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spk13: Greetings and welcome to Northern Oil and Gas first quarter 2023 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Evelyn Inferna, Vice President of Investor Relations. Thank you. You may begin.
spk08: Thank you, operator. Good morning and welcome to our first quarter 2023 earnings conference call. Yesterday, after the market closed, we released our financial results for the first quarter. You can access our earnings release and presentation on our investor relations website. Our Form 10-Q will be filed with the SEC within the next few days. I am joined this morning by NOG's Chief Executive Officer, Nick O'Grady. our President, Adam Derlam, our Chief Financial Officer, Chad Allen, and our Chief Technical Officer, Jim Evans. Our agenda for today's call is as follows. Nick will provide his remarks on the quarter and our recent accomplishments. And Adam will give you an overview of operations. And last, Chad will review our first quarter financials. After our prepared remarks, 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 our 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've 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 free cash flow. Reconciliations of these measures to the closest GAAP measures can be found in our earnings release. With that, let me turn the call over to Nick.
spk11: Thank you, Evelyn. Welcome and good morning, everyone, and thank you for your interest in our company. Given the strong, consistent results and lack of big changes this quarter, I'll be more brief than usual. I'll get right down to it with only three key points. Number one, stellar execution. In our first quarter of the year, NOG's national diversified model delivered once again with better than expected production and cash flows. We continue to fire on all cylinders. Our mascot acquisition was closed on time and our assets are on track to deliver growth throughout 2023. Generated record adjusted EBITDA in the quarter and record oil and total volumes, despite significantly lower commodity prices. Even with the closing of our mascot acquisition this quarter, our LQA leverage ratio was down sequentially capital spending is right on track at about 20% of the midpoint of our guidance and in line with our anticipated 60% first half weighting. In a year of notably weak gas pricing, our oil properties have picked up the slack with our oil cut rising materially in the past few quarters. Number two, growth. In a middling year for commodity pricing, we are seeing tremendous opportunities on all fronts, from our organic properties, from our ground game, and from an ever-expanding variety of growth prospects. Given our size, scale, and diversity as the largest national non-op franchise, we are unique in having access to the best of the best properties across both commodities and multiple bases. Additionally, we've expanded our bolt-on opportunity set beyond our traditional fractional non-op asset acquisitions. We are pursuing other growth avenues, including partnerships directly with the operating as seen with MPDC, co-bidding in M&A as a partner to operators with similar economic discipline, and other unique structured solutions to deliver solid returns for our investors and drive the compounding of returns over time. Adam will talk about it further, but we continue to make traction with our operating partners as a superior capital provider for the co-development of oil and gas assets. We have the scale and the capital to provide solutions for these operators in ways others can't, and we pride ourselves on being a straightforward and reliable counterparty with a track record of execution. Number three, capital allocation. Our goal is to provide our shareholders with the highest possible total return over the long term. We have implemented a multi-pronged approach, including a share repurchase program, repurchasing debt securities at discounts, and increasing the cash dividends for our common stockholders. We recently announced a 9 percent increase to our common stock dividend for the second quarter of 2023, our ninth straight increase. Additionally, we tactically repurchased common shares during periods of volatility. Since we initiated our dividend program and share buyback in mid-2021, we've returned well north of $200 million to investors. And our view at NOG is that our scale should help us build a shareholder return program that can grow over time. As always, we'll be mindful of risk and leverage, but the power of what we've built should continue to deliver an attractive risk-adjusted total return, as the company under our management has consistently done over the past five and a half years. During our tenure, NOG's total return outperformance versus driven by a capital allocation strategy rooted in dynamism. The flexibility inherent in our strategy, as well as our business model, has allowed us to adjust our capital allocation to where the greatest opportunities exist at any point in time, all the while providing a solid and growing cash return via the dividend. We continue to see this as superior to more dogmatic return programs, and the results in the marketplace speak for themselves. In closing, 2023 is off to a strong start for the NOG team, and we remain confident that we can continue to deliver growth opportunities in the coming years. I will remind you, as I always do, that we are a company run by investors for investors. With that, I will turn it over to Adam.
spk05: Thanks, Nick. The first quarter was seasonally strong as we kicked off 2023's operations. Turning lines for the quarter were as expected. adding approximately 13.1 net wells to production organically, which was up over 20% versus Q1 of last year, despite multiple periods of inclement weather. The Williston made up approximately three quarters of the organic activity, driven by larger working interests with several of our top operators. The closing of our mascot joint development project in January added another 16.4% net wells of current production and we continue to be encouraged with the project's overall productivity so far on average actual production results have outperformed our internal estimates by 10 percent in the mascot project the productivity and outperformance across each basin are testaments to our capital allocation process where we target areas and operators that we believe will deliver a superior return on capital. The drilling and completing list finished the first quarter with 59.3 net wells, up from 55.4 net wells where we started the year. During the quarter, we added 14.1 net wells across the Williston and the Permian via organic and ground game activity with an additional 9.2 net wells added from our mascot project as drilling continues. First wave of mascot completions since we joined the project is slated to turn in line over the next couple of months with the second batch set to start completions in the fourth quarter. Our DNC list grew during the quarter, and our near-term backlog of well proposals has also been consistent. During the quarter, we received over 200 well proposals, our highest on record, albeit with varying working interests. Well cost inflation has been consistent with our recent AFEs. We are seeing leading indicators of deceleration, and we expect to realize that towards the back half of the year as operators continue to reset terms with service providers. The quality of the proposed wells also remained high, as we had over a 95% consent rate during the quarter. The M&A landscape continued to evolve during the first three months of the year. Large asset packages were a bit slow coming out of the gate, and the quality of what came to market was not particularly enticing. As such, we passed on a number of potential transactions while continuing to search for opportunities that are better aligned with our strategic positioning and return profile. We're being patient and are beginning to vet more compelling and higher quality opportunities. NOG's total addressable market has expanded given our size and scale, and we have been invited to co-bid on a number of operated prospects, as well as explore sell downs from operators looking to partially monetize and remain as operator. These opportunities are not necessarily available to smaller non-ops as size and scale are required to participate in these large asset packages. This puts NOG in a unique position where we can have a seat at the table with our operating partners, determine a long-dated development schedule, and underwrite accordingly. Looking at the entire landscape, there are currently 14 opportunities we are reviewing across our basins of interest. totaling over $6 billion across large asset packages and joint development structures. Volatility in commodity pricing was also a headwind during the quarter, and there were several M&A processes that were put on hold. While the bid-ask spread was alive and well, we pivoted to our ground game to target drill-ready opportunities in situations where most sellers needed to transact to manage budgets and capital outlay. Taking advantage of that backdrop, we reviewed over 140 opportunities and closed on 10 transactions during the quarter, picking up 2.6 net wells and 369 net acres. We've maintained that momentum moving into the second quarter with a backlog of attractive deals under negotiation. Our Midland Petro transaction last year has shown the art of the possible And while we're exploring large joint development agreements, we've also been able to bring this concept to our ground game, putting together one-off operated units and bringing in operators to develop. While our total addressable market for non-operated properties is as large as ever, we remain steadfast in our discipline. We will never be focused on growth just for growth's sake. Our strict underwriting remains focused on returns. With that, I'll turn it over to Chad.
