STR (2020 - Q4)

Good day, ladies and gentlemen, and welcome to the Falcon Minerals Fourth Quarter Earnings Call 2020. All lines have been placed on the listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Bryan Gunderson, Chief Financial Officer, for some opening remarks. Sir, the floor is yours. Bryan Gu

Good morning, everyone, and thank you for joining today's call to discuss Falcon's fourth quarter 2020 results. Before we begin, I would like to remind everyone that during this call, we will make certain forward-looking statements that address our expected future business, financial performance and financial conditions. Actual results achieved by the company may differ materially from those made or implied in any forward-looking statements due to a wide range of risks and uncertainties, including those set forth in our SEC filings. I would also like to caution you not to place undue reliance on these forward-looking statements, which reflect management's analysis as of the date hereof. The company expressly disclaims any obligation to update or revise any forward-looking statements. Additionally, this presentation also includes non-GAAP measures. Reconciliations of those measures to the most directly comparable GAAP measures are included in the earnings release, which is posted on our website. Lastly, the company will be attending several virtual and in-person investor conferences in the coming weeks, including Siemens Energy's 21st Annual Virtual Energy Conference on March 22 and 23rd, and The Minerals and Royalties Conference in Houston on April 19th and 20th. With that, I'll turn the call over to Falcon's President and Chief Executive Officer, Daniel Herz, for his remarks. Daniel?

Thanks, Bryan. Good morning, everyone. Thank you for joining Falcon Minerals fourth quarter and full year 2020 earnings call. We have a lot to get through today. Following my remarks, Mike Downs, our Chief Operating Officer, will discuss specifics of recent permitting and development activities on our position and the expected favorable impact it will have on production and result in cash flow in 2021. Then Bryan Gunderson, our Chief Financial Officer, who you just heard from, will give the financial report, and then we will take your questions. When reflecting on 2020 and considering where we are today at Falcon, I'm reminded of Red Queen's warning to Alice in Lewis Carroll's Through the Looking Glass. And I quote, "It takes all the running you can do to keep in the same place, but if you want to get somewhere else, you must run at least twice as fast." And we at Falcon are running twice as fast today. We had a solid fourth quarter at Falcon Minerals, during which we generated $7.5 million of EBITDA and $0.082 per share of free cash flow, both excluding nonrecurring expenses associated with our strategic review. Our free cash flow grew by 19% over the third quarter of 2020. In addition, we announced a dividend of $0.075 or $0.30 annualized, which is an increase of 15% from the third quarter of 2020. Of greater importance, I believe, is where we are headed. Falcon Minerals is in -- excuse me, I'll start that over. Falcon Minerals is in a unique position in the energy space and amongst our peer -- mineral peer as we are poised for meaningful production, free cash flow and dividend growth, but without having to spend a single dollar on capital expenditures or acquisitions. This is, first and foremost, driven by the meaningful level of activity on our position in the core of the Eagle Ford shale. That activity is primarily led by ConocoPhillips, EOG and BP/DVN, who collectively have 7 rigs running on our position at this time. Over 3 times the level existed in the third and fourth quarter of 2020. That's right, 7 rigs today. Rig activity is back to pre-COVID development levels. Additionally, as Mike will speak to more specifically, this activity has been centered around units where we hold a high net revenue interest, which further buoy our net wells being turned in line, and that is all happening as we speak. Specifically, we have high net revenue interest locations, which were brought online in January. And an additional high net revenue locations that we are told will come online in the next few weeks, which will meaningfully increase production in the first half of 2021. This coupled with the substantial rise in oil prices, sets Falcon up to see free cash flow growth in the first quarter of 20% over the fourth quarter of 2020, and should drive free cash flow in the second quarter of 2021 to almost double what it was in the fourth quarter of 2020. I note that the second quarter starts in just a month. To put this plain, we see potential free cash flow in the second quarter of approximately $0.60 on an annualized basis, implying a roughly 14% free cash flow yield today. This free cash flow level would be above our 2019 levels of cash flow when our stock was trading at over $7 per share, and the growth trajectory doesn't stop there. We see further significant growth in production and free cash flow in the second half of 2021. Again, Mike will get into the production growth specifically, but just to give you a sense, with 7 rigs running on our position and assuming each rig drills an Eagle Ford shale well in 10 days, that equates to approximately 250 gross wells drilled in 2021, which is on the high end of the last 6 years. To sum all of this up, we believe previously discussed 5,000 barrels of oil equivalent per day average for 2021 is quite conservative, and we expect to exceed that estimate. Now this is, of course, just our base business that does not include any acquisitions. We have recently seen a thawing in the organic or small acquisition market, and are now seeing attractive opportunities in small bites in our core area to grow our base business and long-term value from a free cash flow and net asset value per share standpoint. We plan to pursue acquisitions, and we'll execute on transactions only when they add to the short, medium and long-term value of the business. Importantly, even while paying out 90% of free cash flow, we expect to exit 2021 well below 1 times leverage. Again, even while paying out over 90% of free cash flow, we expect to exit 2021 well below 1 times leverage. Finally, I'm pleased to report we recently took advantage of the run-up in oil prices and hedged a portion of our oil production for the second, third and fourth quarters of 2021. These hedges add further security to our cash flow expectations, while leaving a substantial upside from both higher oil prices as well as growing oil production. In conclusion as I think you can tell, or at least I hope you can tell, I'm enthusiastic about where we are today at Falcon Minerals, where we are headed in 2021 and the investment opportunity that exists for investors. We have clearly defined growth in our base business that will drive production, free cash flow and dividends throughout the year. In addition, we will take advantage of opportunities to further increase value per share through growing our asset base when appropriate. Now, I will turn the call over to Mike Downs, who will get into greater detail about the support of our production growth in 2021. Mike?

