Q3 2020 Northern Oil and Gas Inc Earnings Call
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I would now like to turn the conference over to your host Mike Kelly Executive Vice President Finance.
Thank you Brock and good morning, everybody. We are happy to have you here for northern <unk> third quarter 2020 earnings call in the room with me. This morning spaced a minimum six feet apart, there's northern CEO nickel Grady, our CEO outdoor lumps CFO, Chad Allan Senior Vice President of Engineering, Jim Evans, as well as northern <unk>, a German Brahma crotty we.
Proceed.
As follows this morning, Brian will get US started with his perspective on how northerners positioned in the current environment and then we'll turn the call over to Nick and the rest of the team to provide details on the quarter and touch on our forward guidance and strategy. After that we'll open it up for the Q and a session.
Before we go any further long enough to cover our safe Harbor language. Please be advised our remarks today, including the answers to your questions may include forward looking statements within the meaning of the private Securities Litigation Reform Act. These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward looking statements.
Those risks include among others matters that we have described in our earnings release as well as in our filings with the 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 added.
Adjusted EBITDA.
Reconciliations of these measures to the closest GAAP measures can be found in there. So we issued this morning that take care of its my pleasure to hand, the call over to Northern's Chairman Brahma <unk> right.
Sure Mike.
I'm very excited to be on this conference call today to update you on performance of NOG.
We have a very interesting dichotomy between our strong financial performance and the performance of our stock price.
No what an oil and gas is in a very enviable position.
And third 2020.
Expecting approximately 60% to 70% of our projected production.
Hedged at $58 a barrel.
However, with the convergence of the Saudi Russia price War.
Although it by a massive demand hit stemming from called it.
Prices <unk> oil prices catered [noise].
And our production slowed abruptly.
And we became almost completely hedged on every barrel of production there.
The positive impact of this situation for northern oil and gas.
He said, we collected $58 a barrel.
[noise] produced on a that was produced and the stores are deferred production in the ground for free.
Until oil prices recover.
We have paid down a 160 million.
All of our debt year to date.
And we will pay off our 65 million fiber node with free cash flow in early 2021.
Our banks led by Wells Fargo recently left our borrowing base unchanged $660 million due to the stability of northern or than gas.
2020.
One.
Also it will be a great.
Great to hear for northern oil and gas next year will remain in the same enviable position.
If oil is under 35, we could spend is in this 50 million.
Well, our free cash flow will be well in excess of 100 million.
Dollars if oil.
It was around $45 or higher we spend a little more on Capex, and we'll see higher production and cash flow.
And our free cash flow would still be approximately 100 million under any circumstance you can envision for 2021.
Not at all and gas will generate material free cash flow.
Our track record.
If you reflect on the track record of northern oil and gas over the last couple of years nearly every quarter. There we have been very busy.
We have a creatively grown the business reduce debt to EBITDA and made the company's stronger.
This course of action will continue.
And it will be done at creatively and precisely.
We will continue to make the company stronger and reduced our debt position.
We will position the company to be a very strong publicly held cash flow generating business.
Opportunities in the shale 3.0 era.
Our high return non op business model has a major company in a competitive advantage in the shale 3.2 era.
As upgraded.
Budgets take precedent over non op budget.
Budgets for traditional DNP.
Northern oil and gas pipeline of drilled ready now.
Non op prospects stand at all time high.
We target less than three year payback on these deals.
Yes. These investments are accretive to our already industry, leading return on capital metrics slide.
Slide seven and our Q3 slide deck lays out this opportunity in more detail.
Alignment and like minded.
Management the board.
And approximately 40% of our investors are like minded and I'm committed to take NOG to a strong cash flow generating entity with a very low levels of debt.
We want the company to enjoy a borrowing at rates similar to our RBL.
I'm grateful for this amazing management group.
Has done and are doing every day I'm thing.
Thankful for the alignment from TRT, Angelo Gordon and other partners large partners [noise].
They are committed to building [noise].
Upon what we have done so far in the last couple of years and reaching the levels that they just established earlier. Thank you again.
Thanks for.
Let's get down to a nine point.
Number one it was a solid quarter production was up cost were down and our conservative outlook has paid dividends.
Cost savings it really starts us through in the form of lower operating drilling costs.
Number two our focus on continuing to work on the balance sheet has a meaningful impact for our equity investors.
