomenal job of extracting top dollar and ensuring we optimize lease terms across the portfolio through these lease bonus opportunities. Net income for the quarter was almost $19 million. Record adjusted EBITDA for the quarter was $34.9 million. And adjusted EBITDA, excluding lease bonus, was $33.4 million and up 12% sequentially on the back of continued strength in realized pricing. On costs, gathering, transportation and marketing expenses were $1.6 million or $1.97 per Boe. Severance and ad valorem taxes were $2.4 million or 5.9% of mineral and royalty revenue and in line with historical levels. Cash G&A expense was $3.05 million, representing another quarter of continued record low levels. We are extremely proud of all the hard work our team put in to streamline our business and are pleased to see those efforts continue to bear fruit. Moving to our balance sheet. We remain disciplined in our capital allocation as we pursue highly accretive acquisition opportunities.

We exited the quarter with $14 million of cash and $53 million drawn on our revolving credit facility for net debt of $39 million, only $3 million above our 2Q net debt number despite $12 million in mineral acquisitions. Lastly, with respect to our DJ acquisition, we were able to utilize our platform to consolidate a highly accretive mineral position that emphasizes return of capital while maintaining balance sheet flexibility. Roughly half of the consideration will be in stock to the seller, with the other half in cash that will be funded with cash on hand and borrowings under our revolving credit facility. We estimate an increase in the borrowing base to $230 million, leaving us with nearly $150 million in liquidity pro forma for the transaction. Our current leverage is conservative with net debt to last quarter annualized adjusted EBITDA remaining at roughly 0.3 times. After the transaction, our pro forma leverage is expected to be less than 0.7 times, which allows us to continue to retain the necessary flexibility to execute on our corporate strategy going forward.

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

Robert M. Roosa -- Chief Executive Officer And Director

We appreciate you joining our third quarter 2021 call. We believe Brigham offers a tremendous value to investors, and we have our heads down solely focused on executing our business plan and demonstrating the value of our portfolio and our team. 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

[Operator Instructions] Our first question comes from Jeanine Wai from Barclays. Jeanine your line is now open.

Jeanine Wai -- Barclays -- Analyst

Hi, good morning everyone, thanks for taking our questions.

Robert M. Roosa -- Chief Executive Officer And Director

Good morning, thanks for joining our first question

Jeanine Wai -- Barclays -- Analyst

Our first question, maybe just a little bit of color here. The DJ acquisition, that's the largest deal you've executed as a public company. And you mentioned that the company is going to be a serious consolidator. And so the bid-ask spreads that you're seeing, can you just provide us a little bit more color on your view of the market opportunities for larger deals versus smaller deals? And specifically, any color on how you'd characterize opportunities for larger mineral packages in the Permian would be really helpful.

Robert M. Roosa -- Chief Executive Officer And Director

Yes. So just to recap, Jeanine, thanks for dialing in. I just think that this truly was a really compelling opportunities for us to consolidate in the DJ, a tremendous opportunity to add 1,100 to 1,200 barrels a day of production in 2022 that will generate that high-teens EBITDA yield that we've talked about in the introductory comments. So really, a really terrific opportunity. In fact, we've added a couple of incremental slides to the presentation deck related to it. I would say, though, such a compelling opportunity was still largely focused on the Permian. There have been a significant number of larger packages brought forward in the Permian Basin of late. And I think a lot of that relates to the recent [rise], as Bud mentioned, in crude oil pricing. There's a lot of groups whose backers are looking for liquidation, hence are taking their packages to market. I think there are a number of groups engaged in those processes. I think for us, we've structured the team such that we can evaluate a large number of deals and cycle those through.

And so with that, we're going to maintain discipline throughout the process as we look at these deals and make sure we use consistent underwriting to consolidate. So we'll look at all these different deals that come to us in the Permian, but the underlying principle is to maintain discipline as we go through that process. As we think about the ground game opportunity, we have seen that increase of late, I would say, over the past four to six weeks. We have seen an increase in the rate of interaction with sellers out there in the basin. I think some of that's due to the fact that you're getting toward year end, we pretty typically see an increase in activity as you approach year-end. And some of that also is we've undertaken some incremental efforts to target potential sellers.

