Northern Oil and Gas Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 13 speakers on the call.

Operator

Greetings, and welcome to the NOG's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. The question and answer session will follow the formal presentation. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Evelyn Inferna, Vice President, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Good morning. Welcome to NOG's 2nd quarter earnings conference call. Yesterday after the market closed, we released our financial results for the Q2. You can access our earnings release and presentation on our Investor Relations website atnoginc.com and our 10 Q will be filed with the SEC within the next few days. I'm joined this morning by our Chief Executive Officer, Nick O'Grady our President, Adam Derlim our Chief Financial Officer, Chad Allen and our Chief Technical Officer, Jim Evans.

Speaker 1

Our agenda for today's call is as follows: Nick will provide remarks on the quarter and on our recent accomplishments then Adam will give you an overview of operations and business development activities and Chad will review our financial results and walk through updates to our 2024 guidance. After our prepared remarks, the team will be available to answer any questions. Before we begin, let me cover our Safe Harbor language. Please be advised that our remarks today, including the answers to your questions, may include forward looking statements within the meaning of this 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.

Speaker 1

Those risks include among others matters that we have described in our earnings release as well as in our filings with the SEC including our annual report on Form 10 ks and our quarterly reports on Form 10 Q. We disclaim any obligations to update 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. Reconciliations of these measures to the closest GAAP measure can be found in our earnings release. With that, I'll turn the call over to Nick.

Speaker 2

Thanks, Evelyn. Welcome and good morning, everyone, and thank you for your interest in our company. I'm going to change things up this quarter by answering 5 key questions. Number 1, so how's it been going? On our Q4 call and several before that, I have spoken about the importance of delivering growth and profitability over time.

Speaker 2

I'd like to use that framework once again and put the results from the Q2 into context. Our Q2 adjusted EBITDA was up 31% year over year and 52% versus 2 years ago. Our quarterly cash flow from operations excluding working capital was up 33% year over year and about 48% versus 2 years ago. We achieved outsized growth per share despite commodity prices that fluctuate. Oil prices were a bit higher and gas price a bit lower than a year ago, but 2 years ago oil prices were over $20 higher and gas prices over triple the current price.

Speaker 2

Even more impressive is the fact that despite our growth in a volatile commodity price environment, our LQA debt ratios have stayed in check-in the low 1.1 range. This range is actually lower than a year ago. So in summary, our per share metrics continue to rise throughout the cycle supported by a low leveraged and strong balance sheet. While growth is important, returns and capital efficiency are paramount. Our return on capital this quarter was approximately 25%, impressive when taking into account the step up in capitalization we experience every time we make a significant acquisition.

Speaker 2

In the last year, our return on capital employed was over 28%. That was 14% higher than the average of our 16 company peer set. And for business context double that of the average public non operators in our peer set. Within our broader peer set, it shows that our business model allows for superior capital allocation, but I bring up other non operators to show that from a managerial and asset perspective, we're also doing it better than others within our own niche. Our company continues to be focused on the same simple philosophy, finding ways to sustainably grow profits per share through cycle and over time for our investors.

Speaker 2

We believe that is the path to driving long term share price outperformance. While oil and gas prices go through cycles that can and will affect our profits, again, it is our job and we will find ways to grow the business through such times. With our assets performing well, solid organic growth in the pipeline and recently announced acquisitions, our business is poised to grow profits and cash flow further. Number 2, so what does that mean for you? We haven't even closed on our XCL or point transactions, but based on where the business is year to date and our confidence in the outlook, we will be recommending a mid year bump to the dividend.

Speaker 2

Additionally, we've been active in the first half repurchasing shares and have renewed our share repurchase plan. We are very discerning about when we repurchase shares and have had a track record of entering the market during periods of value compression and when we believe the market has understated our growth potential. And hence, we've had the opportunity in the first half of twenty twenty four. We prioritize that over dividend growth in the short term, but that won't always be the case as our increased recommendation should also show our investors. Let me be explicitly clear.

Speaker 2

We believe there is additional capacity for growth either in dividends or in future buyback capacity, but we are also remaining conservative and dedicated to managing leverage carefully as we have done meticulously over the past 6 plus years. We will sit down with the Board during our regular review in Q1 'twenty five to discuss a further increase to the dividend, additional buyback capacity and obviously ensuring that our balance sheet remains strong and is on a path to getting stronger after the outlay of the capital for the point and FCL acquisitions. Number 3, what's behind the Uinta? In June, we announced our largest transaction ever, the co purchase of XCL Resources Uinta Basin Assets with SM Energy. For many investors, the Uinta is less well known than the Marquis shale place.

Speaker 2

In the past 4 years, however, it's been amongst the fastest growing oil place in the country. I won't mince words when I say that personally I have never been more excited about a transaction during my tenure here at NOG. The benefits of this asset will pay huge dividends for our investors over the next decade. The facts are simple. You have a multi stacked pay asset where unlike the Permian, much of the exploration was not allocated value in our acquisition, providing upside for our investors, even as many of these benches have been proven out by other operators.