spk04: Thanks, Adam. I'll start by reviewing key first quarter results, which outperformed our expectations despite a volatile commodity pricing backdrop. Our Q1 average daily production topped the high end of our expectations, 87,385 BOE per day, an 11% increase over Q4 of 2022. Oil volumes were up 12% sequentially over Q4, as we experienced better well performance across all basins and the addition of our MPDC acquisition, which closed in early January. Our adjusted EBITDA was $325.5 million in Q1, a record for our company. Our first quarter free cash flow was robust at $84 million despite growing activity and commodity price volatility. Oil realizations continue to be better than internally expected, as Q1 differentials came in at $2.67 per barrel due to continued strong in-basin pricing and having more barrels weighted towards the Permian, which are typically priced tighter. Natural gas realizations were 142 percent of benchmark prices for the first quarter, substantially higher than our stated guidance due to the stabilization of NGL prices, and some of our Permian gas tied to West Coast deliveries versus Waha. Balance sheet remains strong. Leverage is trending in the right direction and is down sequentially on an LQA basis versus year-end, even with the closing of our MPDC acquisition, which added approximately $320 million to the balance sheet. Our net leverage ratio should return to our target level by the end of 2023 as our acquisitions contribute to our operations and we are able to organically de-lever. We still have over a billion dollars of liquidity in the form of unused revolver and borrowing-based capacity. Since year end, we have retired 19.1 million of our 2028 notes at attractive prices and have reduced our outstanding revolver balance by approximately 50 million post-closing of the MPDC acquisition. Mindful of our net leverage target, we will continue to look for ways to efficiently reduce leverage if market opportunity arises. We are reaffirming our CapEx guidance and reiterating the amount and cadence of our CapEx spend. As a refresher, the range is $737 million to $778 million for 2023. Our Q1 CapEx investment was $212 million, represented approximately 28 percent of our CapEx guidance at the midpoint, keeping with our expectation of realizing 60 percent of our annual spend in the first half of the year. With respect to cost inflation, year-to-date, we are within our internal expectations, but as Adam mentioned, We are beginning to see early indications of stabilization, and with the continuation of weak natural gas prices, we anticipate the potential for a reduction in rig count and subsequent cost savings over the next six to nine months if current trends stay in place. We are not adjusting our 2023 production guidance and continue to expect a range of between 91,000 and 96,000 POE per day for the full year, barring unexpected disruptions. With respect to our production case for the year, based on our current till schedules, we still expect fairly rateable increases each quarter, with slightly more modest volume growth in Q2 and an acceleration into Q3 as the next wave of mascot wells come online. We have made minor adjustments to our guidance on gas realizations in LOE. On differentials, we are upping our gas realizations to 80 to 90 percent, given stronger than expected NGLs thus far, but keeping our oil differentials the same for the time being as in-basin pricing in the Permian and Williston remains volatile. LOE was adjusted for higher NGL prices realized here today. We'll update you in the coming quarters if we anticipate material changes. With that, I'll turn the call back over to the operator for Q&A.
spk13: Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 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 key. Our first question comes from the line of Scott Hanold with RBC Capital Markets. Please proceed with your questions.
spk14: Yeah, thanks. Hey, Nick and team. Just a question on the shareholder returns. Obviously, you all were able to hit your dividend target much sooner than anticipated. And you've flexed several different aspects of shareholder returns. How do you see that progressing through 2024, into and through 2024? Are you looking to target maybe another You know, dividend is that driven by rate or do you, you know, continue to look at buybacks as an option that increasingly becomes more important?
spk11: Morning, Scott. You know, we're obviously proud of having grown our base dividend and, you know, achieved and exceeded our target plan, you know, well in advance. um and as you know we have active stock and debt repurchase authorizations that allow us to take advantage of market opportunities as they arise um i say this virtually every quarter but but dynamic capital allocation is critical in our opinion to creating long-term value and the ability and flexibility to act when when things change so i think you can trust us to be nimble, you know, as we evaluate where we deploy our free cashflow. Um, but the obvious places, uh, for the future, our dividends, you know, share in debt repurchases and reinvestment in the business. So I think we'll take it all in stride.
spk14: Okay. Thanks for that. And, and, you know, they get them. You, you had mentioned that, um, a lot of opportunities coming in the door, you know, you've turned down, you know, a number of these just cause it, you know, um, It sounds like maybe like a bid-ask kind of spread or, you know, do you guys have a higher bar now with, you know, the success you've seen from Mascot that, you know, fundamentally means that, you know, some of these opportunities that historically have come in need to really kind of, you know, do a little bit more to compete versus, you know, the JV opportunities or partnerships there?
