Northern Oil and Gas, Inc.

Greetings and welcome to the Northern Oil first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. You can queue up for a question by pressing star 1 on your touch-tone phone. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mike Kelly, Chief Strategy Officer. Thank you. You may begin.

Thanks, Diego. Good morning, and thank you for joining us for Discussion Northern's first quarter 2021 earnings release. This morning, before the market opened, we released our financial results for the first quarter. You can access our earnings release on our investor relations website, and our Form 10-Q will be filed with the SEC in the next few days. We also posted a new investor deck on the website this morning, if that's more of your speed. I am joined here this morning with Northern CEO Nick O'Grady, our COO Adam Dirlam, our CFO Chad Allen, and our Chief Engineer Jim Evans. Our agenda for the day is as follows. I will hand the mic over to Nick here for his comments regarding Q1. We'll do that in a minute or two. After Nick, Adam will give you an overview of our operations, and then Chad will review NOG's Q1 financials and 21 guidance. After that, the executive team will be available to answer any questions. Before we go any further, 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 the risk and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward-looking statements. amongst others that we've described in our earnings release as well as our filings with the SEC include our annual report, our 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 EBITDA and free cash flow. The reconciliations of these measures to the closest GAAP measure can be found in the earnings release that we issued this morning. All right, with that taken care of, I will now hand the call over to Northern CEO, Nick O'Grady.

Thanks, Mike. And I would like to thank everyone for joining us this morning. It's hard to believe it's been over a year since the beginning of the pandemic. This past year, we've seen the price of oil go from less than zero back to $65 a barrel. We're very fortunate that we've been able to thrive during this year, in part because of our hedging strategies and also because of the support of our shareholders and lenders. I'm very proud of the Northern team and how we've responded to the challenges. As usual, I'll get down to it with four points. Number one, the quarter. Our results for the first quarter beat our internal forecasts as a result of improving well performance in conjunction with robust pricing for gas and solid oil differentials. These improvements more than offset the work overspending associated with the costs we incurred for getting our production back online that we highlighted in our fourth quarter release. This is the third quarter in a row since the pandemic took hold that our production has risen. The increased work over costs are largely transitory and thus we should see unit costs continue to trend down throughout 2021. Our Bakken assets continue to see strong oil output and increased gas capture and combined with robust NGL pricing resulted in Northern exceeding our internal revenue estimates. Our capital spending was less than expected, which translated into free cash flow of $41.7 million for the quarter. In summation, as we enter mid-year, we are well ahead of our 2021 plan as it stands today. Number two, the balance sheet. As we've outlined in previous earnings calls, one of our primary objectives is continual improvement of our balance sheet and to decrease our operating leverage. Our free cash flow enabled us to pay off an additional $24 million of debt and fund the $17.5 million deposit for our Marsalis acquisition. Based on the current outlook, we expect to end the year with less absolute debt and a leverage ratio of less than two times, and we plan to further reduce the leverage ratio to the mid-ones level by mid-2022. Based on our internal forecasts, we expect to end the year with over $400 million of available liquidity, not including any potential increase to the revolver capacity. and at the current strip, the revolver is projected to be undrawn with significant cash on hand by maturity at the end of 2024. These forecasts take into account a cash dividend with growth over time, which we'll get more into later. I'd like to thank Bank of America for their increased commitment to our facility and the flaws execution advising us in the Marcellus transaction and along with Wells Fargo leading our Q1 financings. RBC, Truist, Citizens Fifth Third, US Bank, and other members of our bank syndicate have been truly great partners as we collectively and successfully navigated through the worst of the pandemic. And I'm particularly thankful that we've had such an incredibly supportive lending syndicate that never wavered in their sponsorship of the company. Number three, acquisition pipeline. We continue to enjoy a robust backlog of acquisition opportunities. from acreage to ground game development, and growing quantities of larger asset packages. Our team has never been busier, and we prosecute each opportunity with the same rigor, and we remain optimistic that from small to large we can create value for our stakeholders going forward. We are currently evaluating 15 different package opportunities, 12 of which are not formally being marketed. The bulk of these prospects are focused on the Williston, Permian, as well as the Eagleford. As I've mentioned previously, the deep bench of opportunities out there is non-operated properties is by our estimates over $10 billion. We believe strongly in creating win-win scenarios for us and potential sellers, but our own stakeholders come first. We are the natural consolidator of non-operated interests, now on a national level with an advantage cost of capital and unmatched size and scale. Number four, dividends and returns to our shareholders. Since we last spoke, we've spent a great deal of time with our board of directors researching the sector in regard to returning capital to our shareholders. We are pleased to announce our first-ever quarterly dividend of 3 cents per share about five months early from our initial plans. While it will be a very modest start for this program, this is just the beginning. Future increases will be tied directly to our reduction in overall leverage, and I'm pleased to tell you that our analysis of where we are and where we are heading has provided a bright outlook. This means we can create a dividend that can grow faster than that of our overall company. So for longer term investors, what will at first be a starter dividend should consistently grow into something more meaningful over the next several years. Additionally, we might be able to increase our dividend even faster if we are successful on the acquisition front in a leverage-accretive fashion, and to the extent that oil prices continue to be strong or rise even further, we might be able to accelerate this strategy or consider alternate forms of returns. As I wrote in our release, this is the culmination of over three years of work by our board and my executive team to get to this point, and I'm very proud of their work and thankful to our stakeholders and bankers who helped us get here. In conclusion, the outlook is bright. Our opportunity set continues to grow with each passing day, and as I will remind you each and every quarter here on out, we are a company run by investors for investors, and I truly thank each and every one of you for your interest. With that, let me turn it over to Adam Durland.