Speaker 2

When planning with SM, we put forth very conservative cost, spacing and pricing assumptions. The economics of the wells are very similar and competitive with those in the Delaware Basin in terms of productivity, but with the cost structure of Midland Wells and an extremely high oil cut with high quality crude that is exceptionally valuable. And while the one knock on the play is the higher cost of oil takeaway, the logistical changes that have taken place over the past few years are less well known. Whereas once the oil was captive to a handful of local refiners, there is now easily expandable rail be ways be ways to cut the transport costs further as well. Even when accounting for the higher transport costs, the economics compete favorably with anything in our portfolio.

Speaker 2

And over the next several years, I think our investors will come to appreciate this asset more and more. And we believe it will pay dividends in the years to come both figuratively and literally. Number 4, how is

Speaker 3

the future looking? We find the business in the

Speaker 2

catbird seat as we hit mid year. We have come through some of the heaviest spend periods over the past few quarters, which has required some patience from our investors. And as you see in the results today, that's converting into significant free cash flow now. Our balance sheet debt ratios are ahead of schedule and more than half of Q2's turn in line activity will actually have more impact on Q3 volumes, so we see a very strong outlook for the base business as the year progresses even as our capital commitments stabilize. Organic activity on our acreage has also been very healthy and as you've seen we've had success in all facets of our business including the ground game and significant bolt ons.

Speaker 2

We're seeing a renaissance of sorts in the Williston with longer laterals and a notable increase in refrac activity as operators are finding ways to maintain and even grow in our legacy basin. In 2023, we raised equity without announcing an acquisition for the first time in my tenure here at NOG, something we didn't take lightly. In marketing our offering, I told investors that, We were getting ahead of the opportunities in front of us and believe it sets the stage for over $1,000,000,000 worth of acquisitions on the balance sheet in just the next year. Here we are 9 months later and we have deployed $900,000,000 through 2 Delaware transactions, one Utica transaction and our Marquis Winters transaction. Our balance sheet remains in great shape and we still have capacity within our framework

Speaker 4

to do more if the

Speaker 2

right opportunity arises. We are people that believe in doing what we say and when we raise that capital, first of all, we believe we have the opportunity set to put it to good work. And secondly, we wanted to be in a position to deliver accretive growth to our investors on the other side. And I'm proud to say I believe we've done just that. These transactions combined with our other organic projects have us poised for year over year per share growth in 2024 and in 2025 regardless of the commodity strip, something few companies can match in the space.

Speaker 2

Number 5, so what's next? In an era of substantial industry consolidation, we've been at the forefront of the trend in our niche and what we've created in just the past few years is incredibly valuable and not always fully appreciated by our investors. An example would be EQT's recent non operated asset sale in Appalachia. It implies a 3 to 5 times or even greater value for what we purchased in the Marcellus just a few short years ago. We're proud of what we've accomplished.

Speaker 2

We believe we've been superior capital allocators and been ahead of the curve in terms of strategy. But as I mentioned earlier this year, we also believe the best is yet to come. People then ask us what is the end game. As a fiduciary, we don't get to answer that question. There is no end.

Speaker 2

Our goal is to never stop growing our profits and ultimately the value of the stock for you. Maximizing value is the main goal, however, that can be achieved. That's how our Board motivates us and that's how we're aligned. From a competitive landscape, we would continue to reiterate what we have said ad nauseam quarter after quarter, which is that scale begets scale and that we stand on our own. Basic business rules apply in our line of work, barriers to entry are real and those focused on small deals, on small assets with small capital commitments face significant competition.

Speaker 2

But the transactions you have seen us participating in the creative, complex and customized solutions are largely those where we simply stand alone and those ones where return potential is much higher, where long term upside with our operating partners is higher and where you'll see us focus our efforts in the long term to the benefit of our stakeholders. That concludes my prepared remarks. So I'll close out as I always do by thanking NOG Engineering, Land, BD, Finance and Planning teams and everyone else on board, our investors and covering analysts for listening and our operators and partners for all the hard work they do in the field. We hit mid year 2024 in great shape. And as always, our team is laser focused on delivering optimal total return.

Speaker 2

That's because we're a company run by investors for investors. With that, I'll turn it over to Adam.

Speaker 5

Thanks, Nick. As usual, I will kick things off with a review of our operational highlights and then turn to our business development efforts and the current M and A landscape. During the second quarter, we saw production increase to over 123,000 BOE per day driven by steady turn in line activity and some increased Permian, Utica and Marcellus activity. We turned in line 30.1 net wells with the Permian making up more than 2 thirds of the activity during the quarter. The most important comment I would make in terms of Q2 TILs is that over half of them occurred in the month of June and the bulk of those wells were cleaning up and contributed very little to volumes.

Speaker 5

They will have a much larger impact on Q3 oil and total volumes and this bodes very well as we continue on track through the year. Thus far in 2024, we have seen steady activity including robust organic activity, increased refrac proposals and continued production momentum from our various JV projects as a significant portion of the capital we deployed in the past 9 months converts into sales. Overall, we expect a relatively consistent cadence in terms of tills for the balance of 2024, though Q3 will likely be lower because of the pull forward late in Q2. This will not have an effect on production as many of those wells are still ramping. We see robust activity in Q4 both in terms of pills and additional refrac AFEs in the Williston.