spk05: Yeah, I mean, we look at everything on a risk-adjusted basis. And so the specifics of any particular transaction and the assets and maybe some of the other kind of qualitative details are going to go into that underwriting. I think the fact that we have so many of these opportunities in front of us, and I feel like a broken record every quarter saying as much, but it gives us the ability to be picky, right? And so... that's going to come out in our conservative underwriting as well as the way that we approach any given particular transaction because we're not going to fall in love with any deal because there's plenty for us to choose from.
spk14: Right. And maybe my underlying kind of question was, do these JVs and partnerships, do they tend to be better return opportunities than, say, the historical buying of non-op working interest, we'll say?
spk11: I think they're just different. I'd say in general, the short answer would be yes. But it's a combination. Adam used the term risk-adjusted. I mean, you have to think about you have concentration, both benefit and risk. You have line of sight and development timing risk. And when you combine all those things together, that's really what you know, from an underwriting perspective, what really will drive the decision making. And so what I mean by that is that you could buy a non-operated fractional business with 2% working interest across those things across the board, and you can underwrite it to a very high discount rate. But ultimately, it takes a lot of activity to be impactful on those assets. If you buy something with a 20 or 30% working interest that has different sets of risks, But especially when you're working alongside the operator, the timing and confidence in that underwritten value, it can be a lot higher. But I would tell you that, generally speaking, when you're talking about bigger ticket items, the discount rate is going to be wider. You are just simply going to be able to have a better item.
spk05: Yeah, and that's a function of knowing who your competition is. And as we see larger and larger non-op types of transactions, that's going to effectively – filter out a lot of the competition that we would otherwise see maybe on some of the smaller ground game things. That will give us the opportunity to raise our discount rate and still get things across the finish line.
spk11: I think, not to be too tongue-in-cheek, but anyone who tells you that we're picking up the small things that no one else is paying attention to, I think that's not true because I think the smaller and the lower the barriers to entry, the more competitive any process is.
spk14: Appreciate that. Thanks.
spk13: Our next question comes from the line of Neil Dingman with Truist. Please proceed with your question.
spk12: Morning, guys. Thanks for the time. Nick, my first question for you or Adam, just on the mascot project specifically, could you discuss, you know, just since you did, I guess it closed not terribly long ago, but since closed, any update on the development plan or just maybe what returns are looking like there? I know it was said. quite interesting project when, you know, you first announced, I think it was mid last year now, just wonder how that's progressed.
spk11: I mean, I would just give an overall, I'll let Adam talk about the details, but I'd say overall, we're really pleased, you know, we take everything, you know, day to day, month to month, but everything so far has been wonderful. I think the, productivity. Obviously, some of this is just conservatism on our end, but the productivity has been better than we had certainly underwritten so far. I'd say they've been hammering away in the field and doing a great job so far, and everything's moving according to plan. I don't know if you want to add to that.
spk05: No, that's right. I mean, it alluded to the fact that, you know, all performing expectations were about 10% on current production. We've got about nine net wells in in process, you know, the drilling and the spotting of the wells is humming along and that'll be rateable across, you know, the rest of the year. And then from a completion standpoint, you know, in the next couple of months, they'll be getting after that. And so, you know, you're talking about, excuse me, about, you know, half those whips, give or take, you know, tilling and late June, kind of early July, and then kind of that next wave coming, you know, into 24, give or take. So, down the fairway, no surprises, pretty much everything that we underwrote.
spk12: No, that's good to hear. I'm looking forward to that. And then just on that, Nick, I think it was in the press release, you continue to talk about the record number of just proposals you're seeing. Maybe could you just speak to that? I mean, again, I guess my question around it is, you know, are you seeing more today than you did even a year ago? And if so, you know, you know, has sort of what your restrictions are when you're looking at these, you know, maybe talk about what the requirements are, you know, how much tougher they've gotten since, you know, since the company is now much larger.
spk11: Sorry, I want to make sure I'm answering the right question. You know, are you talking about like just wealth proposals or are you talking about like transactions and opportunities? I just want to make sure.
spk12: No, I'm just wondering exactly just on wealth proposals, like how many are you getting and, you know, when you and Adam are looking at it now, is the bogey to hit, you know, how much higher would you say it is these days versus, you know, a couple of years ago?
spk11: Yeah. I mean, I think what, I mean, I think we, what was it? We had 200 gross proposals in the first quarter. Yeah. I mean, we had a record number and sometimes these could be a, you know, a fraction of a percent of an interest to, you know, 40, 50% in some cases. And what I tell you is, it goes into the same meat grinder. It goes right through the engineering group. Every single one goes through the same process, whether it's a tiny bit of money or a large amount of money net to us. And I'd say overall, you know, the fact as we've expanded, you're talking about a million gross acres now, you know, plus or minus for our assets. So you're seeing tremendous, you know, tremendous amounts of activity, even as commodity prices have We can somewhat, but if we're doing our job, just like any portfolio manager, if you're buying lands in the right places, you're going to see consistent development. And I think we've certainly seen that. We've continued to high-grade and already high-graded set of acres over the last several years. And so I think we've seen activity that's been at or above our expectations. The net interest in those can vary wildly from quarter to quarter, but I don't know, Adam, you want to add anything else?
spk05: No, I think you nailed it. I think it's just a function of the effective management of the portfolio and your working interests are going to vary and you've got your plan. And so you can hit the gas where you need to, and you can pump the brakes on the ground game and, when you need to, and it's all going to depend on, you know, what the organic asset is pulling and then the opportunity set that we're seeing. And we just continue to manage it day in and day out.
spk12: Perfect. Thanks guys.
spk00: Great work.
