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spk04: Greetings and welcome to the Northern Oil Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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 to your host, Eric Rumslow, Chief Legal Officer. Thank you, Eric. Please go ahead.
spk12: Good morning, and welcome to our third quarter 2022 earnings conference call. Yesterday, after the market closed, we released our financial results for the third 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 our website last night. I'm joined here this morning by NOG's Chief Executive Officer, Nick O'Grady, our President, Adam Durlam, our Chief Financial Officer, Chad Allen, and our EVP and Chief Engineer, Jim Evans. Our agenda for today's call is as follows. First, Nick will provide his remarks on the quarter and our recent accomplishments. Then Adam will give you an overview of operations. And last, Chad will review our third quarter financials and updates to 2022 guidance. After the conclusion of our prepared remarks, the executive team will be available to answer any questions. 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 our forward-looking statements. Those risks include, among others, matters that we have described in our earnings release, as well as in our filings with the SEC, 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 today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, and pre-cash flow. Reconciliations of these measures to the closest GAAP measures can be found in our earnings release. With that, I will turn the call over to Nick.
spk03: Thank you, Eric, and thanks again to everyone joining us on today's call. I'll get right down to it with five key points. Number one, business is humming. We generated a company record $292 million of adjusted EBITDA this quarter and well over $100 million in free cash flow, the highest and third highest in company history, respectively. We produced over 79,000 BOE per day in the quarter, and we have already generated a cumulative $370 million of free cash flow in the first nine months of 2022. Leverage at the end of the quarter based on LQA adjusted EBITDA dropped below one times, even with the closing of our Williston acquisition in August. The increases to cash flow and decreases to leverage ratios quarter over quarter are even more impressive when you consider that oil prices were down substantially from the prior quarter. Number two, growth. As evidenced by the increase to our production and CapEx guidance, we are driving value creation through investment. It is translating into more profits, but more importantly, the increase in capital for the year isn't being driven by inflation, which is something we had already built into our expectations. Instead, the increase in capital is truly incremental investment in additional activity that will in turn drive cash flows higher in the coming quarters. With over 370 million in free cash flow generated so far this year, we are able to increase our investments in high return projects and are thrilled with the organic and ground game opportunities that we continue to see. We expect our balanced total returns based approach will continue to drive superior total returns for our shareholders and we still expect to generate approximately $500 million of free cash flow for the year. We are extremely proud of this achievement, given the decreases in oil prices and acceleration of near-term capital spending. Number three, outperformance. Despite high prices and inflation, we're seeing notable outperformance in all three basins. Our Wilson wells have thus far exceeded past years, even in an environment where we would typically expect step-out wells. Our Marcellus assets continue to surprise as EQTs, new pads materially outperform, and PDP declines have been shallower than expected. In the Permian, costs, realizations, and well performance have all exceeded internal estimates. As I said earlier, business is humming. Number four, acquisition success. As you've seen from our flurry of deal announcements over the last few months, we have been very busy on the M&A front. Make no mistake about it, our discipline remains and we continue to underwrite acquisitions with the same rigor. Our success is a testament to our role as the preferred partner, a company with a reputation of execution and consistency, with a capital availability and the ability to negotiate and close in an honest, straightforward manner. This often trumps price. And I want to stress that we are buying assets that are not just accretive to financial metrics, but accretive to asset quality and future growth prospects. This means resilient assets that have the ability to outperform our underwriting. In short, we're confident that our recent M&A success will deliver both near-term results and long-term value for our shareholders. Number five, shareholder returns. Our goal is to provide our shareholders the highest possible total return over the long term. We have implemented a multi-prong approach, including equity buybacks, repurchasing high-cost debt, and increasing the cash dividends for our common shareholders. A, during the third quarter and October, we repurchased and retired another 10 million of our eight and an eighth notes at less than 95% of par. This lowers fixed charges, which boosts free cash flow permanently, and retiring the notes at a discount to face value is accretive to enterprise value. We are prepared to continue to take advantage of opportunities to repurchase these senior notes. B, on the equity side, we've retired 109 million year-to-date, including 51.5 million of common stock, the remainder being preferred stock. As a reminder, we have 98.5 million remaining on our common stock buyback authorization. Last week, we announced a 20% increase to our quarterly common stock dividend to 30 cents per share for the fourth quarter with the goal of providing an attractive yield for our investors. We strongly believe that the consistency of a stable and growing quarterly dividend is more valuable to investors and our equity value over time than special dividend structures, which can introduce unpredictability and volatility. We announced yesterday that we have executed a mandatory conversion of our preferred stock into common stock. This will have no effect on the diluted share count because the preferred was already included on an as-converted basis. The conversion will reduce annual cash dividend payments and also avoid future dilution through cash dividend adjustments made to the preferred stock each quarter. Preferred Stock was created with our bondholders in 2019 to accelerate essential deleveraging of the company, and we are thrilled with the successful outcome for our common and preferred investors. This conversion milestone will simplify our balance sheet and continue to underscore the strength of our company. In closing, I'll remind you, as I always do, that we are a company run by investors for investors, and I want to thank each and every one of you for taking the time to listen to us today. With that, I'll turn it over to Adam.