Speaker 5

In the second quarter, we consented to another 16.7 net wells, a 46% increase from Q1 on a net basis and 20% increase

Speaker 3

on a

Speaker 5

gross basis with 197 total consents. This points out that we saw larger average working interest in Q2 as well proposals almost doubling the average working interest from Q1. Economics remain strong as we consented to 94% of our well proposals on a net basis, while we continue to manage the portfolio non consenting those that do not meet our hurdle rate requirements. It's worth noting that the working interest average in our non consents is roughly half that of our consented average, which is a testament to our active management. We focus on purchasing more lands in the best areas and our lower working interest and low value areas tend to be the areas where we non consent.

Speaker 5

In terms of costs, while we have enjoyed cost reductions from prior levels on some of our major joint ventures, we are seeing stable costs portfolio wide. Absent any major changes to commodity prices, we are not anticipating any meaningful changes to development costs going forward. The acquisitions we completed in the past few years continue to shine and the capital efficiency is beginning to bear fruit as our free cash flow more than doubled in the quarter and should remain strong as we turn to the back half of the year. At the same time, we continue to see strong AFP activity on our acreage that should keep our production stable over time. Shifting gears to business development and the M and A landscape, the Q2 highlighted another banner quarter for NOG both on our ground game and in larger M and A.

Speaker 5

In a shift from Q1, our ground game in the second quarter saw a market pickup as we focused on bespoke larger working interests. By doing so, we've been able to maintain our full cycle hurdle rates and avoid the more commoditized smaller scale market with lower barriers to entry. In total, we spent approximately $25,000,000 in capital on the ground gain, just under $11,000,000 of which was acquisition capital, acquiring 6.1 net wells and approximately 1800 net acres. Year to date that brings us to approximately 6.7 net wells and almost 3,500 net acres in total. During the quarter, we also signed our largest transaction ever expanding into the Uinta Basin in a joint acquisition of the XCL Resources assets with SM Energy.

Speaker 5

Similar to our approach with Novo and Forge, we partnered with SN to purchase a large scale operated asset coupled with a long term joint development agreement and area of mutual interest. This asset has a very long life, tremendous upside, economics that compete with anything in our existing portfolio and we see significant operational upside from SM stewardship as well as future exploration potential from the multi stack benches. Specific to XEL within our AMI, we are already working on acquisition opportunities, which would create additional optionality and future upside. Subsequent to the closing of the quarter, we have continued the momentum partnering once again with our friends at Vital agreeing to purchase the Ward County Delaware assets Point Energy Partners for $220,000,000 net to NOG. Similar to XCL and our past transactions, we also have a long term joint operating agreement in place with Vital and look forward to many years of development on the asset.

Speaker 5

As we've seen with our forged JV, we think Fido can bring significant improvements to go forward performance on the point assets. As all these transactions detail, we continue to build scale, but scale combined with a key focus on returns. As Nick noted, our return on capital continues to be best in class all the more impressive given how acquisitive we have been. It's a testament to the rigor of our acquisition underwriting, our capital allocation methodology and the quality of the properties that we seek and ultimately acquire. The overall landscape continues to be robust and we see another wave of divestitures coming on the back end of the large scale M and A that has transpired over the past 18 months.

Speaker 5

Many large operators are looking to clean up their portfolios or in some cases their balance sheets and we expect NOG may find some significant opportunities as these processes emerge. Some of these parties have reached out directly to us seeking out customized solutions and we will continue to have those conversations. As I've described before, these off market transactions can be tailor made for both parties and with our growth in size and liquidity could be as large or larger than any of our recent transactions. Simply put, the options to deploy capital on top tier assets is in no way slowing down for NOG. Depending on the needs and the wants of the operator, the solutions could include simple non op portfolio cleanups, joint development agreements, co buying operated properties, minority interest carve outs of operator positions or any combination thereof.

Speaker 5

At NOG, we continue to demonstrate unmatched execution with win win solutions through creativity and alignment with our current and prospective operating partners. By focusing on returns first, growth has become a natural output as we continue to compound capital for our investors and remain singularly focused on putting our stakeholders first. With that, I'll turn it over to Chad.

Speaker 3

Thanks, Adam. Our second quarter results did not disappoint and were one for the record books. Average daily production in the quarter was more than 123,000 BOE per day, up nearly 4,000 BOE per day compared to Q1 and up 36% compared to Q2 of 2023, establishing a new NOG record. We continue to see outperformance on our recent Unica acquisition as well as our Marcellus assets that helped drive the bean on production. Oil production came in at just over 69,600 barrels per day, even over half of our Q2 net well adds occurred in June and contributed only modestly to our Q2 volumes, including our higher oil cut mascot project, which is still cleaning up, but bodes well as we entered the Q3.