Thanks, Nick. Operationally, Northern was firing on all cylinders in the first quarter. On the production front, we continued to see curtailments decline to the tune of 2,000 barrels a day, and even more encouraging was the fact that well productivity outperformed internal estimates. This is driven by certain operators and areas where we have higher concentration levels, and we will continue to monitor these improvements. On the spending side, CapEx came in at $38.1 million for the quarter. Well cost realizations for certain operators came in under AFE as renegotiated costs during the downturn were realized. Approximately 40 new well proposals were received during the first quarter and we elected about half of them with an average well cost at around $7 million. Moving forward, we expect average well costs to range between $7 and $7.5 million depending on the mix of operators and completion methodologies. The lower number of consented wells was largely driven by one operator stepping out into areas where we have seen some meaningful decreases in productivity over the last 18 months. Actively managing our portfolio, we were able to reallocate the capital from the non-consented wells to much higher rate of return ground game acquisitions. We executed on six transactions during the quarter and continued to take a barbell approach, picking up exposure to additional drilling opportunities and both the Bakken and the Permian. With Shale 3.0 in full swing, the number of ground game deals available to us remain at elevated levels. And as operators focus on some of their best inventory, the economics are certainly compelling. As Nick alluded to in his comments, our business development team is busier than ever as we review several compelling asset packages across the lower 48. In April, we closed our Marcellus transaction and related financing generating several reverse inquiries. Our approach to any acquisition will remain disciplined with a strict focus on hurdle rates at an asset level while checking the appropriate boxes at a corporate level. Executing on any one of these will need to meet our specific criteria as we sensibly scale the business and continue to consolidate.