spk02: Thanks, Nick. We closed the third quarter accelerating our investment program across the board, including our organic activity, ground game acquisitions, and corporate M&A. Overall, we picked up the pace as we entered the second half of the year, turning in line 16.2 net wells, a 60% quarter-over-quarter increase. Permian completions were the primary driver, contributing over 70% of the addition at a nearly 100% increase over the prior quarter. Our operators in the Permian are driving efficiencies in order to keep well costs on budget, and as a result, we continue to see shorter spud to sales times down roughly 25% from our well spud in 2021. Accelerated drilling activity and larger average working interest across most our active basins has increased our overall wells in process to 61.5 net wells, an increase of 10% from the second quarter. Driving that increase, we elected to 190 well proposals during the quarter, which was up 65% from Q2 and accounting for 40% of our consented net wells on the year. Our operators are drilling longer laterals to drive efficiencies in this environment And in connection with that, we saw the average AFE rise to 8.6 million, but only up 5% from the prior quarter based on normalized lateral lengths. Our weighted average well proposal remains well within our per well estimates that were already included in our CapEx guidance. Most importantly, the drilling opportunity set in front of us is expected to generate an average rate of return far north of 100%. further supporting our top tier corporate level return on capital employed of 34% during the quarter. With our ground game, we closed on two net wells and 965 net acres in Q3. And the acquisitions today are expected to generate a full cycle return on capital of 49% next year. Strict emphasis is put on targeting the right operators in order to maintain capital efficiency in this environment. This stringent process, both from a planning perspective and the execution within the business development function, has enabled us to largely avoid inflation woes affecting some of our peers, as well as grow the investment opportunity set. As competitors' budgets have been exhausted in the back half of the year, we have continued to raise our full cycle hurdle rates. This ground game success has played a meaningful part in our elective investments. Regarding corporate M&A, we've been extremely busy. We have executed and signed up some of the highest quality asset packages we have seen to date, tacking on meaningful production and even more impactful inventory across the Delaware and Midland basins. On the heels of our Laredo transaction, we have recently announced three more premier acquisitions. Looking back on the billions of dollars in M&A opportunity we've canvassed this year, these three all ranked at the very top in terms of quality, operating partners, and inventory depth. The two Delaware acquisitions we announced pair us with New Bern Oil & Gas, one of the most active and cost-efficient operators, and located in the core of New Mexico. As we close these in December, Northern will directly benefit from their best-in-class operating team and capital efficiency. Our recently announced Midland Petro Joint Development Agreement highlights the expanding suite of opportunities available to Northern as we reap the benefits of reaching a new scale in the non-op space. These JDAs add another arrow to the quiver where we have greater effective governance rights over the operating partnerships including scheduling out the long-term development programs of the assets, as well as modification protections. This Midland Petro acquisition is structurally similar to and an ideal follow-on from our highly successful Southern Midland Joint Development Program signed in Q4 of 2021. In fact, we are establishing momentum with this structure. Conversations with other operators have begun in earnest, and we are actively screening and co-bidding operated assets, as well as discussing buy-downs of operated interests using this model. The expansion of the JDA structure establishes a new set of opportunities that will be unique to a scaled northern, and we will continue to drive value with a disciplined approach that is focused on returns. With that, I'll turn it over to Chad.
spk13: Thanks, Adam. I'll start by reviewing some of our key third quarter results, which was again, one of the strongest quarters in company history. Our Q3 average daily production increased 9% sequentially over Q2 and top 79,000 BOE per day, a 37% increase compared to Q3 of 2021. Oil volumes were up 8% sequentially over Q2 and have normalized after the spring storms in the Williston Basin, which is where we have our highest oil cut assets. Our adjusted EBITDA was 292.4 million, which exceeded consensus expectations and was a record for NLG. Our free cash flow was robust at 110.6 million, despite increased capex spend driven by growing activity. We have generated approximately 370 million of free cash flow year-to-date, almost two times more than the entirety of 2021, despite the additional spending and lower oil prices. Our adjusted EPS was $1.80 per share in Q3 above consensus estimates. Oil differentials were again better than expected in Q3 and came in at 84 cents per barrel due to continued strong Bakken pricing and having more barrels weighted towards the Permian, which are at a premium to WTI. As a result, we're updating our oil differential guidance to a range of $3 to $4 per barrel. Additionally, we're tightening our gas realization guidance as well by taking the low end of our expected range up to 105%. On the CapEx front, we invested $154.5 million during the quarter, roughly evenly split between the Williston and Permian basins. Activity has been robust. As Adam mentioned, Q3 turning lines were up roughly 60% and spuds were up over 15% from the second quarter. while days under development has been reduced roughly 25% from our 2021 levels. This has resulted in a record DNC list of 61.5 net wells and has contributed to the pull forward in our capital spending along with our continued success on our high return ground game investments. While these accelerated investments have led to an increase in our 2022 CapEx guidance, they are also expected to boost our 2022 production exit rate and reduce our 2023 maintenance capital requirements. On slide seven of our earnings presentation on our website, we provided a walk