Speaker 3

Adjusted EBITDA in the quarter was $413,000,000 up 7% sequentially and a record for NLG due to stronger well performance, lower costs and better oil realizations. Free cash flow of $134,000,000 in the quarter was higher sequentially and nearly tripled from the same period last year due to the strength of our underlying assets and the pull forward of activity in the prior quarter, which kept capital in check. We anticipate free cash flow to continue to stay elevated in Q3 and remain elevated for the balance of 2024 as the remainder of our TILs come online and begin to contribute to production and revenue. Oil differentials were better than our expectations at an average of $3.55 per barrel below the lower end of our guidance. Williston differentials trended down in the 2nd quarter as we anticipated and Permian differentials were also improved normalizing for winter months.

Speaker 3

We also saw better realizations from our joint development projects. Natural gas realizations are also ahead of schedule at 107% of benchmark prices for the quarter, materially ahead of our forecast due to better than anticipated natural gas prices in Q2 and higher NGL price realizations. This was partially offset by weaker Appalachian differentials and negative Waha gas for most of the quarter. Overall for the year, however, we believe differentials will trend towards our revised guidance range, especially now that gas has returned to lower levels. LOE was down 7% sequentially to $8.99 per BOE, reflected the continued shift of our production to the Permian, which carries a lower LOE compared to the Williston.

Speaker 3

LOE also benefited from the easing of weather related shut ins from the prior quarter. As we previously discussed, we anticipate LOE per BOE to gradually decline as production ramps from our joint development projects. Additionally, our recently announced acquisitions will add more production with materially lower LOE. These assets are resilient and low cost and the XEL asset also brings very high oil cuts. Production taxes were 8.7%, slightly below our guidance as gas production ramped in all basins, as gas typically carries a lower production tax rate.

Speaker 3

We anticipate production taxes to trend even lower after the addition of XCL as the winter comes with a lower tax rate. On the CapEx front, we invested $237,000,000 inclusive of ground game in the quarter. Of the $237,000,000 59 percent was allocated to the Permian, 37% to the Williston and 4% to Appalachian. We continue to experience a pull forward of organic activity driven by the strength in oil prices. However, given the level of completion in our D and C list, the higher total count in Q2 did not have a material impact on total CapEx for the quarter.

Speaker 3

With that said, if the strength in oil prices persists, CapEx may trend towards the higher end of our revised guidance range for the year. Some of this capital would be driven potentially by 2025 turn in lines that could be accelerated into 2024 and by additional AFP activity for 2025 turn in lines we anticipate in the back half of the year. This will obviously be dependent on commodity price environment, materially weaker oil prices will of course slow operator activity. With that said, if we did see higher CapEx, it would be accompanied by higher production as our D and C list is actively converting to tills and spuds and drawing down our working capital. Specifically on the working capital front, excluding the impact of derivatives, we have seen an improvement of approximately $65,000,000 year to date.

Speaker 3

As a result of the improvement in working capital, we reduced our borrowings on our revolving credit facility by $65,000,000 during the quarter. As of June 30, we had over $1,300,000,000 of liquidity comprised of $33,000,000,000 of cash on hand, including the deposit for XCL and $1,300,000,000 available on our revolving credit facility. At quarter end, net debt to LQA EBITDA was 1.1 times. We expect the ratio to tick up modestly upon the closing of our recently announced transactions, but trained down throughout 2025 solidly to our stated target. As Nick discussed earlier, we actively repurchased shares in the first half of the year.

Speaker 3

Year to date, we repurchased over 1,400,000 shares or approximately 55,000,000 of our common equity at an average price of $37.99 We are committed to allocating capital to share repurchases where there is a marked divergence between our absolute and relative performance. However, given we are funding our announced acquisitions with the revolver, we will be mindful of getting leverage back to our stated target. Given the outperformance of our wells year to date and the anticipated closings of our pending acquisitions, I'd like to address our adjustments to guidance. Note this guidance assumes an October 1st close for both acquisitions We will give an update on our Q3 call if anything changes materially during the closing processes. We are raising total guidance by 4% at the midpoint to a range of 120,000 to 124,000 Boe per day.

Speaker 3

Obviously, we only get around 1 quarter of benefit from our new deals. So this reflects some of the outperformance we've seen year to date, particularly on gas production. We have also increased guidance on oil production at the midpoint by 4% to a range of 73,000 to 76,000 barrels per day, reflecting the higher oil cut of the Uinta endpoint relative to our corporate average. Our turn to line guidance moves up to a range of 93 to 98 net wells, the spuds going to a range of 73 to 78 net wells. With respect to unit costs, given the unique nature of the Uinta, we are lowering LOE by 3% at the midpoint of the range of $9.15 to $9.40 per BOE.

Speaker 3

Production taxes should also trend lower to a range of 9% to 9.5 percent and we are raising the high end of our oil differential to $4.85 per BOE to reflect higher transportation costs in Newanta and we are increasing our gas realizations to a range of 87.5% to 92.5% to reflect better NGL and natural gas pricing. With respect to DD and A, we are tightening the range to $16.50 to $17.50 per BOE. Our overall cash and non cash G and A per BOE should both decline demonstrating the benefits of increased scale and the inherent operating leverage of our unique business model. That concludes our prepared remarks. I'd like to open the call up to questions.

Operator

Your first question comes from the line of Neal Dingmann with Truist Securities. Your line is open.

