Q1 2020 Earnings Call

Hi, I'm all participants are any listen only mode.

I will follow the formal presentation.

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This conference is being recorded it's now my pleasure to introduce your host Mike Kelly SVP of finance. Thank you Sir you may begin.

Next Jesse good morning, everyone. We're happy to walk me to Northern Spurs border 2020 earnings call.

Here this morning, with North Sea, Oh, Oh, Grady, our COO at a barrel and see if I looked at Allen, our senior Vice President of Engineering, Jim Evan as well, there's no there's chairman Brahma <unk> our agenda for today is as follows Nick It out it will get us instead of Union type comments before turning the call over to Chad, who will recap Q1.

Oh, it chabraja wrap up our prepared remarks before we get into the Q and a session.

Before we go any further though let me cover our safe Harbor language. Please be advised that are remarks today, including the answers to your questions may include forward looking statements within the meaning of the private Securities Litigation Reform Act. These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations.

Contemplated by these forward looking statements. Those risks include among others matters that we had described in our earnings release as well as in our filings with the FCC.

Including our annual report on form 10-K, and our quarterly reports on form 10-Q, we disclaim any obligation to update these forward looking statements.

During this conference call, we may discuss certain non-GAAP financial measures, including adjusted net income and adjusted EBITDA Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued this morning.

That taking care of I'll hand, the call over to northern CEO, Nick Oh, great.

Thanks, Mike and good morning to everyone in a similar matter to last quarter, let's get right down to it and seven points.

Number one the balance sheet.

Northern's leverage profile continues to improve.

We reduced leverage by a staggering 78 million in the quarter, including open market repurchases of our senior secured notes at steep discounts from par value.

Since the first quarter ended we've made more progress, particularly on our revolver.

Elevated activity in the back half of 2019, the working capital needs of the business were immaterial drag versus book cash flows in the fourth and first quarter.

And as this reverse as we expect our deleveraging to accelerate.

As of Friday, we've already paid down an additional $9 million on our revolver have over $20 million in cash.

Planned to pay another $10 million in the coming days as one of our bank branches matures.

In addition, since quarter end, we've eliminated another $6.1 million in principle of our senior secured notes again at steep discounts to par.

The senior notes are by far our largest maturity over the next several years and through various methods. We have eliminated over 96 million of done in less than five months of this year.

We expect to continue to ratchet down our revolver borrowings in particular second quarter and an estimate we will reduce over 10% of our total debt and just six months.

In addition, our board of directors made the tough decision to defer dividend payments for both our preferred stock or common stock. This is the right thing to do in an environment like this and the focus that cash flow on our senior obligations first.

Number two hedging.

Our hedge book as of Friday, as a whole hasn't undiscounted market value of approximately 375 million up from approximately 300 million last quarter, even more impressive given that it excludes 31 and a half million a realized gains in the first quarter.

We had done some modest worked at a bar.

In particular restructuring for 2020 do hedge value entered 2021 at even higher net prices protecting those feature gains as well as materially improving net present value.

Given the strong move in the natural gas strip based on optimism surrounding associated gas production, we've been able to layer in some natural gas hedges as well since we last reported we've seen operators scrambling to unwind. There are three way collars in order to say face at prices that may be a premium to the current strip, but are now at sub economic.

Prices that are going to be long term did the destructive to their equity values, particularly as the sector Hills.

This management team took control of northern a little over two years ago, we're focused on risk management on the front end not as the stopgap measure after the fact.

Number three shut ins. This is a hot topic I want to address before that you and I ask the sector attempts to bounce the steep drop in demand.

While these targets are moving and the exact timing is difficult to predict I'm pleased to let you know that northern is about as well prepared as anyone to whether these issues as a non operator, there may be some billing delay in l., we costs coming down.

Regardless of the shut ins and given our hedge portfolio, we expect margins and ultimately cash flow to remain extremely resilient.

The Williston rock is highly conducive to curtailments at the rock and age of the wells should not see material issues as they returned to sales when appropriate.

Second the cost of Elouise, which are driven in large part by salt water disposal, and workovers and to a lesser extent electricity should see drop offs in kind.

Given the delay in billing Vietnam, we'd expect the full benefit of this to be felt in June for the second quarter and to continue on until wells were turned to sales.

Secondly, as I mentioned on last quarter's call, we do not want wells producing in this environment anyway.

The oil is still in the ground.

Oil production is a depleting resource and we do not want our wells, producing hedges or not and their environments such as that.

Instead, because of our strong risk management, we have the potential to earn returns twice on these assets with a hedge gains we are scheduled to receive and the reserves that are preserved for the future.

And they got a few variables, there's likely only a minor impact the cash flow and 2020 drunkard talents and long term. It is a massive positive for our reserves and future production.

There are even select scenarios in which it increases our cash flow. This is why you hedge.

Number four development.

We are carrying a record number of completed wells waiting to be turned to sales and drilled but uncompleted wells. This means that we have a coiled spring absorbs if and when commodity prices improve.

