Q2 2020 Northern Oil and Gas Inc Earnings Call

This conference call at this time, all participants are in listen only mode.

A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note that this conference is being being recorded.

I'll now turn the conference over to our host My Kelly Executive Vice President Finance. Thank you may begin.

Thank you Diego and good morning, everybody. We're happy to welcome you to Northern second quarter 2020 earnings call.

In here this morning, with Northern C O nickel Grady, our COO, Adam <unk> CFO chat, Alan Senior Vice President of engineering, Jim evidenced as well as Northern's Chairman Brahma Karate.

Our agenda for today is as follows Robert <unk> going to kick things off the then.

Over the Nick and team to provide their state of the Union comments in recap for second quarter. After that we will get into the queue recession.

Before you only first let me cover our Safe Harbor language. Please be advised her remarks today, including the answers to your question is made good 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 could be material materially different from the expectations.

The played it by these forward looking statements. Those risks include among others matters that we have described in our earnings release as well it's in our filings with the FCC, including our annual report on form 10-K, it or 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 in adjusted EBITDA Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued this morning.

With that taking care of I will now have the coal over to Northern's Chairman Mr. Brahma Friday.

Thank you Mike good morning.

I wanted to lead off today's call to deliver.

Very clear message a nord there's a vision.

And what shareholders can expect when the company moving forward.

In order to properly framed this first I would like to reflect on the progress that northern has made over the last two years.

Our net debt to EBITDA wasn't nearly seven times at the start of 2018.

No.

Only slightly above two times.

Our production growth has increased more than two and a half times.

Over the same period.

While we have posted.

Yeah, very highest corporate returns in E M P space.

When you reveal northern's second quarter.

The company generated meaningful cash flow.

Continue to reduce doubt.

Right Unprecedent that industry challenges.

We believe our approach to the oil and gas business is unique in both it's a strategy and its success.

And this was evidenced again this past quarter there.

As we look ahead.

Our board and management team are committed to making it abundantly clear.

The northern financial Health is a strong and our business model is sustainable in the long Brian.

Our goal is to build and multibillion dollar N P company a company that will have afforded the slight balance sheet.

Leverage that is one times EBITDA that one times EBITDA or less.

You may ask.

How do we intend to do this our playbook consist of two major pillars one.

We will grow our cash flow by investing in high return assets and too.

We will continue to strengthen our balance sheet by reducing debt.

In terms of the specific actions you can expect us to take.

It will be continuation of what we have done in last two years.

Where every move we made it not only grew the company, but to strengthen the company by paying down debt and taking advantage of opportunistic debt or equity exchanges.

Going forward you can expect us to adhere to those same principles. Furthermore, given the struggles.

Highly levered companies are experiencing an empty space.

We believe the time to accelerate our business model is now.

The opportunity set is impressive.

Actionable lucrative and accretive.

I believe the company is well positioned.

For major success in the second half of 2020 and beyond.

One final comment as it pertains to the proposed to reverse split stock I am pleased to announce as we have received significantly more boats.

Then needed in support of the split.

Over the next couple of weeks, we will determine the exact let's ratios, but our desire is for a high single digit stock price immediately after the split.

The benefit to shareholders of the reverse split our.

Undeniable.

It will enable institutional investors, who have wanted to invest in our company.

Simply couldn't do to internal restrictions placed on the stock trading for less than $5 a share.

On the stock in northern.

Two it will lower our trading cost and three.

It will open the company up for inclusion in additional equity indices.

I will now like to.

Turning the call to Nick but before that I want to thanks.

Mitch and the rest of the management team and members of the board of directors, who have been working incredibly hard.

During these months and I am whatever great [laughter].

Nick.

Do you.

Thanks, Brian.

All right, let's get down to it and five points.

Number one.

The second quarter was one of the most volatile in decades, but it should mark the bottom.

Auction differentials in commodity prices have already dramatically improved compared to Q2.

Production curtailments in deferred completions disrupted pipe <unk> production by an average of about 40% of potential production in twoq.

Peaked in June at nearly 57% of our volumes expected in a normal environment.

These issues are beginning to slowly he is and we project a steady return of our volumes to sales throughout the second half a funny funny.

The crude prices up sharply in the past quarter. We are supportive of these moves by our operators.

As we have discussed in the past few quarters, we have appreciated the rational behavior of our partners and the moves taken in the second quarter curtailed volumes allowed us to capture hedge gains and now our and much higher margins on those same barrels these gains add up to tens of millions of dollars at the current strip that could have been squandered.

We expect assuming support a pricing the secret Tailwinds shut ins and completed wells not turned to sales slowly but steadily come online throughout the remainder of the year.

Ultimately, we expect completion activity to resume at a more robust pace.

Number two we act logic in common sense to prevail as it pertains to the Dakota access pipeline, but if that doesn't come to fruition. The Bakken is still set to thrive.

In regards to the pipeline, we believe cooler heads will prevail.

The legal case against it is and always was weak but in politically charged times. It is always difficult to predict the outcomes in such cases.

Whatever your political beliefs, the solution without dapple will be a higher cost one for American consumers and producers alike, I rail and despite what the detractors seem to want the oil will not be stopped at all but instead travel on a more expensive and dangerous method over bridges in the very same areas of dispute.