Speaker 6

Good morning, guys. Nice quarter and outlook. Nick, my first question maybe for you to add and is just on deal parameters specifically. I'm just wondering maybe how things have changed now with these larger deals. Could you talk about how your requirements when you think about sort of payback periods, HUD value, undrilled location value, all that sort of thing, how that sort of shakes out today versus maybe a year or 2 ago?

Speaker 7

Daniel, I don't think anything's really changed. I mean, I think in general over the last 3 years, we have raised our hurdle rates materially. Just I would say as the cost of capital rose, we've generally increased our hurdle rates and that's been something we've consistently done since, call it, 2020. But otherwise, I think we generally look for a balanced portfolio, which is that we want we look for at a package level self funding assets where we can, but we will look for there are specific things where if it is an asset which is in development that can be okay too. I don't know, Adam, if you want to comment to that.

Speaker 5

Yes, I think it also dovetails into the governance straight and the asset specifics in that regard. And so if there's ways that we can get comfortable with the underwriting with kind of the go forward governance in order to maintain alignment and get that transparency that's all going to come into play, not only with the quantitative, but the qualitative review.

Speaker 8

Yes.

Speaker 7

And I think one of the questions we've gotten from our investors is just the difference between sort of the co purchase of assets with operators versus a traditional non operated asset and how you win. And I think it's just there are different paradigms to earning supernormal returns, right, versus how you underwrite, which is that on an unoperated asset, how you win is ultimately that we the undeveloped asset is you try to pay as little as possible on that undeveloped piece and ultimately be surprised by the future development, right, which is that the PUD value and what you're paying for, ultimately, you get future development costs at a discount, right? And that's the benefit of buying non operated assets at that discount. And what we've observed on the co purchase of those assets is that we've seen huge synergies from the vitals and from the Permian Resources, in which as they've taken possession of these assets, they've become much superior operators and they've cut costs and drilled better wells. And so we've seen huge upside in performance on those assets as they've been able to do better.

Speaker 7

And so we've seen increases in returns in a different way. So it's different ways to create the same types of upside.

Speaker 6

Well said. And then my second just on capital allocation specifically. You all maintain an active ground game to say the least and while continuing to even recently boosting the dividend and talk about shareholder return again, I'm just wondering, could you talk about I know they're not exclusive, but maybe just talk about how those 2 sort of play together?

Speaker 3

Yes, I

Speaker 2

mean, I think in terms of the ground game, I

Speaker 7

mean, I think it ebbs and flows. Obviously, there is a seasonality to it. I would expect as we get towards the end of the year, it tends to get a bit busier. I would imagine we see a bit of a it may start to get active towards the end of Q3 potentially, as budgets start to get tighter. And our ground game has evolved somewhat, which it has become a bit more bespoke and more generally more concentrated in the last few years.

Speaker 7

In terms of how it has happened, it's been a little bit chunkier in terms of the interests. But ultimately, in terms of shareholder returns, I don't think we view them mutually exclusive, Neil. And I think, as we mentioned in our prepared remarks, I think we'll sit down with the Board in the beginning of the year. We really do believe that the business has the capacity for additional shareholder returns, particularly on the dividend side.

Speaker 5

And Bill, the only other thing I'd add on the ground game is that it's also going to depend on kind of what the organic asset is pulling, right? So we're looking at that on a monthly basis and understanding exactly what the working interests are coming in at and that will also dictate whether or not we're leaning in on any particular opportunities on the ground game one way or another.

Operator

Your next question comes from the line of John Freeman with Raymond James. Your line is open.

Speaker 9

Good morning, guys.

Speaker 3

Good morning. Good morning, John.

Speaker 9

The first question I had, I saw that XCL recently closed on the Altamod acquisition. Just can you all provide any color on how that potentially impacts the original XCL purchase price, kind of any pro form a estimates, things like that?

Speaker 7

Yes. So that you're correct, John. So the FTC granted approval to XCL to acquire Altamont. And as part of that, that is within the AMI for SM and us. And so we will have the option to purchase those assets.

Speaker 7

What I can tell you is that we are under we are currently doing our analysis and review of those assets. And what I will say is we're very encouraged by what we see. And obviously, if we choose to exercise that option, respectively, obviously it would be eightytwenty. It would be a material add in terms of acreage to our position, but very immaterial in terms of capital.

Speaker 5

Yes. And there's a number of BSUs that are directly offsetting the position and that's kind of where the focus is.

Speaker 9

Got it. And then my follow-up question, when we think about the timing on those TILs coming on, over half of them come on June and then specifically on the mouse got wells that are taking a while to clean up. Now that we're basically through July, I'm just trying to get a sense on the Muscat wells. Are they like fully cleaned up? Are we still going through that process?

Speaker 9

I'm just trying to get a sense of whether you're going to get the full 3Q benefit from those Mass Cat wells or if it's going to drag a little bit more into the quarter?

Speaker 7

Well, I mean, you put 10,000,000 barrels of water into the ground, right? So it takes several months in a cube development to take it. So I would imagine by the end of Q3, you're going to be pretty I mean, Jim, tell me I'm wrong, but probably by the end of Q3, they'll be pretty much fully going. So you'll get, I would imagine by the end of August or September, they'll be at full capacity. But it takes what it takes.