I'd note that despite significant curtailments, we experienced starting in March and half as many wells turned to sales in Q1 versus Q4, we still saw nearly flat production.

Well liked the entire U.S., we expect to start from a lower production base when the call for U.S. production activity returns will be well situated both on a capital efficiency bases from wells ready to return and from the fact that our volumes have not been wasted in a sub $20 oil price environment.

Both curtailments, we also expect our based production to be significantly higher and the corporate decline rate to normalize given the elevated activity in the back half a point 19.

It's elevated based production level is a big positive to the value our banks underwrite in our RBL and longer term a huge net benefit to our equity holders.

Number five differentials.

Differentials for gas have started to show steady improvement as we as seen in our first quarter results, especially given how poor. They were late last year, we don't expect to see gas differentials as strong as we saw in the first quarter for the remainder of the year, but as we've been telling investors for the past few months as the infrastructure build out from 2019 takes hold.

Many of the issue is playing our gas prices would see improvement.

In addition, they will be influenced as always by the ratio of gas to NGL prices.

Oil differentials are another matter in a normal world the shock from lower oil prices and lower production should be having a material that benefit to our in decent pricing. In fact, we believe strongly that when the market returns to normal we will see a multi year horizon for vastly improved differentials for oil take away from the slack capacity.

That will exist.

In the short term with demand so weak the physical limitations of the market have been driving very wide pricing differentials. However, if you believe is I do that at some point, we'll all go back to work and the stay at home orders will continue to ease it would suggest that differentials with plenty of available takeaway in the wells in will be improved dramatically for the next several years.

As those take place in the short term it will be volatile, but the future for a net backs should be bright.

Number six guidance I promised more meticulous guidance this quarter and we are mostly delivering on that although given the wild swings we're seeing in the sector. It is more challenging than where we stood in early March any immediate term production will be nearly impossible to predict and while we know the second quarter will carry significant shut in volumes.

Only the pace at which the cobot 19 battle is solved but we know how production begins to normalize the operators do not know this let alone us.

The good news for northern is that it doesn't really matter because we've prepared for this our cash flows are well insulated regardless of the outcome. Our incredible hedge portfolio means we can give ranges that actually matter, which is not production levels, but cash flow.

Back to produce 350 to 410 million an adjusted EBITDA in 2020 and spend approximately 175 to 200 million Capex. This points out that approximately 45% of the anticipated capital spending for the year has already occurred and that is driven by the first two months of the year being relatively normal.

However, it should not be treated like any typical midpoint of guidance the variable variables driving these will be shut ins in basin differentials and the price of W.G.I. for our net gains on our hedges.

This range will be driven by the mix that ensues, our book interest expense should range between 55 and 60 million.

This equates to approximately 135 million in free cash flow at the midpoint I note that by our definition of it only about 5 million of that free cash flow was realized in the first quarter as our normal way spending ramp down so the bulk of it is yet still yet to be realized.

Also note that we're holding 50 million of completion capital as a reserve in the event that oil prices come Roaring back and we see a flurry of wells completed and turned to sales. However, based on the current forward strip, we see that is highly unlikely, but we want investors to be aware should we see a strong rally in pricing.

Number seven finally opportunity knocks if I can lead our investors with one message. It is this we are on the offensive I told you on our last conference call, but I believe firmly there would be opportunity is beginning to show up our superior risk management puts us in an enviable position to acquire producing assets underwritten.

Earn and exceed our cost of capital based on the environment that we're in today something that is not likely to endure.

If successful this will give us an enormous convexity to the upside and potentially give us additional undeveloped resource for literally no cost.

Opportunities abound everywhere bankruptcies and distressed asset sales mispricing of our own capital structure that lies our financial strength and the fact that we have incredibly supportive stakeholders, who share our vision.

We continue to evaluate all the opportunities in front of us, including continuing to opportunistically reduce debt and we'll deploy our capital to those opportunities with the greatest return for our stakeholders on a risk adjusted basis.

That's it for me this quarter for everyone on the call. Most importantly, I hope you and your families are safe and healthy I hope you're managing through the market impacts in economic hardships that are affecting so many and I said as as and as I said before and I'll say again I'll conclude that this difficult period is a tremendous opportunity for northern and we continue to strengthen the balance.

She the asset base and we are on the Han for opportunities to make a stronger lower risk enterprise.

As I stated in my prepared quote in this mornings press release I cannot emphasize enough that northern is different well other scramble and react to this crisis issuing multiple revisions to their guidance and scrambled to cut DNA, we prepared our business in advance with our balance sheet moves and multiyear risk management program. In addition, we have been focused on doing right.

I, our investors long before the situation called for it that's because this board and management are actually significant owners of this business.

Our cash DNA is already at industry lows with only 24 employees and an executive team that has paid at some of the lowest levels in the industry. This was done on the front end not in reaction to the current market conditions. The flexibility of our non operated model allows us to execute on capital decisions in real time without the burden of a bloated cost structure.