We are prepared if it faces long term issues as we underwrite acquisitions and deploy capital with this mindset, but by no means do we think it as a killer to our business. However, it will add modest amounts of Pos to our differentials and until such resolution takes place it will slow the pace of activity.

The Williston is full of opportunity and we're seeing the best <unk> sets of wells, we have ever had in process period.

The Wilson survive prior to 2017 without dapple and it will survive and thrive without it now, but we hope it will not come to that.

Number three we remain committed to paying down debt.

We have continued a dual path of growing our business, where there are attractive returns and continuing to de risk the balance sheet.

We've been doing this consistently since the rebuilding of this company two years ago.

The recently announced deals both on the debt and acquisition front, we continue to strengthen the company.

We have several other ground game deals and process and it's completed we will update you accordingly.

When completed our tally year to date, we'll have caught our senior notes by over $124 million and cut our revolver by an additional 12 million.

As we reduce debt through next year. We can also focus on moves to extend maturities increased liquidity further and simplify the balance sheet, but all in good time. There is a fine line between doing things when you can and when you should we will continue to reduce risk.

We also continue to bolt on core net inventory at the ground level wellbore by Wellbore, an acre by acre, which brings me to my next point number four we're confident for the remainder of 2020, and we're set up well for 2021, we currently forecast our capital spending which was down dramatically in the second quarter have you well within our stated guidance.

Even though our ground game has been active in continues to add to our wells in process inventory.

We had been encouraged by our operators recent public commentary in regards to their shut in return shut ins returning to sales and this could mean a past faster than we are modeling.

The only 3.6 net turn in line well as expected in our guidance for the remainder of the year. It would mean spending for the lower end of our current capital guidance. However, it's both the return of production and turned in line accelerates faster than we anticipate it could mean more production and more new wells online, which would bring us to the higher end of spending as well as significant.

On the more production.

With potentially 30 or more net wells ready to be turned to sales by year end. What this also means is that even as we've reduced <unk> debt dramatically by year end and spend substantially less capital. We still we can still see a path in early 2021 to production levels within striking distance of where we began the year nearing 40000.

The OE per day.

What does this mean an aggregate at today's strip it means that EBITDA could actually be higher year over year in free cash flow higher as well. This despite an 80% reduction in the Williston rig count year to date importantly, much of the capital and those 30 or so wells that we can exit the year would have been completely or partially paid for this means the capital call and.

2021 should remain very efficient and we should be able to roughly sustain those levels with the capital spending provided in our release.

The capital.

Similar to 2020, and the 2021 range. We've provided is driven at the high end by how much additional activity develops throughout next year. If oil prices are supportive and we see more activity. This would mean spending at the higher end and likely more cash flow and production in the back half of 2021 and into 2022, depending on the timing the credit for this go.

I was in part to our operators, who have not wasted those producing volumes in a low price environment and to our engineering Atlantic team, who have continued day in day out to find the best economic drilling opportunities for us to recycle our capital.

Number five we remind investors that the durability and flexibility of the working interest business model is second to none.

We get asked constantly by investors, if we would take our strategy out a basin. We have responded that we are data and economically driven and our advantages in the Williston give us underwriting confidence that is not easily replicated.

And my two plus years here, we have looked at over 50 opportunities in other basins in past if one good thing has happened in 2020, it's that the downturn has brought more realistic expectations to other basins closer to our economic hurdles as the flippers fade away and importantly, with capital scarce brought in many parties from other areas.

Seeking to partner with us, we're cautious and conservative by nature and believe in walking before we run.

We focused on top tier capture operators and the best of the best areas and this is a must from a risk management perspective for anywhere we look as we build our data and experience we expect to be can find opportunities in other basins, assuming they compete for capital.

As demonstrated by recent announcements, we also continue to see ample opportunities within the Willis and there is no shifting priorities are basins, but merely potentially an extension of our strategy. We are focused on making money not on being bigger although we have clearly benefited from our cost structure as we build scale.

But if we can replicate our data advantage and use the same methodical process season. Other basins, we wouldn't be able to benefit from an expanded opportunity set.

I'll conclude my saying that well things are undoubtedly better than when I last spoke to you our focus on risk remains in place our hedges are deeply in the money through next year and in fact netted us over $77 million unrealized gains last quarter alone.

The gas hedges, we just put on in April have already begun to pay out netting us approximately $1 million since inception. We also added our first hedges in 2022 for 1000 barrels a day at about $50.

Hedges have served their main purpose and giving us the ability to continue to build for the company's future. During a very trying time. However, if all of you have learned one thing in this business. It's that risk management is critical on the front end create long term value in the commodity space.

As we see acquisitions and find economic drilling opportunities on our acreage we won't change our stripes, which have allowed us to whether these times, we'll continue to hedge away risk and continue to whittle away at the debt on our balance sheet.

The equity infuse moves we've used in recent times directly benefit the company and its investors over the long term and have been done on an accretive basis to the enterprise.

Despite where activity in the United States is we literally as a team have never been busier. We've analyzed over 25 separate major transactions in the past three months and continue to look for ways to add value to northern.