spk13: Thanks Neil. Our next question comes from the line of John Freeman with Raymond James. Please proceed with your question.
spk01: Thank you. First thing I wanted to touch on was just on the cost inflation side. I know you all had a budget for kind of 7.5% cost inflation this year. And I know that last quarter, Nick, you mentioned that you're really seeing more of the cost creep in the Bakken where you had some operators that were seeing some longer-term service contracts rolling off relative to the Permian, which you had said was a lot steadier. And I guess I'm just wondering if in the first quarter, When, you know, as Adam mentioned, y'all were like three quarters of your activity was in the Bakken. If that maybe skews a little bit of the cost inflation that you're seeing relative to the rest of the year when it's obviously a lot more balanced with Permian and Bakken, especially as mascot, you know, continues to ramp.
spk11: I mean, maybe a touch, John, I'd say that, you know, we have to think about how fragile, you know, the overall situation I don't want to get on my macro horse here, but the overall market in general is quite fragile right now. And I'm not talking about the oil market per se. I'm talking about the entire capital markets. And you've had material sell-offs in natural gas. You've had oil go through probably two hard sell-offs in the last five months. But like anything else, this takes time. And so You're correct. We definitely have seen costs rising year over year, and certainly even since, say, last fall. As Adam pointed out, the biggest challenge last year was not necessarily cost, but actually logistics, like getting items. And I think I remember on a prior call saying, hey, building a steel pipe or sand are not things that are going to be in long-term shortage. It's just going to take time. And those logistical things and shortages of materials have largely passed. I think where it goes from here is really going to be determined by, as dumb as it may sound, you know, it's going to be determined by the price of crude. What you find is that overall E&P margins stay relatively static over time, whether oil is 100 or if it's 65. And so, if oil prices are materially weakened, I would expect over time you're going to see material reductions to margins for service providers as that overall activity falls. If prices, you know, hang in there and do their thing where they are today, I still think through drilling efficiencies, we continue to see operators drilling longer and longer laterals and larger amounts of wells at a pad level at any given time. And those will add up to material kind of per lateral foot savings over time. And so I would expect you probably can see some relief as time goes on. And, yes, I think as our program moves to be more balanced over the year, I think you've definitely seen a material slowdown in the Permian, specifically in inflation of well costs. And so I think that will ease it over time, I think. to the extent that we're going to see any relief is going to, you know, we're going to have to, you know, wait and see over time. I think, you know, everyone from a service provider to an operating group are going to have their chest puffed out when you see periods of volatility, and we'll see how that plays out.
spk05: Yeah, John, I think the only other dynamic that I'd add to that is just kind of the operator kind of cadence and flow. And you mentioned the Williston, you know, Adam Miller- Continental and kind of co we've seen you know the most activity that you know within the quarter and just looking at kind of their weighted average at these it's certainly encouraging continental being one of our most active operators and being relatively lower than the overall base and average.
spk01: T. Great and then just my follow up, you know Adam you you kind of gave us an idea of how. the production cadence kind of looks, um, over these, these next few quarters and government clear on sort of the CapEx breakdown of that 60%, um, in the first half of the year. But, um, I was hoping to maybe get a little bit more color on, on the till cadence. Um, you know, the, uh, obviously last year it was sort of average, you know, 10 tills the first half of the year, and it had the big step up in the second half of the year. And then this year, it sounds like it kind of builds as you go throughout the year. Can we get any more of a breakdown on how you kind of get to that 80 to 85 till guidance for the full year, kind of how the remaining quarters look, just rough numbers?
spk11: Yeah, I mean, without going specifically into the numbers, John, just because I don't have those sitting right in front of me, but I would expect you'll see consistent to slightly higher activity this quarter, and that should generate some modest growth. In the third quarter, obviously, early in the third quarter, you should have the bulk of the first wave of mascot wells on, so you're going to have a material step up in the third quarter. And the CapEx doesn't really track our tills. Like, the money we spent this quarter for 13 tills isn't really necessarily going to those wells. Those wells were largely, you know, that money was spent last year. And so that's why the weighting is up front. Because the way we accrue on a percentage of completion basis, right, the till is just sort of the icing on the cake at the end. So the capital we spend in the first and second quarter will really go towards that weighting in the back half of the year. And so I would imagine even from a production and a till cadence, which will be more closely aligned than the capex cadence, would be that you're going to see a more material step up in the third quarter and into the fourth quarter than you would necessarily expect. in the second even as you're drilling a lot of those wells. And it also, to be candid, depends on what time they come on in the quarter. If we have a bunch of wells come online in June, that's not going to have a huge impact on the second quarter necessarily. So we try to be very mindful of that because those drill schedules move around all the time. So really, I think you would see probably, and Jim, correct me if I'm wrong, but I would say the third quarter is probably going to be the most active quarter from a till cadence. this year with the fourth quarter not far behind.
spk01: That's perfect. Thanks, Nick.
spk11: Yep.
spk13: Our next question comes from the line of Derek Whitfield with Stiefel. Please proceed with your question.
spk15: Thanks, and good morning, all. Morning. Good morning. With respect to the larger operator-specific opportunities you may pursue, how important is line-of-sight activity and investment pacing in your evaluation process? And would you generally require a modestly greater return to offset operator concentration risk?
spk05: And Derek, just to be clear, you're talking about like co-bidding assets or partnering in some sort of partial sell-down? Is that kind of where the question is based?
spk15: Yeah, no, I'm thinking more like the mascot opportunity. I was directionally assuming that was the 14 larger packages you were referring to.
spk11: Yeah, man, the answer is all those risks weigh into it. What we really focus on is alignment with the operator, and that can be through governance. It can be through what share of what everyone owns, and it can be a combination of all those things. With concentration risk comes just that, but We are an IRR, NPV, and risk-adjusted return on capital weighted company. That's how we evaluate these projects. And so line of sight is also incredibly important. But just because you have line of sight, you need to make sure that you have governance that they can't change their mind and not do that because that's obviously an easy way to store value. So we try to weigh all those things contractually and to ensure that the operators align to do the same thing that we would want to do with our money.