Thanks, and let me briefly turn it over to our COO, Adam Darryl on to talk about field activity. Adam Thanks, Nick from an operation standpoint, I'd like to quickly touch on first quarter is well elections and ground game acquisition activity and then what we're seeing as we move forward.

And the current environment the wells that we're electing to our only wells located in the core of the basin, where completions will be deferred in the near term, but will generate an acceptable return in a lower for longer price environment.

Total rig count in drilling activity in slow tremendously as operators elected ROI, well, the drilling and completions of any new wells.

In the first quarter, we received a total of 159 well proposals non consenting 43.

During the month of April we really saw the reduction in activity as we received only 28, well proposals or about half our 2020 monthly average of the proposals that we received we elected to participate in 37% of them on a net well basis.

As it stands today, we anticipate fewer and fewer well proposals as rig contracts are satisfied or get renegotiated.

And the conversation that we've had with our operating partners. Most completions reporting 20, we'll be back half weighted over many operators continue to take a wait and see approach.

For the wells or we have elected to we've been encouraged up reduction in average well cost in the first quarter, we elected to.

5.6, net wells with an average cost of 7.6 million inclusive of facilities. We believe there could be some downward trajectory as we review the well proposals that we have received in the second quarter, but overall cost will depend on the operator lateral lengths and completion methodology.

From an acquisition standpoint, we closed on 12 transactions during the quarter working with both non operators and operators like create transactions that are mutually beneficial.

In the first quarter, we acquired 965 net mineral acres 60 on net royalty acres and 3.6 net wells.

Continue to say creative and in one instance, we're able to work with an operating partner to carve out a non operated working interest in a handful of their own world, where we would mutually agreed upon completion timing.

As we move into the second quarter, we anticipate the ground game acquisitions the slowdown so.

In this price environment, we have no intention of moving our hurdle rate for either acquisitions or well elections with prices based on water activity and the bid ask spread where they are spending will come down.

Being said, we will continue to be opportunistic and continue to review all types of acquisition opportunities in order to make northern a stronger entity coming out of this downturn.

I'll turn it over to chat I want to discuss the financials.

Thanks, Adam Ive, a few highlights the over this quarter, starting with a quick summary on northern financial performance.

First and foremost our first quarter return on capital metrics remained strong.

Our return on capital employed coming in at 11.7% and our recycle ratio staying flat sequentially at 1.8 times.

Our production increased 28% year over year and was effectively flat sequentially to an average of 43735 barrels oil equivalent per day.

Production held in nicely during the quarter Spike continue curtailments and to a lesser extent the cobot 19 economic shock in March.

Adjusted EBITDA was 108 million for the quarter, which was down only 5% sequentially. Despite a 20% drop in oil prices.

Kashi and it came at a 95 cents per BOE in this quarter, 14% lowered in the fourth quarter, which continues to be one of the lowest in the industry.

Well differentials were $8, a 50 cents during the quarter, which was due in part the poor in basin pricing as we move to the quarter and other seasonal factors.

In the current environment, we would expect oil differentials to narrow substantially throughout 2020, and we're seeing that as we speak today.

Lease operating expenses came in at.

$9.38 up 6% sequentially during the quarter due to higher production processing costs and fixed charges on wells that were shut in.

As Nick mentioned.

We significantly improved our leverage profile since then of the year and our focus continues to be on debt reduction in these challenging times.

Reduced our net debt by approximately 86.3 million or 8% since year end.

We are in the midst of our spring borrowing base Redetermination and given the current corporate lending environment, we expect a reduction our borrowing base, but not nearly two what is being experienced by many others due in large part to our robust hedge book, our PDP coverage base and healthy leverage metrics.

Capital expenditures for the first quarter was 86.7 million, which consisted of 64.9 million of organic DNC capital and 21.1 million of total discretionary acquisition capital inclusive of acquisition DNC.

We expect that approximately 50% of our annual budget 2020, Capex was incurred in the first quarter as we ride activity levels down from a normal capex environment.

We expect our 2020 capital expenditure, but at the range between 175 200 million.

A reduction of 53% to 59% compared to our actual development capital expenditures in 2019.

Our wells and process grew to 27.2 at quarter end up 1.4 net wells since the beginning of the year.

There is important to note, but the 27.2 net wells and process 6.1 that wells have already been completed and are ready to be turned to sales when the time is right.

On the hedging front.

Our hedge book is a testament to our commitment to protect invested capital cash flow stream and our balance sheet.

We have approximately 27000 barrels a day hedged at an average price of $58 for the remainder of 2020.

Based on the May of 2020 close in Australia.

I'm, just kind of market value of our hedge book is approximately 375 million. So we expect to generate a significant amount of <unk> free cash flow from our hedge book.

And with that I'll turn the call over Northern's Chairman Brahma Crowley.

Thanks, Chad.

Mike, Nick Adam and Chad have done a great job articulating our results.

