Northern Oil and Gas Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 11 speakers on the call.

Operator

Greetings and welcome to the NOG Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require the operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded.

Operator

It's now my pleasure to introduce your host, Evelyn Infurna, Vice President, Investor Relations. Thank you. You may begin.

Speaker 1

Will be ready for questions.

Speaker 2

Good morning. Welcome to NOG's Q3 2023 earnings conference call. Yesterday after the market closed, we released our financial results for the Q3. You can access our press release and presentation on our Investor Relations website. In our Form 10 Q will be filed with the SEC within the next few days.

Speaker 2

I'm joined this morning by our Chief Executive Officer, Nick O'Grady our President, are Adam Dirlam and our Chief Financial Officer, Chad Allen and our Chief Technical Officer, Jim Evans. Our agenda for today's call is as follows. Nick will provide his remarks on the quarter and our recent accomplishments and Adam will give you an overview of our operations and business development activities and Chad will review our Q3 financials will walk you through updates to our 2023 guidance. After our prepared remarks, the executive team will be available to answer any questions. Before we begin, let me cover our Safe Harbor language.

Speaker 2

Please be advised that our remarks today, including the answers to your questions, may include forward looking statements within the meaning of the Private Securities Litigation Reform Act. These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by our forward looking statements. Those risks include, among others, matters that we have described in our earnings release as well as in our filings with the SEC, see, including our annual report on Form 10 ks and our quarterly reports on Form 10 Q. We disclaim any obligation to update speak to these forward looking statements. During today's call, we may discuss certain non GAAP financial measures, including adjusted EBITDA, adjusted net income and free cash flow.

Speaker 2

Reconciliations of these measures to the closest GAAP measures can be found in our earnings release. With that, I'll turn the call over to Nick.

Speaker 3

Thank you, Evelyn. Welcome and good morning, everyone, and thank you for your interest in our company. All right. I'll get right down to the 5 key points. Number 1, all is well.

Speaker 3

Operationally, things are going swimmingly. Last quarter's activity slowdown became this quarter's acceleration and our Mascotte project well performance continues to impress. Production was near the upper band of our guidance, the oil cut was up significantly and our operating unit costs were lower. Additionally, we are pleased to have raised our dividend again for the 11th straight quarter. Our ROCE ticked up 160 basis points It's a testament to the rigor of our investment process and the scale we've built.

Speaker 3

Number 2, we have entered harvest mode, are pursuing a dual path. We generated significant free cash flow from our assets this quarter, about 2.7 times the amount in the prior period, and we head into Q4 looking towards a potential record quarterly figure. Free cash flow has not empirically proven to be a driver or valuation marker for stock performance, but it is definitively a provider of shareholder returns. And more importantly, it is a powerful convexity tool, Which provides optionality for dynamic capital allocation, something we believe we've proven to be adept at doing. When you have free cash flow, you effectively can choose your destiny.

Speaker 3

Our choice has been and will continue to be to serve both masters, deliver solid, dependable and growing cash returns, while also driving total return by investing to grow our longer term profits. Number 3, opportunity and dominance. We continue to see compelling investment opportunities, big and small. We had elevated ground game success in Q3 and larger and smaller packages are spooling in the Permian and Appalachia. NOG's capital allocation has benefited from the domination of our niche.

Speaker 3

We find ourselves involved in nearly every operated and non operated have a strong M and A process, which is providing us an incredible range of opportunities. So even as we're larger, we're finding that options in front of us allow offer increased returns and more flexibility. Shorter term, this has driven capital spending higher, but spending today provides the returns for tomorrow. Adam will give more details. Number 4, bigger and stronger.

Speaker 3

When we started this journey back in 2018, Our Board Chair was clear in his belief that scale would drive powerful outcomes for NOG. Scale was the are key to grow the company beyond the over levered balance sheet we inherited and scale would provide more stability and diversity to our asset base. It would lower our long term cost of capital and provide access to a larger investor pool. Over time, Scale would lead to higher return opportunities with more influence for us. Scale would grant access to capital to purchase assets that our competitors could not because of size or concentration, scale has never been more important and our thesis has borne itself out over the past several years.

Speaker 3

The perpetual challenge of this strategy was and always has been to maintain our high asset level return standards and to keep focus on core assets. We could have simply bought lower quality assets to temporarily create scale, But the harder path was to actually improve our asset quality and return profile while simultaneously growing the business. We have achieved this and then some. With interest rates and the overall cost of capital the highest in over a decade, never has size been more important. What we're finding is that scale begets scale.

Speaker 3

Now that we're bigger, the opportunity set has grown in lockstep. The theme of bigger and stronger ties into my final point. Number 5, optionality leads to potentiality. We recently raised $290,000,000 of equity capital in a bought deal and many of you rightfully so might be asking why. After all, I just described how we are generating significant free cash flow and that our leverage levels are in good shape and set to improve further.