So I'm not going to get into the exact details, but the team is approaching, interacting with sellers a little bit differently, such that we gain a broader market share and interact with more sellers. So it feels to me like the market for the smaller deals is enhanced up late. So I think it's a really tremendous opportunity, one that we're able to capitalize on the DJ opportunity. But a lot of our focus is still in the Permian as we think about those larger packages that are out there, the opportunity to consolidate. And I think this really speaks to our opportunity going forward, the utilization of equity here for the first time. The seller taking back roughly 50% of the deal in equity, and we look forward to doing that again into the future.

Jeanine Wai -- Barclays -- Analyst

Okay. Great. That all sounds pretty positive. In terms of how we square that -- we know you're going to be disciplined, but you do intend on being a more serious consolidator, at least in the near term, given the opportunity set. How should we view the trajectory of the payout ratio in the near term given the rich opportunity set? Does it really warrant maybe a lower payout than 75% to 80% in the near term, while you kind of chase some of these deals and then it would increase over time?

Robert M. Roosa -- Chief Executive Officer And Director

I think as we've mentioned, the message to the market, we've seen kind of a 75% to 80% payout ratio is where we want to be going forward. I think the opportunity there is to continue those regular consistent upward trajectory distributions to our shareholders to instill confidence. I think the key thing I want to point out is, one, we have not had to go back to the market for a primary equity offering since December of '19. So now we're two years plus into this cycle in terms of being able to continue to consolidate and not have to go back to the market. I think the realization that we have undertaken a lot of these optimization efforts and continue to utilize those to fund near-term accretive deals is highly beneficial for shareholders. So just again, to recap, in the third quarter, we undertook about $5 million of optimization, and that's a combination of divestments in Oklahoma and what I'd also refer to as acceleration of sales, where we're down as a part of an interest in the middle tract for an operator to accelerate development.

We generate about $5 million of proceeds. That, along with our retained cash flow, allowed us to fund almost the entirety of our capex for the third quarter. And then as we look here into the fourth quarter, we undertook the STACK transaction, generating about $9.2 million in proceeds. And that, again, combined with our retained cash flow and is going to allow us to likely fund the entirety of our ground game capex. And so really, when you look at the mechanics there, it's a tremendous opportunity for our shareholders because we're transitioning divesting about 30 -- sorry, interest was about 30 barrels of production per day. For tracks that I mentioned, have about 78% composition of PDP DUCs and permits. So really a tremendous opportunity to recycle that cash for tracks with significant near-term cash flow over the next 12 to 18 months.

Jeanine Wai -- Barclays -- Analyst

Very interesting. Thank you very much.

Robert M. Roosa -- Chief Executive Officer And Director

Yeah, appreciate you joining.

Operator

Our next question is from Chris Baker from CSFB. Your line is now open.

Chris Baker -- CSFB -- Analyst

Hey, good morning guys, Congrats on the DJ announcement. I guess my first question is just given that transaction and other sizable increase in activity backlog, could you maybe just share an update on how you're thinking about the first half of '22 volumes? I know the prior comment was second half of this year, first half of next year, averaging 9,000 to 10,000 barrels a day.

Robert M. Roosa -- Chief Executive Officer And Director

I think we're set up really nicely for the fourth quarter and into 2022. And Chris, as you mentioned, a lot of that's driven by the significant activity well backlog that we have currently, even excluding the DJ deal. So just to recap for people, we have about 10.2 net activity wells in inventory at the end of the third quarter. About six of those are DUC locations, about a 20% increase in DUCs, driven by really that tremendous response that we've seen on the drilling side wherein drilling activity added about 1.7 net locations to our DUC inventory. And as I mentioned in the introductory comments, really a record level of drilling on our asset. Again, even exceeding what we saw in 2019. That's complemented by the 4.2 net permits that we have in inventory. And so when I think about that, those are really the main drivers for production and cash flow over the next 12 to 24 months.