Now I'll turn it over to our CFO, Chad Allen. Thanks, Adam. I have a few highlights to go over this quarter starting with a quick summary on Northern's financial performance. Our production averaged 38,417 barrels of oil equivalent per day, an 8% increase over the fourth quarter, which was a strong start to the year. Curtailments and shut-in production began to ease as we exited the quarter, but we estimate it still reduced our first quarter production volumes by approximately 2,000 BLE per day. Our adjusted EBITDA for the quarter was 98.8 million, and our free cash flow was 41.7 million, up 5% and 43%, respectively, over the fourth quarter. do in large part to increase production levels and better realize commodity prices. Oil differentials were $6.56 during the quarter, which was an improvement of approximately 5% over the fourth quarter and 38% over the pandemic lows. As expected, gas realizations saw significant improvement over the fourth quarter, due in large part to strong natural gas and NGL pricing. Lease operating expenses for the first quarter came in at $34.3 million, or $9.92 per BOE, which was slightly higher than our full year guidance range. However, as I mentioned on our last earnings call, we expected our lease operating costs to be higher earlier in the year as we incurred costs from higher work over activity. Cash G&A, excluding one-time acquisition costs related to the Marcellus transaction, came in at $1.01 per BOE this quarter, about 12% better than the midpoint of our Q1 guide. One thing to highlight is that we still expect to incur approximately $2.5 to $3.5 million of additional non-recurring acquisition costs related to the closing of the Marcellus transaction in the second quarter. I'd also like to highlight Cass G&A costs. Proforma for the Marcellus transaction and our growing oil volumes are projected to be approximately 85% per BOE, by far one of the lowest in the industry. Capital spending for the first quarter was $38.1 million. are a 22% reduction compared to the fourth quarter, which consists of $33.1 million of organic DNC capital and $4.4 million in total discretionary acquisition capital, inclusive of acquisition DNC capital. In terms of cadence, as it stands today, we expect the second and third quarters to have the highest levels of CapEx for 2021, particularly for the Marcellus assets, where the majority of the development is projected to take place mid-year. We strengthened our balance sheet and liquidity profile since the end of last year through debt and equity offerings with gross proceeds of approximately $690 million. These transactions allowed us to fully equitize the Marcellus transactions, which closed on April 1st, and extend our maturity wall by retiring the remaining $65 million of our Van Bakken note and 95% of our second lien notes, of which the remaining $15.7 million will be called on May 15th of this year. The remainder of the proceeds were used to pay down the revolving credit facility. As of March 31st, pro forma for the closing of the Marcellus transaction, we had approximately $366 million outstanding on our revolving credit facility, leaving almost $300 million of available liquidity, including cash on hand. We started the year ahead of our internal forecast and have a lot of confidence in our 2021 program, both on a capital spending front as well as the pace of our production volumes. We remain conservative on our outlook, and we will look to reflect any upward adjustments on our second quarter call as warranted. With that, I'll turn the call back over to Mike Kelly.

Thanks, Chad. All right, Diego, let's assemble the queue for Q&A. Thanks.

Thank you. And at this time, we will open the call for a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from John Freeman with Raymond James. Please state your question.

Good afternoon, guys.

John, how's it going?

Good, thanks. Congrats on establishing the dividend. That's a great accomplishment. How do you all, I just want to sort of piggyback off of some of your comments, Nick, and I realize, as you said, that acquisitions can certainly impact the pace of dividend growth, but sort of X acquisitions, just sort of maybe how you all think about managing the growth of that dividend going forward in terms of do you think about establishing like a percentage of your free cash flow that goes toward the balance sheet and then another percent that's kind of earmarked for dividend growth, just any additional color on how that long-term dividend strategy would be helpful.

Yeah, not being trite in any way, but we had called it sort of a one-third doctrine a few years back when we were first contemplating this, and I think that that's about the right place to end up, where about a third of your distributable cash flow is going back to your stockholders. That's still the goal. That hasn't changed. When we've done this analysis, the average upstream E&P is paying out less than 15% of their distributable cash flow right now. Obviously, our starter dividend is a smaller portion of that. And I think, as my prepared comments said, that as we hit our own internal leverage targets, I think we can share more of that with our stockholders as we de-risk the business. and so as we kind of hit that one and a half times milestone, I think we can see a substantial step up in that and as we get closer to one, which is really where our forecast looks like over the next couple years, I think we can really get to that one-third area.

That's great. And then shifting gears, you know, the AFEs were down nicely again from the fourth quarter to a new low, you know, just below $7 million and going forward. Y'all indicated sort of expect kind of $7 to $7.5 million is what y'all are planning for. And since the budget was based on $7.5 million on the AFE side, does that mean there's sort of a downward bias to the full year budget?

Potentially. I think we need to be mindful just as the rate count picks up overall. And I think the Williston rate count in particular is going to pick up some that we want to leave some buffer. But certainly, if it goes at the pace now, there would be some downward pressure, which would be great. We'll leave it as is for the time being.