Speaker 3

So why did we raise capital? As we discussed our future with the Board, we highlighted to them that the investment opportunities big and small coming to us. We also discussed how the economic and geopolitical situation in the world candidly is as complicated as it's been since the financial crisis 15 years ago. And so, knowing what's in front of us and also knowing the conflicting signals in the capital markets, we collectively decided to simply de risk the path to are delivering growth to you in the future. We now have the flexibility to act no matter what happens in the macro environment.

Speaker 3

The options in front of us now carry less risk. To the extent we see a market meltdown, we can aggressively purchase securities or assets for sale. To the extent things stay the same or better, we can continue to do what we have been doing while staying within our self imposed leverage constraints. Our capital raise was not a call on our stock pricing, certainly not because the capital was needed at this very moment, as you can see from the results today. Rather, we have shrewdly, astutely and carefully found growth opportunities that have driven this business and our profits higher over time.

Speaker 3

With the extra capital that you provided trust that when the time is right, we will allocate it to benefit all stakeholders. Are doing this is why our corporate returns have been driven ever higher as risk has declined and it's how we delivered superior total return. As I have said in the past, we are a company run by investors with a goal of growing value for our investors. It's our fiduciary duty and it's how we are incentivized. In the short term, we may make difficult decisions that aren't always popular, are focused on driving long term value.

Speaker 3

And what is most exciting is that I am confident that we can continue on a similar path for the see a future to drive growth for our investors. We will keep our focus on delivering strong results over time. We thank you for taking the time to listen to us today and your continued trust in us and interest in our company. With that, I'll turn it over to Adam.

Speaker 4

Thanks, Nick.

Speaker 1

In the Q3, we saw an acceleration of activity on all fronts, setting up for a solid 2024 campaign. I'll start by reviewing this quarter's operations and then turn to the M and A landscape and our business development efforts. During the Q3, turn in lines rebounded to a company record of 22.6 net wells, A 64% increase quarter over quarter. Our organic assets did the heavy lifting with 18.9 net well additions, Well, our ground game turned in line 3.7 net wells, the majority of which came online towards the end of

Speaker 5

the quarter. Activity had a

Speaker 1

healthy balance between the Williston and the Permian. And as we enter the 4th quarter, We expect to see elevated turn in lines before seasonal easing during the winter period. Well performance has been encouraging as our mascot prospect continues to outperform expectations. And while it is early, our new operating partners in Vital, Earthstone and soon to be Permian Resources have all been making improvements to our recently acquired co developed assets. Continuing with the theme of acceleration, Our wells in process again grew to an all time high as we ended the quarter at 74.2 net wells, A nearly 10% increase quarter over quarter.

Speaker 1

Driving activity levels, our organic acreage added 14.6 net wells and accounted for 1 third of our Permian activity as our acquired acreage over the last 2 years continues to show its value. We added another 9.3 net wells from the closing of our Novo transaction And the ground game accounted for an additional 5.5 net wells. In total, the Williston and Permian combined to count for nearly 80% of our wells in process, while the Permian has grown to 60% of our oil weighted wells on the D and C list. As we have taken market share, we've also seen our average working interest grow to 13% From under 10%. This is a 34% increase relative to our producing wells, which will enable us to do more with less rig activity if we so choose.

Speaker 1

Inbound well proposals also saw an acceleration As we reviewed 194 AFEs, up from 140 proposals in the 2nd quarter. This was driven by the Permian, where activity levels more than doubled from Q2 to Q3 and also accounted for the highest number of net wells evaluated during the year. Our Williston activity has remained stable and consistent as we have seen over 100 well proposals expected rates of return far exceeding our hurdle rate even as we sensitize our evaluations for a lower commodity price environment. This translated to a greater than 95% consent rate during the quarter as we partner with our top tier ops, making up a much greater proportion of the total activity. Normalizing for lateral length and basin, estimated well costs were relatively flat quarter over quarter.

Speaker 1

Given the volatility in commodity markets, We remain conservative in our views on costs as we plan for 2024. We continue to have conversations with our operating partners And we've seen some of our larger operators along with some of our more adept operators drive costs down, while seeing others get squeezed as contracts roll off. Moving on to our business development efforts and the M and A landscape, We continue to adapt to the ebbs and flows of the market. As I alluded to on our Q2 call, There was a bit of a low in quality large scale assets in the market over the past few months. During that time, we were able to pivot early in the quarter and capitalize on the dislocation we observed with lower commodity prices And stayed busy with our ground game.

Speaker 1

We closed on 8 transactions, adding an estimated 5.7 net wells in process And 5 14 net acres weighted towards the Permian. This brings our year to date activity to 31 transactions For an estimated 24.9 current or future net wells and approximately 1800 net acres. Since the beginning of the year, we have reviewed over 400 ground game deals and continue to leverage our proprietary technology and data to run these evaluations. This has afforded us the ability to focus on only the high quality transactions, Which has translated to an expected ROCE north of 30% on our 2023 ground game. As I mentioned earlier, we closed our Novo transaction in the middle of the quarter and are excited to get to work with our new operating partner, Permian Resources.