Speaker 7

You're pumping out, call it like 30,000 barrels a day of water out of them. So it's going to take some time, but everything is going according to plan. You're not going to get all that water out, John, but it just in a cube development like this where you're doing all the zones, it's a massive project, right? So, everything is going about the way it's expected.

Operator

Your next question comes from the line of Scott Hanold with RBC. Your line is open.

Speaker 4

Hey, thanks. I have a question on M and A. Obviously, you guys have done

Speaker 10

a number of deals here

Speaker 4

over the last few years and it sounds like there's still some pretty decent visibility. You've got Ultomont, other things in the Uinta. Can you give us a sense of how you think about the balance sheet? I know I think it was Nick or Chad mentioned some of the stuff you felt you prefunded coming into earlier this year. But can you think about like as you think about moving forward in the balance sheet, any incremental transactions, how do you look at funding and where do you kind of like to see that balance sheet leverage at on a go forward basis?

Speaker 7

Yes. I mean, Scott, certainly within our framework, we have the capacity currently to do a significant amount more before we would bust out of our kind of self described framework, which is really kind of a 1.5 times. I mean, I think could we go slightly over that for a period of time if we were comfortable? Sure. Would we like to do that?

Speaker 7

No. But I think from a liquidity perspective, you could always bond out that capital if we really needed to. I don't think we feel compelled to do that at all just given the cash generation of the business at current. But I think look, the fact of the matter is with M and A, the timing is very unpredictable. So unless something was to come in the immediacy, if we roll the clock forward 9 months from now, as the business generates cash flow, quite frankly, we'll be able to handle more M and A on balance sheet without worrying about these types of things, right, because ultimately it's more a function of timing than anything else, right.

Speaker 7

I don't know if I could say it any differently than that, meaning like the way we model this out within a few quarters, we're right back to target. And so therefore, I don't really unless M and A becomes so substantial, that you'd really have to capitalize it in some other way. So it really it's more about the acute moment in time than it is absolute leverage.

Speaker 4

My apologies.

Speaker 3

Go ahead.

Operator

Once again, ladies and gentlemen, Your next question comes from the line of Donovan Shafer with Northland Capital Markets. Your line is open.

Speaker 11

Hey, guys. Thanks for taking the questions. So first, I just want to dig into the Arinta play a little bit. I'm not as familiar with that one in the more like current shale revolution type context. I know that from a more historical standpoint.

Speaker 11

So the different benches and things being developed there, is it more of is it really like a true sort of shale play? Or is it kind of a statistical play where as long as you put enough holes in the ground, you can feel good about the returns? Or is it going into something more conventional, but having an opportunity to exploit it with horizontal drilling, fracking and so forth? Any clarification there would be helpful.

Speaker 10

Yes. Hey, Donovan, this is Jim. Yes, I would attribute it similar to shale play, very similar to the Permian where you've got 4,000 feet of all these stacked zones. We do see that there is true separation. If you look at the oil that comes out of the different benches, they are different color, different grade.

Speaker 10

So you can tell that they are true standalone different zones. All of them have been proven from a vertical standpoint. It's just recently that they've switched to horizontal. The main target is what they call the lower cube. That's the primary Yulin Butte, Upper Wasatch that has been targeted most recently.

Speaker 10

They're now starting to target the upper cube, which is going to be your Garden Gulch, Douglas Creek. That's a little bit earlier in the stages, but those are the primary zones that are being targeted. You've also got deeper zones as well that are kind of early stages proven vertically, but not yet horizontally. We're giving no value to that. But that's kind of what we're seeing here from a geologic standpoint.

Operator

Your next question comes from the line of Charles Meade with Johnson Rice. Your line is open.

Speaker 12

Good morning to the whole energy team there. I want to actually pick up on where you just left off with that discussion of the Uinta. As I've tried to come up to speed on the play, some of the big players there, let's just say that they're maybe emphasizing other parts of their portfolio, but it looks like XCL and SM have been the most have given the most disclosure and are maybe the most aggressive in identifying the upside. So my impression is most of the development has been in that Ute and Butte. And I'm wondering if you could kind of say if that's your plan going forward for the next 12 months, if that's what you're going to target?

Speaker 12

And what any timeline is to target some of these other horizons with horizontal wells that have been historically proven productive in vertical wells?

Speaker 10

Yes. So the plan is primarily focused on the lower and upper cube. It's going to be a mix of both. We're not just drilling the Ueland Butte and Wasatch, we're mixing in the Douglas Creek as well. So we plan to co develop the upper and lower cube together.

Speaker 10

The deeper stuff is farther down the road. We'll develop that as we kind of see how these first couple of cubes turn out and then we'll go from there.

Operator

Your next question comes from the line of Phillips Johnston with Capital One. Your line is open.

Speaker 4

Hey, thanks for taking the question. I wanted to ask about your implied natural gas production guidance for the back half of the year. Sort of suggests that volumes will decline by more than 15% from the Q2. I know you had some EQT wells that led to some pretty strong growth in Q2, but it seems like the decline for the rest of the year is pretty steep, I guess, especially considering you've got some incremental gas in the door from these 2 acquisitions?