It's not some hollow catchphrase. This is a company run by investors for investors and we believe as we prosecute on our plan northern will come out on the other and stronger than ever.

Thanks for your time, and let me pass it on to Adam barrel and our COO.

Thanks, Nick from an operational standpoint activity levels, So certainly falling to historic lows in the Williston basin.

But in an environment like this northern's competitive advantage is most apparent.

Through our active management during the second and third quarters, we've been able to hybrid our wells and process and inventory.

Just continuously being prosecuted through ground him acquisitions.

Non consent process.

Wellbore and acreage trades as well as other initiatives.

As we recently announced the opportunities available to us have never been better off the ground game level.

Operators have retreated to the core in order to develop some of their best inventory in a depressed price environment.

So all basin wide activity has slowed to just 10 rigs is through our ground game acquisitions that were able to increase our exposure to the best areas and best operators, where the wells are still economic inclusive of all costs.

I'm doing this on a real time basis, we've been able to adapt to the changing environment and increase northern's net activity to set up one of the strongest with wells in process in our history.

As noted by one of our acquisitions announced last week.

Even in these uninsured times, we can adapt if necessary adjusting for potential Dakota access disruption in our economic analysis.

For the second quarter and first part of the third we've signed up or called on over 850 net acres 0.7, net producing wells and 4.1 net wells in process, all while staying within our stated budget for the year.

As our guidance suggests regarding curtailments and well completions, we expect curtailments to Ratably is through the end of the year.

During the second quarter, most of our operators heavily curtailed their volumes and as we moved into the third quarter, we're starting to see meaningful volumes come back online.

Well many other basins have already seen the bulk of their volumes come online.

Given our strong hedge position, we're pleased that our operating partners have been rational and patient.

This in turn will lead to both a stronger base of production and a stronger reserve report as we under the fall.

The result is more production at a time of higher prices than having been wasted in the low priced environment of the second quarter.

Put simply we'll get the earn on these barrels twice.

Well, we've used our ground game acquisitions stuff into more drilling opportunities that have met or exceeded our hurdle rates. We have also non consented a number of wells and traded out of others that no longer penciled in this price environment.

In the second quarter total well proposals fell to about half of what we would typically see any three month period.

Of the well proposals that we did see we elected to participate in about two thirds of them for a total of 2.3 net wells.

Our ability to react quickly to a volatile market enabled us to elect out of wells with operators that might have worked in a normalized price environment, but not the current one.

We ended the quarter with 26.7 net wells in process and we expect a significant majority of the completions will be deferred until the latter ended the year and into 2021.

Well costs remained relatively consistent with the first quarter as our average if he came in at around 7.7 million.

However July has been encouraging as the average well was validated for approximately 7 million.

Northern will continue to stay nimble in a volatile market high grading our asset base and taking advantage of the distress and lack of capital availability in the market.

I cannot stress enough that we will remain disciplined only electing to invest in projects that will continue to reinforce our best in class return on capital employed.

As we looked at 2021, we see production bolstered by the rational curtailments from point 20.

Participating and only the best wells and process that will drive a strong cash flow and production profile, while continually augmenting the asset from our active management throughout this year.

With that I'll turn it over to our CFO choteau under discuss the financials.

Thanks, Adam.

Ive a few highlights to go over this quarter, starting with a quick summary on Northern's financial performance.

Our production decreased 32% year over year to an average of 23804 barrels of oil equivalent per day.

Production was significantly impacted by curtailments shut in production and delayed development plans by our operating partners.

We estimate that our second quarter production was reduced by approximately 16800 Boe per day as a result.

We've given production guidance based on the ramp we expect from curtailments.

We recognize particular in the third quarter. These estimates are below wall Street estimates.

Our challenge by the fact that we did not give prior guidance.

However, it's worth noting that even versus consensus production estimates due to our strong hedge position. This would have little impact on our cash flow estimates.

We estimate the adult would be less than 4 million at the current strip.

Oil differentials were $10.60 during the quarter, which is due in part the poor in basin pricing and storage constraints as we move for the quarter.

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

Gas realizations were significantly impacted during the quarter.

Much like we saw in the oil markets.

Natural gas and NGL prices were affected by physical stores constraints and higher processing costs, which created a negative pricing for NGL products as the man collapsed due primarily to the Cobas 19 pandemic.

Lease operating expenses for the quarter came in at 26 point 6.6 million.

29% sequentially, driven by 46% reduction in production volumes, partially offset by increased processing and salt water disposal costs.

We've already experienced further reduction early in the third quarter.

We expect to continue to see basin wide cost savings during the remainder of the quarter.

Gosh you they came in at a $1.61 per Boe in this quarter.

Continues to be one of the lowest in the industry.

Even though production volumes decreased over 46% compared to the first quarter.

In the third quarter, we expect to see a slight increase in cash unit costs in the form of acquisition costs for both deals we've executed on the deals we have not.

As a result in a significant effort, we put forth analyze numerous acquisition targets in recent months.

Additional acquisition costs could range from 200000 4000.

As Nick mentioned, which significantly improved our leverage profile since end of the year and our focus continues to be on debt reduction in this challenging times.

We have reduced our net debt by 132 million or 12% since end of the here.

This has reduced our run rate interest expense by approximately $11 million.

