Northern Oil and Gas, Inc.

Welcome to NOG's second quarter earnings conference call. Yesterday after the market closed, we released our financial results for the second quarter. You can access our earnings release and presentation on our investor relations website at noginc.com. And our thank you will be filed with the SEC within the next few days. I'm joined this morning by our chief executive officer, Nico 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 remarks on the quarter and on our recent accomplishments. Then Adam will give you an overview of operations and business development activities. And Chad will review our financial results and walk through updates to our 2024 guidance. After our prepared remarks, the team will be available to answer any questions. Before we begin, let me cover our safe harbor language. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of this private securities litigation reform act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by our forward-looking statements. 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 obligations to update these forward-looking statements. During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, and free cash flow. Reconciliations of these measures to the closest gap measure can be found in our earnings release. With that, I'll turn the call over to Nick.

Thanks, Evelyn. Welcome and good morning, everyone, and thank you for your interest in our company. I'm going to change things up this quarter by answering five key questions. Number one, so how's it been going? On our fourth quarter call and several before that, I have spoken about the importance of delivering growth and profitability over time. I'd like to use that framework once again and put the results from the second quarter into context. Our second quarter adjusted EBITDA was up 31% year-over-year and 52% versus two years ago. Our quarterly cash flow from operations excluding working capital was up 33% year-over-year and about 48% versus two years ago. We achieved outsized growth per share despite commodity prices that fluctuate. Oil prices were a bit higher and gas prices a bit lower than a year ago, but two years ago, oil prices were over $20 higher and gas prices over tripled the current price. Even more impressive is the fact that despite our growth in a volatile commodity price environment, our LQA debt ratios have stayed in check in the low 1.1 range. This range is actually lower than a year ago, so in summary, our per share metrics continue to rise throughout the cycle, supported by a low leveraged and strong balance sheet. While growth is important, returns and capital efficiency are paramount. Our return on capital this quarter was approximately 25%, impressive when taking into account the step-up in capitalization we experience every time we make a significant acquisition. In the last year, our return on capital employed was over 28%. That was 14% higher than the average of our 16-company peer set, And for business context, double that of the average public non-operators in our peer set. Within our broader peer set, it shows that our business model allows for superior capital allocation, but I bring up other non-operators to show that from a managerial and asset perspective, we're also doing it better than others within our own niche. Our company continues to be focused on the same simple philosophy. finding ways to sustainably grow profits per share through cycle and over time for our investors. We believe that is the path to driving long-term share price outperformance. While oil and gas prices go through cycles that can and will affect our profits, again, it is our job and we will find ways to grow the business through such times. With our assets performing well, solid organic growth in the pipeline, and recently announced acquisitions, Our business is poised to grow profits and cash flow further. Number two, so what does that mean for you? We haven't even closed on our XL or point transactions, but based on where the business is year to date and our confidence in the outlook, we will be recommending a mid-year bump to the dividend. Additionally, we've been active in the first half repurchasing shares and have renewed our share repurchase plan. We are very discerning about when we repurchase shares. and have had a track record of entering the market during periods of value compression, and when we believe the market has understated our growth potential. And hence, we've had the opportunity in the first half of 2024. We prioritize that over dividend growth in the short term, but that won't always be the case, as our increased recommendation should also show our investors. Let me be explicitly clear. We believe there is additional capacity for growth, either in dividends or in future buyback capacity, but we are also remaining conservative and dedicated to managing leverage carefully, as we have done meticulously over the past six-plus years. We will sit down with the Board during our regular review in Q125 to discuss a further increase to the dividend. additional buyback capacity, and obviously ensuring that our balance sheet remains strong and is on a path to getting stronger after the outlay of the capital for the point and FCL acquisitions. Number three, what's behind the Uinta? In June, we announced our largest transaction ever, the co-purchase of FCL resources Uinta-based assets with SM Energy. For many investors, the Uinta is less well-known than the marquee shale place. In the past four years, however, it's been amongst the fastest growing oil plays in the country. I won't mince words when I say that personally, I have never been more excited about a transaction during my tenure here at NOG. The benefits of this asset will pay huge dividends for our investors