When you think about conversions in the second and third quarter, we averaged about 0.8 net conversions in the second and third quarter of this year. If you then think about our six net DUCs that we have in inventory,and you assume that those are going to be converted over kind of a four-quarter period, as you've mentioned in some of your research notes, that's about $1.5 million net DUCs per quarter that are going to be turned in line over the next year. So you can see roughly doubling the net number of net DUCs that are going to be brought online to production over the next quarter. So really an interesting opportunity. I'd also tell you that we pretty regularly track or consistently track activity on our DUCs, monitoring satellite to the -- for when frac crews show up. And we've had a really nice response in terms of frac crews showing up on those DUC locations, which further bolsters our belief that we're going to see regular consistent conversion of our DUCs to PDP here over the next five quarters.

So really feel good about what the trajectory looks like going forward. I'd tell you, as we talked about in August, we're going to be providing kind of a production guidance update in February of this year. And at that point, we'll update for the full year 2022. And so as we've mentioned in the past, kind of the game plan going forward is update in February and August of each year. But again, to recap, just really tremendous opportunity ahead with the number of DUCs and permits that we have in inventory. And then when you layer on the incremental DUCs, the 3.1 net DUCs that we've added through the DJ transaction, 1.6 incremental DUCs, taking us to 7.6 net DUCs, and then another 1.5 net permits taking us up to 5.7 net permits, you really start to feel good about what production and cash flow look like into 2022.

Chris Baker -- CSFB -- Analyst

Great. Appreciate that. And just as a follow-up, I just want to touch on the portfolio rationalization effort. I think that makes a lot of sense. Could you maybe just frame up how much more work there is to do there as we head into next year? And any color in terms of where you're seeing opportunities for -- on the sell side in terms of yields that buyers are willing to underwrite versus where you see these acquisition opportunities like the DJ would be great?

Robert M. Roosa -- Chief Executive Officer And Director

Yes. So anything that we're interested in potentially divesting is largely undeveloped sections that you've had largely a private owner or a private company interested in acquiring. And so it's really, I think, interesting opportunity for us to divest, as I mentioned, low production tracks in different areas for tracks with much higher components of DUCs and permits that are going to be immediately contributory to production and cash flow. So I think real interestingly for us, probably we are going to focus on here in the near term, what I referred to previously is the acceleration opportunities with operators. So opportunities wherein we have tracks, there's an operator that we know has been acquiring minerals. They can increase their net revenue interest in these wells by acquiring minerals and make the utilization of their drilling rigs and frac crews that much more efficient.

And so I think there's ample opportunity here as we go throughout the remainder of 2021 into 2022 to undertake some of these additional opportunities. And so I challenged the team to pretty regularly try to bring one of those deals per quarter to -- in the fold, so we can further enhance the retained cash flow and fund a pretty significant portion of our capex budget internally and thereby reduce the reliance on the capital markets for funding of our capex budgets. And so it's something that we're acutely focused on, want to continue to generate and create shareholder value. So it's something that we're going to be managing and looking forward to executing upon for the next five quarters, if not longer.

Operator

Our next question comes from John Freeman from Raymond James. Your line is now open.

John Freeman -- Raymond James -- Analyst

Hi guys. Morning, John. Thank you, Julian. I just want to follow up on the really successful the DJ acquisition. I mean it was just last quarter that you all had to reduce the acquisition capital guidance and kind of talked about how seller expectations have just gotten too elevated in the strong commodity backdrop. And so I'm just trying to get a sense of did the market just change that rapidly?

Or was it more a nature of maybe, previously, there was a lot of focus on the Permian and you sort of saw as you kind of look at some of the other basins that there were better opportunities at least in the current environment? Just a little bit more background on how the deal sort of came together because it is quite a big divergence from some of the commentary last quarter on how competitive everything was.

Robert M. Roosa -- Chief Executive Officer And Director

Yes. No, I appreciate the question. So really, when I think about the acquisition market, we really need to bifurcate those two markets between the ground game opportunity set and then the larger deal opportunity set. And so, John, we'd categorize the DJ deal into a larger bucket opportunity set. And so really, when we reduced the capex budget in August for the remainder of 2021, it was really a result of the ground game or the smaller deal opportunity set becoming that much more competitive. And the bid-ask spread there are being pretty wide. So when we make an offer to a seller, those sellers [Indecipherable] given where crude oil pricing was at that point were, in many instances, exceeded what we were willing to buy or pay for that asset. And so that -- hence, kind of the slowdown in activity that we saw on the ground game and reducing our ground game acquisition budget from about $25 million per quarter to $15 million per quarter.