Thanks, Daniel. Good morning. Thank you for taking time to join our call today. We are excited about our results at the end of 2020 and have a strong conviction about our production growth for 2021. This is driven by our line of sight inventory and the consistent drilling activity we've seen from our operators. Our core operators continue to run rates throughout the pandemic with a focus on building DUC inventory with the objective to turn wells in line in a higher pricing environment, adding value for their shareholders as well as ours. We are 100% supportive of this plan. As we enter 2021, we have seen rig activity increase over 200% on our Eagle Ford position compared to the fourth quarter. The increased rig activity, along with the recent well connections support our positive production outlook for 2021. Now let's get into the details. During the second half of the fourth quarter, we had a high NRI pad with 4 gross wells and 0.2 net wells turn inline. This pad experienced compression issues during the fourth quarter, which impacted production. Our expectation is this issue has been resolved and production levels will be back in line with forecast. Moving into the first quarter of 2021, we have seen operators begin to turn wells in line to take advantage of the higher pricing environment. We have confirmed that a high NRI pad with 5 gross wells and 0.5 net wells turned in line in January. Additionally, we have received communication that another of our high NRI pad with 6 gross wells and approximately 0.45 net wells are expected to be turned in line during the first quarter. We have an additional 116 gross and 0.74 net wells that are considered DUCs, with the majority of these wells forecasted to be turned in line during the first half of 2021. This includes an 18-well pad and approximately 0.14 net wells, where we have been informed that one of our operators is engaged in drilling out plugs and expect this pad will be contributing to Q2 production. The second half of 2021 will benefit from the significant number of net wells turned in line during the first half, plus the robust inventory permits that are forecasted to turn in line in the second half. This is supported by the current rig activity in the current trough. ConocoPhillips is running 4 rigs, EOG is running 5 rigs and BP/DVN is running 3 rigs. The current rig activity, along with the continued drilling efficiencies by our operators, with some wells being drilled in under 3 days, give us great confidence that our 109 gross and 1.37 net permanent wells will be turned in line later this year and into early 2022. This includes 6 gross and approximately 0.4 net Hooks Ranch wells, where we expect to see production in the fourth quarter of 2021. As a reminder, we based our forecasting assumptions on historical development timing by operator. The forecast also includes additional risk factors to account for delays associated with recent activity by operators through the pandemic. Factoring in everything I have said, and including some additional -- and including some potential downtime due to the weather in Texas and reflected in Daniel's comments regarding expected free cash flow growth, we see production rising modestly in the first quarter and then rising meaningfully in the second quarter and the back half of the year, with the benefit of full periods of production from the wells discussed. Thank you for your time today. I will now hand the call off to our CFO, Bryan Gunderson.