Sounds good. Excellent quarter, guys. Congrats.

Thanks, John.

Thanks, John.

Our next question comes from Scott Hanold with RBC Capital Markets. Please state your question.

Thanks, and congrats to all of you. You all accomplished a lot in a very short period of time, and I think that dividend is certainly, at this point, the cherry on top, so congrats. Where I want to go is kind of continue down the path of the dividend and just shareholder returns. Obviously, Nick, you indicated you'd like to get to that one-third payout ratio. As you progress to that point, how do you think about doing that through a base dividend versus, you know, some of the other mechanisms, you know, such as a variable dividend. Do you see there's value in a structure to make it very predictable and, you know, have a variable bent to it just to, you know, mitigate, you know, commodity price, you know, volatility impact?

Yeah, I mean, I think someone on Twitter said I had the worst IR game on the street because I was sort of downplaying the concept of special dividends and The volatility they ensue, so I'll try to do better this time. I think special dividends have a role. I think that we've been watching that carefully. You've seen from the Devins and the Pioneers of the world a formulaic structure. I believe the Pioneer one is kind of once a year, kind of backward-looking. I think that makes sense to some degree, and so I think you have to think about the balance. We don't want to go down a path of, were upstream MLPs where you have high fixed dividends and then you wind up cutting them, which is worse. And so the special dividend definitely gives you the ability to navigate through the volatility of commodity prices. And so I think it does have a role. I think our first plan is really to build a small and solid-based dividend and continue to ratchet it up over time as we hit our targets. And I think the special will play in to the extent that things are going the way they are now, which is that we continue to exceed our own internal targets. It gives room to move quicker. And so I don't want to make false promises or hopes, but I do think it has a possibility, particularly when we're in robust periods as we are today.

I think that's pretty clear. Thanks. And my follow-up question. You cited that you see over $10 billion of opportunities out there right now. Just to clarify, is that specifically non-op opportunities or is that everything you see out there? And secondarily, of those dozen or so opportunities you're looking at, can you describe just the size and scale of some of those individually?

Yeah, it's, you know, 100% non-op. Nothing within kind of that population would be operated. And so I'd say it's primarily weighted towards the Permian and the Bakken. You know, a number of different Permian, you know, deals we've seen kind of off market as of late and continue to kind of see, as well as some other formal processes that are being run. And I'd say, you know, we're looking at stuff that's anywhere from, 10 to 15 million north of 500 at this point and kind of anywhere in between. I'd say kind of the sweet spot's been kind of 100 to 200, kind of give or take.

Yeah. And I mean, I think that the way to think about it, Scott, is that zero to $100 million can be more competitive just because obviously it's a smaller quantum of capital as you get north of $150 million. The companies with the wherewithal to make those transactions in the non-operated space start to shrink It doesn't mean the sellers always enjoy that fact, but it tends to make those processes less competitive. But obviously, the larger it goes, capital becomes an issue, and you want to make sure that you're not stretching your balance sheet or anything like that. But I do think that what we're referring to is really just a function of The amount of capital sunk into non-op over the last 10 years, probably a third of it is looking for a home now, and the other third to two-thirds have to be monetized over the next three to four years. And that's where we kind of come up with about that $10 billion.

Got it, got it. And I guess part of my question was, too, is, like, you know, how big of a deal, like, can you guys do, like, just operationally and financially? Like, what do you think that limit is for you guys?

Boy, I mean, I think the answer is, you know, I think the business could support and the capital markets could certainly support a half a billion dollar transaction. I don't think that's necessarily where we'd want to start. I think that we find somewhere in between and in the more moderate where, you know, it's generally our sweet spot. but certainly the companies at a size and scale in which you can do meaningful transactions. I don't know, Adam, you have?

No, that's right. I mean, the other thing I was going to add is, you know, we're looking at a bunch of different, you know, non-operated properties, but we've also had a number of different reverse inquiries from operators that are looking to, you know, take down particular operated packages. And we've got the ability to carve out a non-operated working interest kind of within that, potentially put together kind of a joint development agreement. and right-sized the transaction for everybody. And so that's another lever that we can pull in terms of kind of taking down certain acquisitions.