So really then the different subset of the acquisition opportunity is these are these larger deals, and that's the DJ deal. And so really, the opportunity set there, as I mentioned earlier, is you've got a whole host of investors, private equity firms, even individuals, family offices, etc., that over multiple years has invested in and acquired minerals in different basins. And now with the market where it is, crude oil pricing where it is, they're seeing a nice opportunity to divest those minerals. And so it's our job to cycle through as many of those opportunities as possible. The approach is pretty similar as to what we do in the ground game. There's a lot of initial scoping that's undertaking for each large opportunity that comes in, identifying where those deals are in the basin, who the operators are, what does the cash flow trajectory look like in terms of the composition of PDP, DUCs and permits and undeveloped locations. And so all that's done. And as we cycle through these larger deals ranking them one through 10, how we want to evaluate them and working them up and deploying our team to the evaluation process. So really, John, it was that bifurcation of deals. That reduction in the capex budget was more related to the smaller ground game deals.

But I would say, as I mentioned toward the end of my comments, it looks like that ground game acquisition budget may be picking up again here in the near term. As I mentioned, we're seeing a lot more interaction with sellers, a lot more interest from sellers, a lot more responses to our offers. And so it feels like, at least initially, we could potentially have a small, if not maybe a little bit larger ramp-up in ground game acquisitions. I would say, as we think about the availability on the credit facility and liquidity that we have to work with, as Blake mentioned, we have $150 million of liquidity to work with when the borrowing base is redetermined here in the fall and incorporates the DJ asset. So even at a $20 million per quarter ground game acquisition budget, you're looking at two years of runway to work with, not even factoring in the potential to supplement that with the optimization efforts. So we think we have a lot of runway here to work with continue to consolidate and utilize that liquidity for both ground game and larger deals.

John Freeman -- Raymond James -- Analyst

That's very helpful, Rob. I appreciate all the color on that. And then my other question in conjunction with the deal, you all said you're going to increase the quarterly base dividend, another 7%. And maybe just some additional color on how you are thinking about the base even going forward. I know that initially, it was set at the same as that 2Q '20 dividend level, which obviously was at the absolute trough period of the pandemic, and so that obviously makes sense. But just as you're now increasing it and just going forward, just sort of -- just any additional color on kind of what, I don't know, commodity assumption or just any other detail on how you're setting that base dividend going forward.

Blake C. Williams -- Chief Financial Officer

Yes, John, it's the same methodology that we used when we announced the base dividend. So obviously, the $0.14 was sort of symbolic because it was in line with what we paid out in 2Q of 2020. But we run multiple sensitivities on the PDP and DUC reserves and our abilities to sustain that dividend in low price environments with trough-level type activity. And so with this DJ deal having consistent, abundant near-term cash flow from the PDP and DUC reserves, it's obviously meaningful to the base dividend. And that's why we're signaling that we're expecting to recommend to the Board of a 7% increase going from $0.14 to $0.15. So I think that we've got plenty of deals in the hopper and are always looking for things with near-term cash flow accretion that will be accretive to that base dividend.

John Freeman -- Raymond James -- Analyst

And congrats to you all on the acquisition.

Robert M. Roosa -- Chief Executive Officer And Director

Appreciate it. Thank you.

Operator

Our next question comes from Steven Dechert from KeyBanc. Steven. Your line is now open.

Steven Dechert -- KeyBanc. Steven -- Analyst

Hey guys, Just want to get an understanding of why the oil production was down again in the third quarter and particularly in the Delaware Basin.

Robert M. Roosa -- Chief Executive Officer And Director

So I think a lot of that, Steven, points to the strength of the asset in some of the other areas. Blake mentioned in the introductory comments production was up about 5% in each of the DJ Basin, in the SCOOP/STACK plays. So as you think about the composition of the product stream there in the DJ Basin and SCOOP/STACK, those tend to be more NGL gas focused. And so the uptick there is related -- or the uptick in gas and NGL production as a result of increasing levels of production in those two basins. The Delaware Basin was down slightly from the second quarter, largely as a result of the continued build in the DUC inventory. So as we think about production volumes going forward, we're going to see an upward trajectory in both the Midland Basin and the Delaware Basin, as our DUCs and permits are brought online to production.