Speaker 1

We know the Permian Resources team well and having greater exposure to PR will provide incremental benefits From their increased scale and cost synergies, governance through our joint operating agreement and our area of mutual interest with Earthstone remain intact and we expect nearly a decade of self are funding continuous development within our Tier 1 inventory. Through leveraging partnerships with our operators, We've been able to aggregate in high quality areas, while gaining line of sight to development. We continue to reap the benefits of more opportunities to deploy capital to accretive transactions as we scale the business with resilient assets. In the past 12 months, we have added over 25,000 net acres in the Permian, more than tripling our position. Looking ahead, there are a number of high quality prospects that we are reviewing ranging from traditional non op packages To minority interest sell downs from operators to joint development programs.

Speaker 1

Put simply, We estimate that the universe of on and off market opportunities that are available to us has never been broader. However, we will remain consistent in our underwriting, focusing only on potential transactions that will benefit the business for the long term and that generate superior returns that our investors expect. Will be available. With that, I'll turn it over to Chad.

Speaker 4

Thanks, Adam. I'll start by reviewing our Q3 results And provide additional color on the operating update we released on October 25. Our Q3 average daily production topped 100,000 BOE per day for the first time in company history, a 13% increase compared to last quarter. Oil volumes were up 16% over Q2 as we rolled in our Forge and Noble acquisitions and benefited from the reversal of most of the prior deferments in the back half of the quarter. But the real story is the addition of record level of turn in line wells and the continued strong well performance across all of our basins.

Speaker 4

Our adjusted EBITDA was $385,500,000 in Q3, up 32% over the same period last year. And our Q3 free cash flow was $127,800,000 despite continued elevated levels of organic and inorganic investment, Commodity price volatility and to a lesser extent, TIL deferrals. Adjusted EPS was $1.73 per diluted share. Oil realizations were better than internally expected due to continued strong in basin pricing and a higher percentage of barrels coming from the Permian, Which is typically priced tighter than the Williston. Natural gas realizations were 82% of benchmark prices for the 3rd quarter, below our year to date run rate with realized actuals in the Marcellus down over 30% from last quarter As basis spreads widen for the shoulder season, the biggest driver is the NGL to natural gas ratio, which moved back to more normalized levels in the quarter as NGL prices were relatively flat quarter over quarter and natural gas prices were higher.

Speaker 4

LOE came in at $8.76 per BOE, below our annual guidance range, Driven primarily by increased Permian volumes, which have a lower cost structure than the Williston. On the CapEx front, We invested $216,600,000 in drilling, development and ground game capital in the 3rd quarter, with roughly 2 thirds allocated to the Permian and 1 third are the Williston. We had previously expected our CapEx cadence for the second half of the year will be equally weighted between Q3 and Q4. However, as a result of having access to high quality opportunities, success on the ground game, along with the pull forward of organic activity on higher commodity prices, we shifted more investment into the 3rd quarter. This shift in spend led us to adjust our full year CapEx guidance, which I'll discuss shortly.

Speaker 4

After quarter end, We took the opportunity to further enhance our balance sheet. In early October, we completed a $290,000,000 equity offering, Price down just 4.75 basis points from the closing price, truly highlighting our access to capital. More importantly, it was done in a manner that had minimal effect on our existing investors and provides us with capital to pursue significant M and A opportunities within the confines of our stated leverage goals. Our expectation is that the near term dilution from the offering can be more than offset over time through value enhancing acquisitions. In the meantime, we have accelerated a path towards our stated leverage target.

Speaker 4

Now turning to annual guidance. We have made a few adjustments, which are highlighted on Page 16 of our earnings presentation. We are tightening our annual production guidance to 97,000 to 99,000 BOE per day. The main drivers for Q4 will be the timing of completions, given our record number of net wells in process and seasonal factors, particularly in the Williston, where well timing can be highly sensitive to weather. We now expect Net wells funds for the year in the range of 76 to 79 net wells, which along with our Till guidance should assist in modeling.

Speaker 4

The higher level of net wells explain the bulk of the move in the CapEx, which is ultimately just growing 2024 activity stacked on to this year's capital. Our annual CapEx guidance has been revised to a range of $790,000,000 to $820,000,000 reflecting year to date investment activity ahead of our prior forecast and as I just mentioned, the increased spud count. Our full year gas realization guidance has been improved to a range of 95% to 105% of Henry Hub to reflect year to date realizations, which implies more typical levels for the remainder of the year. And lastly, We've also tightened the expectations for oil differentials to a range of $3 to $3.75 for the year. As we exit driving season and oil prices have increased, we began to see seasonally wider oil differentials starting at the end of the third quarter and expect that trend to continue through the winter.