spk05: Yeah, and I think it's understanding the needs and the wants of the operating partner, right? Because each individual operator is solving for something, you know, different. We've had conversations with operators that say, hey, Northern, choose your own adventure. You tell us, you know, what you want to drill in order to come up with, you know, the best number that you can. And then you've got other operators that want more autonomy and in terms of what that drill schedule looks like, and we'll underwrite it accordingly and take those factors into consideration.
spk15: That's great. And then building on John's earlier question on service prices, are you guys seeing any improvement in well cost across any categories on a leading edge basis? And then separately, regarding your continental commentary, does that price advantage appear to be efficiency or market pricing based?
spk11: On the latter part, what I could tell you is that there's a huge difference, you know, between a one or two rig private company, you know, and a, you know, large several hundred thousand barrel a day company, uh, from a, both a technical perspective and from just a sourcing. I mean, you're talking in some cases, millions of dollars per well. And that means it's because the small guy is, uh, know borrowing a frat crew in between times and sourcing their tubulars on the spot and all those sort of things and so that's why you know the bulk of our operations general we're a smaller company by public standards but our operated group is mostly large companies it doesn't mean there aren't private companies that are incredibly good drillers and can make up for it in other ways there are there are exceptions to every rule but by and large scale is incredibly important from a sourcing perspective You know, there's just a big difference between a company like Amoeba and that operates a lot of our Permian assets with, you know, 20 rigs running versus someone with a stand-up rig and sourcing things on the spot. Everything from midstream contracts to drilling costs to every ancillary cost along the chain.
spk05: No, that's right. I think, you know, having conversations with our operators, they're seeing some relief on the tangibles. You know, not necessarily having to put down deposits in order to secure the supplies, all that kind of comes through from a pricing standpoint as well, from an inflationary standpoint. And on the leading edge, is there anything worth discussing? No, I mean, I think it's the tangibles that really we've seen the relief. There's been, you know, some drilling contracts and those types of things that we've seen. Does that make up the largest percentage of the overall AFE? No. Does it help? Yes.
spk15: Makes sense. Very helpful, guys.
spk13: Thanks, Derek. Our next question comes from the line of Donovan Schaefer with Northland Capital Markets. Please proceed with your question.
spk02: Hey, guys. Thanks for taking the questions. I want to start off talking about – it's a little bit kind of further looking. I mean, this would be talking about one to maybe even like three-year time horizon. I want to focus on infrastructure and pipelines and so forth. So, Yeah, obviously you have pretty big stakes in some of the major basins, the Permian, the Williston, and then, you know, you've got a certain amount of involvement in Appalachia. And these are all areas that, you know, have potentially meaningful benefits from, you know, some addition of pipeline infrastructure, maybe, you know, LNG capacity in the Gulf, just other types of developments like that. And then you've got the situation right now, like I also cover a lot of the kind of clean energy names. And I was at a conference this week in California with, you know, commercial fleets are getting forced to like electrify to do something. And they're freaking out because the infrastructure, like they are, I mean, it was like just shy of panic in terms of being able to hit targets that are being legislated and so forth. So now you've got Democrats and Republicans is like what Manchin tried to do, um, you know, try and get like a permitting reform, something where it seems like, you know, they might be able to get Republicans on board or the key to it could be giving concessions on, you know, traditional sort of oil and gas type infrastructure, making it easier for all that to happen. So I'm just curious, you know, if you guys have any kind of unique insights that this is something you follow, you know, there's kind of the bigger picture macro political stuff, but But even anything worth pointing out, like, you know, even near term at the regional level, I think some, a couple of pipelines are coming on and like South and parts of Texas. Um, but like the Williston or Appalachia, you know, anything either regional or national, but just kind of bigger picture, what you pay attention to and what you think could be beneficial from a pipeline infrastructure standpoint.
spk11: Um, Well, we do spend a decent amount of time and money on understanding the political landscape and as it pertains to infrastructure, because as it pertains to traditional energy and oil and gas, you know, the bulk of of the. the bulk of the impediments to the business have been attacking infrastructure projects in order to choke off supply, and generally to the detriment of American citizens. That's a larger conversation. But what I tell you, as it pertains to the three basins that we're active in today, the Williston is candidly oversupplied from a takeaway capacity. You've seen that in better pricing over time. And the basin as a whole, while our volumes are set to hit records, the basin as a whole is not growing tremendously. And so I don't think we have a ton of concerns in the Williston. In terms of the Marcellus, while you have Mountain Valley Pipeline and other things that could potentially change the game there or even LNG expansions, our base case assumption has been nothing gets better ever. And that's how we generally underwrite there. That's generally our view. It's just been challenged. It's both political geographical all of those things going into above do i hold some optimism that at some point um logic will prevail sure but but we're not counting on it uh in the case of the permian you know you do have a ton of lng expansions coming on uh the the gas infrastructure in particular is quite tight right now and we've we've had that view internally for some time but those those logistical issues are getting solved in real time. And I have no doubt in my mind that we've even seen operators find ways around it, as Chad mentioned, rerouting gas, especially because the bulk of our Permian assets are in New Mexico, which has more options. And so, you know, money is an amazing thing and motivates people to solve problems and where there's capital. And so I don't think we have a ton of long-term solutions. worries within the Permian Basin. And I think given its proximity to the Gulf Coast relative to other places where, you know, business is largely still open, I think LNG expansion over time will both help ease, you know, the glut of natural gas over not necessarily this year or next year, but over a multi-year basis, as well as infrastructure projects getting ahead of it.