from the prior midpoint to the current midpoint of guidance. The balance sheet's in great shape. Closed on a convertible notes offering shortly after quarter end that largely cleared out our revolving credit facility borrowings to fund our closed and pending acquisitions. The convertible notes offering had tremendous demand and the terms associated with it ultimately provide low-risk, unsecured term debt with an all-in cost of borrowings below that of our current revolver and have further extended our maturity schedule at the same time. Additionally, due to the features we selected, there will be minimal to potentially zero dilution to our existing holders, and to the extent that there is, the company has options to manage this over time. We expect leverage will tick up slightly over the next couple quarters with the closing of our pending acquisitions, but the ratio should be back below one times by the end of 2023. Year to date, we've retired 23.4 million of our 2028 notes and continue to monitor the interest rate environment as well as our bond levels. We continue to look for ways to efficiently reduce leverage if the market opportunity arises. With respect to hedging, since our last report, we opportunistically added hedges in the form of attractive, costless callers, that allow us downside protection with the opportunity to participate in upside if prices rally. We continue to hedge out volumes from each closed and pending acquisition based on our stated hedging strategy. Finally, a few comments on our updated guidance, which we laid out on slide six of our earnings presentation. We increased the midpoint of our full year 2022 production guidance by 1,250 BOE per day, and now expect to exit December at over 83,000 BOE per day. which includes our Midland transaction that closed in October, a full month from our two acquisitions that are expected to close in December, but does not include our pending MPEC transaction, which we expect to close in January. We bumped the midpoint of our full year CapEx guidance by 42 million as a result of the factors I mentioned earlier. Cost guidance has remained largely unchanged from prior guidance with a slight increase in LOE from increased field level costs. All in all, we expect to generate approximately $500 million in free cash flow for the year, and from a value creation perspective, the exit rate cash flow and production volumes are substantially higher. With respect to 2023 guidance, we're hard at work in having board-level discussions over the coming weeks and expect to be able to provide our plan by early next year. With that, I'll turn the call over to the operator for Q&A.
spk04: Thank you. At this time, we will be conducting our question and answer session. If anyone would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 keys. One moment, please, while we poll for questions. We have a first question from the lineup, Neil Bingman with Truist Securities. Please go ahead.
spk07: Morning, Nick and team. Guys, my first question is on 23. Specifically, you all highlighted on the press release and Nick in your prepared remarks all the continued attractive opportunities driving the boost this year, not necessarily inflation. I'm just wondering, are you able to give – I know you don't have specific 23. I don't want to press you too much on that, but I'm just hoping you can maybe give a little color – on the latest increase and how that could shape 23 production and maybe more importantly what type of capex increase you all might entertain next year morning neil um what i think what we'll tell you is this and it won't be as simple as sort of well cost times the number of wells
spk03: You know, I think to grow to and sustain, call it 100,000 barrels a day, we'd need to drill about 80 wells a year for 90,000 around 65. And the building and maintaining of the DNC list and the associated capex accrual means the nuance timing, total amount is far more complicated than just that simple math. And it'll depend also on what region we allocate capital to. and what role the ground game plays into it, if any. But this should be a helpful start for some bookends. I think the bigger questions for us are, as the windfall develops from the mascot project, do we have competitive reinvestment opportunities for that, or would we rather harvest the cash windfall for our investors? I think we'll spend a lot of time at the board level debating these topics in the coming weeks and months.
spk07: Okay, so I mean, you know, are you prepared? I mean, just on sort of production or CapEx Sky, I mean, are you able to say just what you're able to let that, you know, maybe broad comments on what that might go up? Are you just talking about inflation? Yeah. Yes, driving that. Are you, you know, that would probably be the more specific question.
spk03: Yeah, I mean, I think as it pertains to inflation, I think most of the reporting operators have been guiding to a kind of 10% inflation rate. You know, I think that's a deceleration, you know, certainly year over year. I think we look forward to coming back to you soon with our overall investment plan and kind of our own views on the accuracy of that. I think, but at current, I don't think we really have a differing opinion. So what I would tell you is that, you know, there's definitely leading edge inflation. I would agree that it is somewhat decelerating and operators are enterprising folks in there figuring out ways to offset some of that. I don't know, Adam, you want to add to that?
spk02: I think once we get through Q4, kind of understand what that overall mix is, basin by basin, operator by operator, we'll be able to nail that down a little bit better. So that's kind of how we're coaching it at this point.
spk07: Okay. And then, Nick, something you just said, you know, on the growth versus show the return life. I don't think any of these days, I don't think Brahm's on the call anymore. But I'm just wondering, Nick, as you mentioned, you're having the conversation going forward with the board when addressing 23 production growth versus shareholder return. I'm just wondering kind of how those conversations go. I know for a long time, you know, a lot of times the board favored maybe more shareholder return. But, you know, you mentioned that the goal is to provide the highest total shareholder return, total return over long term. So I'm just wondering kind of how those conversations might go.