We have stayed on track to generate free cash flow.

And we are set up significantly is set up to inc. and set up to significantly increase free cash flow into second quarter and beyond.

As we move ahead similar to the last few years every move we will make.

Well the aim to one.

Enhance our balance sheet.

To increase free cash flow.

Three.

Reduce our debt to EBITDA and for.

But the company in a position to have access to lower cost borrowing.

At all times, we're playing the long game and sometimes.

I had requires tough decisions in the short run a few months ago, we decided not to move ahead and pay a dividend that our common shares.

Now we have to do the same and the fair the dividend on our preferred stock.

Ensuring the most possible cash flow and this uncertain environment is a must.

Additionally, as you can probably anticipate.

The opportunity to acquire assets increasing by today.

With that I will turn it back to Mike and look forward to answering any of your questions experiment with that I'll turn the call or the operator for the Q and a portion of the call. Jesse If you. Please go ahead to give instructions for the QNX. Thanks.

Absolutely, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad. The confirmation to indicate that your line is in the question Q you May Press Star kill if you would like to remove your question from the Q.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one on that please let me pull for questions.

Thank you. Our first question comes from Don Mackintosh with Johnson Rice. Please proceed with your question.

And some of the other board members and about 30% in stock year, and just wondered kind of what are you all expecting to see how did this management team that you have accomplished a lot over the past 12 months and I assume you're expecting a lot more over the next 12, but just I guess, maybe kind of frame. It in there in the context of as you alluded to a little bit M&A opportunities versus debt.

Doug option and kind of how you see them navigating this unprecedented time, we found ourselves on you know with with oil at $25.

Well I appreciate the question first of all I could not be more thrilled with this team. This is an all star team, they're always on their agile they're thinking they're responsible.

Again, I can't say enough great things about that might have outmost level of confidence in though.

Next is.

Really the opportunities for.

Companies like this in many companies is really when things are really really tough or when things are really really good.

At this point or would the hedges that this team has put together.

Strategy the company, we are well insulated.

And sitting in a great position to study.

Understand.

And pull the trigger India event, we see opportunities. So we're looking at every opportunity is out there.

However.

As I've mentioned in my prepared remarks.

In the event, we find something that makes sense. It would have to be in structure that will enhances the balance sheet of the company going forward and is consistent with the philosophy that we have put in place the last two years.

Last that more equity.

A more cash flow and play the game as long as you know playing a very long game.

In the oil and gas business I have the most confidence in this company.

In terms of our ability to continue to build up a very very large substantial business.

That is managed professionally and the team is fantastic.

Okay, great. Thanks <unk>.

Maybe next for I'd ever Jim or.

What price do you think or at what point do you think operator start thinking about bringing volumes back on and then and then ultimately maybe even some activity back out in the field.

That is it more of a headline price or obviously you know what you're realizing in basin is gonna be the ultimate driver there and just kind of maybe from a timeline perspective as obviously, there's a lot of uncertainty out there, but as things stand today, maybe you're kind of vision on the next.

Three to four months through the summer in the Bakken specifically.

Yeah I can go first engine can fill in any holes.

At a high level I mean, I think we saw.

Yes.

Production curtailments to start kicking in in mid March we saw that pick up in April and we anticipate that kind of continuing into me as operators kind of get other talk syneron in that regard and I think it's on the conversations that we've had with with our various operators, they're taking a look at their breakeven prices.

Across the isn't taking a look at leasehold obligations, whatever it might be and kind of Kerr curtailing causes such.

Certain operators, a different midstream and marketing contracts that have minimum volumes.

You know a lot of those operators are still continuing to try to meet those those volumes and so it definitely varies in terms of curtailments.

Across the basin by area and by operator, but that being said, we're seeing a a quick and swift reaction across pretty much all of our operators. There's maybe only one or two even from I got a well proposals standpoint that are still kind of go on most operators w. their renegotiated or are satisfied their rig commitment.

And so I don't necessarily anticipate a whole lot of new well proposals kind of going forward at least in the near term.

And Jim.

Yes, you want to yeah. It all is kind of dependent on with operators are receiving some operators have lower operating costs and others and so they can turn those wells back on a little bit sooner, we would expect though probably mostly through the second quarter that there has been you pretty significant curtailments I'm, probably until we get north of $30 and then it into the third quarter import cars little early.

Seasonal of wells come back on Yeah, and this is Nick I think you have to take into account two things the absolute price oil and then the in basin pricing I think in April when differentials were you know and a $20 depending on the various methods that probably drove those decisions as much as the absolute price of oil.

So I think that that is going to be a and to Jim's point, it's going to vary some operators may have contracts it insulate them from that.

But even when you add Gulf coast pricing go to a discount that can have an impact is obviously dapple volumes a touch the Gulf coast.

And so I think it's really going to be dependent on on that so the absolute price of oil does matter I would say that said it.