Yeah, and I guess I'll just put a bow on that, Scott, and just say that, as you saw with the Reliance transaction, granted, we started that transaction when the sector was really on its lows and capital was fairly scarce. but we brought in a financial partner on that transaction and certainly for some of the really big and chunky stuff that's always on the table and I can just tell you that we are inundated from everyone from private equity groups to large family offices looking to partner with us every day.

Thank you. Our next question comes from Brian Downey with Citigroup. Please state your question.

Good morning and thanks for taking the questions. The first, solid production performance to start the year. You mentioned rig count earlier, but I'm curious on the duct front. Has your sense of operator duct completion cadence changed at all in the Williston as commodity prices have risen?

Yeah, I mean, we certainly saw the duck count get worked on in the first quarter, and I think we're seeing the same thing kind of going into April. You know, we're looking at 40 AFEs that came in in the first quarter. I'm looking at April activity, and we had 30 come in. So as the operators kind of work down those ducks, I think you're going to kind of see Potential rigs and new well proposals following through that. We're monitoring that as we move through the second quarter and what that means. Obviously, we're looking at our hurdle rates and seeing what makes sense. The thing that you've got to be careful about when you get into this commodity price range is certain operators like to start stepping out into Tier 2 and Tier 3 stuff. We're running sensitivities that at every particular oil price range to kind of understand what that means should we see any sort of pullback. So depending on kind of how operators act in that regard, we'll be using that lever and then obviously using kind of our ground game to backfill anything. But I think from a net well standpoint, even in April, we've seen kind of double the net wells that we saw in and Q1 alone. So all signs are certainly pointing to a general uptick in overall activity in the Williston.

Great. And then as a follow-up on the acquisition front, in areas, particularly the Permian, we've seen private operator rig count rebound more so versus public operators being a little more disciplined. Has that private operator dynamic changed how you're thinking about A&D opportunities at all or created any interesting opportunities?

Yeah, I mean, I think there are a handful of private operators, high quality ones in the Permian in particular, that we have targeted a lot of our acquisitions around. So names that might not be household names to public investors, but ones that are, you know, well-renowned. And we're not talking about the small, you know, sponsor-backed company with one rig. We're talking about big, large, private, you know, legacy Permian companies. And so they've definitely been the most active. And a lot of the Akeridge that we're targeting, which is really for near-term development, has been targeted around those guys.

Great. I appreciate the comments. Our next question comes from Neil Digman with Truett Securities. Please state your question.

Morning, all. Nick, I just want to say you and the team are still top of my book despite that IR ranking.

Thanks, Neil.

My first question really My first question, Nick, for you or Adam, I'm just wondering, you know, again, given the sort of rise in price and, you know, everything that's going on, has that changed your, you know, requirement, you know, what I would call a sort of return requirement now when you're looking at, I don't know, either one-offs or even, you know, larger sort of pads that you can, you know, do, whether that's in BOC and PERM, you know, gas, any of those. Can you talk about that a little bit?

Yeah, I mean, I think, you know, this is my second time since I've been here where we've seen a big spike in oil. The last was in the fall of 18. And what I tell you is, you know, people get, you know, their tolerance for risk actually goes up the more price goes up, and we kind of work the opposite here. So as prices go up, we tend to become more selective, not the other way around, not just, hey, this works now, let's do it. And we've seen In the Permian in particular, people bidding more aggressively on certain properties as prices have gone up with lower discount rates, which we're happy to miss on that stuff because you want to buy properties that are going to work at $40 oil as well as $65. So if you're going to miss, you're going to miss small. I think our batting average as of late has certainly gone down, but I guess that would be offset by the overall number of opportunities that we're seeing.

So net-net, you're probably about the same, similar in that regard. And then from a ground game standpoint or even packages, I mean, we're running different sensitivities at different commodity prices and then taking a look at higher discount rates to see what that means in terms of how we can get things done. And fortunately, what we've seen with the stuff that we've been able to get in the boat, we've been able to capitalize at much higher discount rates.