spk03: Yeah, I mean, I think it's the age-old question, Neil, of getting a dollar today versus making that dollar worth more tomorrow. It's a challenging debate with our board, with investors, and it's the crux of our capital allocation process. The biggest challenge, you know, as I read sell-side notes as an example, is that at this point in the year, much of the capital we're putting to work will translate into volumes and cash flows next year, not necessarily right away. I think also factor in that we're pretty conservative by nature. And so we certainly could give you a scenario that would give you immediate gratification, but we want to make sure we achieve those things, you know, before just promising the moon and the stars. So I think trust is a big driver. And investors should know and trust that these dollars are being, you know, put to good work and will drive stronger results. And let's put it into perspective too, you know, We're still going to generate a half a billion dollars in cash this year, even with the extra elective investment. So this isn't a reckless decision. I can tell you empirically that those companies that have focused exclusively on free cash flow have lagged over the short and the long term. And those that have gone for broke and kind of spent and have outperformed certainly in the short term. But admittedly, that's a strategy that's way too risky for investors. us and it's been bolstered by strong pricing. So, you know, over the long term, I'm not sure that that's the right strategy either. So, you know, we constantly repeat ourselves, but we're focused on balance, finding a way to generate growth and additional recycling of returns, but also never getting over our skis and delivering solid shareholder returns. So I think in the next several quarters, I think the logic of both the acceleration we just announced today, as well as the robust cash on the back end will play out for investors.
spk07: Great answer. Thanks, Nick.
spk04: Thank you. We have next question from the line of Scott Honnold with RBC Capital Markets. Please go ahead.
spk08: Yeah, hey, thanks, guys. You know, Nick, maybe, Adam, can you give us a sense of, you know, this, I guess, joint venture thing? acquisition you all did i mean how big do you think that opportunity set is going forward say relative to i'd say more of the traditional kind of deals that knock has done over the last several years yeah i mean i think it's early days it's certainly been encouraging in terms of you know the reverse inquiries that we've gotten after announcing the midland petro deal
spk02: That's on the heels of a call of a drill code light that we signed up late last year that we're finishing up here. And that's frankly been a home run for both the operator as well as Northern. I think it's unique to us because you need to be able to move the needle for some of these operators. And you can frame it up in a couple of different ways. You can co-bid assets, operated assets that are on the market. Maybe there's an independent that doesn't want to issue equity or doesn't want to or can't wear it on their balance sheet. And so you can carve out a non-operated interest out of anything. And, you know, we can come in, underwrite it with our technical team and effectively take down the minority interest in that. And then subsequent or in parallel with that, you can put together the joint development agreement and kind of plan the business around it. I think there's other operators that are out there that have run some failed processes over the past year, whether it's drilling obligations or whatever it might be, in terms of getting kind of the right bid from other operators where they've got to socialize that with the rest of their inventory. And so I think there's an opportunity to kind of come in. and buy down again an undivided interest uh minority interest and put together a joint development program and we've got you know at least two or three um that are live right now uh i don't know if they'll necessarily meet our return thresholds and we've had um significant kind of reversing breeze coming after the fact so uh certainly encouraging but we'll just have to see how that shakes out relative to some of the other you know typical non-op packages that we continue to screen.
spk08: Yeah. And do those typically, because, you know, I know this recent one you all did had a pretty high work and interest. Do they typically come with high work and interest? And how do you think of that in terms of like a risk profile?
spk03: Yeah. I mean, sorry, I didn't mean to interrupt you, but I think, Scott, you have to think about there's concentration risk and then there's control and timing risk, right? And so each set of assets have similar, you know, right? If you buy a traditional non-op asset, You certainly don't have the same concentration risk in most cases, but we have to really spend a lot of time on the art and the science of the timing of that development to ensure that we're earning our IRRs. And so the neat part about it is as we get larger, more concentrated interests don't really rock the boat. And so that timing factor can make up for a lot of those things. And that's why you'll notice we're spending a lot of time on super high quality areas, right? You're talking about the guts, probably some of the best pieces of land in North America, which is why you can and are able to take those risks, but also a project that's over 30% complete, so you have well control and an understanding of how that area is performing already. And so that can give a lot of confidence to the underwriting. I would tell you we're not known for being optimistic here, and so I think that that's critical to that beginning phase. But I think it's going to be an all-of-the-above approach You know, we recognize that these projects are a bit different, especially when you're thinking about it not as a 10-year asset, but as an asset you're going to go and mow down. But I will tell you, as it pertains to the Midland Petro project, that is the highest underwritten return we've ever done. And so I think, you know, while it might seem, you know, weird and different, I think over time it'll prove its fruits to our investors.
spk08: Okay. And, you know, when you look at, you know, obviously a lot of discussion this past quarter on well performance, you know, for various operators. And, you know, look, I know you guys do your diligence to take a look at, you know, different types of permitting that, you know, your partners are going to do. But, you know, how do you get comfort in sort of that, you know, kind of more mid to longer term, you know, view on the quality of inventory that your operators have and, you you know, in, in, you know, how do you, you know, kind of comfortable with that assessment? Maybe I'll leave it with that.
spk03: Yeah. Are you referring to that project in itself or in general?
spk08: Just in general, not, not any specific project, just in general, in terms of, you know, your, your partner's depth of their well and the quality of it.
spk03: Yeah. Yeah. I mean, I think we, look, we do our own work, right. You know, every, every piece of leasehold that we own, we draw our own sticks. We have our own URs. We have, I mean, nearly 400 tight grips in the Williston alone. So we certainly, you know, with no offense to any particular operator, but we're not listening to their views on what they think those wells can do or what that inventory will do. We do our own work. And so, you know, every acquisition we do is bottoms-up engineered by our own team. I don't know, Jim, if you want to add to that.