Speaker 4

As we finish out 2023, we are extremely well positioned for another year of strong growth in 2024 Given our recent acquisitions and record wells in process, we are still working through our 2024 budget I look forward to providing guidance details on our year end call. With that, I'll turn it back over to the operator for Q and A.

Operator

Thank you. At this time, we will conduct a question and answer session. Using speaker equipment, it might be necessary to pick up the headset before pressing the star key. One moment please, while we are pulling for questions. Will be ready for questions.

Operator

And our first question came from Scott handled RBC Capital Markets. Please sir, go ahead.

Speaker 6

Yes, thanks. Good morning all. Hey, Nick, I can't help kind of think back a few years ago when you and I chatted with Bram about like just growing scale, what's important For the long term, for Northern and certainly you guys have moved quite a bit from that, I think up like somewhere around threefold. When you kind of think about the future and the opportunity sets you see in front of you and just in general the maturation of certain parts of the U. S, Like is there an optimal level you think that there is for Northern?

Speaker 6

And if you could also kind of parlay into this answer, how does the higher interest rates kind of impact your ability to kind of do M and A transactions or see just things out there?

Speaker 3

Yes, I mean, I think I'll answer the latter part first, Scott. When the cost of capital goes up, so too do the discount rates. And so we've observed That clearing discount rates have risen. From a strategic perspective, it's definitely benefited us as our Cost of capital has probably been more static than that of our private peers and it just were require bank capital or things like that. So it's definitely helped us.

Speaker 3

But You see it particularly, you saw a kind of a wave in the last couple of years of people using asset backed securitizations to finance PEP heavy acquisitions and that game gets really tough when base rates are over 5%. To the other point, I think I got asked this question recently by one of our investors and I think my answer would be our fiduciary ability as a company is not to decide what size is the right size. It's really our job is to earn high returns and grow the business and make more money for our stockholders. And I think that that's our path going forward. And I think while shale overall is maturing, from a non operated perspective, I think it's wide open for us.

Speaker 3

The opportunity set in front of us is as big relative to the sizes of our company as it was 3 or 4 years ago. And so I feel very confident that our team can continue the path that we have from a lot of large numbers, maybe that percentage doesn't move quite at the same pace. But from an opportunity set, frankly, were as busy as we've ever been. I don't know, Adam, if you want to add to that.

Speaker 1

I think you touched on the majority of it, scale begets Opportunity, right, and I've touched on in my prepared remarks in terms of kind of the different structures that are now available to us. I think That gives us the optionality to deploy capital where we see fit. If you rewind 5 years majority interest buy downs, joint development agreements and all of that is at scale, right. And so I think we're are much larger and better capital provider and partner to a lot of our other operating partners that gives us significantly more opportunity.

Speaker 6

I do appreciate that. And as my follow-up, I know it's going to be a little bit early for 2014 2024 thoughts. But I was kind of curious, especially with respect to the Mascotte, which was your first JV. You talked about the well looking good. Can you talk about pace of that going the pace of completions for that and production going into next year and just your kind of thoughts on how that sets you up for 2024?

Speaker 4

Well, I'll cover just

Speaker 3

a little bit, which is obviously we shifted some of the development into 2024. And so it really would have been peaking, I think both in terms of volumes and in terms of capital in the Q4 and some of that shifts out. I mean, I think in the next batch of wells is really it's obviously been performing extremely well, and we'd expect that the next Major batch of wells comes on sort of early in the second quarter, Adam?

Speaker 1

Yes. Performance is kind of 13% better overall versus Our forecast, Scott, and as far as kind of the modified schedule goes that we discussed last quarter, we'd expect production to decline a little bit in In the 4th and the Q1 and then begin ramping materially in late March. So to Nick's point, that's when the larger Batch of wells come online.

Speaker 6

Okay. So then from an overall cadence perspective, I mean, you guys should will be starting next year in a pretty good spot overall? Yes.

Speaker 1

Yes. I think Q2 and Q3 is really where we see kind of the bulk of But Phil's comment on the Mascot project.

Speaker 3

Yes. And we typically see a seasonal slowdown in the Q1, particularly in the Williston around kind of the winter weather piece, but that's been the pattern for almost every year.

Speaker 6

Right. Okay.

Speaker 1

Thank you.

Operator

Our next question came from Neil Deignan, Tristy Securities.

Speaker 7

Porter, Nick, my first question is on M and A. Specifically, it sounds to me like you all have more than, I mean, continue to have now more than ample M and A opportunities ahead having the, what I call the non op market cornered. I'm just wondering, can you speak now when you look at your deal criteria, how these requirements have changed, maybe Different standards today versus when you were looking at maybe a year or 2 ago, because again, this seems like just how accretive the deals are today. So I'm like when you and Adam chat are looking at some of these deals, how the requirements have shifted?