spk02: Okay, that's helpful. The perspective is it's good to know you're not baking anything in. That's a good thing for me to know as I look at things. Yeah, I mean it. It's nice to know there's a conservatism there. I'm optimistic. I mean, like, or I'm hopeful. Let's call it hopeful. But, okay, that's helpful to know at least you're not baking anything in there, which is good. So I want to ask for the, you know, record level of M&A opportunities. I mean, you guys talked a lot about this. You gave out the number $6 billion, kind of an opportunity. But I don't remember getting a dollar number. Maybe you did, and I'm just blanking on it, before last quarter. So can you give us a sense of the magnitude of how that's changed since the last update? Was it $5 billion a quarter ago or a you know, like what's in the magnitude change over the kind of near term or short term time frame. And then with respect to magnitude, you know, does that mean like if the opportunities get doubled, should we think of it as like that kind of like doubles your appetite and you're like, oh, you know, we can scoop up 2x the amount of things we wanted to scoop up or does it translate more into or just skew more towards quality where you're like, well, no, we can just It doesn't change as much of our appetite per se, but like, wow, now we can really beat guys up and bargain and negotiate and get some good economic terms.
spk11: I think like any business, the more optionality you have, generally the more opportunity you have. So if you have access to more opportunities and you have scale to participate in more opportunities and those barriers to entry rise in those opportunities, you're going to have better return prospects. And as we've scaled, we've seen nothing but a benefit. But in terms of the, we have in the past talked about our pipeline, and this is certainly probably a record level. But I'd use an analogy to this, which is like take the real estate market, take commercial real estate as an example. Whatever that total addressable market is in the United States, there's only a smaller portion of minority interest owners across all of those commercial buildings. There might be you know, billions of people that own 20% of a building or something like that. But if you're large enough and you have the scale enough to talk about, you know, working with the majority owners of those buildings to own it, your addressable market is growing in kind. And I'd say that that's where we are in the life cycle of our company. And so, frankly, I don't think we could even really tangibly, you know, you've got hundreds of billions of dollars worth of oil assets in the United States, and we're really just scratching the surface. But as Adam and I tell our investors a lot, you can carve a working interest out of anything. You can carve an minority interest out of any eight-eighths asset in oil and gas. And so what we're finding is that that total addressable market has increased markedly from our sizing. But if you want to go back to kind of how we select this stuff, you know, M&A is one of those things that is about having a 1,000-yard stare. We don't fall in love with anything. We don't do something just because strategically we want to do it. We do it because we can earn as much money as we require ourselves to or more. And when you do that, you can make good decisions. And the thing is you're going to have to take a lot of swings at bat. I mean, I think our success rate on the ground this past quarter was about 5%. but that still adds up to tens of millions of dollars. And so no different for corporate M&A. It might seem like it's easy because we've obviously done a billion seven in just the last two years, but it really masks a lot of failure, which is you're probably looking at, you know, a three or four times multiplier to that when you back into the success. But I will say we're moving to avenues in which we remain one of the few people that can participate in those. And that allows us to, target the returns that we want and also broaden the horizons. I don't know if you want to add to that. We covered it.
spk02: Okay. And then just one last question, and I'll take the rest offline, is the NGL to gas ratio I know is kind of above historical levels, and that showed up kind of nicely in this quarter. I also know that's a hard thing to predict and know exactly where that's headed. I mean, the only one I know, I think, Rusty Brazil, the only one I know who actually wrote a book on it and knows this stuff inside and out, but kind of beyond my skill set. But can you tell us what you look at? I know it's like the next impossible for you guys to kind of guide on anything like this, but just, and you don't control over it, right? Like when the operators are electing to go to ethane rejection or keep it or do the extraction and so forth. But, you know, what are you, like, watching and how are the trends in what you're watching that underlie this? You know, if you can just elaborate on that. If there's anything, like, we could watch or monitor that helps give us a sense of where it's going.
spk11: Well, I mean, the NGO basket trades every day. The mix of which we receive varies from day to day. You mentioned ethane. And ethane rejection is probably at a high. There are limits to how much you can do and Some operators extract it one way or the other because of contracts they might have entered, and you're going to get a worse realization in a market like that when that happens. But ultimately, you're talking about probably about four variables. You've got the in-basin differential. You have the NGO basket as a ratio to gas, and then you have the fixed gathering and transportation costs. And then in some cases, you have the percentage of proceeds piece in which there is an added cost as those go up. Chad, I don't know. You want to add to that?
spk04: No, I think you said it right. I think, you know, we would expect our guidance as a just to be more realistic going forward. Obviously, gas differentials are volatile. And then the recent weakening in oil prices will have an effect on kind of the go-forward price, we believe. You know, I think rejection obviously played a role this quarter, as well as kind of the takeaway to the West versus Oaxaca and the Permian for us, so.
spk02: Okay, that's helpful. Thanks, guys.
spk13: Our next question comes from the line of John Abbott with Bank of America. Please proceed with your question.
spk09: Hey, thank you very much for taking our questions. First question is on capital allocation. I appreciate you've got a dynamic process here of allocating towards growing the dividend, paying down debt, buybacks. But when you sort of see what investors can sort of earn as far as they return on cash, does that change the calculus at all? Does it make grabbing maybe, maybe makes potentially buying back shares or reducing debt more attractive in the near term? Just how do you think about that?