We finalized our spring borrowing base redetermination shortly after the quarter with our borrowing base set at 660 million.

Which is less than a 20% reduction while many of our peers experience while over 40% reductions.

This is a testament to our hedging strategy high quality PDP asset base.

And our healthy leverage metrics.

Given that this reduced level, we expect to have ample liquidity will expand our liquidity profile through our free cash flow generation.

We ended the quarter with 568 million outstanding our revolving credit facility and on the working capital front, we continue to work down or operating current liabilities, which are down 41% since the beginning of the year.

We expect it will take through the third quarter to work done our working capital deficit because of the non operator, we tend to see cash capital spending cost like compared to that of our operating partners. So it'll depend on the time you those to us.

Nevertheless, we expect to reduce our revolving credit belts significantly by the end of the here from its current levels.

Capital spending for the second quarter was 34.5 million.

Sounds, 60% compared to the first quarter.

Consisted of 32.7 million of organic DNC capital and 1.8 million of total discretionary acquisition capital inclusive of acquisition DNC capital.

As you saw in our earnings release. This morning, Northern has reiterated its 2020 capital spending guidance to a range between 175, and 200 million a reduction of over 50% compared to our actual capital development expenditures in 2019.

On the hedging front or hedge book is a testament to our commitment to protect our invested capital cash flow stream on our balance sheet.

We have approximately 26500 barrels per day hedged at an average price of $58.26 for the remainder of 2020 at approximately 21400 barrels per day hedged at an average price of $54.66 in 2021.

We've also added natural gas hedges and began to hedge oil for 2022.

At the end of second quarter, the fair value of our hedge book was 188.4.

So we expect to generate a significant amount of cash flow from our hedge book.

With that I'll turn the call back over to Mike Kelly.

Thanks, Chad Diego, if you'd up but my queuing up the today, we'd appreciate it.

Thank you.

This time, we will be conducting your question and answer session. If you'd like to ask a question. Please press star key followed by the number one key on your telephone keypad, a confirmation tone will indicate that your line is in the question Q.

You may pressed to Starkey followed by the number two key if you would like to remove your question from the Q4 participants do things speaker equipment, it may be necessary to pick up or handset before pressing the star keys and once again ask the question Press Star one.

Our first question comes from Derrick Whitfield with Stifel. Please state your question.

Thanks, Good morning all.

I want to.

Sure.

Hey, perhaps for Nick or Adam regarding your comments on the ground game heating up could you offer some additional color on the degree of deal flow, you're seeing and current seller expectations.

Yeah, I mean, the deal flow that we're seeing as it's been relatively consistent with with what we've seen and call. It. The past 12 to 18 months I think even with the activity levels dropping you've got a handful of both both non operators and operators.

That either don't have the ability or they've got a mandate in certain circumstances, where they're unable to invest and orbio or non operated.

Working interest opportunities and so what we're seeing is a lot of the operators at the 10 11 rigs that are going right now you know.

Retreat into the double Bulls eye of the basin, but you've got.

810, a if these maybe being validated that even given time given the development that's going on and no one wants to participate and those that creates the opportunity for us too quickly evaluate is with the engineering.

Type curves that we have ability to move quickly and close these out and the only other thing I'd add is.

In times like this certainty to close the.

Oh, even most importance relative devaluation and with northern's balance sheet and track record, we can offer that to both our non operating and operating partners.

Only thing I'd add Derek is that the.

We have continued to up our own internal hurdle rates and.

Hi dramatically and so.

In times like these and certainly early in the in the second quarter, we've been able to execute on these at higher returns than we've ever done before with all the optionality of upside to commodity prices and so and the deals that Adam as prosecuted in the last few months, what we underwrote is already significantly.

ER.

The returns are likely to be significantly higher than what we underwrote just because we had to convexity on oil prices.

Right.

That's great great color guys, and then shifting over to dapple when your potential exposure. If we were to receive an adverse ruling in the coming months could you speak to the degree of exposure you have.

And a ballpark more than fine and then offer some commentary on the current dynamics of available rail takeaway at how much is immediately available for dispatch.

Yes, so, but we'll start with the last part first there's there are 700000 barrels a day, a plus of idle rail capacity in the basin. So theres theres plenty of take away.

Thing with rail is pretty simple, which is that there's term rail and then there spot rail spot rail is very expensive.

Term rail is sometimes about half of what that is and let's just be clear here that the Dakota access pipeline is not a cheap form of transportation.

With Gulf Coast oil prices, where they are today.

Does not compete with engage and pricing. So it is among our more expensive forms of transportation.

Differential on dapple today, it's a high for dollar one net and that would be that's an up before you include the gathering costs of getting the oil to market.

So relative to rail dapple was a very cheap alternative in 2017, when Gulf coast spreads were $7 versus double B T. I M E H was less than a dollar yesterday.

And so in terms of its overall impact it's going to be relatively muted in terms of our own production volumes.

I would say, it's relatively low to deal overall period. It does shift from time to time, but I would wager to say is less than 20% of our aggregate volumes on a normalized basis, our largest operator doesn't transport anything to double the only thing I would tell you is that.

