Northern Oil and Gas, Inc.

Greetings and welcome to the Northern Oil and Gas First Quarter 2020 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 operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Kelly, EVP of Finance. Thank you, sir. You may begin.

Thanks, Jesse. Good morning, everyone. We're happy to welcome you to Northern's first quarter 2020 earnings call. I'm joined here this morning with Northern CEO Nick O'Grady, our COO Adam Dirlam, our CFO Ted Allen, our Senior Vice President of Engineering Jim Evans, as well as Northern's Chairman Barama Crotty. Our agenda for today is as follows. Nick and Adam will give us some State of the Union type comments before turning the call over to Chad, who will recap Q1. Following Chad, Baran will wrap up our prepared remarks before we get into the Q&A session. Before we go any further though, 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 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 these 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, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During this conference call, we may discuss certain non-GAAP financial measures, including adjusted net income and adjusted EBITDA. Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued this morning. With that taken care of, I will hand the call over to Northern's CEO, Nick O'Grady.

Thanks, Mike, and good morning to everyone. In a similar manner to last quarter, let's get right down to it in seven points. Number one, the balance sheet. Northern's leverage profile continues to improve. We reduced leverage by a staggering $78 million in the quarter, including open market repurchases of our senior secured notes at steep discounts from par value. Since the first quarter ended, we've made more progress, particularly on our revolver. With the elevated activity in the back half of 2019, the working capital needs of the business were a material drag versus book cash flows in the fourth and first quarter. And as this reverses, we expect our deleveraging to accelerate. As of Friday, we've already paid down an additional $9 million on our revolver, have over $20 million in cash, and plan to pay another $10 million in the coming days as one of our bank tranches matures. In addition, since quarter end, we've eliminated another $6.1 million in principal of our senior secured notes, again at steep discounts to par. The senior notes are by far our largest maturity over the next several years, and through various methods, we have eliminated over 96 million of them in less than five months of this year. We expect to continue to ratchet down our revolver borrowings, in particular the second quarter end, and estimate we will have reduced over 10% of our total debt in just six months. In addition, our board and directors made the tough decision to defer dividend payments for both our preferred stock or common stock. This is the right thing to do in an environment like this and to focus that cash flow on our senior obligations first. Number two, hedging. Our hedge book as of Friday as a whole has an undiscounted market value of approximately $375 million, up from approximately $300 million last quarter, even more impressive given that it excludes $31.5 million of realized gains in the first quarter. We have done some modest work to the book, in particular restructuring forward 2022 hedge value into 2021 at even higher net prices. Protecting those future gains as well as materially improving net present value. Given the strong move in the natural gas strip based on optimism surrounding associated gas production, we've been able to layer in some natural gas hedges as well. Since we last reported, we've seen operators scrambling to unwind their three-way collars in order to save face at prices that may be a premium to the current strip, but are now at sub-economic prices that are going to be long-term destructive to their equity values, particularly as the sector heals. Since this management team took control of Northern a little over two years ago, we have focused on risk management on the front end, not as a stopgap measure after the fact. Number three, shut-ins. This is a hot topic I want to address before the Q&A as the sector attempts to balance the steep drop in demand. While these targets are moving and the exact timing is difficult to predict, I'm pleased to let you know that Northern is about as well prepared as anyone to weather these issues. As a non-operator, there may be some billing delay and LOE costs coming down. but regardless of the shut-ins and given our hedge portfolio, we expect margins and ultimately cash flow to remain extremely resilient. The Williston Rock is highly conducive to curtailments as the rock and age of the wells should not see material issues as they return to sales when appropriate. Second, the costs of LOE, which are driven in large part by saltwater disposal and workovers and to a lesser extent electricity, should see drop-offs in kind. Given the delay in billing via non-op, we'd expect the full benefit of this to be felt in June for the second quarter and to continue on until wells return to sales. Secondly, as I mentioned on last quarter's call, we do not want wells producing in this environment anyway. The oil is still in the ground. Oil production is a depleting resource, and we do not want our wells producing, hedges or not, in an environment such as this. Instead, because of our strong risk management, we have the potential to earn returns twice on these assets, with the hedge gains we are scheduled to receive and the reserves that are preserved for the future. Depending on a few variables, there's likely only a moderate impact to cash flow in 2020 from curtailments, and long-term, it is a massive positive for our reserves and future production. There are even select scenarios in which it increases our cash flow. This is why you hedge. Number four, development. We are carrying a record number of completed wells waiting to be turned to sales and drilled but uncompleted wells. This means that we have a coiled spring of sorts if and when commodity prices improve. I'd note that despite significant curtailments we experienced starting in March and half as many wells turned to sales in Q1 versus Q4, we still saw nearly flat production. Well, like the entire U.S., we expect to start from a lower production base when the call for U.S. production activity returns. We'll be well situated both on a capital efficiency basis from wells ready