over the next decade. The facts are simple. You have a multi-stacked pay asset where, unlike the Permian, much of the exploration was not allocated value in our acquisition. providing upside for our investors, even as many of these benches have been proven out by other operators. When planning with SM, we put forth very conservative cost spacing and pricing assumptions. The economics of the wells are very similar and competitive with those in the Delaware Basin in terms of productivity, but with a cost structure of Midland Wells and an extremely high oil cut with high quality crude that is exceptionally valuable. And while the one knock on the play is the higher cost of oil takeaway, the logistical changes that have taken place over the past few years are less well known. Whereas once the oil was capped into a handful of local refiners, there is now easily expandable rail capacity to take oil away from the basins of the Gulf Coast where the crude is in high demand. Over the longer term, we believe project by project there will be ways to cut the transport costs further as well. Even when accounting for the higher transport cost, the economics compete favorably with anything in our portfolio. And over the next several years, I think our investors will come to appreciate this asset more and more. And we believe it will pay dividends in the years to come, both figuratively and literally. Number four, how's the future looking? We find the business in the catbird seat as we hit mid-year. We have come through some of the heaviest spend periods over the past few quarters, which has required some patience from our investors, and as you see in the results today, that's converting into significant free cash flow now. Our balance sheet debt ratios are ahead of schedule, and more than half of Q2's turn in line activity will actually have more impact on Q3 volumes, so we see a very strong outlook for the base business as the year progresses, even as our capital commitments stabilize. Organic activity on our acreage has also been very healthy, and as you've seen, we've had success in all facets of our business, including the ground game and significant bull dons. We're seeing a renaissance of sorts in the Williston with longer laterals and a notable increase in refract activity as operators are finding ways to maintain and even grow in our legacy basin. In 2023, we raised equity without announcing an acquisition for the first time in my tenure here at NOG. something we didn't take lightly. In marketing our offering, I told investors that, quote, we were getting ahead of the opportunities in front of us and believe it sets the stage for over $1 billion worth of acquisitions on a balance sheet in just the next year. Here we are, nine months later, and we have deployed $900 million through two Delaware transactions, one Utica transaction, and our marquee went to transaction. Our balance sheet remains in great shape, And we still have capacity within our framework to do more if the right opportunity arises. We are people that believe in doing what we say. And when we raise that capital, first of all, we believe we have the opportunity set to put it to good work. And secondly, we wanted to be in a position to deliver accretive growth to our investors on the other side. And I'm proud to say, I believe we've done just that. These transactions, combined with our other organic projects, have us poised for year-over-year per share growth in 2024 and in 2025, regardless of the commodity strip, something few companies can match in this space. Number five, so what's next? In an era of substantial industry consolidation, we've been at the forefront of the trend in our niche. And what we've created in just the past few years is incredibly valuable and not always fully appreciated by our investors. An example would be EQT's recent non-operated asset sale in Appalachian. It implies a three to five times or even greater value for what we purchased in the Marcellus just a few short years ago. We're proud of what we've accomplished. We believe we've been superior capital allocators and been ahead of the curve in terms of strategy. But as I mentioned earlier this year, we also believe the best is yet to come. People then ask us, what is the end game? As a fiduciary, we don't get to answer that question. There is no end. Our goal is to never stop growing our profits and ultimately the value of the stock for you. Maximizing value is the main goal, however that can be achieved. That's how our board motivates us, and that's how we're aligned. From a competitive landscape, we would continue to reiterate what we have said ad nauseam quarter after quarter, which is that scale begets scale and that we stand on our own. Basic business rules apply in our line of work. Barriers to entry are real, and those focused on small deals on small assets with small capital commitments face significant competition. but the transactions you have seen us participating in, the creative, complex, and customized solutions are largely those where we simply stand alone, and those ones where return potential is much higher, where long-term upside with our operating partners is higher, and where you'll see us focus our efforts in the long term to the benefit of our stakeholders. That concludes my prepared remarks, so I'll close out, as I always do, by thanking the NOG engineering, land, BD, finance and planning teams, and everyone else on board, our investors and covering analysts for listening, and our operators and partners for all the hard work they do in the field. We hit mid-year 2024 in great shape. And as always, our team is laser focused on delivering optimal total return. That's because we're a company run by investors for investors. With that, I'll turn it over to Adam.