Okay, then just to follow up, I don't know if Ram's on, but I guess my question, Nick, would be kind of when you talked about the third and what you think about Dealing with the excess, it's nice to now be able to ask that question about what to do going forward with the excess shareholder return. I mean, is that, I guess, a decision more just what you think for the business? Is it more driven by what Brom and the board's saying, you know, you and the rest of the board are saying? I'm just wondering how that's – again, I like the answer prior. I think that makes a lot of sense. I'm just kind of curious to know if, you know, anything else behind that.

Yeah, I mean, look, we've made tremendous progress. We still have wood to chop on our balance sheet. I still, you know, we still want lower overall leverage. It looks we're on a glide path at this point. It seems easily achievable, but you got to achieve those milestones before you start to get ahead of yourself. You know, we want to stay humble, and I think, so really, I think this is a board decision, truly, and so I think we had some built Frankly, in the event of this one, you'd be surprised to know that the board, frankly, came to us and said, you know, you're well ahead of where you were. Don't you think this is time? Whereas we had sort of stayed on that path as a management team. And so I would definitively tell you that the board is very active in these discussions. They're watching. They're using our own metrics and our own targets to help solve for that. So To the extent that we continue to be successful, that we continue to chip away at the leverage, we see those ratios fall. It should be relatively mechanical in fashion of how we get there.

Nice. Good decision. Great operation, guys.

Thanks, Neil. Thank you. Our next question comes from Phillips Johnston with Capital One.

Hey guys, thanks and congrats from me as well. Just one question, it's really a follow-up to Scott's question. It's obviously early to start talking about variable dividends, as you mentioned, and I'm sure you'll be watching to see how the market responds to the structures and policies that a few companies have adopted. But Nick, once we get to a point where the base dividend is sort of maxed out and you start to evaluate other options, At this point, do you think special or variable dividends would be preferable to share buybacks, or is it still sort of a TBD type of thing?

I do. I think the E&P sector has been a horrible buyer of stock. How many E&P companies were buying stock back last October when their stocks were actually at the lows? They're all turning them back on now. I don't get it. I think symbolically I want people to have the cash in their hand as a proof of return, no different than a private business.

Okay, great. Thank you.

Our next question comes from John Daniel with Daniel Energy Partners. Please state your question.

Hey, guys. Thanks for letting the dumb OFS guy on the call. I appreciate it.

Big risk.

Don't let me down, John. I'm going to really dumb this down. So I got really three questions. The first one is on the comments about workover costs and activity. Was that really a function of just bringing back a bunch of rigs early on in the year, and does that fade as you go through the course of this year? I'm trying to distinguish between workover and drilling rigs, because I know you talked about Williston going up.

Yeah, I mean... So the way that curtailments work, and I kind of talked about this last call, but a lot of the actual physical curtailments were eased, but those wells need to be repressurized, worked over. And so you saw a slew of work over rigs. One of our operators had seven alone in January going on to the acreage and basically flushing out and repairing those wells and doing basic maintenance to get them to produce what they should be producing. So that's why it's really quick turnaround. So we saw it start in earnest really in December, and all indications look like it was peaking out about March. And so I think sequentially it should be slowly coming down. It'll still be somewhat elevated because operators really want to cut their LOE as fast as they can during the downturn. So when you curtail a well, you just simply stop maintaining it. But that's not a sustainable practice. And so the first thing is really to get the wells back to maximum production. We're almost there. and then we should see that expense fade materially.

Okay. Sounds good. You noted all of the acquisition opportunities that are out there and gave a pretty wide range and this is a bit of a follow-on to another person's question but help me understand. I don't know this. Again, it's a dumb question but the managerial time commitment on your part and the team's part when a $20 million deal versus a $200 million not just the time to look at it but also once you've Once you close that deal on a go-forward basis, the time allocation, if you could just give me that tutorial, it would be appreciated.