So when you think about that six net DUCs that we have in inventory, about 70% of those DUCs are in the Permian Basin, which is a record level. So we should see ever-increasing production volumes in both the Delaware and different basins, which tend to be more oily. And so you'd expect those oil volumes to tick up. And then the permits also are heavily weighted toward the Permian. When you look at the permits, about 60% of those are Permian Basin-weighted. And so again, oily focused, those should help to oil volumes. And on an aggregate basis, about 2/3 of our activity wells are in the Permian. So as we look forward into the remainder of '21 and into 2022, we should see some pretty solid growth in production volumes in the Permian as those activity wells are turned in lines of production.

Steven Dechert -- KeyBanc. Steven -- Analyst

Okay. And then just with the really strong gas price in the third quarter, was there anything unusual in there? Is that just from higher prices?

Blake C. Williams -- Chief Financial Officer

No, nothing unusual. Obviously, the gas strip has had quite a run here. And as I said in my introductory comments, that's reflected here. NGL pricing could be a little bit of a lag. So a tailwind on NGL pricing into the fourth quarter, I think, is something to note as a lot of operators are announcing pretty significant increases in those NGL realizations. But those are the realized prices that we were paid from our operators this quarter.

Robert M. Roosa -- Chief Executive Officer And Director

Yes, I think, Steven, that's one of the really interesting opportunities sets as it relates to the DJ asset, about 50% of that stream is natural gas. So as we think about entering the winter and the potential for cold weather, really the opportunity to enhance our cash flows as you think about that component being more gas-oriented. So there's a lot of optionality there as we think about moving forward in gas pricing. And that's something that I've mentioned in the past that within these basins, even though you consider them more liquids-rich, there's opportunity deploy capital within these basins to be more gas focused. And hence, you don't really necessarily have to take the steps to get into the Haynesville or Marcellus to increase your gas opportunity set.

Steven Dechert -- KeyBanc. Steven -- Analyst

All right, thanks.

Operator

Our next question comes from Pearce Hammond from Piper Sandler. Your line is now open.

Pearce Hammond -- Piper Sandler -- Analyst

Yeah. Good morning and thanks for taking my questions. So as we look at '22 and just sort of following up on some of the earlier questions. So as we look at '22, given what's happened with the gas strip, do you expect a higher gas mix on your acreage even before the DJ acquisition? So that's my first question.

Robert M. Roosa -- Chief Executive Officer And Director

No. I think if you just look at the base asset, excluding the DJ deal, you'd see an increasing rate of oil production related to the asset. And again, that relates to the vast majority of the DUCs in inventory being Permian-focused. So about 70% of those DUCs are in the Permian. And then when you then factor in or layer in the permits on top of that, about 60% of those in the Permian, we think that you're going to see the oil percentage rebound as you look at into the future. And so we'd expect that to reverse itself and more of the contributory of the production coming from the oil side and the liquids in particular.

Blake C. Williams -- Chief Financial Officer

Yes, to come back in line with where it has been in the past in the low 50s range. Obviously, on the revenue side, certainly, as we've seen gas run pretty significantly, we could see an increased share of revenue come from gas. But echo Rob's comments on the product mix from a volumetric standpoint.

Pearce Hammond -- Piper Sandler -- Analyst

And then my follow-up question, I think the portfolio optimization is really sensible, smart move to do. How hard is it to do? I mean could you do -- is it possible to even do a chunkier deal mirroring what you did today in the DJ with the chunky acquisition, but to do, say, a chunky divestiture?

Robert M. Roosa -- Chief Executive Officer And Director

I do think there's opportunity for chunkier divestitures, but I think the approach that we've taken on the acquisition side is similar to how we approach the divestment side in that we've floated other assets out there. But we're still very judicious when we look at divesting an asset. And so economically, that also has to make sense for shareholders, we're very, I would say, disciplined and consistent in that process as well. And so if an asset is put out there to the market,for evaluation for other folks, we're going to apply that same consistent disciplined approach to make sure we're maximizing value for shareholders. And so one of the things that we did when you think back to 2020, and I had mentioned this previously, is there were a lot of people out there in the market looking to divest assets or put hedges on in 2020 at the depths of COVID and OPEC+.