Thanks, Nick. As usual, I will kick things off with a review of our operational highlights and then turn to our business development efforts and the current M&A landscape. During the second quarter, we saw production increase to over 123,000 BOE per day, driven by steady turn in line activity and some increased permanent Utica and Marcellus activity. We turned in line 30.1 net wells with the Permian making up more than two-thirds of the activity during the quarter. The most important comment I would make in terms of Q2 tills is that over half of them occurred in the month of June, and the bulk of those wells were cleaning up and contributed very little to volumes. They will have a much larger impact on Q3 oil and total volumes, and this bodes very well as we continue on track through the year. Thus far in 2024, we have seen steady activity, including robust organic activity, increased retract proposals, and continued production momentum from our various JV projects as a significant portion of the capital we deployed in the past nine months converts into sales. Overall, we expect a relatively consistent cadence in terms of tills for the balance of 2024, though Q3 will likely be lower because of the pull forward late in Q2. This will not have an effect on production as many of those wells are still rampant. We see robust activity in Q4, both in terms of tills and additional refract AFEs in the Williston. In the second quarter, we consented to another 16.7 net wells, a 46% increase from Q1 on a net basis and a 20% increase on a gross basis with 197 total consents. This points out that we saw a larger average working interest in Q2's wealth proposals, almost doubling the average working interest from Q1. Economics remained strong as we consented to 94% of our wealth proposals on a net basis while we continued to manage the portfolio non-consenting those that do not meet our hurdle rate requirements. It's worth noting that the working interest average in our non-consents is roughly half that of our consented average, which is a testament to our active management. We focus on purchasing more land in the best areas, and our lower working interest and low-value areas tend to be the areas where we non-consent. In terms of costs, while we have enjoyed cost reductions from prior levels on some of our major joint ventures, we are seeing stable costs portfolio-wide. As in any major changes to commodity prices, we are not anticipating any meaningful changes to development costs going forward. The acquisitions we completed in the past few years continue to shine And the capital efficiency is beginning to bear fruit as our free cash flow more than doubled in the quarter and should remain strong as we turn to the back half of the year. At the same time, we continue to see strong ASE activity on our acreage that should keep our production stable over time. Shifting gears to business development and the NMA landscape, the second quarter highlighted another banner quarter for NOG both on our ground game and in larger M&A. In a shift from 2-1, our ground game in the second quarter saw a market pickup as we focused on bespoke larger working interests. By doing so, we've been able to maintain our full cycle hurdle rates and avoid the more commoditized, smaller scale market with lower barriers to entry. In total, we spent approximately $25 million in capital on the ground game, just under $11 million of which was acquisition capital, acquiring 6.1 net wells and approximately 1,800 net acres. Year-to-date, that brings us to approximately 6.7 net wells and almost 3,500 net acres in total. During the quarter, we also signed our largest transaction ever, expanding into the Uinta Basin in a joint acquisition of the XTL Resources assets with SM Energy. Similar to our approach with Novo and Forge, we partnered with SM to purchase a large-scale operated asset, coupled with a long-term joint development agreement and area of mutual interest. This asset has a very long life, tremendous upside, economics that compete with anything in our existing portfolio, and we see significant operational upside from SM's stewardship, as well as future exploration potential from the multi-stack benches. Specific to XEL, within our AMI, we are already working on acquisition opportunities, which would create additional optionality and future upside. Subsequent to the closing of the quarter, we have continued the momentum, partnering once again with our friends at Vital, agreeing to purchase the Ward County Delaware Assets Point Energy Partners for $220 million net to NOG. Similar to XTL and our past transactions, we also have a long-term joint operating agreement in place with Vital and look forward to many years of development on the asset. As we've seen with our forged JV, we think Vital can bring significant improvements to go-forward performance on the point assets. As all these transactions detail, we continue to build scale but scale combined with a key focus on returns. As Nick noted, our return on capital continues to be best in class, all the more impressive given how acquisitive we have been. It's a testament to the rigor of our acquisition underwriting, our capital allocation methodology, and the quality of the properties that we seek and ultimately acquire. The overall landscape continues to be robust We see another wave of disasters coming on the back end of the large-scale M&A that has transpired over the past 18 months. Many large operators are looking to clean up their portfolios, or in some cases, their balance sheets, and we expect NOG may find some significant opportunities as these processes emerge. Some of these parties have reached out directly to us seeking out customized solutions and we will continue to have those conversations. As I've described before, these off-market transactions can be tailor-made for both parties and, with our growth in size and liquidity, could be as large or larger than any of our recent transactions. Simply put, the option to deploy capital on top-tier assets is in no way slowing down for NOG. Depending on the needs and the wants of the operator, the solutions could include simple non-op portfolio cleanups, joint development agreements, co-buying operated properties, minority interest carve-outs of operated positions, or any combination thereof. At NOG, we continue to demonstrate unmatched execution with win-win solutions through creativity and alignment with our current and prospective operating partners. By focusing on returns first, growth has become a natural output as we continue to compound capital for our investors and remain singularly focused on putting our stakeholders first. With that, I'll turn it over to Chad.