Speaker 7

Yes, that's right, Philip. So, it's really a function that our planned EQT development really came on. We had some deferred production from Q1 that came back on in Q2 plus our EQT wells for the year were completed, as well as some other Marcellus wells and our Utica project came online in 2Q. So that was as flush as we'll be. So that will be that really peaked out in Q2.

Speaker 7

So obviously that's over 100,000,000 a day of our production, which will be in decline. Obviously, you'll get the benefit of the other assets. And so you will have growth in the other basins. But that will really be the peak of the gas production for the year. So that is the drive.

Speaker 7

So that is correct. So our Appalachian production tends to go in waves. So it tends to be especially on our Marsalis asset where the development tends to be in the spring every year. And so there'll be another wave of development next year around the spring. So you'll have another surge next spring, but we're sort of done for the year.

Operator

Your next question comes from the line of Paul Diamond with Citi. Your line is open.

Speaker 4

Good morning. Thanks for taking the time. Just a quick one on kind of timing and cadence. Last week, Cory has seen kind of a pull forward of activity. I know you talked about a possibility that could continue to occur.

Speaker 4

Later half of this year, potentially pulling some 25 activity forward. I just wanted to know if you could talk about kind of if you see that as a more of a permanent compression or just a function of current market dynamics or I guess how should we be thinking about that going forward?

Speaker 7

Yes, Paul. I mean, I think we're a little gun shy. And so I think that's kind of where our heads are right now. I think, I guess what's the term once bitten twice shy. And so I think, as we've kind of pointed people to the sort of up kind of post the midpoint of our guidance, it's with the assumption that we'll see based on the AFE activity we've seen year to date that we'll continue to see robust AFE activity and the possibility of continued pull forwards.

Speaker 7

Now those pull forwards don't always account for additional accruals, but they can. And so the concept was that we would see potentially in the Q4 a combination of both pull forward of TILs and potentially 25 activity being pulled forward. And so that's kind of where our heads are now. It's not a given per se. And so that's why the band is slightly wider.

Speaker 7

But we have seen that and it will be price dependent. So obviously, if we were to see commodity prices take a nosedive, it's unlikely that that would happen. And that's why we really do want to see why we keep that band there. But that's correct. It could but I do think, if we see high 70s and low 80s, it is more likely to happen than not because that's the trend we've been seeing for the last

Operator

18 months. Your next question comes from the line of Noah Hengness with BofA Securities. Your line is open.

Speaker 2

Good morning all. I just wanted to ask on the refrac opportunities that you're seeing today and really what's driving that increase there and how you guys compare the refracs to maybe new drills in a similar place in the basin?

Speaker 7

Yes. I mean, I think it's been notable. I think, we view refracs as locational, right, which is that not all refracs are good. And it's important to understand that, which is that they are significant in cost, right? They can be 60% or 70% of the cost of a new well.

Speaker 7

But we have seen a pickup specifically in the Williston in the last few years. Historically, we have literally just budgeted in our workover budget. And as our analysts have been asking us why our workover budget kept going up, we realized that we had to start to break it out because it is productive capital. But I'll let Jim talk a little bit more about it.

Speaker 5

Yes. I can jump in here. I've got the stats in front of us. I mean, I think year to date we've received roughly around 30 gross refrac proposals and the bulk of that work is going to be done in the 3rd and the 4th quarters. It's also going to depend on whether or not it's an offensive or a defensive frac, meaning a defensive frac is coupled alongside new drills.

Speaker 5

So they're refracing legacy wells while they're drilling the new drills. And then you've also got kind of the offensive refracs and that's going to be effectively going into pretty much a fully developed legacy unit and then refracking those. That's going to depend on the depletion as well as the completion methodology. And so it's very intensive in terms of what our technical team is underwriting. But I'd say that probably 2 thirds of the refrac proposals that we've received in the Williston have been kind of through Grayson Mill and now ultimately Devon and you've seen some of their commentary there.

Speaker 5

So I think we're

Operator

Your next question comes from the line of Noel Parks with Tuohy Brothers. Your line is open.

Speaker 5

Hi, good morning.

Speaker 8

Just looking at the this announcement you just had with Vital and taking additional position in the Permian. I'm just curious in the M and A landscape of what you've seen the potential deals coming to you and so forth. Just wondering about your thoughts on sort of prolific, but still gassier parts of the Delaware, somewhat further south. Just wondering how much you're seeing out there in the market and whether you're kind of what your appetite is in that part of the play, all things being equal?

Speaker 7

Yes. I mean, as you go south in the Delaware, it doesn't mean it's all bad, but the geology becomes very complex, right? You have a lot of faulting, specifically in Reeves County. And as you get into Vegas, it's a very challenging geology. So there are people who know how to do it.

Speaker 7

It's operator by operator, and so it can be done. But I would say it is definitely something you wouldn't go with as you would say now with a hammer but with a scalpel. And so I think it's not something that's out of the question. It's just something that requires more of a fine tooth comb. Certainly, it's a different paradigm.