The biggest purchaser of oil in the base and very few operators have firm transportation on pipelines in general marketers are the purchasers of many of those barrels and so where they ultimately end up they go to the terminal and their resold so some of those.

Charles maybe resold so it's a difficult question to answer however, what I would tell you is I think based on current Gulf coast spreads and what dapple barrels ultimately receive a rail barrels can actually get a slightly better price I wouldn't anticipate having a huge impact differentials overtime, our strongest marketing partners that we work with would today.

So maybe a $2 differential increase.

The only thing that will take some time and I think one of the reasons why curtailments have been slower in the Bakken in general is that to sign those long term.

Real agreements you only want to do so if you know that you have to.

So there will be some time for those barrels to spool up over time and for the railcars to be delivered and then for those systems to go Act.

My final comment on that it's just that the mobile rich crossing which goes overlake allahu is directly across from the standing rock reservation.

Ultimately the same barrels that they don't want to go thousands of feet underground are going right over that rail bridge on a more dangerous method and our view both ethically and I would just say legally is that longer term. These issues will be resolved, but it may go on we're not talking about people.

Necessarily who are thinking rationally, but ultimately we want the oil to be transported in a safe to say this method.

The only other thing I'd add to that just from an underwriting standpoint, I mean, that's the way we're viewing this isn't a worst case scenario, we alluded to it in our prepared comments, a little bit, but the acquisitions as well the inbound kind of organic issues that we're looking at we're looking at it through that lens. So this should those get resolved.

In a beneficial where we'll see an uptick in terms of rate of return yeah and final and just to Adam's point is that these numbers I'm discussing our assuming that the pipeline a shutdown and nothing else ever happens. My guess is the industry is dynamic and with an arbitrage that will be opened up you will see modifications expand.

Options and other things that will go and overtime to add additional capacity another and other ways that is competitive on a cost basis.

That's great guys I certainly agree with your views and thanks for your time in response.

Our next question comes from down Mackintosh, with Johnson Rice and company. Please state your question.

Well Nick.

On the guidance for kind of three in Fourq, you pretty wide ranges. There just wondering what are some of the levers.

I guess, maybe hurdles you have to get over that would kind of pushing towards the upper.

Upper over into those ranges.

So if you look at our stated guidance on.

We're only assuming about 3.6 net turn in lines through through the remainder of next year. So the vast majority of the volumes are returning our it's just the pace of curtailments coming back on that's as an operator, that's a harder thing for us to predict I would say based on public comments, we've seen from the operators and early results in the third quarter, we're very encouraged.

But it's it's early to tell and especially given how tenuous the recovery in oil prices are we are going to be as conservative as we possibly can.

Given that we have 26 plus wells in process today prior to some of the closings of these kind of getting deals. There's also the potential that more wells turned in line.

Especially if prices remain relatively robust and so that can have a dramatic impact on those numbers. We've really just taken with what we know we are.

Hi, guys all know, we live and die by our engineering analyses and so we have to take the most cautious approach, but the the ranges purposely wide because the number of outcomes is equally wide and so what we will update you guys. Accordingly, as we know more.

Alright, Thanks, and then kind of along the same lines, but just saying going forward a little bit into 21.

40, 40000 a day.

Good relative to consensus and even to the lower end as well, but my question is more on on the Capex side and then how it's set you up longer term for 22, not not necessarily looking for numbers, but how you're thinking about the spend I'd imagine there's going be a lot more on the ground game based on your comments. This morning, and I'm just kind of how the spend next year sets you up for 22 and really the longer term.

Strategy of northern.

Yeah, I mean, I'll, let Jim set that up but I would just say from obviously as you've had a lower activity levels, our maintenance capital call is declining from where it was.

And I think going forward from there on out using that sort of range. We could you could expect to spend a very similar amounts of money and sustain those volumes I think it'll depend obviously on the opportunity set in the quality of those wells and the timing.

What I would say as we as we gave that sort of early look at 2021, it's important to understand that the timing of that spend is as important as ever so as I mentioned on my prepared comments.

If you spend towards the higher end of the range. It would mean likely that theres more organic activity that develops throughout 2021, what that would mean would be more volumes and more cash flow and more production towards the back half of that here given the timing of spuds and so that ultimately will then you know somewhat reduce the capital calling them in the and the.

Following your I'll, let Jim talk about it a little bit as he has done some good analysis on us.

As we kind of mentioned, we expect to exit the year with about 30, net wells and process and so with the curtailments coming.

Back off towards the end of the year with very that while the process. We think thats an enough wells that could hold production flat at roughly 40000 barrels a day next year.

A significant portion of that capital it's already spent on those wells so.

If we were just shooting for a one year goal to hit 40000 next year, we'd be at the lower end of that capital spending, but obviously, we're looking more at a three for your outlook and so in order to maintain those barrels in future years need to spend a little bit more in the back half a 0.1 to set up 20, 2022 and claims micrium beyond that so in that scenario, where we're trying to hold production.

On slide it at 40000, a day over next couple of years, we'd be at higher end of that guidance range on capex.

Oh, I'd say from a from a sustaining capital perspective, again subject to timing of when the money spend you're talking somewhere between.

202 hundred $40 million as a consistent maintenance number for the for the years beyond that maybe less it just depends on on that how how flush. The production is at any one given point in time.