Our interest expense was down 32% year over year.
We retired 17.1 million of bonds and preferred stock this quarter through negotiated exchanges.
With these deals we captured 4.4 million of discount and an additional 1 million in annual fixed charge savings. This is real cash and a real accretion to our enterprise value comprising over 30 million per year and run rate interest savings versus last year, which flows directly to the bottom line we should.
See another significant sequential drop in interest expense in the fourth quarter and first quarter of 2021.
Number three we continue to be well protected despite the challenging environment. It's important to understand that the company remains well insulated in the coming 18 plus months. The world May in fact get worse in the near term and we're okay with that our hedge book still has a gross value of nearly $150 million and our cash flows.
Will remain stable.
As I have said in each of the last three quarters the hedges in the cash flow that they provide means that we do not have to waste our volumes in a low price environment to generate cash flow as baran stated there simply being stored for free and will save them for better days ahead.
Number four the set up for 2021 is strong.
While as a non operator timing is always the most challenging thing to forecast we have built in momentum through our large wells in process list. We expect to end the year with a record number and these wells are of the highest quality as you'd expect in a downturn. This simply means that as we look out to next year for perhaps some of the best case.
Capital productivity in our history as we've shown in our guidance sensitivities, we're not throwing away our inventory in a low price environment will curtail and throttle back spending in a poor pricing scenario. None of these outcomes is a bad one given the number of wells in process. We are carrying every $10 move in oil is roughly two.
[music] million in revenue and free cash flow for a new well on an annualized basis with 30 net wells in process. We don't want 60 million of a dent additional revenue and free cash potentially frittered away at low prices.
As noted in our guidance, we will govern our activity levels based upon common sense spending driven by the oil pricing strip. There is no losing scenario given our hedge profile if prices aren't supportive of development activity will simply produce more cash flow and preserve that development for the future.
Number five we are expanding we closed on our first out of basin acquisition this quarter and the Permian has become front and center over the past few years simply because of its high levels of activity. We continue to look in the Permian and other basins, where we can build inventory drilling prospects for producing cash flows that are either deeply disk.
Counted or meet or exceed our full cycle hurdle rates and preferably both there will be more to come number.
Number six cash is king we produced over $50 million or free cash flow. This year to date reduced our working capital deficit dramatically and as our cash flows actually accelerate in the fourth quarter. It will continue to free up additional liquidity throughout 2021, I have personally been observing almost every independent producers balance.
She I continue to believe the Wall Street does not carefully monitor those carrying large working capital deficits, which is effectively shadow debt and our misconstruing company's debt reduction with the fact that they're simply deferring paying their bills, we have not done that.
Working capital deficit is the lowest in years, which means the cash coming in the door can service debt not passed accruals.
Number seven every dollar matters, we continue to remain within our $200 million capital budget. This year the variance in our fourth quarter spend will be any incremental success in the ground game or if we see higher prices and accelerated completions. Many investors ask us about transformational deals and my response is.
We're looking at everything our backlog today stands at over $750 million in active M&A opportunities, we're working through but we focus on assets that make money. The key is to measure the benefits costs and risks of every deal risk is the factor for these transactions that is now.
I've always appreciated, but something we spend an enormous amount of time analyzing we continue to be on the hunt for big and small deals, but we will not sacrifice our standards number.
Number eight as you've seen we actively manage our business through the ground game and larger M&A program. We are not just a passive EG after the operators on our organic acreage anyone forecasting our business based on Bakken operators, the rig count or our organic footprint have been wrong over the past few years and will be wrong for the foreseen.
About future opportunities are everywhere as I, just mentioned, our current backlog of producing assets and drilling prospects. We're evaluating right now in the marketplace is nearly a billion dollars what does low activity in the Williston mean for our business. The answer is nothing as long as we're doing our jobs I'm here to tell you that we control that not our operators.
And not the activity in the basin. The key managerial linchpin of this non operated strategy is that we focus on quality and we focus on cost of entry.
Based on deals signed or closed we should have our first Permian production online this quarter and the basin already makes up nearly 5% of our wells in process and so focusing on just the net acres. We've acquired is a key misunderstanding of what creates value acres only have value when they're converting into cash flow Adam.
I'll provide further color on some of our progress there number nine watch what we do not what we say.