Thanks, Mike. Our assets generated $10.2 million in royalty revenue during the fourth quarter 2020. We recognized a cash loss of $17,000 from our commodity derivative instruments during the period. For the full year 2020, our assets generated $40.1 million in royalty revenue and recognized a cash loss of $0.3 million from our commodity derivative instruments during the period. Falcon's net realized price for oil during the fourth quarter was on $40.21 per barrel. Average realized price for natural gas was $2.42 per Mcf and NGL realizations averaged $14.99 per barrel. For the full year 2020, Falcon's net realized price for oil was $35.84 per barrel. Average realized price for natural gas was $2.01 per Mcf, and our NGL realizations averaged $12.28 per barrel. During the fourth quarter, we did not enter into any new hedge contracts. As Daniel mentioned, subsequent to the quarter end, Falcon entered into crude swaps for Q2 through Q4 2021. Exact volumes and the associated pricing for all hedged volumes are laid out in the company's updated investor presentation that is available on Falcon's website. Total cash operating costs for the fourth quarter of 2020 were $3.5 million inclusive of $0.8 million of expenses attributable to our strategic review process. On the tax side, ad valorem and production taxes were approximately $0.6 million for the quarter. Ad valorem and production expenses for the full year were $2.8 million, representing a 34% reduction from full year 2019 levels. Marketing and transportation expenses were $0.4 million for the quarter or $1.10 per barrel. This expense represents a decrease on a dollar per barrel basis from the $1.37 per barrel of expense that we reported in the third quarter 2020. Marketing and transportation expenses were $2 million for the full year or $1.19 per barrel. Cash G&A expense was approximately $1.7 million for the fourth quarter, excluding $0.8 million of expenses associated with the strategic review process. These expenses are associated with the use of third-party experts and the increased time that Falcon's Board of Directors spent considering all potential options. Full year cash G&A in 2020, excluding expenses associated with the strategic review was $7.6 million, which represents an approximately 18% reduction over 2019. Fourth quarter cash G&A excludes approximately $0.9 million of noncash stock-based compensation expense recognized in the period. Adjusted EBITDA for the fourth quarter was $7.5 million, excluding $0.8 million of expenses associated with the strategic review. This represents an increase of $1 million from the $6.5 million reported in the third quarter of 2020. The increase was largely attributable to a 9% increase in average realized oil prices compared to the third quarter. Adjusted EBITDA for the full year 2020, inclusive of expenses associated with the strategic review, was $26.7 million. At the end of the fourth quarter, Falcon had $39.8 million outstanding on its revolving credit facility and $2.7 million of cash on hand resulting in a net debt of approximately $37.1 million at the end of the fourth quarter. Falcon's net debt-to-LTM EBITDA ratio at the end of the fourth quarter was 1.39 times. Falcon reported a fourth quarter net income of $0.4 million on a standalone basis and $0.8 million net income inclusive of non-controlling interest. On the GAAP income tax expense of $0.2 million for the quarter is mostly attributable to the utilization of our deferred tax assets. Similar to the last 3 quarters, the company incurred no amounts related to the current period income tax expense and incurred no cash tax -- cash income taxes in the fourth quarter 2010. This is primarily due to the tax benefit of a basis step-up related to the assets that Falcon acquired as part of the transaction with Royal Resources in 2018. As a result of this stepped up basis, we expect to benefit from a tax perspective for the foreseeable future. As I mentioned on previous earnings calls, 80% of dividends paid to Class A shareholders during 2019 were classified as non-dividend distributions and therefore, represent a reduction of basis rather than ordinary income. Falcon expects that substantially all of the dividends paid to Class A shareholders during 2020 will be classified as non-dividend distributions in 2020. This treatment will generally result in a non-taxable reduction to the tax basis of shareholders' common shares. As a reminder, non-dividend distributions are treated as a reduction of basis until the time of an investor's basis is fully recovered. The reduced tax basis will increase shareholders' capital gain or decrease shareholders' capital loss when the shareholder sells their common shares. On February 11, 2021, Falcon declared a fourth quarter dividend of $0.075 per share. This dividend is payable on March 8, 2021, to shareholders of record as of February 25, 2021. The $0.075 dividend payment reflects a payout ratio of 93% of pro forma free cash flow, excluding expenses associated with the strategic review process. Pro forma free cash flow per share was approximately $0.082 per share for the fourth quarter, excluding expenses associated with the strategic review process or $0.073 per share, inclusive of the expenses associated with the strategic review process. We define pro forma free cash flow as adjusted EBITDA inclusive of non-controlling interests, less interest expense and pro forma cash income taxes. Our estimate for pro forma free cash flow for the fourth quarter of 2020 did not include an amount for pro forma cash income taxes. With that, I will now turn the call back over to Daniel.