Alright, Thank you all.

Our next question comes from just crap with Northland Capital markets. Please state your question.

Well I guess.

I was curious how how a higher visiting or thinking about potentially revisiting the dividend conversation obviously the markets.

Everything around but is there a leverage goal.

Commodity stability level that you guys might want to see before revisiting that are just any high level, a little possibly great.

This is Bob I'm going to take this one.

Obviously as I've mentioned multiple times, our focus is to make sure that entity is a strong and we make every move to make sure the company will remain solid.

He could save you want to resume.

The condition that at which we want to resume paying dividend.

Is when we have visibility.

Two.

Stabilization of the oil prices long enough.

That we have the ability to put in strong hedges for the following gears.

As well as balancing that to EBITDA, but more.

And then combination of these dynamic things will allow us to get to a point, where we believe we can start the dividend.

And maintain it in a sustainable fashion.

Through any commodity pricing.

And that's what this management on the executive members of the board have done so well.

With this company as you can see right now.

I think it can be it can be soon it could be early next year.

Could resume into some form of a dividend.

But it's really a function of the conditions coming together, allowing us to run a incredibly safe.

Entity and a solid movement to dividend, where there's never a chance that we have to pull that dividend back.

Got it perfect that's Brahmin.

Follow up it sounded like you guys or maybe a little bit more constructive on Outta basin opportunities then you've been in the past.

Just kind of curious how you guys would evaluate the framework and turns out.

Necessarily want you guys. The name what basements are doable versus not but that's kind of a framework for.

What's that we're going to look like you guys to pull that trigger.

Jeff its neck.

What I said my prepared comments is pretty.

I think which is that.

We've told people, we get asked constantly and the reason that were discussing it now is that we've looked <unk> been looking for two years and we don't even really have to look at the opportunity to come to us.

Added it all up and it's over 50.

50 things that have come our way and what I tell you is that we're just driven by economics and so if we can look at our entry costs full cycle return have full confidence in underwriting.

It shouldn't matter what base in your in.

But what I would tell you on the latter part is it that confidence in that data that we have is really hard to match and so it's made for a very hard high bar I would say in a lot of the.

Active basins in the country <unk>.

<unk> had a lot of funding money going around which is really meant that regardless of how well how good wells aren't any given basin. When you added it all up it didn't earn a return on capital employed.

And what I was suggesting is that it may be that we're entering it time now where it's really just doesn't make money or not in the bloom. This off the rows and in that case. These deals may start to compete and so we'll have to see how it plays out.

But again I'd say that.

The concept of us the only somewhere else and testing out some tier two area is very low.

If if we're going to find something it's going to have to check every single box.

Because our appetite for risk is about zero.

But I do think there are there's no reason that this business model can't work everywhere I think I've been consistent and then I think everybody here feels the same way. It's just that it has to be done the right way and you can't.

We've seen plenty of public companies, who felt that they needed another arrow and the clever and spent tons of money to jump into some other other basin only to spend way too much money and never earn a return even if that based in itself was okay.

Not gonna do that what we're gonna do is make sure that every deal we do basically adds value day, one not just to make some symbol, we're about making money here on I'll leave it at that.

Got it per head and neck, thanks for that time.

Thank you. Our next question comes from Neil Dickman with tourists. Please to your question.

Good morning.

Nick's My question is you all had been pretty I guess, probably for your one of the guys are you guys been very nimble on.

Looking at maybe going non consent, and then taken that capital and going elsewhere I'm just wondering going forward.

Are you going to continue to.

Sorta used one is that.

And do that to really just use ones most prudently.

I mean, we talk about return on capital employed in rate of return until the answer should be obvious I'll, let Adam talk and a second but I'd say that if we have an organic well that is.

Wishy washy in terms of its return will not concerned it because we know we have 10 deals behind that that will R&R cost a capital and so we're just capital allocators and that's what drives every decision let me make.

I mean, you've got operators that'll drink their own kool-aid, even in an environment like this and so we look at the we look at the ground.

And the organic if he has those kind of.

One in the same.

So we're taking a look at what we're getting on an inbound basis on a daily basis and then we're we're proactive in sourcing other opportunities get in front of a drill bit as well as the inbounds.

On a deal for standpoint, and so we're trying to put all those together high grade everything and that's what we've been able to do and so we've been able to.

Pick up.

A handful of drawn game bills, and the third quarter and kind of late Q2.

Non concern at a handful of wells and then we've been also been able to kind of trade out of other tweeners.

Meantime, and that's effectively setup for one of our most impressive kind of wells in process with.

S operators, thus rock so certainly encourage in that regard yeah, yeah sure.

Okay.

Go on one of my standard rants, one other things that I think we find the most frustrating is that people <unk>, some sort of ETF on the back and that.

If continental or marathoner, conoco or whoever in there right down in their activities going one way or another that that dictates what are capital and what are outlook is going to look like and that's the farthest thing from the truth, we're no different than any portfolio manager.

Just because one sector is going down doesn't mean that that that your portfolio ask you. If it's structured correctly and so what are moves and the last few months should show you is that if the economic returns are there were able to add activity that may not correlate with some passive entity sitting there waiting for those things to happen that's not what we're doing it's not what we've ever been doing.