spk11: I think we think about it as, you know, you, you mentioned the word dynamic. We think about it dynamically because those, you know, those inputs change every day, right? You know, there's our, our, the stock price versus our, you know, our ability to reinvest capital versus, you know, taking risk off by paying off debt to ever increasing dividends. And that balance matters. And I also think that, you know, like anything in life, too much of anything is not a good thing, right? And so we've really tried to keep it balanced. I think in the coming months, you know, we're going to spend a lot of time, you know, we've laid out what we viewed as a long-term plan, you know, a couple of years ago. and we really need to think about what's next for us in the next couple of years. And I think it's going to be a balanced approach to all of those things, right? And I think we'll spend a lot of time with our board and our advisors to really go through, because ultimately, I think certain things come in and out of vogue from special dividends to dividends to buybacks, and they tend to oftentimes reach a fever pitch. And we've really tried to eschew that And think really long term, because when oil was $100 last year, a special dividend sounded like an awesome plan until prices pull back and then those special dividends go down. And you may have foregone other opportunities that might have created more value for the long term. And so we really try to be very, very careful and methodical about this. That's why we really stuck to a base dividend. We do believe we have a path to grow it over time. as well as to leave enough meat on the bone and enough excess cash flow to allocate it to things that are going to drive that dividend growth, you know, in a solid fashion over that long-term period.
spk09: Yep, it does. And then as a broader question, more on production, you know, it looks like you had a beat here. on the Bakken. Also, if we sort of look back earlier during the week, you know, there was another operator that had relatively strong performance out of the Bakken. There was some prepared remarks on productivity in the Bakken. Could you provide any more color on how you see productivity trends sort of in the Bakken?
spk11: Broadly speaking, what I would tell you is that what I've been impressed at when I get shown the raw data, and I'd rather Jim answer most of this question, is that stuff we would have viewed as Tier 2 three or four years ago is performing about as well as Tier 1 stuff now. And so, the one thing about the Bakken is a higher cost basin, say, than the Permian. It has a higher break-even. It's also a lot more consistent. And because the activity has been relatively muted, you know, there have been about 50 rigs consistently for the past couple of years, you've seen a lot of discipline to that development. You don't see the wild variations. You see the best of the best in the Permian, and you see the worst of the worst. It's a much more consistent, you know, both dolomitic rock that is more consistent as well as, you know, consistent behavior from the operators. And I would say, John, honestly, we saw better than expected productivity in all three of our basins, including the Marcellus. I mean, the declines in the Marcellus have been notably better than we would have expected. I don't know if you want to add to that.
spk10: Yeah, that's right. With the latest completions and operations, we have seen some improvement where you used to think Tier 2, Tier 3 was uneconomic. Now we view it as Tier 1 in some cases. Obviously, operators are trying longer laterals, so three-mount laterals. That's helping on the productivity as well. And then part of it for us, again, is going back to the active management. We focus on the areas that are highly productive within the core areas. So that's kind of how we manage the business.
spk09: Very helpful. Thank you for taking our questions.
spk13: Our next question comes from the line of Charles Mead with Johnson Rice. Please proceed with your question.
spk07: Good morning, Nick and Chad and Adam and the whole NOG team there. Nick, you've made a couple comments, I guess, in the Q&A section about the importance of operators, and I think you've made a a comment or two about the importance of having operators that have scale. For the mascot project, talking with that to investors, what's the message or what's the context you give to people when they say, you know, Permian Deep Rock Law, I've never heard of them?
spk11: Well, as I said, there are exceptions to every rule. I think there's also an operator piece. There's a geology piece. But I would tell you that this is a company with a team and a history, a long history of excellent performance. You have multiple rigs operating not just on our lands but also on his other properties. We had a good look at a multi-year. He had built out all the infrastructure directly on the properties, which is atypical for a company of their size. And that all went into the, you know, into the primordial soup of our decision making. But I can tell you they know how to drill wells.
spk05: David's been doing this for years. And, you know, when we went in to underwrite this, there was a number of wells, obviously, that they had already, you know, drilled and completed and brought online. And that gave us the conviction of, you know, with David's team that they could put down highly productive wells and keep well costs under control. And so, you know, when we're going into these types of things, we need to make sure that our analysis is bespoke.
spk11: Yeah, and I would say, you know, you're talking about a company that has everything from redundant and excess water disposal to excess gathering for crude and gas takeaway and, you know, long-term contracts in place for the operations, and we've been thrilled at how they do it. But you're right in the sense that that is, if you think we weren't, worried or thinking about that when we went into this, you'd be mistaken. We definitely, that was a big part of the analysis that we went into.
spk07: Got it. So, reasonable question, but, you know, that's helpful detail that you gave. Nick, if I could go back to your prepared comments and you were talking about the not just the size of the opportunity in front of you, but also the nature of the kind of opportunities, more of these, as you say, like, you know, bespoke carve-outs. You know, I recognize that it's the role of all management across companies is to allocate capital. So everyone's doing that. But hearing your comments, it seems to me like you're Maybe there's a shift in how you guys are thinking about yourselves away from being an oil and gas company that happens to be focused on non-op and more towards a capital provider to the industry. Is that a shift that's going on in your mind or in the minds of the management team and the board? And if so, how should we change what we expect from you guys?
spk11: Maybe it's a change in how we explain it, but I'd say we've always been both. We're both a capital provider. We're an investment company, and we're an oil and gas company. What I tell you is that for operators that require capital to develop, and these aren't necessarily small. We hear from the biggest independents and quasi-majors in the country about needs for capital for certain reasons or another. But what I tell you, at the end of the day, as a non-op, you are a capital provider. But the difference is we are an oil and gas company. We do our own engineering. We do our own technical work. We have the infrastructure to manage those assets ourselves. And so what we found is five to 10 years ago, you had a lot of true financial, whether it be private equity groups or others that provided capital in non-operated ways to operators. And what we found is that Ultimately, the need to securitize or find some, you know, buy and then exit path for those capital providers made it very untenable for the operators. And we find them seeking us out, not just, you know, we are like the concept that we've we would ever abandon or that we're leaving for others. Our traditional non-operated business is far from the truth. We are as active in just our normal course of business as we've ever been. But what I would tell you is that we have a lot of operators who come to us who say, I did a deal with XYZ financial firm, and I don't want to do that ever again. I want to deal with someone who understands oil and gas, who's willing to take the risk, and who's a permanent owner of these assets. And in that respect, cost of capital matters, but really what matters is alignment and risk sharing and an understanding of what we're actually doing, not the need to just scrape a return and then move on.