to return and from the fact that our volumes have not been wasted in a sub $20 oil price environment. Post curtailments, we also expect our base production to be significantly higher and the corporate decline rate to normalize given the elevated activity in the back half of 2019. This elevated base production level is a big positive to the value our banks underwrite in our RBL, and longer term, a huge net benefit to our equity holders. Number five, differentials. Differentials for gas have started to show steady improvement as seen in our first quarter results, especially given how poor they were late last year. We don't expect to see gas differentials as strong as we saw in the first quarter for the remainder of the year, but as we've been telling investors for the past few months, As the infrastructure build-out from 2019 takes hold, many of the issues plaguing our gas prices would see improvement. In addition, they will be influenced, as always, by the ratio of gas to NGL prices. Oil differentials are another matter. In a normal world, the shock from lower oil prices and lower production should be having a material net benefit to our in-basin pricing. In fact, we believe strongly that when the market returns to normal, we will see a multi-year horizon for vastly improved differentials for oil takeaway from the slack capacity that will exist. In the short term, with demand so weak, the physical limitations of the market have been driving very wide pricing differentials. However, if you believe as I do that at some point we'll all go back to work, and the stay-at-home orders will continue to ease. It would suggest that differentials, with plenty of available takeaway in the Williston, will be improved dramatically for the next several years as those take place. In the short term, it will be volatile, but the future for our netbacks should be bright. Number six, guidance. I promised more meticulous guidance this quarter, and we are mostly delivering on that, although given the wild swings we're seeing in the sector, it is more challenging than where we stood in early March. In the immediate term, production will be nearly impossible to predict. And while we know the second quarter will carry significant shut-in volumes, only the pace at which the COVID-19 battle is solved will we know how production begins to normalize. The operators do not know this, let alone us. The good news for Northern is that it doesn't really matter because we've prepared for this. Our cash flows are well insulated regardless of the outcome. Our incredible hedge portfolio means we can give ranges that actually matter, which is not production levels, but cash flow. We expect to produce $350 to $410 million in adjusted EBITDA in 2020 and spend approximately $175 to $200 million in capex. This points out that approximately 45% of the anticipated capital spending for the year has already occurred, and that is driven by the first two months of the year being relatively normal. However, this should not be treated like any typical midpoint of guidance. The variables driving these will be shut-ins, in-basin differentials, and the price of WTI for our net gains on our hedges. This range will be driven by the mix that ensues. Our book interest expense should range between 55 and 60 million. This equates to approximately 135 million in free cash flow at the midpoint. I note that by our definition of it, only about $5 million of that free cash flow was realized in the first quarter as our normal waste spending ramped down. So the bulk of it is still yet to be realized. We'll also note that we're holding $50 million of completion capital as a reserve in the event that oil prices come roaring back and we see a flurry of wells completed and turn to sales. However, based on the current forward strip, we see that as highly unlikely, but we want investors to be aware should we see a strong rally in pricing. Number seven. Finally, Opportunity Knox. If I can leave our investors with one message, it is this. We are on the offensive. I told you on our last conference call that I believe firmly there would be opportunity. It is beginning to show up. Our superior risk management puts us in an enviable position to acquire producing assets underwritten to earn and exceed our cost of capital based on the environment that we are in today, something that is not likely to endure. If successful, this will give us enormous convexity to the upside and potentially give us additional undeveloped resource for literally no cost. Opportunities abound everywhere. Bankruptcies and distressed asset sales, mispricing of our own capital structure that belies our financial strength, and the fact that we have incredibly supportive stakeholders who share our vision. We continue to evaluate all the opportunities in front of us including continuing to opportunistically reduce debt, and we'll deploy our capital to those opportunities with the greatest return for our stakeholders on a risk-adjusted basis. That's it for me this quarter. For everyone on the call, most importantly, I hope you and your families are safe and healthy. I hope you're managing through the market impacts and economic hardships that are affecting so many. And as I said before and I'll say again, I'll conclude that this difficult period is a tremendous opportunity for Northern, and we continue to strengthen the balance sheet, the asset base, and we are on the hunt for opportunities to make a stronger, lower-risk enterprise. As I stated in my prepared quote in this morning's press release, I cannot emphasize enough that Northern is different. While others scramble and react to this crisis, issuing multiple revisions to their guidance and scramble to cut G&A, we prepared our business in advance. with our balance sheet moves and multi-year risk management program. In addition, we have been focused on doing right by our investors long before the situation called for it. That's because this board and management are actually significant owners of this business. Our cash GNA is already at industry lows with only 24 employees and an executive team that has paid at some of the lowest levels in the industry. This was done on the front end, not in reaction to the current market conditions. Flexibility of our non-operated model allows us to execute on capital decisions in real time without the burden of a bloated cost structure. Thanks, and let me briefly turn it over to our COO, Adam Dirlam, to talk about field activity. Adam?