Our growth rate, good meet or exceed the base and even with pen rigs active we continue to add net wells in process to in your record and so.

I think for anyone who thinks that they can.

Look at other companies activity as a barometer, how northern is going to perform over time.

If you look at our own growth and the last several years, it's had almost no correlation to those of our other operators, even our production net to any one operator has not showing any correlation and that's going to continue as long as we're here.

Got it in my second questions for Brown Brown.

Been active in recent quarters buying shares back certainly you perceive as undervalued and I would agree but my my question is first how strong you still believe that these are undervalued and then I'm just thinking secondly.

Is there something else you could do with that capital within the company, but besides buying shares such as potentially taken a more at the position with a deal or something like that that would actually benefit potentially the company, even even quicker and more material then maybe just buying shares yeah I think if there was.

Need to.

Two.

Provide cash to the company me and the rest of the large shareholders would do so.

Point, the company has been able to to do that.

Obviously I have been acquiring chairs for four years and.

Haven't sold any so.

Certainly believe that the company is undervalued from the standpoint that.

We are in getting never really haven't gotten any value for the intellectual.

Knowledge capabilities, the data of the company and the performance of the management.

Prices always sort of hey, what's the.

<unk> value of the wells and reserves, there's really not giving any credit to the to this amazing management team and the board.

So.

We will do that when necessary I do.

Going to emphasize that I think 2021.

Can be an incredibly amazing a banner year for energy in the sense that.

While we have been producing.

Positive cash flow this year.

And.

Fortunately for me.

Nina any sort of a call of the C V or the chairman of a company I hate to see any Mrs of any kind.

We're very competitive we want to make sure everything is.

Wind, but.

I have to look at it in a fair perspective.

What's really happening is we have invested substantial amount of cash.

Into wells.

We have a lot of money invested where it actually not producing right. Now. So 2021 is these guys have tried to.

Highlight has the potential to have a significant amount of production and for the oil prices come up to the 55 or 60 any unreasonable range.

Obviously, the operators will open the faucets and start kind of letting the oil to come out we have invested the money already we will have massive production and like Jim said, the money, who would spend would be for the future years. So I think we can come into a 2021, where the spending is.

Moderate but the production their returned and the cash flow will be significant so patients has the virtue here.

Unlike many other company, we don't have any buns to our head, we're still going to be in a positive cash flow.

Situation in this company under any circumstance. So we have the staying power to wait and see when that moment of time turns around and then all that oil that is being saved in the ground right now will come up at the prices that would be more lucrative for us so I am very bitter.

Very bullish on this company probably more than I ever have been.

Very good thanks, Brian Thanks, Tim.

Thank you just a reminder to ask a question of Crestar. One. Our next question comes from Phillips Johnston with capital one please state your question.

Hey, guys think just one for me as a follow up on the topic of dividends for either barometer Nick.

About seven quarters ago, as you guys about the idea of a variable dividend given your business model and just your.

I tried to free cash flow profile I'm sure you saw a couple of days ago.

Two larger.

He was laid out a strategy of returning capital to shareholders, what's essentially a.

Plus variable dividends strategy. My question is once we.

Get back to environment, the barone outline or your cable to return free cash shareholders does it makes sense for northern just from a consensual.

Point of view to adopt beige plus variable dividends strategy.

And if not what kind of florals or drawbacks juicy with that type of payouts strategy just.

Other than the fact that it hasn't really been done before and ECP space. Thanks.

Yes Phillips.

So.

They say that.

It would be intelligent and you have to be willing to change your mind and I think that.

I'd kind of Johnson skepticism to that in the past.

And what I'd say is that I saw a pioneer announced and I think it's interesting I think it's something to take especially given that.

It's been.

Quite a volatile time over the last several let it feels like forever now, but it really since 2014, it's been constant volatility in the oil and gas sector and so.

I do think that that idea has merit of a small based dividend and the ability to go through.

I certainly think that I think is pioneer also alluded do we get pressure oftentimes to buyback stock.

And it's proven that.

Companies are really really bad at that and who's to say that we'd be any better I do think that you always have to have that area arrow and your quiver.

I think that ultimately the most important thing that we can do is deliver a total return and I think that's certainly that adds flexibility I think our my skepticism on on on that in the past has been willow market ever credit you for that variable dividend will give you consistent value and things like that when it's going to very.

From quarter to quarter and put it create more volatility I think we need to do some more work on our end on that but I certainly think that we are open minded to the concept. So.

I want to add on so I'm committed.

Strategically to get.

This company to a point.

Where we can pay a dividend.

And as is practical.

I also.

Believe that.

And environment, where I believed in the future.

A capital there's going to continue to come down across the board for.

Almost any business returns are going to be challenge for most businesses.

It's important to not get yourself in a situation, where you would have to borrow expensive money.

So we're going to chip away as long as we can at this.

It's kind of a eight 5% bond and hopefully at some point I expect to be able to.

Completely eliminate that whenever that's done I think this company can have.

Clear clear path for sustainable dividend.

An ongoing basis, whether or not.

We do Ah Highbred, where a portion of it is fixed.

And a portion of it is.