Thanks, Brian. Thanks, Mike. Kat, we're ready to open the call up for questions.

[Operator Instructions]. And our first question comes from Kyle May from Capital One Securities.

I wanted to start with maybe the outlook for 2021. As we look back at activity in 2020, there were about 1.9 wells that were turned in line compared to the 3.5 net wells that were line of sight development back in January of 2020. So that works out to around 54% of those wells were converted. And understanding that 2020 was an abnormal year, how should we think about the conversion of your line of sight wells in 2021?

Thanks, Kyle. I think it's a great question. And Mike, feel free to supplement when I get done with answering. But yes, I think 2020 was definitely an abnormal year as we all know. I think the best way to think about it is actually to look back at our third quarter earnings call. In early November, we had 3.13 net line of sight wells at that time. And I think we talked about at that time, looking at our 2021 numbers, and that, I think, when we started talking about 5,000 boe per day, only based on a subset of that line of sight, getting us to that 5,000 boe per day number. So that's obviously 14 months, we've seen a significant progression of moving wells from waiting on connection to in line and waiting on completion into both being connected as well as waiting to be connected and then permit moved into DUCs. So I really would reflect back to that November call and where we were, and when we look at the number we've talked about, which we think is conservative -- is quite conservative, it's really based on a subset of that line of sight coming online. And then when we see the increased activity, whether it's the 7 rigs running across our position, which is pre-COVID levels or the completion activity, et cetera, we're in a very, very good position to nicely exceed that 5,000 boe per day number. I guess the second aspect, Kyle, that I'd point out is really this high net revenue interest locations. So we can really identify very, very clearly, which wells and which units are coming online. As we said in our release, we've already had 0.5 net wells come in line in January. We have 0.45 net wells coming online this month. So you already have 0.95 wells that will be in line in the first quarter, when you look back at that 3.13, and you can just continue to move through the progression of the completions and the DUCs as well as the permitted wells into production this year.

Our next question comes from Pearce Hammond from Simmons Energy.

Daniel, in the past, we've talked about maybe a Falcon 2.0, and it sounds like the strategic review process has been complete. So I was wondering if you could kind of put a bow on it and let us know what you decided from that process and how that affects or impacts your forward outlook?

Thanks, Pearce. Kyle, we will be sure to follow-up with you, unless you requeue, sorry for the technical glitch here. Pearce to answer your question, the strategic review continues. So not putting it in a bow yet, we're continuing to turn over every stone, every rock and make sure that we are pursuing every avenue to maximize value for shareholders.

Okay. Great. And then when we think about the quarterly progression of production this year, would you expect your high watermark to be in Q2 or Q3, given the huge number of wells being turned in line in the first half of the year? Or just any color on that quarterly progression would be helpful?