We were patient, realized that the market was likely to rebound, and hence, waited until this year to capitalize on that opportunity set and much -- shareholder much better off by being a little bit patient, waiting for the opportunity set to improve and, hence, capitalizing both in the second and third quarter. I do think there's opportunity for chunkier asset sales, and it's something we've tasked the team with to continue to evaluate the portfolio, look at what opportunities that are out there, identify potential buyers and then working with them to evaluate those assets. And so that is something we are going to regularly look at.

Blake C. Williams -- Chief Financial Officer

Yes. And I think for a little more color. One of the things that make us excited about that divestitures, we basically sold things that were yielding 3% or 4% and redeployed them into the DJ acquisition, yielding high teens. So a very exciting kind of rotation of the asset.

Pearce Hammond -- Piper Sandler -- Analyst

Thanks guys. Appreciate it. Thank you.

Operator

[Operator Instructions] Our next question comes from Derrick Whitfield from Stifel. Your line is now open.

Derrick Whitfield -- Stifel -- Analyst

Good morning all. And Congrats on your transaction updates.

Robert M. Roosa -- Chief Executive Officer And Director

Appreciate it, Derrick. Thanks very much.

Derrick Whitfield -- Stifel -- Analyst

Absolutely. So with the understanding that your focus has been on oil basins in the past, has the improvement in gas macro change your perspective on how you view gas opportunities and predominantly gas basins?

Robert M. Roosa -- Chief Executive Officer And Director

Derrick, I still think there's a lot of opportunity within the basins we currently operate in, in particular the DJ Basin and parts of the Delaware Basin, to integrate gas-weighted assets. And so our familiarity with those assets, having bought really in those basins for -- since 2013, naturally lends us to participating more in those basins. I do think there's opportunities in the Haynesville and Marcellus. But I do think our focus, our strategy has been to focus on the Permian, SCOOP/STACK, DJ and Williston Basin. So you'll see us be consistent with that strategy of deploying capital to those basins, because I do think there's ample opportunity to ad assets that have a gassier component within those basins themselves rather than extending the strategy and going -- entering into new basins.

Derrick Whitfield -- Stifel -- Analyst

Great. And as most of my questions have been asked and answered. I'll end with the fun question for Bud. So Bud, with regard to your comments on the macro environment and it being as constructive as you've seen, would you care to share your view on where oil is headed?

Ben M. "Bud" Brigham -- Executive Chairman And Director

Well, thanks for asking. This is a unique time. I think the math is easier now than it typically is. I mean the underinvestment in oil and natural gas over recent years and what the biases against investment in resource, it's just -- while demand is increasing as the economies kind of come back online post pandemic, I think it's -- as I stated, it's a very bullish setup. And normally, we would see -- if you look at the rig count relative to oil prices, pre-pandemic, they're -- I can't remember exactly 50% or 60% of where they were at this pricing. So we're not getting the normal supply response. And so that's going to mean higher process. I think it's inevitable. I am concerned personally that they could get too high. Clearly, it's going to be not be beneficial for the consumer and for the overall economy. It's certainly inflationary. So I think we're in a great spot. It's a Goldilocks like period, in my view, for oil and natural gas with a lower cost structure coming out of the down cycle while prices have validated and we're not getting the supply response. So it does give us a longer runway for value creating in the industry. So I can't give you a sort a projection on where it goes, but I am concerted it could go meaningfully higher from where it is.

Derrick Whitfield -- Stifel -- Analyst

Yeah, I agree, Ben and great update again, guys.

Ben M. "Bud" Brigham -- Executive Chairman And Director

Yeah. Thank you Thanks. Appreciate you joining.

Operator

Our final question is from TJ Schultz from RBC Capital Markets. Your line is now open.