Speaker 3

Yes, I mean, I think Discount rates have definitively gone up. It doesn't always show up in the multiple and the other multiple is going to be a function of the longer term growth and value of the undeveloped piece, right? So The short term multiple to the investors might not seem obvious, but we've seen in the last 3 or 4 years probably even on the ground probably a 1,000 basis point increase in our own clearing price and that's a function of the cost of capital. It's also a function where we're targeting and we've really changed some of our focus to where we feel like we can get a much now we become much more Critical to that part, that's generally through concentration or scale and size.

Speaker 1

I don't know if you

Speaker 3

want to answer the other part.

Speaker 1

Yes. I mean, as far as the criteria qualitatively, I think we're relatively agnostic in terms of overall structure, it's really going to boil down to the overall rate of return and asset level returns there. So we're never going to change our stripes in that regard. Big deal, small deal, I'll take the same amount of time. And so I think where that probably comes into play a little bit more is the ground game side, Right.

Speaker 1

Is a 1% working interest really going to move the needle for us? And frankly, when you get into the larger ground game deals, The higher concentration, the competition is relatively limited, right, when you think about your competition and what their capital pool is and how they want to their capital allocation. So we've definitely stepped up in that regard. But as far as overall structure or quality, those types of things, I think we're going to continue to just stay the course with what we've done in the past. And As far as where those opportunities are located, I'd say, primarily that's going to be in the basins where we're at, Permian, obviously, with the rig level activities there in the Delaware, to be a bit more specific, is generally where we're seeing Those opportunities, but we've been surprised about some of the things that have come to market and we've been approached on in the Appalachia, as well as the Bakken.

Speaker 1

Not to mention, the Haynesville, does that work in this particular price environment? Maybe, maybe not. You've got the Eagle Ford that's been an area of interest, but given the maturity and the way things are blocked up there, we just haven't found the right asset. TJ, great rock. You know, got to obviously take into consideration the political environment there and so I think a lot of these other places, I forgot the Utica that's been interesting, obviously got to be under the right operators there.

Speaker 1

And so, kind of those four areas are areas where we're obviously keeping our ear to the ground, but are going to have a much higher bar to get things done.

Speaker 3

Yes, Neil, I mean, I think the one thing you have to take into account is the commodity environment we're in. I mean, commodity prices are relatively high. And so we generally stick to our knitting. We want resilient assets, right? You really want to focus on lower breakeven assets, especially in an environment like this because whatever the discount rate is, the sensitivity on the discount rate is going to be very different depending on if you see a pullback in prices as well activity.

Speaker 3

Not all returns are they might be underwritten alike, but the resiliency of them are different. And that's why you've generally seen us focus on higher quality assets in areas that are always active.

Speaker 7

That makes total sense. And then Nick, just secondly, maybe I'm trying to get an idea of how do you you gave some good ground game update as well as your dividend growth, you recently just talked about that. And I'm just wondering kind of going forward, how do you sort of balance the production and shareholder return growth?

Speaker 3

Yes, I mean, I think that is the special sauce. And I think that in general, we want to be were conservative by nature, Neil. And so I think that In terms of raising the dividend early, it's about $2,000,000 additional capital this year than we previously planned. I think the Board was very confident that were there. And we've obviously done a ton of hedging and de risking of the assets we bought over the past quarter.

Speaker 3

But I think over time, I think we view there is upside to dividends. I mean, I think you can easily look at the environment we're in today and say, well, why are you paying out a lot more capital? And I think it's because we're not just thinking about Giving everybody what they want right away versus being a good steward of capital and thinking about the potentiality of outcomes. And so I think we want to be purposeful. I think there is is there upside to our current dividend plan?

Speaker 3

Of course, there is. And we'll take that in stride as we achieve goals and as we get there. But I think we want to be careful. I also think and you've heard me say this quarter after quarter, but we really do think about Capital allocation and total return, which is that every personally, I love dividends. I love every time we pay a dividend.

Speaker 3

I am a significant stockholder. But at the same time, we want to see we want the flexibility to dynamically allocate that capital so that we can create more dividends for the future, not just as much as we can get today and so it's a fine balance. I think we've done empirical studies with our investors and I think that the view is that 1, a dependable regular dividend is the way to go. I think that's been proven out over the last year. I didn't That was very popular when I said that a few years ago, but I think people have come around to that.

Speaker 3

And I think the second thing is that you want something that's sustainable and has a path to grow and they want to see us grow our profits Because I think ultimately that's been the driver of why our stock has performed better than peers, not just because we're paying a dividend, but because we're providing a dividend and providing And as a non operator, we don't really run the same risk. We don't have the same inventory concerns that some operators may have and we don't affect overall supply.

Speaker 7

Perfect. Thanks, guys.