Sure. And again, please, Mike or Bryan jump in after I get done if there's anything to add. But we actually -- we see a very -- well, we've seen an upward progression throughout each quarter of this year. Just as we're seeing the numbers play out. So for example, in the first quarter, Mike mentioned in his remarks, that we see a modest increase in production as compared to the fourth quarter, and that's taking into account the storms and any impact of that. Then we see really a pretty nice step function change in the second quarter, as we have the benefit of a full quarter of production from the big pad that came online in January, plus the additional pad 0.45 net wells that will come online late this month, plus a portion of the additional wells that are DUCs being completed. We see that happening throughout the second quarter. Those additional wells and into the third quarter, but the third quarter then benefiting from full quarters of production from those smaller wells, but a lot of them coming online during the second quarter. And then the fourth quarter is buoyed by production from the 0.4 net wells coming from Hooks Ranch, which is expected to come online.

Okay. That's very helpful, Daniel. And then last one for me, and I apologize if I missed this in the prepared remarks. But Bryan, regarding the hedging, did you say how many barrels had been hedged and at what price?

Yes. Thanks, Pearce, for your question. So it's laid out on Page 9 of our investor deck, which we posted this morning for -- again, laid out here. We -- in Q2, we did 1,096 barrels a day; Q3, 940 barrels a day; and Q4, 836 barrels a day, and prices are laid out off the side there. It's around $56 a barrel on average.

And our next question comes from Derrick Whitfield from Stifel.

Perhaps for Daniel. Shifting back to your strategic review process, could you share with us any insights on the process to date and how we should think about the timing of the next steps?

Sure. I'm going to be I think pretty narrow in how I respond to that. We have -- in our looking at every aspect we have been, it's obviously been an environment where we've seen our stock price increase by, call it, 75% from early August. I think we're still meaningfully undervalued. That's my opinion. But we have a lot of options available to us to maximize value. And so we've been thorough in going through all of that. And so I look forward to coming back to everybody just as soon as possible with the outcome and stay tuned.

And then as my follow-up, regarding your comments on M&A, could you speak to the depth and size of the micro opportunities you're seeing?

Sure. And I mean, when we say micro, I don't know -- for us, it's deals -- we look at deals, $50,000 up to $5 million as far as what we consider to be small acquisitions or organic acquisitions. And as a reminder, we have, as a team, and then through our predecessor over a decade of experience in the Eagle Ford and specifically in the Karnes Trough, acquiring minerals actually drew some of our history operating E&P assets. So we have a long history in the -- in our area. And I think that affords us and has afforded us great relationships on the ground. And so we've maintained very close contact and strong dialogue with our mineral owners and brokers and others. And we're seeing opportunities in, I'd say, quantity really come to us and us begin to go to them. And so the transaction values are appealing relative to what they've been at other points. I'd say, late 2019 was -- it got extremely expensive in the mineral space, and that's when we put a pause, because we -- I mean we're frankly pretty disciplined when it comes to capital allocation, and we see the value we have. And I think this year demonstrates the value of our business without having to buy anything. But we see attractive opportunities relative to our cost of capital and where there can be value added, we'll do that. But I think the biggest takeaway there is for us at Falcon, we're not going to run around like chickens with our head cut off, trying to just buy assets to grow scale. It actually has to add value and that short, medium and long-term value.

And our next question comes from Brian Downey from Citigroup.

Daniel, just a quick follow-up on the prior question. Should we anticipate any of those asset opportunity comments contemplating anything beyond the Eagle Ford or just within that basin?

That's -- it's a very fair question. So we've kept tied to our core buy area, which is Karnes Trough. I think -- and you can see based on the drilling and level of activity, we've got probably the best operators or certainly some of the best operators in the world on our position. They're allocating substantial capital with the 7 rigs running across our position, the completion activity. I think it's highly likely to assume that we would very much stay focused on our position, because it is as good as it is.

Great. And then, Bryan, maybe a follow-up on the oil hedge question. I'm curious, your strategy of using swaps versus would you ever think about potentially collars on the oil side of the ledger. And how should we think about the prices above which you layered on those additional hedges for 2Q through 4Q? How did you decide those were the right price levels as you're thinking about your 2021 expectations?

Yes. Thanks for the question. I'll take the first cut out, and then Daniel can jump in if he has other things to add. So in answer to your first question, we certainly look at all types of ways of protecting cash flow. And in this case, it really -- the swaps really made more sense than the collars just based on the pricing. To remind you, we did place natural gas collars at the end of 2020. So we're not averse to using collars. But in this particular, it's based on the pricing the swaps made the most sense. Maybe, Dan, you can jump in on how we would think about it going forward?