spk09: Yeah, and obviously we're looking at the inventory that we think the operators have left. You know, we can go out there. We've got everything mapped across the entire basin, so we can look at units. have an idea of how many years of inventory we think a specific operator has left, how they might target that. And that's part of our proactive management where we can go in, target specific DSUs that we know that the operator's gonna have to move to within the next couple of years to get developed. And so we use that to help augment. And then on all the acquisitions that we do, again, we're using that to augment our inventory. So all the acquisitions we've done over the past couple of years have been to improve the remaining inventory that we've got left in our portfolio.
spk08: Thanks for that.
spk04: Thank you. We have next question from the line of Charles Mead with Johnson Rise. Please go ahead.
spk01: Good morning, Nick, to you and the whole NAHL crew there. I wanted to go back and ask something about what you're seeing in the ground game. There was a little bit of an uptick there we saw in 3Q. I guess I'm really interested in how much of an uptick – obviously, you've given a guide for 4Q, but how much of your 4Q guide are you expecting to see an uptick and more opportunities to – to elect into Wells or participate where other people not. I think you mentioned this in your press release, but I want to get an idea of the magnitude.
spk03: Yeah. I mean, I think a lot of the raising CapEx is ground game. That's already been really in process. So there's, I would say beyond the normal course business, I wouldn't say that there's an anticipation of a material increase from, from here going through the end of the year. Charles, I would say this and I'll let Adam or Jim, you know, chime in at any point, which is that, We have found a big return disparity as well as competitive disparity in what I would call chunkier ground game opportunities. There are a lot of people chasing a tenth of a well bore or five or ten acres here or there. What we're seeing are just attuned to what we were talking about with Scott before in larger ground game interests. materially higher underwritten returns for us and a lot more success rate. And so that's a good thing, but it also means that when you have that success, it's obviously going to be actually more impactful to our capital over time, which is one of the reasons that we sat down with our board and really had to make some tough decisions in terms of how much money we wanted to spend in the last few months.
spk02: Yeah, that's right. I mean, it's the competitive universe when you get into these larger, more concentrated deals where subscaled non-ops, frankly, don't have the wherewithal to spend the money or don't have the risk tolerance because they don't have that base. And so we've continued to raise our discount rate as we've moved through the end of the year as people have exhausted their budgets and have been successful in that regard.
spk01: That is helpful color. And then, Nick, going back to your convertible bond offering, can you give us a narrative of your evaluation and your selection to go with that kind of financing route rather than either some mix of straight equity and or straight debt and whether –
spk03: whether this was something that you that you decided was the solution you wanted you went looking forward to whether it was the other way around that maybe you know the market came to you and said we've got we've got favorable terms yeah i mean i think let's let's take a step back for like 30 000 foot we've been looking at convertible bonds for chad and i've been looking at for four or five years uh and the various it is a very bespoke instrument um you know i I had a board member once tell me that it sounded like witchcraft to him, which I appreciate. And the complexity is interesting. Look, the reality is that you can make a convertible bond whatever you want. And obviously, the embedded optionality in it provides a lower cost, which is particularly sensitive in an interest rate rising environment like we're in today. But ultimately, if you look at the instruments that we chose for this bond, and Chad mentioned this in his prepared comments, effectively, we've been able to boost it to a $52-plus conversion rate. But even at that conversion rate, there is no dilution. Effectively, we pay back the bond in cash. And so, therefore, if you and Charles, I think I provided you with some of the kind of Excel metrics on how this works. But ultimately, it provides all the good things of a convertible bond, which is a lower coupon rate. with really minimal dilution on the back end. And because we used a cap call where we can control it, we can always over time move and manage that cap call to prevent any dilution if we so desire with a minimal impact of the overall cost of capital. So we've really threaded the needle here. I will tell you the convertible bond market is heavy in tech and biotech. And so they're not used to profitable corporations being part of it. So the demand was off the charts We recognize when you do and price this and just the mechanics of the derivative is going to hurt your stock for a day. But I think as you saw, it was really a one and done type scenario when it goes through there. I mean, when you compare it to common equity, you know, we don't really feel like this wasn't really a function that we felt like we needed to manage our leverage ratios. In fact, you know, they'll flex up for a quarter or two, but we didn't really need an equity injection scenario. And I think that we feel like the high-yield bond market is too expensive, just simple. And so this instrument provided all the good with really none of the bad, and I think it was a fairly obvious choice, admittedly a more complicated one.
spk01: Thank you, Nick.
spk04: Thank you. Again, to ask a question, participants may press star 1 on the touchstone phone now. We have next question from the line of Derek Whitfield with Stifel. Please go ahead.
spk11: Thanks. Good morning, all. Good morning. Throughout earnings, I think Scott touched on this earlier, but co-development has been a subject of focus, particularly in the Midland based on industry commentary. Regarding your mascot project, could you speak to the co-development strategy there?
spk03: In terms of – I mean, we will spend pretty much every – are you just talking about in terms of structure, Derek, or in terms of communication and all those sort of things?
spk11: More associated with how you're going to develop the suite of intervals.