Operator

And our next question comes from Jon Abbot, Bank of America. Please sir, go ahead.

Speaker 7

Hey, good morning and thank you for taking our questions on a very busy morning. Yes, so in the opening remarks, There was some commentary related to seeing some contracts, potential costs going lower to contract moving lower as well as some operators potentially being squeezed as contracts sort of roll off. So how do you think about what are your thoughts as you sort of look at the Permian and the Bakken and maybe the Marcellus, as far as how you think costs play out next year for operators?

Speaker 3

Yes. I mean, I think that operators are always finding ways to be more efficient, drill faster and find ways to get more bang for their buck. And I think that Productivity improvement never really stops and so there's always some benefit to that. I think that you have to take the practical reality, which is that you've had the rig count come down, the completion piece, the fracking piece is the most it's 70% of the well cost, Right. So rig rates are down.

Speaker 3

Ancillary costs from tubulars to sand are down, water handling down. But at the end of the day, those really don't move the needle all that much unless the cost of completions go down. And that's really going to be dictated by the number of wells drilled in the rig count and the number of wells being drilled don't always foot with one another. Certainly, there's a lot of static costs in between there. And so you have to think about the commodity environment that we're in, right?

Speaker 3

We've seen commodity prices trough this year and then come back up. And so if overall levels are stable. And you do have inflation to labor and other costs over time. I think we view that costs are going to be relatively static unless something materially changes if gas prices, for example, were to stay weak for another year and you see gas activity falling off those completion crews may have to move and compete for services and you could see some further costs, but I don't think we necessarily want to count on that. And so I think that where we are now, I think things are stable.

Speaker 3

Our costs were up quarter over quarter, but that's a bit of a misnomer because it's really a function of the Permian making up a higher proportion Permian wells cost more. And secondarily, the lateral length on our wells were much are on a kind of per lateral flow base and agnostic basis that were relatively flat. I don't know if you want to add to that.

Speaker 1

That's the reason why we focus on partnering with the larger operators. The conversations that we're having right now and you've seen the rig levels fall, a lot of those guys are going back to Service providers laying down rigs in an effort to kind of keep costs low and if you're running 17 to 20 rigs or whatever it might You can still keep and maintain your operations plan, but still be able to kind of flex your muscle and We've got to manage the volatility. I think Nick mentioned it last quarter on the call. If commodity prices go higher, then we'll expect see well costs do the same and likewise we will see a gap down then something has got to give there. And I think as we manage All of this volatility, we're going to stay conservative, especially as we're going into 2024 planning.

Speaker 7

Appreciate it. And then for our follow-up question, I think this is for you there, Chad, is just now with the acquisition with the deals that you've done, how do you see the trajectory of cash taxes over a multiyear basis at this period of time for Northern?

Speaker 4

Yes. I talked a little bit about it on the last call, addressed in my prepared remarks. I mean, it hasn't really moved. We contemplated Novo In that last year, we kind of knew what we had. So I think it's still a 2024 item.

Speaker 4

It's going to be to a lesser extent in 2024 and then obviously it's going to be a bit more fully loaded

Speaker 8

Ladies and gentlemen, I apologize for the technical difficulty. We will move on to our next question, which comes from the line of Paul Diamond with Citi. Please proceed with your question.

Speaker 9

Hi. Good morning, Alan. Thanks for taking my call. Just a quick one for me. Talk a little bit about the shifting CapEx.

Speaker 9

I just wanted to get your Any idea on how that goes forward into 2024? Should we think about this as more of a quickening of cadence over the course of the year? Or is it something that's more that there was that one time opportunity Ross kind of brought that block forward.

Speaker 3

It's a little bit of both, Paul. So I mean, I think we saw some kind of 2024 pull forward and obviously some ad hoc capital. I think so in a sort of in a vacuum, it's in many ways a pull forward of 2024 activity. I think we still look at 2024 and our target CapEx is sort of what we want to target. And I think, look, I think we can address 2024 without explicitly endorsing.

Speaker 3

We have not guided or anything like that. But we've looked at the 2024 ranges of consensus from sell side analysts. I think it's around 111,000 to 117,000 barrels a day equivalent and call it around 840,000,000 of CapEx. And I said, I would say based on Current pricing, etcetera, I think those are very plausible. I think the reason that we wait Until the reporting year end, before we share guidance is, first, I think and foremost, and this is important to your question, is that we're return driven, not growth or production driven.

Speaker 3

So we want the time to take a look at all of the drilling proposals and projects in front of us And then look at the timing of those and everything from completions to overall cost to provide the optimal plan. I do think those numbers are achievable though. And to the extent that we produce less and spend less, obviously, we generate More cash to the extent we spend more, we'd likely produce more, but generate less near term cash. So we'll make allocation judgments for optimal total return, whether we feel we have those projects that meet our hurdles. But I will say given the opportunities we're seeing every day, It's always a balance of meeting what we say we're going to do and juxtaposing that with our fiduciary duties to grow and deliver profits.