It appears to me and I think my team would agree with me that the market in North Dakota is in balance based on the shut ins that we're seeing today might even be tied the dapple contracts and trading at a premium dwt I've never seen that before.

And so that would tell you that the shut ins are are working I would expect if absolute WT I prices go back up it could get a little wildly in the first months as operators spring production that needed to come back to market, but doesn't but what you could see those in basin pricing.

Points wobble around as they try to balance that out and bring some volumes back.

Like any recovery it'll be a little wobbly.

Alright, great, Thanks, Nick and Adam agenda, Robin everybody and.

Look forward to falling off.

Thank you.

Thank you. Our next question comes from Derrick Whitfield with Stifel. Please proceed with your question.

Hey, scoring all congrats on a strong update despite the macro environment.

Thanks Kurt.

Perhaps for Nick or Chad I wanted to address your prepared comments regarding the celebrated debt repayment given the potential value. This could create within that's trading immaterial at discounts I wanted to understand how aggressively you could pursue this and if there any conditions are covenants within your capital structure that will limit your ability to pursue this action.

Derek I'll just give you started the you know I talk about risk adjusted all the time I think the most important thing is that the return on capital from by our bonds at a discount it is substantial rate.

We also are especially relative to repaying your credit facility. However by repaying your credit facility you build liquidity and so as we mentioned the capital return reserve for completions that we would look for in the event of a recovery you want to make sure you maintain adequate liquidity you'd be able to process.

Those because those returns can exceed certainly see that sort of 30% threshold that the bonds offer in the future and so it really comes down to a balance I would say that we have a lot of strong stakeholders.

Our creative guys and we're thinking of lots of creative ways to deal with to take advantage of those bonds. We've certainly use so far but I also think like I said last quarter. This is a an art of balance of thinking about the future and not just the present opportunity I mean I think.

Got an asked a lot in the past about stock buybacks and it's not that we haven't been insulted by our stock price at various points in time.

But I also think that that's an example, you've seen lots of companies buying their shares back you know at much higher prices and here, we are where the equity markets crashing in their canceling those when the stock prices actually low and so when you have a dollar in your hand, it to be very careful not just to.

Allocated to the highest return today, but to be playing the long game as Brian mentioned and thinking about the future and making sure you stay for a rainy day.

Got you when I think.

Sure.

That's great guys and then as my follow up perhaps thinking with with your neck regarding your comments on northern being in a position to play offense.

Could you share with us your views on the current environment in both still flow and seller expectations.

M&A could present, a near to medium term opportunity for you guys.

Yeah, I think it's still early stages.

The distress, we're going through one.

Bank Redetermination season, what I'd tell you is that most companies when prices are low do not want to part where they are producing assets because they need the cash flow more than ever.

So usually for them to part with them as because they have to.

And that is going to take pressure from their lending institutions from their covenants or what have you. So I think we're in the beginning.

Ladies and that is starting to show up I'd say that the opportunity set is going to be broader than I would have anticipated because I think look let's let's be honest here a low cost play high cost play the only thing that really matters. When oil prices are at $24 is are you hedged and what's your aggregate debt levels and so a lot of good companies are going to find themselves.

We have good assets in a bit of nickel here.

And so I'd say that.

We I think the way we look at this is simple that at today's strip very little undeveloped nationwide makes a mix of an adequate return and so theres very little value for that today do I think that that's going to but I think the strip in two years is accurate I'm, probably not but we have to underwrite it based on that and so we have to focus on.

Producing assets net of any curtailments, they're experiencing net of any obligations that they have in value them accordingly, and try to design.

When when situations, where we can help them.

And obviously earn our cost of capital day one.

I think that.

Given that banks will own a lot of assets in this downturn I think thats, that's obviously well publicized.

You know I think that they have to weigh the difference between their own liquidity.

And ultimately how long it will take them to recoup that their losses in those cases, and so we're hopeful that we can be a helpful partner in those conversations.

It's very helpful well done guys.

Thank you. Our next question comes from Phillips Johnston with capital. One. Please proceed with your question.

Yes, Thanks, I'm just to follow up on the curtailments do you guys have any guesstimate as to how much of your may production as a either shut under curtailed.

Yeah, we're still getting information coming in the operators haven't given us a lot of specific Aidan, which wells, it's going to be or or that sort of thing. So.

We're still kind of in the early stages of that obviously, we saw quite a bit in April that we'd expect more in may, but we haven't haven't seen information yet or we are not really speculate yet yeah. The plan seem to be changing on a weekly basis, and so it's Dave and contact with our operating partners consistently that to understand exactly.

Kind of how they're looking at things.

Okay has slawson then as aggressive as continental in terms of shut ins.

Do you know.

Slots and we'll certainly be aggressive I don't know relative to the comment at all but both those operators seemed to be her telling a significant portion of their production.

Yeah, Okay, and then maybe just a housekeeping question since the Q isn't out yet what was the cash outlay for the 90 million of senior secured notes you guys repurchased.