spk03: Oh, yeah, yeah. So we began negotiations and discussions with MPDC back in June. and they laid out their view of development and optimal development, and we spent a lot of time with our advisor and our technical team reviewing that, and, you know, candidly, it's changed like anything else over time, and then ultimately we memorialized it when we built a joint operating agreement, which, you know, both gives us, you know, obviously, you know, ripcord features and protections along the way, but also, you know, a strong level of confidence in how it's developed, I think, It's really important, too, in these units to really develop them all at once to maximize the EURs and the ultimate IRRs on those wells. And that was something that we very much agreed to both experientially and just in terms of how the midland and communication between those units or between those wellbores works. So it's very important. I'm sorry, go ahead.
spk02: No, that's right. I mean, the short answer is that's exactly what's going to happen. I mean, what they've done, and you can see it on the gun barrel in the presentation, that drilled the deep rights to HVPL acreage, then the offsets in order to, you know, mitigate any sort of frack communication with offset operators. And then they're effectively just moving east to west across the board.
spk09: Yeah, you can see this is a four-unit development. So one of the units is already fully developed across the entire suite of zones. So we can see the impact of the parent wells versus the child wells. And going forward as co-developed, we can model that out with our expectations. And obviously, as Nick mentioned earlier, we're always a little bit conservative. So I think here in this area as well, we're being conservative with our assumptions here. And there's probably some upside to what we think the actual results will be.
spk11: That's great. And maybe just a build on where you ended there. In light of how active you guys have been in A&D, I wanted to ask if you've had a chance to perform lookbacks on your 2021 acquisitions to see how close your projections were. I'm sure, as you guys admitted, you've been quite conservative in your assessments.
spk03: Yeah. I mean, I can tell you universally, I think we've destroyed every single forecast that we put forth. I mean, I think we mentioned it in my prepared comments about the Marcellus and just the underwrote that as if Chevron still operated it. I think both performance and cadence of development on our Veritas, which is our largest one, has materially exceeded our estimates. I mean, I think literally if you go deal by deal over the last year and a half, and frankly, I think almost every transaction we've done since 2018, you know, I think, you know, we don't talk about it a ton, but the flywheel transaction we did back in 18, which is heavily leveraged to Oventive, has turned out to be a home run, and they've been one of our marquee operators in the Williston over the last year or two.
spk11: Terrific. It's very helpful. Thanks for your time.
spk03: Thanks, Jared.
spk04: Thank you. We have next question from the line of John Freeman with Raymond James. Please go ahead.
spk05: Hey, good morning, guys.
spk04: Good morning, John. John, what's happening?
spk05: Hey, the first thing I want to touch on, obviously, I've done a remarkable job, you know, growing the base dividend over the past year plus. And I just, you know, a year ago, roughly like last December, y'all had a presentation y'all put out that sort of gave sort of more detailed kind of look around the base dividend kind of growth plan and kind of how y'all thought about the structure. And I just sort of want to revisit that kind of initial concept. So, you know, initially that was based on, you know, $50 oil, $3 gas. And you basically said at that price deck, you'd be able to grow kind of 20%, um, on average kind of quarter to quarter growth rate through, through 23. And that, that would sort of equate in 23 to like one third of your, your free cashflow, um, after maintenance CapEx at that, that price deck. And excuse me, I'm just trying to get a sense for, obviously y'all are almost a year ahead of schedule, you know, combination of you know, mainly, you know, M&A has obviously been much more than y'all were assuming in that plan, which didn't assume any M&A. But when I think about, like, going forward, obviously, you've made it clear kind of what your view is on the special dividends. But should we think that, like, on a go-forward basis, the base dividend, it's always going to kind of run at kind of that rough, you know, idea of a price stack at the 15.3, a third of free cash flow post-maintenance capex, or Is there any thought at all about longer term, you know, like maybe what the large caps do with having this kind of fixed plus variable component or just assume the base dividend kind of is what it is. And as you do acquisitions, maybe that kind of goes up with it. You keep the conservative price stuck and then you just sort of layer on from time to time, you know, the buybacks like y'all have. I'm just trying to get some more color around how you think about long term because y'all have obviously been way ahead of what y'all originally projected.
spk03: Yeah, I mean, I think we noted in our quarterly presentation, I think this quarter's dividend is about 43% higher than what we promised last December when we launched the plan. I think it's a little more complicated, John, in the sense that, you know, we want to provide a solid and growing dividend. I think the rules that you're discussing are healthy and consistent and true. But also, you know, we think about it too in terms of, you know, what is the yield you're providing to investors? Too much yield is not a good thing for the business long-term and too little yield is not a good thing. I mean, I think we're, this sounds, you know, sort of boilerplate, but we really are focused on delivering the best risk-adjusted total return value proposition for the stockholders. And this, you know, it means, you know, consistent, well underwritten base dividend, you know, premium cash flow growth. It is one of the highest base dividends, you know, in the space. And that's partly because I think we have higher ROCE than average. And I think it's a disciplined approach, you know, from acquisitions over the last two years as well. You know, I think we can continue to drive capital allocation, balancing current income with future cash flow growth and targeting that superior total return. You know, but I think They are out in the public forum. You know, I think we've targeted, you know, by the end of next year to get to about 37 cents a share per quarter. And we've fairly consistently accelerated upon those plans. And so if and as we achieve those internal goals, I think we hope to keep delivering better returns. We may shift our capital allocation over time, though, because the factors that will drive that will be the valuation of the stock, the yield, of the stock and the opportunity set in front of us in totality. I'll take dynamism over kind of dogmatic plans any day from a long-term value creation perspective. I think people love formulas, and I think there are formulas you can set as baselines, but I think flexibility in making the best decision for the business over the medium and long term will trump that over time.