Speaker 3

So I also just as a side note, one of the things that I always am concerned about is that we will report our year end in in February and a lot can change in the commodity market between now and then. And so I don't think we want to be in a position where we have to do this twice. And given how volatile it's been and given how wacky the macro has been, it's never been more important to do this once and to do it right.

Speaker 8

Thank you. We'll move on to our next question, which is coming from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Speaker 10

Good morning, Nick, Adam and Chad and the rest of the NOG team there. Nick, I want to go back. I'm not sure it was Comments that you made or that Adam made either in prepared comments or earlier in the Q and A. But you referenced about how interest rates are higher And that moves the hurdle rate up across the board. And I'm curious, I've talked to some other Companies who are active in the A and D market and they have mentioned that there's a little bit of an issue between or what they were saying is a little bit of issue In the bid ask spread, in that ask, the ask side hasn't really or had not really adjusted for this higher interest rate And consequently, you need to use a higher discount rate on the PDPs.

Speaker 10

And so I'm curious if you are seeing that. And if so, if there's any Moving to a resolution or any other dynamics that may be surprising given the move in the risk free rate.

Speaker 3

Yes, I mean, I don't think I've ever met anyone who didn't think their children were more beautiful than everybody else. So is that a surprise to me that the social issues around A and D are the most important and most difficult to come over, which We feel like we generally have a pretty good pulse of where things are going to trade for and what they're worth. But you can lead a horse to water, you can't make a drink and we spend a lot of time banging our heads against the wall with people who have wildly unrealistic expectations. You've seen a flurry of M and A this here at the operated and operated side, but there have actually been a number of failed processes that we've seen go dormant just because people had completely ridiculous assumptions of what their assets were worth. And so that is the thing we have to navigate.

Speaker 3

And honestly, a lot of times on the front end will decide or not decide to participate in something because of the counterparty and whether we think they're a realistic seller. I mean, look, I mean, look, really good assets are going to still sell for good prices and weaker assets are going to get weaker prices. But I think, I don't know, that's the art of the deal.

Speaker 1

Different facing stuff, right. I mean, I think we try to be as transparent as we can in order Educate our current parties as to where we are coming from. Maybe that's the way that you help bridge some of that bid ask spread in terms of kind of the overall expectations that Nick alluded to, but yes, that works.

Speaker 3

Yes, I

Speaker 1

mean 30%, 10% of your time.

Speaker 3

Yes, I mean, 60% of the time, I'd be remiss if I didn't feel a movie quote or So I'm always reminded that the movie Trading Places and he's trying to pawn his watch and he says, well, Philadelphia is worth $50 and so we deal with that every day.

Speaker 8

Thank you. Our next question is coming from the line of Donovan Shafer with Northland Capital Markets. Please proceed with your question.

Speaker 5

Hey, guys. Thanks for taking the questions. I want to start off with the ground game. So it seems like you see simultaneously a lot of opportunity there, while also not a lot of competition. So it sets kind of the economics and opportunities up really attractively, while at the same time, like what you've talked about with larger kind of more of a low in larger package deals and some of those bid ask spread stuff on larger M and A.

Speaker 5

So I'm curious, Like, so my understanding is maybe what's going on with the ground game is it's like People get into AFB and they've got to make a decision quickly. And if it's an operator or someone with a lot of kind of different irons in the fire and a limited budget they planned for this year, If there's an acceleration in activity, then they're not ready to pull the trigger on all those AFEs or consent to them. And so it kind of becomes almost like a scramble. And so maybe there's more of this scramble that's relevant to like the ground game kind of AFE market And then people dealing with limited budgets, maybe some of that runs up against ESG stuff where less capital is maybe not as quick to respond to better commodity prices and all that. So that's kind of my understanding.

Speaker 5

So just can you confirm like is that what you're seeing and that's kind of what is happening with the ground game or are there other dynamics that are making it so particularly strong right now?

Speaker 1

I think directionally, you've got one of the themes there, right? You've got operators that have shareholder return requirements, Dividends, buybacks, they want to drill their own wells, whatever it might be. And then they've got their own set budget and Different operators, Andrew, they're non op in different ways. Some of those folks are packaging it up and selling it. Some of them are Selling them the well proposals as they get them and then you've got other operators in order to manage everything, what I kind of alluded to on the Q2 call, where They've got maybe 2 obligation wells, but it makes more sense to do cube development and they want to drill 6.

Speaker 1

Well, how do you manage capital there or you go find the non op partner sell on your interest, get a carry or whatever, a promoter or whatever it might be And you drill additional wells in that regard. So I think that's definitely a theme that we've seen. I don't know that it's Certainly changed in the short term. We have seen that forever. I would also add On the competition side of things, there's definitely competition.