Variable based on the cash flow of the company, but Nick and I and the rest of the board will come up with strategies, but no for fact.

That we are.

Thinking already about when and how we can resume a dividend for our shareholders.

We'll have sometimes it works out for these guys in the meantime, thanks, Ken color.

[laughter].

Thank you. Our next question comes from Scott handled with RBC. Please take your question.

Thanks.

I appreciate your commentary on how not to use other.

Other barkan participants as a barometer for northern obviously you guys have proven that's the case here recently, but as you guys look forward and understanding that E&P Comforters officer being a little bit more disciplined with cap for at least that's the.

<unk> right now and obviously, the the potential risk over double and whatnot.

Does that.

How does that change your strategy does that change your started does that make your beef up your ground game, a little bit more and certainly then obviously have you talked about the update or at least evaluating.

Other opportunities outside of the base in that have come to you, but but how does that change your strategy going forward considering other operators are being a little bit more.

Tight with their wallets.

Yes, Scott I think that's a that's actually.

Very prescient in the center, that's exactly how we think about it which is that.

It's not like.

We sit here with some amount of money that we want to spend and then we go out and spend it kind of regardless really we have a hurdle right. We want to meet and if we can find opportunities under that hurdle right, whether they be organic or through the ground game, then we'll do them.

In times like we've seen recently, where there's almost no activity and we have additional monies available to us and those hurdle rates pop up in or we can execute on them and so I do think.

It's.

There is the potential that that becomes a bigger part it also could be that we start to build up <unk>.

Additional inventory and areas that are going to be active but what I would say is that we want our recycle R capital to the highest return opportunities wherever that might be and so.

What I would tell you this is that.

The rates of return and passed a capital to enter any of these assets tends to be fluids. So if.

Apple is shut forever and differentials go up modestly you'll just see that reflected.

In the cost for every acre you purchase.

And the return, we'll wind up being quite the same no different than if you look at <unk> return on capital in a 50 dollar world versus 100, there's not much different because the cost of entry changes.

Accordingly.

And so what I would say, though is that we have never had so many.

And I would say very varied opportunities in front of us so from.

Risk to being able to reinvest R capital into return into things that earn our returns I C. As a risk that we're not terribly worried about on Nevada.

Thing is.

Capital disciplined push.

Limited the number of rigs that are running.

Operators are doing now rather than running around and HB being acreage in order to most efficiently develop their units they're developing.

A significant majority of them all at once and so what that translates into from a development standpoint is significantly more if these validate in that cash call.

Going significantly higher and so that has created an opportunity that we've seen.

Both the North Dakota, as well as elsewhere, creating an opportunity where.

Potentially have the ability to step into these units that are are being developed.

In totality and so then the optionality in terms of deal structure.

Gets wider.

Whether you're picking it up on a wellbore only basis, whether you're picking up the acreage it doesn't necessarily matter as much because you're developing the entire unit right.

And so.

Between the capital call the pushed a development and then the chunkier interests that we're seeing based on.

The actors that are out there that don't have the ability to deploy the capital is all dovetailed very well under our strategy.

Great Great appreciate that answer in there.

On your view on hedging going forward I mean.

To keep leverage yet I think you're all set of one times kind of range and maybe even Laura I mean, that's certainly a pretty high bar for premium beef companies, especially with a lot of your peers and would you envision becoming much more active on the hedge front.

Maybe even get them as much as being more of 100% hedged as you go on these years to help.

Protect that balance sheet and allow you to pay the dividend more sustainably.

I think I certainly think it's possible I think we gotta get their first obviously.

And I think that I think our philosophy is.

When we underwrite any dollar we spend we want to make sure. We are in the return we under under road and that's really driven our decisions and that's not going to change I would say as we get larger the flexibility you get from your lenders in terms of how we already have seen a material uptick in the last three years twice now of our ability.

<unk>.

Thanks to the folks at Wells Fargo, when we read it or credit facility and November they gave us much more flexibility and we're directly benefiting from that and we <unk>. The moment. The credit facility closed we were able to hedge an additional 10% of our volumes and for much longer duration periods of time I want one of the reasons for so well hedge next year, So I think as.

Or that metrics continue to whittle away I mean, even at the strip today, we see them improving materially over the next two years.

Yes from the cash and that will generate in front of some of the moves we've made in the last three to six months.

But what I would say is I think.

At least as it pertains to my policy to the extent that you under wrote something at a at a return that meets your Earl rates and you can head to that and you should because so much capital in this space has been destroyed.

People, who spent money based on certain assumptions and those assumptions tend to change over time.

That being said you never are going to really be able to hedge 100%. Maybe you can for the first year or so but.

At a PDP level there is some risks you're creating for yourself as you go too far out.

And you also obviously from a development perspective hedging future development, yet you cannot hedge those costs those well cost may change self oil if you had yet $60 in 2022, and then oil lines are being 80.

And you hedge walls, Utah, you were going to be drilling the cost of the well might be significantly higher from inflation. So you've got to be somewhat careful but I do think our strategy will be continue to add duration and consistency to those hedges, particularly when you are paying fixed obligations.

I appreciate that thank you.

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

Great. Thanks, Diego and thank you everybody for dial it in today's call have a great weekend.

Thank you okay.

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