spk05: I appreciate that, Nick. And then just my follow-up, Just touching back on M&A again. I mean, last quarter in August, you mentioned that there was just a number of sellers out there with unrealistic expectations. You talked about how the bid-ask spread was very real. And it's just, I guess, sort of remarkable just from August to now what y'all did with those three pretty meaningful acquisitions during the quarter. And I'm just trying to get a sense of what do you think sort of changed? Like, is it you know, I don't know, private-backed entities that just need to monetize or just, you know, just something that caused all of a sudden for a bunch of things to kind of domino for you all to be as successful as you all were on the M&A front.
spk03: Yeah, I mean, I'll give my pithy commentary and let Adam finish it up, but I think my view is a lot of this is timing. You get a lot of bluster, and then people, you know, threaten and say, we're going to go run a process. And we say, sure, go ahead. And then we, you know, we come into the process and we realize whether we have the highest price or not, we're certainly the most viable and likely to close. I would say that, you know, in the recent transactions, when you do one, you know, it's kind of funny. You do one and it actually seems to exert pressures on the others because they're afraid that then you're going to be out of the market and suddenly people are willing to negotiate. So I would say that as we've had the success on those few, it has tended to actually bring down the expectations from others, in our opinion. But honestly, we are always – you guys might be surprised at how many transactions we are able to accomplish. I think we would be just as equally surprised. You know, we don't – we go into this with a fairly – I won't call it mean-spirited, but fairly mechanical approach here. Sometimes it works, most of the time it doesn't, and when it works in a rapid succession, color us surprised that we certainly don't go looking for this. I don't know, Adam, do you want to finish up?
spk02: Yeah, I think two of the three took effectively six to nine months from kind of start to finish, and so I think the next point, a bit unexpected. We would have been thrilled to have one of these, and the fact that we're able to tuck in all three is a bit coincidental in terms of you know, signing them up on top of each other. The third, you know, acquisition was frankly a group that we had done, you know, prior acquisition with, you know, prior years. And so that was easy in terms of, you know, prosecuting and negotiating the PSA. I typically just take the same one off the shelf. And, you know, as we look forward, I think, or look back in terms of the tracking list of last quarter or, you know, this year, these were ranked one, two, and three is called the most desirable in terms of asset quality and balance. You know, as it stands today, there's probably another $2 billion worth of live opportunities that are out there. But the quality of the assets, I think is hard to compare with what we've been able to sign up to date. And all that said, if these come in in a linear fashion, and so to the extent that there's something compelling, we'll certainly be screening them. Yeah.
spk03: And I mean, I just, To give you a frame like how much of a crapshoot this can be sometimes, there was a Williston asset for sale this summer and I think someone outbid us by like close to 50% or 40% for it. And it's an asset that we were in two-thirds of the properties. And so people have differing views on value and If someone wants to, you know, we're happy for the seller if they can get that value, and we're certainly happy not to have it if it's going to trade for that value. And so, like I said, we're pretty mechanical, and sometimes we have success, and a lot of times we have failure, and it's just the way the cookie crumbles.
spk05: Thanks, guys. Well done. Thanks, John.
spk04: Thank you. We have next question from the line of Donovan Schaefer with Northland Capital Markets. Go ahead.
spk10: Hey guys, thanks for taking the questions. In the Q2 call, you guys talked about, I think as an example, you mentioned an AFE that came across your desk for a two-mile lateral that was like $16 million and you went non-consent. It seems sort of like a no-brainer. But I've also heard that sometimes operators might inflate their AFEs as a way to... you know, sort of discourage the non-operated interest holder from participating. So I guess first my question is just, is that kind of true where you might get some inflated AFUs where they're trying to kind of trick you into not participating? And if it is, then, you know, how do you know, you know, the difference in those cases, whether you should go non-consent or whether they're just kind of trying to fool you. And then I guess also if there's a competitive advantage there where someone that might get scared away by a padded AFE, but you can look at it and say, no, no, no, we know we can see through this. So just any clarification on that or if that's even a thing.
spk02: We certainly see it from time to time. What I would tell you is that's a very slippery slope because these operators are legally obligated to give us their best estimate. And so if they're caught doing that, they're going to create a whole host of other problems for themselves. And it's a small universe. People talk. We've had it happen probably in the, it's been a few years at this point. We approached the operator and, they kind of went about face and reissued the AFEs. And so I think, you know, by and large, there's certainly contingencies within the AFEs. And those are things that our engineers are looking at on a line by line basis. But you're generally not seeing that sort of trickery going on in the space because the ramifications are, are high.
spk03: I just say, Donovan, we're in almost 9,000 wells. We have 100 operators, and we generate a billion dollars in cash flow a year. I don't think that a high-cost AFE is going to scare us. And because we're in all those wells, if we see it's something that looks out of school, our data is going to tell us in advance.
spk02: Yeah, that's right. I mean, I would almost even look at it on the flip side. You're going to have certain operators that have, you know, drinking their own Kool-Aid, you know, from a well-cost standpoint. having that data to really understand which operators have the propensity to overrun is probably more important.