TJ Schultz -- RBC Capital Markets -- Analyst

Great, thanks. Maybe just to stay on that macro backdrop, but I don't think we take it lightly when you say it's the best setup you've seen in your career. But just kind of thinking as the public operators remain constrained from ramping rig activity, given really the current capital allocation preferences that are out there right now. Do you think there's an oil price where the script has slipped a bit and we see activity levels increase? Or is the view just that the public E&Ps really hold the line here and that's given you all pretty high conviction on oil prices that it's helping you potentially underwrite more deals here?

Ben M. "Bud" Brigham -- Executive Chairman And Director

Well, I have -- this is Bud answering. I have been very impressed with our friends in the C-suites of these public companies, how disciplined they've been. And it's -- obviously, it's a function of a couple of things. One, of course, is the fact that the investors have sent a very clear message that too much focus on growth and not enough focus on value creation and particularly recycling capital back to investors. So my sense is that the executives of the public companies are going to remain disciplined and -- until the investors beg them to significantly elevate capex. Now I do think with the expanding cash flows, we will see elevated capex in 2022. But when you look at -- but not commensurate with the rate of return on drilling projects.

The rate of return on Permian drilling projects is easily the best I've ever seen. It's really remarkable. So you are seeing -- the other factor is with the public, there are a lot of pressures on ESG and the negative biases against oil and natural gas. And so that has more of an effect on the public companies. The private companies are certainly more rational in my view, as I see the rate of return on drilling projects is just exceptional. And so we will see -- I think continue to see the privates pick up some of the slack and increasing activity to deliver some supply response. But still, that's not going to be enough in my view to meet the growing demand.

Robert M. Roosa -- Chief Executive Officer And Director

Yes, I think one of the issues that people forget is even as potential rig activity might be forecast to increase, the lag there is sufficient. I mean you really can't expect wells to come online for 12 months or so, and then you have a whole host of other issues and drivers, etc., and labor force. And so I'd echo Bud's sentiment that this could potentially be a much longer than normal run and positive outlook for crude oil prices and natural gas as well as we think about moving into even 2023 and 2024. And one of the interesting comments, I think, Bud made was the potential reduction in the cyclicality of the industry, not having -- maybe reducing the risk toward a negative event that we've seen multiple times in the past, just given the muted supply response relative to increasing demand. And many people are now talking about demand being in excess of 100 million barrels a day again. So it's really an interesting dynamic that's going to play out over the next 12 to 18 months.

TJ Schultz -- RBC Capital Markets -- Analyst

Great. I appreciate all that. Maybe just to end with the kind of financial question into that setup as you guys think about a pretty constructive macro environment. How much debt leverage would you be willing to take or carry on a short-term basis if there's more of a meaningful acquisition opportunity set and you're seeing better bid-ask that would give you maybe an opportunity to act on more now?

Blake C. Williams -- Chief Financial Officer

Yes. I mean we've always said that we're going to keep the capital structure conservative. And so we still stand behind that 1.5 to two times net debt to EBITDA is kind of our internal governor, wouldn't take on more debt than that. I never want to get caught flat-footed. And I think what we've seen throughout or the last couple of years, certainly, last year is that our lack of leverage actually allowed us to play offense kind of in any environment. So we always want to be able to pursue these opportunities, especially in times when others are not able to do so. So I think we'll still keep leverage certainly under control really in any environment.

TJ Schultz -- RBC Capital Markets -- Analyst

All right, thank you.

Operator

[Operator Instructions] And we have no further questions, I will now hand back to Robert Roosa for any closing remarks.

Robert M. Roosa -- Chief Executive Officer And Director

Again, I appreciate everybody joining us this morning for our third quarter conference call, and looking forward to get back in touch with you guys in February related to the fourth quarter. So we'll talk to you then. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Jacob Sexton -- Investor Relations

Ben M. "Bud" Brigham -- Executive Chairman And Director

Robert M. Roosa -- Chief Executive Officer And Director

Blake C. Williams -- Chief Financial Officer

Jeanine Wai -- Barclays -- Analyst

Chris Baker -- CSFB -- Analyst

John Freeman -- Raymond James -- Analyst

Steven Dechert -- KeyBanc. Steven -- Analyst

Pearce Hammond -- Piper Sandler -- Analyst

Derrick Whitfield -- Stifel -- Analyst

TJ Schultz -- RBC Capital Markets -- Analyst

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