Well you can actually let's just a portion of it was done with preferred stock in January I don't know the number off the top my head 79 million preferred stock, yes. So I think in total the 90 million I think it was something like around.

Please don't honest me, if I'm incorrect around $10 million tenant at $9 for the entire 90 million I think yes, that's right that's exactly right yeah.

Okay makes sense thanks, guys.

We want to preserve the cash for the opportunities that we think is coming.

But it doesn't mean that we're not paying attention to when the bonds traded at a discount and want to take advantage of that.

Thank you. My next question comes from Neal Dingmann with Suntrust. Please proceed with your question.

And all that Nick on my first questions about the sensitivities you touched a bit on their prepared remarks, and really what I'm digging into is you know and appeared marts you suggested or the guidance, you're suggesting 350 to 410 in the forecasted EBITDA I'm. Just wondering can you walk through a bit as far as how you all view operators as far as the price.

First on do you have some out there as you mentioned slawson Oh.

Ah Continental et cetera that are still curtailing quite a bit others not curtailing very much I'm just wondering kind of based on the guide that you have out there I guess more.

Generality, you know statements you could just to become calderon, what you'd like to see an indexed.

Several months, given I guess sort of based on different prices.

Yes, so I mean, I think I'll give you a an ironic statement, which is that for the better part of the year. The Williston has been capacity constrained and so our el he has been somewhat elevated because wells were curtailed from what they could so we carried some cost of operating them, even though they werent running at full capacity.

But what I would tell you is one of the big drivers of that's going to be that as I mentioned in my prepared comments. The l., we will drop dramatically as these wells are curtailed because you're not hauling water a you're not.

Paying for electricity and you're not working those wells over.

And so there will be some time lag to that and it will depend operator, operator, how that starts to feed into our system, we're taking a pretty conservative attack to be honest with you about over those overall impacts and what we carry.

Obviously for the wells that are producing it's going to matter of what are the marketing agreements for those barrels a I would imagine just seeing economic creatures.

The barrels that are still producing and not being curtailed they're going to be those that satisfy contracts that are the most favorable.

And so what I mean by that is at the Netbacks and the in basin pricing, which in hand when prices are this low can have a huge impact on the net revenue.

And so I think that with you know in recent periods we've seen.

In decent pricing rally strongly so for the barrels that are producing and that are sold and based on I think you're going to see better pricing certainly than we would've expected even a few weeks ago, but.

But then the question is going to be how quickly does the cost burden come down and then the third variable. Obviously is just the realized gains on our hedges and so in some as I mentioned there are some scenarios in which.

We can actually seeing increasing cash flow certainly if oil prices go back to negative $37. So yes, we can make more money than we would have the wells are actually producing.

And so I think it's just going to be the cocktail of those variables that drives the aggregate cash flow levels or what I would say is that you can run some pretty mean spirited outcomes and ultimately those those hedge values are pretty sticky and so and the market is fairly flat goal for most of these volumes they can be probably.

If pricing rallies really hard to which if that at our hedge gains would be coming off some of those volumes can return to sales quite quickly within a few weeks in most cases, and so I think that we're going to find that range to be to be pretty accurate.

No. Okay. Good details and then second just for Adam added I think you mentioned.

That somewhere I think you participate in just said 37% of proposals I'm. Just wondering you talked about required rate of return or why why that you don't kind of how that level verse has been versus maybe the even just the prior quarter too.

Yeah, I mean, I think first off I think it highlights the non operated business model right. We've got the ability to pullback brings a lot faster than a lot of our other operating partners that have these commitments and so when we look at well proposals, we're running a handful of different sensitivities, what's the right.

Return when it comes on X price why price the price and then from there Jim and I am and our team are getting together to understand exactly what the mentality of the operator is.

And what they're doing it so a lot of the wells that you saw us all locked in through and kind of late March and April were.

Wells that we have certainty that we're going to be duck.

In the near term, but that if you don't lower pricing where to persist there was something that we're comfortable and would generate an acceptable rate of return based on the sensitivities that we run.

Very good thanks, guys.

Thank you. Our next question comes from Jeff Grampp with Northland. Please proceed with your question.

Well I guess.

I was curious first off I'm looking at slide 20 of the updated deck. It looked like sand on other maybe step change and well performance, albeit with limited data here on 2020, but can you guys. Just talk about your your views on the sustainability of that is there I guess high grading opportunity still left in the basin that operators.

Consolidating into or are we just read into a super early data here a little too much heavy.

Well, what I will say I'll, let Jim talk about though well performance, but I will say one thing we haven't really anticipate a much up but I expect we'll see.

And we've seen some incremental data, but we tend to be a lagging indicator is that I do think from or a turn perspective, well costs are going to come down. Some further you know we see the operators presentations of what they say their or their wells cost I would say the fee certainly don't foot to those numbers, but on the if he has also have contingent.

<unk> costs, and then which likely in this environment are not going to be realized so I do think from a return perspective.