spk10: Okay. Okay. That's helpful. And then as a follow-up, it looks like you had some good Marcellus production that came in during the quarter. So I'm just curious, was that, you know, on acreage that you already had in place at the end of the second quarter, or was some of that from you know, incremental, you know, non-op opportunities, AFEs or things that you were able to sort of pick up during the quarter?
spk03: No, Donovan, it's all organic. We don't, we have not really had an active ground game in our Marcellus properties. It's a large, right, joint development with EQT.
spk10: Okay. And then if I could just squeeze one more in real quick. So the MPDC, you know, the mascot project, Um, you know, it's, uh, you know, I may be completely off the mark on this, but my, you know, my intuition are just sort of, um, you know, Texas is a super friendly jurisdiction, so that's all really positive. But, you know, it did, it did, uh, you could see that you're sort of drilling into the city of Midland there. And I'm wondering, you know, are you guys in a better position to kind of underwrite that if there are any, you know, is that the type of thing that would discourage other potential bidders, but you can look at it and think through it and say, well, I don't know if there's any kind of risk or concern. Maybe other people have a superficial reaction the same way I'm kind of thinking about it on the face of it.
spk03: I'll give you the easy answer to that, which the answer is no. I think that while it's under the city of Midland, Land and surface where it's being drilled from is outside of the city of Midland. Both Pioneer and Dever above these acreage are doing the exact same thing. I think what gave us an advantage in this was that the operator did not want to sell the entire project. They wanted to stay in it. And so I think it's just as simple as that. And that ultimately gave us a strategic advantage. And believe me, there were plenty of operators ultra-circling, hoping to take the entire project.
spk10: Okay, all right, great. That's very helpful. Well, thank you, guys, and congratulations on the quarter. I'll take the rest offline.
spk04: Thank you. We have a next question from the line of Noel Parks with two Wee Brothers. Please go ahead.
spk06: Hi, good morning. Good morning, Noel. Just a couple of things. You know, as you talked about the process of coming up with what 2023 is going to look like on the budget side, I'm just curious about your degree of visibility this year and I'm just wondering if you're in the position of waiting for more ASE input into your own calculations and whether what you're seeing for ASEs are looking relatively stable or in line with your expectations or sort of trending up. And I just ask about the ASE timing because operators have been pretty unanimously reluctant to give much of an idea of budgets, with many, many deferring until early 23. So I was wondering if that was rippling through into your information flow.
spk03: I mean, I would say from a visibility perspective, we'll enter 23 with the highest level of visibility we've ever had as a company, anchored by a bunch of important projects, but also just given the levels of AFEI targeted towards 2023. I think the question that really surrounds our 2023 budgeting goal is very simple, which is what level of activity and production do we want to target? Like, what do we think is the appropriate way? And I think that there are various schools of thought within the business, and I think that's what's driving why we want as much time as we do. I don't know, Adam or Jim, if you want to add to that.
spk02: No, I mean, from an AFB activity standpoint, we had double the gross AFBs or close to it, you know, kind of quarter over quarter with, you know, a relatively flat average working interest. And a lot of that is driven by the Williston as operators kind of get ahead of things before, you know, winter weather sets in. So all of that's going to be 2023 activity. And then to Nick's point, I think, You know, we need to be dynamic in terms of the acquisitions that we've, you know, signed up, the joint development agreements that we've got in place. And then, you know, what role does the ground game and the opportunity set look like as we move into 2023? And so it's a matter of balancing all of those three prongs, actively managing it all and high grading for that matter.
spk06: Great. Thanks. And then I just wanted to, sort of in a bit of housekeeping, turn to the hedges. And you mentioned the addition of some really attractive collars. And I think with the different deal announcements you've done, you had updated the hedge info accordingly. But I'm a little unclear about sort of the as of or the effective date of the numbers you put out. Because it did seem to me that there was maybe a little bit of shifting in the numbers in the presentation. I don't know if it was a little bit of trimming here and a little bit of adding there. But any insight on that would be great.
spk13: Yeah, I don't know what you're talking about there, Noel. But, you know, we did add some pretty attractive colors. You know, maybe it's just the timing of the presentations that we did. But I don't know. I don't recall. I don't know what you're talking about.
spk06: Yeah. Now, the things I saw were just like super minor, so may have even just been, you know, rounding error.
spk03: Would you have one small Brent link hedge, which could maybe move the dollar figures ever so slightly? That's the only thing I can think of. I mean, I think it's like 1,000 barrels a day or something next year, right? Yeah.
spk06: That's the only thing I can think of.
spk03: Right, I think that was just the one I saw. I don't know if that's it. We're talking about Penny.
spk13: Yeah, I mean, I'd tell you to use what's in our release.
spk06: Okay, great. And those are all as of 9.30, right?
spk13: Those would be as of today.
spk06: Oh, okay. Yep. Great, better still. Okay, thanks a lot. That's all from me.
spk04: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back to Nick O'Grady, CEO, for closing remarks. Over to you, sir.
spk03: Thanks, everyone, for joining us this quarter. We'll work extremely hard, and we'll see you on the next one. Thanks.
spk04: Thank you. To access the digital replay, please dial 877-660-6853. or 201-612-7415 and enter access code 13733042. I repeat, 13733042. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.
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