Yes. I think it's -- I think it's -- we're opportunistic. In reality, we looked at the value proposition that exists and the amount of cash flow we can lock in at the time we're locking it in. And obviously, our balance sheet is super strong with less than $38 million of net debt. We're locking in, when we see -- I think it was like [$0.60] plus of free cash flow, which was representing north of a 15% free cash flow yield. I just -- it's hard to ignore that type of economics from our perspective as a Board and as large shareholders. And so I would think of it as opportunistic. But really, you're also putting it in the context of how much we're hedging, given the substantial growth we see in production, we have a substantial portion that's unhedged as well. So we have -- we feel like very comfortable that we're capturing a ton of upside to the extent prices continue to rally. And so we look at it as, a term I've used before, heads we win, tails we win scenario, with this type of hedging at $57. When you think about where prices were for on average 2020, it's a fantastic outcome.

Our next question comes from Chris Baker from Credit Suisse.

My first question is just on the new Marcellus slide in the deck. Some nice detail there. I was wondering if you could maybe just reflect on how that portion of the portfolio performed last year, and then just any sort of color on how you expect it to contribute to the outlook you've kind of outlined for 2021?

Sure. Chris, so as I think you know or many people know, we have a long history in Pennsylvania and specifically in the Marcellus and Utica through our prior experience at Atlas Energy, which was sold to Chevron and now was recently sold again, that position out of Chevron. This is a fantastic asset for us. We've always called it a call on natural gas prices. This covers 80,000 gross unit acres, roughly 1,500 net-net acres. And it really has been the ultimate call on natural gas. As prices have rebounded in natural gas, we've seen activity increase and rig count increase. I don't -- it will not be a material portion of our production and business as we see it. But it's a nice add and when prices rebound and we saw prices $3 plus that obviously drives higher revenue from natural gas, and we'll take it.

Great. That's helpful. And then just in terms of the current rig count, I think certainly some well-deserved enthusiasm there. Could you share a breakdown of rigs by operator? And then just how you're thinking about -- looks like the capture rate of rigs on your position versus the overall sort of activity in Dewitt and Karnes, how should we think about that capture rate for the rest of the year?

Sure. So, yes. I mean we're -- frankly, I would have been enthusiastic with 4 rigs running on our position. I think 4 rigs twice the level of the third and fourth quarter would be great. And that's a great sustained level, but it just continues to creep up. And I mean if you -- we're not going to break it down by operator because it is, I think, you know, a fluid ebbing and flowing across our 250,000 acres as to which rigs come on and which rigs come off. But I think the best way to think about ConocoPhillips, good example, is we cover roughly between 40% and 50% of their core position. So if you want to think about rig capture for them, think 40% to 50%. I think if you think about the BP/DVN joint venture, and we've been obviously pleasantly surprised by the activity level there. We knew there was completion activity that was coming, but they've picked up nicely on the rig side. And I think there -- I think what you're seeing in this price environment is and this energy investing environment is, capital goes to the highest return in place, and that's our position. So great activity from BP/DVN. I think you can probably assume 75% type capture in the Karnes Trough for BP/DVN on our position, being conservative. And then EOG, I think you could assume -- I think you can assume 30% type capture or -- and I think that's -- 30% capture's probably on the medium to aggressive side, maybe it should be more like 20% to 30% capture. We've consistently seen no 30% capture, but we don't hold 30% of their position. So it's just -- I'm giving you what we've seen historically over the last year or so.

Okay. Great. Yes. No, that's super helpful. And I guess just where I'm trying to go with this is given the higher rig count, some nice growth that you've kind of outlined in terms of expectations for this year. If we think about maybe 10% year-over-year growth in '21 and then the benefit of the rig activity flowing through as well as that next Hooks Ranch pad in the fourth quarter of the year, just curious directionally where that kind of shakes out for 2022, realizing it's still early days?