Yeah, I mean, I think you'll take some comfort that the company is effectively built to acquire property. So the entire organization is built around this. So it's pretty much old hat. So the numbers change, but the workflow really doesn't. So whereas four or five years ago, this was all built around doing and the rest of the team. We've looked at a number of different

We're already in 60% to 70% of the value associated with those acquisitions. So it's literally just moving your working interest in your NRI and you're off to the races. And it's actually not terribly dissimilar to some of the deals that we've seen in the Delaware as of late. The concentration of value in some of those packages is stuff that we're already in. And so from an engineering standpoint all the way through kind of to the The title and the due diligence phase, you can start moving quicker and then rolling those things in.

Okay. Guys, that was helpful to me. And then a final one, Nick, just you've been doing this a long time, all of you guys have. I'm just curious if you could speak from an industry perspective. What in the world do you think happens with the E&P spending in 2022 if the strip stays where it is? I mean, I know everyone is toeing the line with capital discipline in 21, but what would you envision

I think my view broadly at the macro level is a couple of things. One, this reminds me a lot of when I started in the industry at the end of the 90s and it had been a bruising 15-year downturn for the sector and oil went from $10 to $40 and people really didn't respond except a handful of notorious E&P CEOs, which we all know their names. And then eventually, after it lasted three or four years, you saw the sector take off and get rewarded for being undisciplined. And so I think that's really going to be predicated on the overall markets. Those that aren't disciplined, if they're rewarded by the markets, that can start to feed itself into other companies. But the one thing I think we're aided by this go-round, which was very similar to that kind of 2001 to 2004 period, is that Thank you very much. I think it's going to be harder for people to have the inventory and capital efficiency to drill at the same speeds they have. Even the Permian, we see a lot of maturity in areas that are largely the best stuff has already been drilled. So with that, I guess to sum up your question is that I think it really depends. I think we like kind of nice oil prices but not super high because that discipline can start to waver. So if oil prices are $70, I can't promise the U.S. industry won't lose discipline. I would push that back to Wall Street and say make sure you keep them honest because I think that that's going to be, you know, people are enterprising, and if they get rewarded for certain behavior, they're going to do it like a lab rat trying to get his water, right?

Yeah.

Okay.

Fair enough. I appreciate your candor, and thanks again for letting me in.

Yeah, thanks, John.

Our next question comes from Charles Mead with Johnson Rice. Please state your question.

Good morning, Nick. I guess they're letting really anybody in now. I wanted to ask, you talked about those 15 deals, and to me, It was notable that the Marcellus wasn't one of those areas where you mentioned deals. I know it's a newer area for you, but it's also my sense that each operating area has a little different rhythm and composition to the way A&D comes about from identical opportunities to closing on them. So can you give a sense of what you think the outlook for ground game is? Thank you for joining us.

looked at, but they're not for sale. But they are really nice properties. And, you know, certainly if they ever went to market, we would take a look. I mean, Adam, you want to talk about that?

Yeah, we screened a number of them, and they just didn't necessarily check the box. So they didn't make it into our 15. So if we would have this call about two weeks earlier, it might have been 17 or 18. But, you know, there's certainly opportunities out there. It's just got to, you know, check boxes, both from a qualitative and a quantitative standpoint, and those ones didn't necessarily do that.

Got it. And then my follow-up, Adam, this goes to a comment you made about reverse inquiries. I can imagine those taking a few different forms. When you first mentioned it, I thought that it was maybe non-op sellers or non-op, you Coming to you as a new entrant in an area, but it sounds like it could be that, but it's also more of reverse inquiries from financial partners. So can you kind of give a sense? Are both happening? Do you just mean one? And what's the little more detail on what you mean?

Yeah, no, it's certainly all of the above. We've got a number of different financial partners that have reached out, and it's broadened our overall opportunity set in that regard. We've got operators reaching out to us in order to kind of right-size certain transactions, and we've screened three or four at this point. And then you've got just kind of your classic 100% non-operated packages coming from the family offices, the private equity groups that may be a little bit longer in the tooth, those types of things. So it truly is all of the above at this stage. And so we've got the ability to be picky, and we're going to stick to kind of the script of how we underwrite things and focus on the quality assets, the quality ROC, and the quality operators.