spk07: Thank you for those comments. Appreciate it. Sure.
spk13: Our next question comes from the line of Paul Diamond with Citi. Please proceed with your question.
spk06: Thank you. Good morning, all. Thanks for taking my call. I just want to touch quickly on, you guys talked about hitting a hit rate of like 10 of 140 grounding of opportunities. As of late, just puts it in a kind of a low to mid single digit or mid single digit hit rate. Is that the, could that be thought of as kind of your target for the longer term or is that just, is that going to shift quarter to quarter depending on what's in front of you?
spk05: Yeah, it's going to shift quarter to quarter. It's all going to depend on the quality and other qualitative factors in terms of, you know, what the average size working interest is. Is it going to move the needle? So it's all going to be rig and seller dependent. You know, we've got our hurdle rates. That's what we're sticking to. And then from there, it's a matter of just distilling down the quality opportunities. You know, we mentioned 140 opportunities. 70 of those probably went in the garbage as soon as they hit the inbox. So it's all dependent on overall activity flows because this stuff all comes in in a linear fashion.
spk06: Got it. Understood. And then just one more kind of circling on M&A as well. You discussed 14 opportunities you're currently looking at. Is there anything we should expect as a departure from scale from the ones we've seen over the past 18 months, or are they all relatively within that same range?
spk11: Yeah, I mean, the range generally at the kind of package level is kind of like $100 million to up to $1 billion. I'd say the average size is still probably less than $200 million. I think there's a point at which, you know, a big deal and a small deal take the same amount of time. And so obviously you want something that's significant enough to be worthwhile of your time and to be impactful to the bottom line. You know, you have a lot of costs associated with these evaluations, legal costs, all sorts of stuff. And so you want to make sure that it's going to be meaningful to the investor. But we're still the dustbuster. You know, we're still picking up tiny, tiny interest every single day. You know, and going back to your last question just for a second, you know, I think it's worth noting that we're pretty robotic in terms of how we look at this, right? When you have 10 times the amount of things coming at you that you'd ever want to underwrite or go through, you can afford to be, right? And so it's pretty robotic. And what we found is that there's a lot of cyclicality within all of the different businesses that we – business lines that we have. And that hit rate goes up and down, and oftentimes it really comes down to risk. We find when oil prices are 100 and convexity is weak, we're highly uncompetitive in most things. And when things get ugly and crude breaks $60, I promise you it will be the last game in town, and there you're dealing with situations where we can extract some more value. So that convexity plays into that decision-making and our own competitiveness.
spk06: Got it. So it makes more sense to think of it more as a counter-cyclical to the aggregate price of the commodities.
spk11: I like to think of us as a counter-cyclical investor in general. I mean, I think that the most active we ever were as a percentage of our size on the ground was in 2020, right, when things were pretty ugly.
spk06: Understood. Makes perfect sense. Thanks for your time.
spk11: Yep.
spk13: Our next question comes from the line of Phillips Johnston with Capital One. Please proceed with your question.
spk03: Hey guys, thanks for squeezing me in. I'll keep it short with just one more question on the 14 opportunities. Just wondering if any of those are located outside of your existing three regions.
spk05: The majority of them are across the Delaware, Midland, and Bakken, as well as Appalachia. We've seen a number of properties in the Eagleford as well. And, you know, we've been looking at the Eagleford, as we've alluded to in prior calls, haven't necessarily found the appropriate fit or assets for us, but it's definitely, you know, one basin that we keep an eye on.
spk03: Yeah. Okay. And then I realize you guys don't typically do PDP only types of deals with no real upside, but do you guys ever look at, conventional non-shale types of packages with low PDP decline rates that would be a creative, but would also help keep your overall PDP decline rates down?
spk11: Yeah, I mean, we have bought a handful of PDP assets. You may remember we bought some assets from Comstock a few years ago that we owned about 90% of already, and they were low decline PDP. And so the decline rate for a PDP only asset is really important. I'd say on the conventional side, The one challenge there are that typically, you know, if you took like a CO2 flood asset or something like that, it might have low declines, but it also probably has $20, $25 LOE costs. So it's going to be much more sensitive to oil prices. And so that's another risk factor. It may have less, you know, operating risk or need for growth from an underwriting perspective, but it's going to be more sensitive. You know, one of the things that we talk to our investors a lot about, and particularly as it pertains to PDP assets, are that you really have no upside to your returns besides pricing when you buy a PDP asset. And so you really need to think about where you are in the cycle. Ultimately, what we find is that undeveloped assets become, in a period of traumatic pricing, the NPV of those undeveloped assets becomes very low, and that's when you can ultimately underwrite things based on PDPs and get that upside for a relatively de minimis amount. You know, conversely, buying a PDP asset when the crude strip is $100, you really don't have a ton of anything but downside.
spk05: And in a lower price environment, it's going to be seller dependent. And, you know, what is their balance sheet and financial health look like, right? Because you're going to be looking at a pretty big bid-ask spread the majority of the time to the extent that they're healthy.
spk11: Yeah, I mean, I think we think in general there are better buyers for PDP assets than us. But there are occasions where it makes a ton of sense, Phillips. And I just tell you, in terms of what we see, We get sent everything. I mean, I'm talking – we've been sent Alaska, Gulf of Mexico, Tuscaloosa Marine Shale, Alabama, conventional production. We've been sent everything, but I wouldn't say anything's made it past the email inbox as it pertains to those types of opportunities.
spk13: All right. Sounds good.
spk11: Thanks, guys.
spk13: There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
spk11: Thank you guys for joining us today. We'll continue to work to execute on our plan this year. We're dedicated to providing a superior return to the marketplace. And again, thank you for your interest. This is a way.
spk13: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
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