Yes. I appreciate that. I think this goes back to kind of what Kyle had asked at the beginning, which is relative to our line of sight. And it's super important, and Mike said this in his comments, but it's super important to note that a nice slice of our line of sight is actually coming online in our models in 2022. So everything like -- I mean we're already building a very nice line of sight for 2022, and that's only going to grow because of that drilling activity. So we mentioned 7 rigs, that's 250 wells, we only have 109 wells permitted. So that would build at that 250 wells, another 140 wells, right, which I think is the point that you're making. And I guess our models -- we've tried to become, and Bryan has done a great job, very conservative, pushing out our timing, pushing back timing. Mike has done on the production side, a very good job, with his team on further risking. We see growing production this year and pretty nice, stable to growing production next year with one caveat that if we, again, have the benefit of having high net revenue units, as the ones that are drilled, we really could see nice further growth in 2022, but that's an if.

And our next question comes from TJ Schultz from RBC Capital Markets.

So on the hedges, I understand the hedges are opportunistic. But having those in place or if you think maybe you extend hedges longer if the opportunities arise, does that give you any more comfort to maybe use a little more of the balance sheet as you think about acquisition opportunities or outside of that, just your view on enhancing M&A if you're trading within that, call it, mid-teen free cash flow yield range?

Yes. Totally. TJ, nice to talk to you. I don't -- we don't really see sitting here today, any interest in hedging into 2022. At this point, we'll see if prices go to $80, we'll obviously reassess. And the environment is changing, we're constantly reassessing. I think more importantly, we see our balance sheet as something that should be absolutely protected at all cost. We are going to be below and nicely below 1 times levered exiting this year just by the pure ramp in free cash flow, and that's paying out 90-plus percent of our free cash flow in the form of a dividend. We're going to do that. I think I just have a strong view, just having been -- been running energy companies for 17 years now, protect the balance sheet, protect the balance sheet, protect the balance sheet. And being under 1 times levered is a great approach. We're going to continue to do that. As far as acquisitions, we have a number of options available to us, which will allow us not to lever up the balance sheet.

And our next question comes from Noel Parks from Tuohy Brothers.

I just had a couple of quick ones. I apologize if you addressed this already. But on the reserve report, was the revisions category nearly all priced based? Or were there any other components in there?

Mike, why don't we give you some airtime?

Thanks for the question. The majority of it was price driven. However, one other item was just the timing of the development associated with the SEC rules. So the development time was adjusted a little bit based on 2019 -- I'm sorry, 2020 activity, but the majority of it was price driven.

Great. And I was wondering, since the reserve category isn't broken out kind of everything fits in there. I was wondering if there were any type curve revisions from wells brought online last year? Or if in this most recent set of wells that have come out online, have you seen any upside to well performance versus expectations for the wells just completed? I know some of them haven't been on terribly long so far.

Sure. So I'll jump in, Mike, and you can correct me where I'm wrong. The beauty of our position is it's well understood. And so there's -- there -- within reserves, there's effectively no adjustments. We -- the results as far as new wells coming online, exceeding expectations, they're in a very tight band. So there -- I mean I wouldn't say they exceed our expectations or are below our expectations. We have a very clear view within our -- and across our position as to what the wells are going to produce. And I think it's been very much on trend with that. What I would say in the real pricing benefit, Devon has talked about, Conoco has talked about, and EOG has talked about, and that's the recompletion and redevelopment activity. And we have seen our operators consistently recompleting wells and redeveloping wells, and that's just added benefit to us. And we don't model for any of that upside. And then, of course, EOG and others on the enhanced oil recovery, which, again, we're seeing and we get the benefit of, which are really nice surprises quarter in and quarter out. Mike, would you add anything?

I would not.

Our next question comes from Gail Nicholson from Stephens.

I just wanted to talk about when you guys look at the uptick in rig activity, what's the current inventory levels that you see today? I know Hooks Ranch is about 75% undeveloped. I was just curious on kind of how the rest of the position looks. And then, Daniel, you talked about the refracs in the EOR potential. Any given quarter, do you -- I mean, how much has the refrac been a benefit? How do you guys see kind of that benefit potentially also adding to shareholder value in the future?