Yeah, I mean, I think to keep it simple, to Adam's point, You can create a non-operated interest out of anything, right? I mean, it's not like these are distinct asset classes that there's operated and non-operated. To Adam's point, we've been approached by multiple operators that are trying to buy properties and are happy to have us carve out a working interest in those properties alongside them. And, you know, to the extent that properties meet our investment criteria, we're happy to do so. And in some ways, that's what our reliance transaction was. tied to a really high-quality operator. So, you know, we talk about $10 billion, but frankly, really, the limit is really the greater lower 48 in terms of all of operated properties because these ultimately can be synthetically created. And to Adam's point, they're not just one set of non-operated properties that happen to be so. Right. Thanks for that insight, Nick.

Our next question comes from Nicholas Pope with Seaport Global. Please state your question.

Morning, guys. Hey, I was hoping you could talk a little bit. I know you guys have spent a couple years kind of hammering away at the various dead instruments that you had and kind of are in a good place right now. You still have the preferred, the convertible preferreds out there. I was kind of curious what Your thoughts are about that instrument today and going forward and maybe kind of what do you think an optimal capital structure looks like for this model and what you're kind of trying to achieve longer term on that aspect?

Well, one thing I would like to clarify in regards to the preferred because this is really important and I think that, you know, as equity analyst and I was a former equity analyst, I understand it. The concept of the treatment of that preferred. Most preferred stock has a term on it. And so it might be called preferred stock, but it's really debt. It has a term. It has a coupon. You cannot pay that coupon. It's not a default. But ultimately, it has to be paid back at some point in time. So theoretically, it is worth the liquidation preference. Our preferred stock is perpetual in nature. That means it is perpetual like our equity. It is true equity. It does have a dividend yield associated with it, but ultimately it is a permanent instrument. And so the ideal path is that we will continue to create value. We will drive the stock price higher and someday down the road it will convert out and everybody's happy. You know, I kind of talked about that I'm not a big fan of stock buybacks, but that Preferred does have a coupon. So if we're ever in the position in which we really feel like our leverage is there and we're just driving a lot of cash, driving so much cash flow that we don't know what to do with it, certainly it can be bought back and terminated in that regard, especially as our own cost of capital falls. And if it winds up being on the higher end of that, it is not today, but if it does, That is a form of buyback and certainly one that has some tangible benefits.

Are the options for buyback, I mean, is that a, I'm assuming there's a premium associated. Is there something available outside of just the conversion?

No, Nick, it's just like stock. I could go in the market and buy it tomorrow.

Got it. That's all I wanted to talk about.

Thanks, Nick.

All right. Thanks, Nick. and just a reminder to ask a question, press star one. Our next question comes from Jim Buren. Please go ahead.

Good morning. I just have an overarching question about the derivatives that were, you did a mark to market on those. Are there expiration dates on some of those derivatives? Were you hedging against the price of energy going down? I'm just curious about what that was.

Our mark to market on our derivatives is simply the change in the value. So, for example, if you have a stock portfolio and you buy a bunch of stocks, and then at the end of the quarter they lost value, you take a mark to market, but you never really took a loss until you actually go and sell those stocks. So it's just a moment in time. So ultimately, all it is is our hedge portfolio where we lock in our oil prices, and as the price of oil has risen, The value of those has gone down, and that's just it. But obviously, the actual cash monetized, which is about a $7 million loss, represented the actual monetization. So it's just simply the reflection of value, not a loss necessarily. No different than we took a $350 million gain one year ago, and that gain was just simply that the value of that portfolio went way up, but ultimately... whether or not we actually realize all those gains or not is really going to be determined as they mature over time. And our head schedule is published both in our filings as well as in our presentations.

Very good. Thank you.

Thank you. There appears to be no further questions at this time. I'll turn it back to management for closing remarks.

All right, well, that's it. Thank you, everybody, for dialing in this morning. Reminder, we've got the presentation on the website, and feel free to give us a call if you have any follow-ups. Thanks a lot. Thank you.

And just a reminder as well, to access the digital replay, please dial 877-660-6853 or 201-612-7415 and enter access code 137192 Thank you for your participation. You may disconnect your lines at this time.