Speaker 1

It's just what level of competition are you dealing with, at what size of transactions and that goes back to the comments that we made earlier on the concentration, number of wells, Average working interest, all that good stuff. And so, you've got a handful of different dynamics that are playing, you've also got what funds are coming into the year. Gangbusters generally were not nearly as successful on the ground game on are on the front end of the year where everybody is kind of flush with cash and they've got their budget set and they want to deploy it. And then by the end of the year, everybody's going to shot their bullets, but the AFEs and the drilling rigs don't come and you've seen some of that in our Q3 reporting here. So it ebbs and flows, right?

Speaker 1

And it's going to be the same thing with commodity pricing. I think It's almost comical when we see oil rip north of $90 to $95 a barrel. Our competition are getting outbid 2 to 3 times and then as soon as everything pulls back, everybody starts running for the hills, but it's Just a function of the market, some things can be explained, some things can't.

Speaker 3

Yes. I mean, I think the 3rd quarter success in the ground Donovan is really predicated on the 2nd quarter weakness in oil prices. So the bulk of those transactions are being worked on in the second were likely closed in early Q3 and you really see the whites of the eyes of people when crude is 60 here in the 60s or low 70s in today's cost environment and that's when we tend to be the most successful. And then conversely, to Adam's point, a month ago, it's accrued in the '90s. We're shaking our heads at where we see things transact, and

Speaker 8

Thank you. Our next question is coming from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Speaker 10

Nick, apparently, I had a copyright infringement by Hey, the follow-up question I wanted to ask was, you I think Adam mentioned in you're talking about the A and D opportunities there. I think you said that Something surprised you of what you're seeing coming out of Appalachian, especially in light that you guys have been really active in the Permian in the last call 12 or 18 months. But what is surprising about what you're seeing in Appalachia now? And Is that kind of maybe moving back into focus for you guys?

Speaker 3

Yes. I mean, I don't think it ever went out of focus. I think last year, we bought the asset and gas basically ripped from day 1, which made it more challenging, especially gas, which is even frankly more volatile than oil, more cyclical, buying we looked at a handful of things last year and just could never get comfortable that buying stuff in a $6 environment was a good idea. But like the fact is, it's been bad for the bulk of this year and suddenly dollars start to become a lot more precious to Those counterparties and it's shaken loose some activity and there are a lot of exciting things out there. There are also A lot of sort of special situations there where some of the more creative structures that we've done in recent times can be very appealing to groups that may not want to sell themselves entirely and things like that.

Speaker 3

But I do think we have to be are naturally more structured in Appalachia. The land structure of Pennsylvania in particular is very different than can say New Mexico or North Dakota. So it does quote narrow the field in terms of how we structure these things. But I think at the end of the day, when it comes to non operated interests, many operators may want to control all of that, but then when they're bleeding money, suddenly those just become a real thorn in their side and they need a source of capital. So I think we've been reviewing I think Everything under the sun in terms of structure there, but I think we're probably a little bit more optimistic and I think we take it each day, so don't take it with a grain of salt, but that we can find ways to grow that position over time.

Speaker 1

Yes. I think there was interest last year, but going back to the whole bid ask Right, right. I mean, volatility is going to widen that significantly from a seller's viewpoint and a buyer's. And so You've kind of had things settle down a little bit, and so there's maybe a little bit of a backlog. And so now I think we're having some additional conversations with counterparties were it really didn't even make sense to have those conversations in the past periods.

Speaker 4

Yes. Matt, I

Speaker 3

think we want things that if gas goes back to $2.50 still work. I mean, it doesn't have to be pretty, but they'll work. And a lot of assets that tend to come for sale when gas $6 look great, but there's the undeveloped has no value in an environment like this. I think that's been honestly the challenge in the Haynesville. It's an amazing play.

Speaker 3

But ultimately, you want to be in an environment where you can have some confidence in the outlook. And I think the strip certainly gives you that confidence, but spot price has not. I mean, obviously, it's been a little bit stronger of late, but

Speaker 4

I think that should get

Speaker 3

you there, if that makes sense.

Speaker 10

Got it. I appreciate that in detail. Thanks, guys.

Speaker 8

Thank you. Ladies and gentlemen, that concludes our question and answer session. I would like to pass the floor back over to Nick O'Grady for concluding remarks.

Speaker 3

Thank you again for joining us today. We appreciate your continued support and look forward to touching base with you in the coming days weeks. This is the way.

Speaker 8

Thank you. Ladies and gentlemen, this does conclude today's teleconference. If you would like to access the digital replay for today's call, please dial 877 are 660-6853 or 201-six twelve-seven thousand four hundred and fifteen and enter access ID 13,740,092. Once again, this concludes today's teleconference. We thank you for your participation and you may disconnect at this time.

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Earnings Conference Call
Northern Oil and Gas Q3 2023
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