Ralph D’Amico: And I think it’s important to note that when we say probable, it’s probable location per an SEC definition, because we don’t have something written down on paper from the operator that says we are going to drill it within the timeframe that the SEC would deem it as approved and develop the location. I would venture to say that, a significant portion of those probable locations are actually proved undeveloped locations on the operators’ books. So it’s a little bit of semantics on the definition, but these are — for oil and gas folks, these are very high quality locations as Chad referenced.
Derrick Whitfield: That’s terrific color guys. And Chad, perhaps for you or Ralph, could you speak to the A&D pipeline and the broader environment for minerals in your focus basins in light of your pending working interest divestitures? And separately, are there material non-core mineral divestitures you would pursue as well?
Chad Stephens: Yes. So I attempted to somewhat address that in the notes that we just — call notes that we just went through. So we are in somewhat of a sweet spot given our — we’re a small company, we need to grow and we are growing. But the deals that we look at and the deal size, there’s some food chain out there and the larger companies are focusing on the larger packages, the larger mineral asset packages in the $50 million to $100 million to $150 million range. And we’re way down that food chain and we’re focused on have been since we started this in late 2019, early 2020. We’ve been focusing on the deal size as $1 million to $5 million range, which is material to us, moves the needle. And we in 2022 closed, I think, in our press release we talked about $48 million worth of total acquisitions closed in 2022 and that included over 30 different deals to accumulate that $40 million worth of acquisitions.
So we’re doing a lot of deals. They’re all relatively small, but at the end of the day, they all move — all of those acquisitions collectively move the needle for us in terms of royalty volume growth and royalty reserve growth, which is important to us as well. And we continue to see in that range, the $1 million to $5 million range, we continue to see robust deal flow, we’re very confident we can continue the kind of the quarterly deal closings, the money we’re spending, the capital we’re allocating on a quarterly basis is steady, the steady kind of $10 million to $15 million a quarter deal flow. We see it now. We we’re optimistic, we’ll continue to see in the areas where — in which we’re focused. So we’re very excited about that. I think the Board is confident of that too, because they approved this dividend increase, most recent dividend increase, which speaks to the overall ability for us to continue to grow our royalty volumes and ultimately our EBITDA and cash flow.
Ralph D’Amico: Yes, the good news is, we don’t have to chase, we don’t have to go elephant hunting for lack of a better term, in terms of bigger deals where there is much bigger competition. We’ve basically put together a system where we can aggregate quite a few of these smaller deals that Chad talked about and we can very quickly and efficiently redeploy the proceeds from the sale of the working interest assets.
Chad Stephens: So we’re really excited about the royalty volume growth trend and we now have over the last, say, three or four quarters have really demonstrated that trend or that ability to grow the royalty volumes. So to address your other question, the non-core minerals, which was the legacy, the old Panhandle Oil and Gas legacy minerals, unleashed open, never had any activity on them or on the margins of these basins and they’re not strategic to us. They have no real value to us. Someday, somehow they may be drilled or developed. But under any current technology or commodity price environment, there’s — it’s very doubtful that any of these minerals will never return to cash flow in the near term. So we’re steadily attempting to sell all those non-core mineral assets and there are small private companies out there, that’s their business, that’s their strategy.
And we’re continuing to have discussions with them about piecemealing off from various areas. These non-core minerals, which today we own, Ralph, what about 150 — 150,000 net mineral acres all over the U.S. So we’re continuing to focus on turning that. And we can take those nonmineral sales — excuse me, non-core mineral sales and redeploy those proceeds into these acquisitions that we’re focused on and turn it into cash flow immediately. So again, just a way of — as I keep referring to high grading the asset base, just improving the overall asset quality and asset base and the interest that are cash flowing for us.
Derrick Whitfield: That’s great. Thanks again for the update.
Operator: Thank you. Our next question has come from the line of Donovan Schafer with Northland Capital Markets. Please proceed with your questions.
Donovan Schafer: Hi, guys. Thank you for taking the questions. I first wanted to just kind of reorient ourselves around your hedging approach and philosophy. It’s a great kind of reminder and commentary about the hedges you have in place today that are rolling off. It looks like a much lower kind of under the current pricing environment sort of serves as a burden for next year, but it’s a much lower burden versus, say, last year as it’s kind of rolling off. But — and that was driven by your lenders going through COVID and the commodity prices have really turned downward. What’s kind of your sort of more overall strategy or philosophy review? Do you want to be largely exposed so that you are kind of a vehicle for investors that way who have a view on where commodity prices are going?
Or do you want to have more stability there to just kind of help you manage cash flow and how you guys adapt? Do you want to stay above 50% hedged? Do you want to come below 50% hedged to 20% or something? What your overall kind of thinking there strategically going forward?
Ralph D’Amico: One, certainly we have covenants in our credit agreement that require and should put hedges in place, right? And just as a refresher, it’s 45% each for oil and natural gas existing PDP. So it’s got to be producing today in forward months one through 12 and then 25% in months 12 through — or months 13 through 18, right? So that’s sort of the minimum, right? So for the PDP portion, we tend to think because we don’t really have any capital obligations in terms of where cash flow goes, right? We like to use collars, right, which you can see after the hedges that we have to put on in 2020, which were swaps. We’ve been really using collars, which is a way to sort of protect the downside from any sort of abnormal drop in prices, right, but keep us exposed to the upside.
So if you look at calendar 2023, right? We have exposure on the existing collars, all the way close to $7 per Mcf. Generally speaking into the summer, right? In this winter, right, I mean, we’re exposed up to almost $12 on upside, right? And we protect our downside, obviously, as well. So I think we’re going to — from an instrument standpoint, we’re believers that collars provide the upside, while still giving us some black swan downside protection. And because we don’t have any capital obligations, right? I mean, if you have a sustainable lower commodity price environment, we can very easily pivot some of the cash flow that’s being used for the acquisition program, right, and pay down debt, which right now we’re one times debt to EBITDA is fairly conservative.
But if anything happens, we can very quickly pivot and reduce that even further. I think that — remember that the growth rate that we’re showing on royalty volumes, right? All of that is until it becomes production, it’s unhedged, right? Because you cannot hedge or you should not hedge production that you don’t currently have, right? So I think when all of that shakes out, you may see that on a total production standpoint, in the near quarters, right? You end up seeing that 50% rate. It’s probably a pretty good gauge, but a much better pricing, right? And as we look into the future, as new volumes come on, we will layer on additional collars and we’ll keep investors exposed to and ourselves exposed to higher prices, while protecting any kind of black swan.
So that would happen in early to mid-2020 which Chad and I inherited never happens again.