Great questions, as always. Thank you. So our undeveloped position is, I mean, just under 3,000 locations. So you're talking about at 250 wells a year, a 12-year inventory. The last several years, we're closer to 200 wells a year. So you're talking about a 12- to 15-year inventory of Tier 1 locations. Those are all Tier 1. There's additional locations that are below 100% type returns. But then the Tier 1 locations, you're basically at 3,000 undeveloped locations. So we're in a very good position from an undeveloped standpoint. Remember, ConocoPhillips, which represents 60% or so of our net asset value, they have taken a very methodical approach or did historically in really developing their expertise as to how to maximize recovery and maximize results from the wells. And that then led them in 2019 to moving into full manufacturing mode. That is in large part, what really drives the fact that we have such a great undeveloped position, is the work that they've done and continue to do, a great company. As far as impact quarter in and quarter out on refracs and enhanced oil recovery. The historical impacts have been on a quarterly basis, relatively low. So you might see 50 barrels of oil equivalent per day impact on 1 given quarter. It's been small. What I think we may see -- and I think -- well, I think it's pretty obvious, we'll see that increase over time. And not in the next year, but in the next 2, 3, 4, 5 years, because our position was developed heavily on the earlier side of the Eagle Ford by some of the developers. That provides example, Devon's 700 redevelopment and refrac locations. So I think we'll see that activity pick up in the coming years.

Great. And then not to be a dead horse on the hedge question. I know you guys opportunistically hedged, but when we look at the volatility that we saw in '20 with the oil price environment, when you guys look on a go-forward basis, is there a certain amount of cash flow that you -- a baseline that you want to protect in any given year?

Our operating cost per barrel are $9 or less. So it's an extremely low price. I think 2020 was like the perfect year to really understand one's business and energy. Are you the real deal or are you not? And I think what we showed in what our business in our -- in the mineral businesses generally showed is these are highly resilient businesses to severe downturns in commodity prices. And so I think, we as a subsector within energy, Falcon being the same-show, that there is not -- if you have a strong balance sheet, there is not some minimal level that you need to lock in. It's rather, for us, at least, locking in attractive prices and leaving plenty of upside. And I would also say Gail, we talk to our shareholders on a regular basis and some daily, some weekly, some monthly, and we also try to be super responsive to what we're hearing from our shareholders. Many of whom were saying, take advantage, take advantage, take advantage, and we like that type of daily, weekly and monthly interaction to try to come up with the best answer.

Our last question comes from Jon Evans from SG Capital.

Daniel, in the press release, you basically alluded to in Q2, you thought you could double the fourth quarter cash flow per share. And so that roughly could give you about $0.16. What I'm curious is the markets are backwardated, and so if all else stays relatively equal, just as you roll down that curve because you have production coming on strong in Q3 and Q4. I mean could you keep that free cash flow pretty flat? Or can you give us any kind of insights into that?

100%. The -- thank you. Yes. The -- I'm looking at our model right now. So I mean, from our numbers, even with the backwardation, we have growing cash flow per share throughout the year. That's our model. That's just -- that's where we have it today. That's with Mike and Bryan and teams, haircutting and conservative nature, so we feel pretty good about that, to say the least.

So if I could just ask you 1 more question just relative to kind of -- obviously, you have tremendous asset. You're not very small from a market cap. You did this 2.0. And I guess, but it seems like it's a pretty high bar to find something that's accretive, that's attractive. I mean, basically, you got a free cash flow yield of 15 plus percent, et cetera. So if you buy something, it will be accretive immediately, right? You're not going to waste our time with not making it accretive?

Yes. I will not -- we will not that's not -- we're large shareholders. We pride ourselves on alignment, and we have zero interest in doing anything that's not going to meaningfully add value to the enterprise in the short, medium and long-term.

And at this time, ladies and gentlemen, I would like to turn the floor back to management for any closing remarks.

Great. Thank you. Thank you, everyone, for joining the call today. We look forward to seeing many of you at the upcoming conferences. We're always available to speak if you have any follow-up questions. Have a nice day.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.