Speaker 7

But what I would tell you is that we're focused on quality, but I would also tell you that inventory in general in the country is changing and some people would tell you that they're looking for the next wave of inventory and that is something that we have to adapt in the world, which is that ultimately we have to recognize in the United States that sticks are becoming more and more scarce. And so this may be what is the new paradigm in a few years. And so we'll evolve as the market does.

Speaker 5

But dovetailing off of that and I think it's evident in terms of what we've seen in Williston with operators refining completion techniques and stepping up. And if we're focused on rate of return, we need to continue to monitor the dynamics and the changes there. We've obviously looked in Southern Delaware before and there's have been a number of opportunities that haven't necessarily fit the bill. But as operations change hands using forage as an example, we've seen a 13% reduction in well costs and we've seen early performance on underwritten type curves that have exceeded by roughly 20%, right? And so if we start rolling those types of changes into acreage that otherwise didn't necessarily pass our hurdle rates, then maybe that changes in the future.

Speaker 5

And so that's why we're continuing to do our look backs both with our operating partners as well as the folks that were participating on a heads up basis. And if those things continue to change and we've got conviction in that, then that's something that we'll honor.

Operator

Your next question is a follow-up from Charles Meade with Johnson Rice. Your line is open.

Speaker 12

Thanks for letting me back in the queue there. Nick, I wanted to ask a question about the on these co purchase deals, the dynamics and the motivations of your partners. When I think about what they would look for or the advantages they get from partnering with you, I think about well, first off, they can kind of get the size of the deal where they want it. But truthfully, if you're taking a 20% cut, that's not maybe that big a delta. I think that I don't imagine that you're bringing a lower cost of capital or some significantly lower cost of

Speaker 4

capital to the

Speaker 12

deal. And I think that perhaps from the operator's point of view, they're reducing their LOE a bit by charging you some overhead. But what are the what do you think when you sit down with these guys, what is the

Speaker 7

They can't charge us overhead.

Speaker 3

What do you

Speaker 12

bring to the table for them? Say again?

Speaker 7

They can't charge us overhead. They do not. But

Speaker 12

Cannot, okay.

Speaker 7

No, I mean, you pay we paid the typical we pay LOED straight. It's just it's an undivided interest. But the answer is you hit at the same thing, which is that if it's cost of capital, it's very simple, which is that if you're a company and you are looking I mean, I can't answer the motivations for every company. So I mean, you're asking me to answer somebody else's question. But what I would tell you is that we're an oil and gas company, right?

Speaker 7

At the end of the day, we are certainly a financial owner in many ways, but we're not a financial entity. We're a permanent owner of the assets, right? We're not turning it into a security. So our cost of capital in some ways is higher, right? But if you're a private equity firm, your main goal is to own it for 5 years and then flip it, right?

Speaker 7

And you require a lot of maintenance and so your cost of capital might be lower than ours. But then at the end of the day, it's heads or tails, I win because I needed to be a security and then I need you to buy me out at the end and I need you to manage it and do all these things and then turn it around. Whereas for us, we're a true oil and gas concern from so from the operator's perspective, we're a great silent partner because we understand and we can underwrite alongside them. We have our own engineering team. We literally can sit down with them and we do our own underwriting, right?

Speaker 7

Number 1, our technical team become a great sounding board because they can sit there and say they know that we agree with them when we go through this process when we're going to purchase these things. But and so that we know we all agree. But number 2, for those partners, they can understand that when they're going to size these transactions, they're not stretching themselves financially, right? But if they take on more debt or they take on another financial party, they have to deal with that party at some point whereas we own it forever, right? And they don't have to worry about what we're going to do at the other end or buying us out or if something goes wrong in the case of a security in which that person says they have to be paid or that a VPP where in a VPP, I'm not sure you're aware, but if the volumes disappoint, you have to give them more volumes, right?

Speaker 7

So no matter what happens, you pay the man, right? And so ultimately, we wind up being a much better partner where we take risk alongside an undivided interest means we share in the benefits and if things go wrong.

Operator

Your next question is a follow-up from Phillips Johnston with Capital One. Your line is open.

Speaker 4

Hey, thanks for the follow-up. It's early to talk 25, I know, but just from a directional standpoint, it looks like consensus CapEx next year is around 9.75 which is pretty similar to this year. Just wondering if you guys would potentially envision a higher spend next year, considering your implied capital efficiency for this year's program has helped by about 20 more net TILs than what you have plans for net spuds?

Speaker 7

Yes. Phillips, it's a little early, but I would just say this, like looking at consensus so far, we haven't seen anything we really object to. But again, I don't want it's too early to truly opine on it, but so far we haven't seen anything that has terribly scared

Operator

us. This concludes the question and answer session. I'll turn the call to Nick O'Grady for closing remarks.

Speaker 2

Thank you for joining us today. We appreciate your continued support and look forward

Speaker 7

to touching base with you in the coming weeks.

Operator

This concludes today's conference call. We thank you for joining. You may now disconnect.

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Earnings Conference Call
Northern Oil and Gas Q2 2024
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