If the wells are the same as they were before youre going to see materially lower costs and then Jim I don't know if you want to talk about high grading. Yeah. I mean, you can kind of see on slide 19, we've got that map on there that kind of lays out where all the wells are located and so you can see though.

Well to be completed in 2020, and mostly consent centered within the core of the pace and we came into the year with a really good set of wells and process and so we feel pretty strongly. So initially that this was going to be a good year in terms of well performance, we're probably not going to see a whole lot more of a efficiency gains in terms of a well performance within the core I think.

We're at a kind of an optimal size standpoint last year, you know we had quite a few wells. They got completed outside the core and that was kind of a mix of.

I fear to stuff operators testing new areas as prices were arent. So I think you know for 2020 with prices mean low we'll see most of the wellforce be kind of center within the corn, we should continue to see good good performance in our 2020 program.

Got it really helpful for my follow up I noticed you guys highlighted thinking that prepared remarks, acquiring some some royalty acreage I know that hasn't been a huge focus for you guys. Historically, but is that maybe a sign of maybe some some loosening of that market in the basin is that an increased focus for you guys or maybe just a one.

I guess is trying to handicap future opportunity specifically on the royalty side.

Yeah, I mean, we looked at working interest and royalty deals all the time and generally speaking the working interest opportunities that are presented in front of its generate a significantly better rate of return and so that's where we're allocating our capital but with the volatility.

And the opportunities that changing out there we saw a handful of deals that we were able to kind of get done on the royalty side of things not gone on Theres anything else you on it.

Comment on in terms of yeah, I mean investors have heard me rant about this the royalty in the working interest business are really the same thing one just as a higher repair and one is a lower return the lower which are one as a little bit less risk.

And we do own some minerals and often times, we view it as a supplement to our working interest in which we can increase our and our eye and something that were already participating and so.

Think of it is using your your at our eye.

You know from 80% to 85% as opposed to some pivot to the business itself.

Got it sounds good thank you guys.

Thank you. Our next question comes from Jason Wangler with Imperial Capital. Please proceed with your question.

Hey, good morning.

I was curious on the remaining Capex budget cuts, probably 100 million or so on the high end, how you see that use throughout the year I assume is going to be.

Right.

Drilled uncompleted wells and kind of where you think you kinda exit the year from a wells and process standpoint under that scenario.

I think the cadence.

You know we've looked at it is so someone equal weighted I think theres. The chance you know I think the hard part with how we accrue for is that will accrue for these wells based on a percentage of completion and then the operator may say sorry, we you know we took a pause and so then will reverse that and so I don't want to.

We tried to give a broad range I don't want to get too granular.

We certainly would expect a lot of stuff to get pushed to the back half of the year and we sort of put that reserve number in there just because in the event that we see.

In the fall some huge ramped oil prices and we see a lot of the DUC count getting brought forward I want to make sure that we account for that you guys don't think we're out there are over spending or something like that but I still see that as a remote possibility at this point.

I see we're carrying 27 net wells today.

That's a huge number, especially given six of them are already frac and paid for.

And we think that that should continue to build throughout the year, because we are seeing that DUC count continuing to build and we're not completing very many wells I would say in terms of the exit it's really going to depend on what happened so pricing in the fall if we see a rally in pricing we may see some of those get completed this year and some may if if prices stay in the toilet.

We will see them come out at the end of the year. So I think we'll just.

I'd say.

Well, we'll watch how that goes and we'll react accordingly, and I think we've tried to give that capital with the assumption that the majority of those are going to be turned to sales, but some of them could get delayed but we'll just have to see how it plays out.

That's great.

And just one one thing I I can't emphasize enough. This is for our banks and for everyone else, which is that the hedge value means that we're collecting on this cash flow, but as we push those curtailments forward that production is saved for a future day, so that base production that we restart in a higher price even if its say 35 dollar.

The world will be materially higher than if we had just blowing down the production from the beginning of the year like would normally happen in a $40 world. So we view. This is really serendipitous set of events and I think that I think that if you're prepared for this and you're not taking on water or having to borrow money through that period of time, which were certainly not going to be.

It puts us in a really strong position and we'll make.

Resuming growth at some point in the future a heck of a lot easier.

That's great color. Thank you Nick go ahead.

Yes.

Thank you. Our next question comes from Gregg Brody with Bank of America. Please proceed with your question.

Good morning, guys take your trial the color.

Just picking up in the last question that you mentioned.

Sort of your base production will be material higher materially higher.

[laughter].

No. There's general question about shut ins potential evil degradation and performance and obviously the buckles had had a history of of shutting just due to the winter weather. If you just help us think through how Thats managed and then there should we should not expect too much issues with while performance puts shut ins.

Yes, so I would say for wells that are frac and not turned to sales. It can sometimes meaning that there is a lower IP rate. When they are turned to sales, but from an you are perspective generally it actually can sometimes have a net benefits of the well will produce.

More for a longer I'm, just as it builds that pressure.

If we were I want to for everyone's referenced the backend there's not a shale at the Dolan medic rock in between few shales.

Shale production in shales, which are more fraction for us.

With that and where there is lots of water there can be issues with.

Shutting in curtailed volumes damaging those reservoirs I'd say.

I never say never but the wilsons about as good of a plays as you possibly could be for that we deal with shut ins all the time.

Some of our producers.

Curtail their volumes on a quarterly basis, we dealt with some pretty significant ones last and the beginning of last year with very little long term impact Jim you want to add to that.

No just like Nick said, we feel the Bakken is is a great reservoir, you don't really see a lot of damage, especially with the low water cuts if you're on a area with 60 plus percent market I would expect to see some degradation in that well performance. When it comes back on a for US we're not really expecting any degradation and well performance. Yeah. I mean, I think the Delaware basin can produce like 85.

On water like I wouldn't want to curtail volumes there enough that we are a producer there, but there are places where it's going to be more troublesome than others.

Interesting.

Let me just a few years, obviously a lot opportunity here to you given maybe coming into the cycle.

It is is there a possibility that you said that you ship strategy, a little bit pick about taking on operating positions.

Whereas it's because it's still not up all the way.

I think I think will do anything that makes economic sense I think that the hurdle rate for everything that's outside of our core strategy is a lot higher.

I think that we we will do what's best for the business.

And we'll be very very careful about that I think that I'm. The one thing I would say and maybe it's kind of ironic given that sometimes we feel like we get punished in the market is that our observation has been at most of our non operating peers are in a hell of a lot better financial position than our operating peers. So may.

Theres something.

The water of non operators that we tend to manage our business is a little bit better.

So we haven't seen the same level distressed and non operating as we have an operating but I would say the hurdle rate for any operator business is very very high.

That's helpful and then.

Maybe just.

The the borrowing base, how do you do you see.

How do you see.

Potential availability of credit.

Affecting our ability to pursue strategy.

[noise] I mean, it depends on what that strategy winds up being I'd say.

For good ideas there is always the money available. It certainly is difficult period as I ever remember banks are weighing wheel losses the cycle. They didn't even have that really in 2016 to a large degree.

I'd say, we have what I believe a really strong bank syndicate remember that our bank lines newer than most and so while some may have syndicate members, who are trying to get out of the oil and gas business by large those that were trying to get out werent around by the time, we started our so I'd say, we have a healthy group of banks have been tremendously support.

I do think that you know as Chad mentioned, it's going to go down.

Certainly at a manageable level, our business doesn't require a ton of liquidity.

And because we're we're sitting on cash we're not a user of cash.

And I think we've looked at pretty much every draconian scenario can look like and we feel really confident that we're going to have more than enough liquidity to prosecute everything we want to do.

I would say.

That.

Being in a position that we've been in we have never been taking more inbounds from people looking to provide capital.

And so I should tell you something that people are looking for the winners in this cycle.

And I think if the right appropriate structure is there and somebody that will certainly find other ways to bring money and do I think the bank market is going to be tough for the next couple of years absolutely.

Yes. It just last one you talk even some great color on the on the crude market.

You mentioned, we cast market appears to be back to normal just any observations about where the potential parliaments could deal or opportunities can be gasoline just ngls.

Yeah, I mean, yet over a billion cubic feet a day of processing capacity to to.

Come on line at the end of last year, it's been a real thorn in our side frankly, the gases has been holding back crude production.

North Dakota steps up to 91% in the fall and so what you're seeing as our oil volumes are pretty consistent and we're putting more gas to sales are capturing more of that.

At the time that new NGL and gas processing takeaway there. So it added a little bit of cost because those new systems are more expensive than the legacy ones, but you've seen at more than pay for itself in the net backs.

We're still taking a pretty conservative package and so volatile that I don't want everyone to think that we're going to get a 140% of Nymex all year I just don't I don't think at this point in time, that's a reasonable prognosis, though you know who knows.

I'd say, though that the Wilson peaked out at about a man have barrels or whatever the baseline is going to be when curtailments everything shut and all this stuff are taking place is going to be a lot lower than that.

It has 900000 barrels a day a pipeline takeaway alone.

And so I see a system that is built out for a much larger production base and it will need many years before its maxed out again, which means generally speaking that.

Pricing innovations going to be really really good.

And I think that is something that I would not have said I mean, I would've expected multiple years of tightness frankly coming into 2020, so it's been a button.

It's a it's a good thing that has come out of a pretty bad time.

Thank you for the time guys I appreciate it.

Thank you we have reached the end of our question and answer session I'd like to pass the floor back over to management for any additional closing comments.

Yeah. Thanks, Jessica Thanks, everybody for dialing in this morning.

We look forward to speaking with many of you over the next few months on the virtual conference call or NDR circuit, we've got pretty good. It zoom has a management team here over the last couple of months and look forward to speaking to you.

Some venue sometime soon thank you.

Yes, the only please give the replay information at this time.

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