Since this management team rebuild this company two and a half years ago, we've done a billion dollars in equity centric cash flowing acquisitions and over $1.7 billion in gross financings to continue to improve the balance sheet and cut our cost of debt.
We have taken many often pains painful steps to improve the balance sheet and cash flows of the business, we're not even close to done and we will do whatever it takes to ensure that northern thrives on the other side of Covance, we cannot control the stock market or what it wants to ascribe to a smaller producer in the marketplace today, but as our results show we're still here.
We're still making money.
The the model we've created is spinning off cash and we're not going anywhere while we firmly believe that the market will improve in the next year hope is not a strategy will take every step just as we have done in the past two plus years, regardless of what the market May say today, you don't have to believe what we say today, but you can trust in what we've done and.
What we will continue to do that.
Thank you for your time Adam.
Thanks, Nick in the third quarter, our active management resumed or the second quarter left off North Dakota, the rig count continue to languish, but our ground game acquisitions picked up the slot.
Targeting our best in class operators, we acquired 4.6 net wells in process and picked up around 650 net acres and 140 net royalty acres. This has continued to bolster our wells in process with some of the most productive wells in the basin and in the quarter at a recent high of 28.3 net wells.
As previously announced we closed on our initial acquisition in the Permian during the third quarter and continue to screen more opportunities than ever before.
Now more than ever our operating and non operating partners in the Bakken and Permian value. The certainty to close that we can provide and it has enabled us to continue to bolt on additional assets at attractive prices.
We upped our hurdle rates significantly over a year ago, and our evaluation process remains unchanged despite the lower strip.
We continue to add here to our strict underwriting and return requirements to maintain our best in class return on capital employed.
Well there are a myriad of opportunities, though we are evaluating if commodity pricing or the quality of the assets will not generate an acceptable rate of return, we will deploy that capital where it is better suited.
Through the end of October we have continued to maintain our ground gain momentum and have committed to or closed on an additional 100 barrels a day 3.2 net wells in process 670, net acres and 420 net royalty acres in total for the year that accounts for roughly two net wells turned to production.
10.4, net wells in process 2400, net acres and 630 net royalty acres and to be clear.
All of this active management through our ground game is embedded within our stated Capex guidance.
At an operational level, we have been encouraged by our operator's ability to respond to this environment with effective reductions in well costs.
Our average proposed well in the third quarter inclusive of facilities came in at just under $7 million.
And from 7.7 million in the second quarter.
As of late we have seen well proposals from some of our operators in the five to 6 million dollar range with some close to the bottom of that range. This will have a material impact on the embedded rate of return for these developments despite lower oil prices.
Third quarter as well proposals remain consistent with second quarter's activity levels, but with our operators retreating to the core we are only seeing the best of the best areas get developed.
Combined with the reduction in estimated well cost about 80% of the net wells that were proposed to northern met our hurdle rates and were elected to.
Production Curtailments continued to date during the third third quarter were 3500 barrels on average brought back online from the second.
Heading into the fourth quarter, we expect similar levels of curtailments with roughly 11000 barrels a day either still curtailed were attributed to delayed IP given the current price environment.
We are supportive of this move, particularly given the recent downdraft and prices were effectively storing high quality barrels in the ground for free well our hedge profile allows us to preserve that value for a stronger environment.
Regardless of the curtailments, we continue to expect to produce between 30 and 40000 Boe per day during the fourth quarter.
With that I'll turn it over to our CFO Chad Alan Thanks, Adam.
A few highlights to go over this quarter, starting with a quick summary on northern financial performance.
Production averaged 29051 barrels of oil equivalent per day.
A 22% increase over the second quarter.
Came in at the high end of our guidance.
Production was significant significantly impacted by curtailments shut in production and delayed development plans by our operating partners.
Which we estimate reduced our third quarter production by approximately 11000 barrels of oil equivalent per day.
In our earnings release this morning.
We've given 2021 production and Capex guidance based on sensitivities to oil price decks.
Our base case for 2021 is based on oil average at least $40 per barrel, but in scenarios were WT eyes below 40.
We actually expect will generate significantly higher free cash flow due to lower capex spend.
Oil differentials were $6.54 during the quarter, which was an improvement of approximately 40% over the second quarter.
Gas realizations continue to impact our revenues during the third quarter. However, recent upward moves in the natural gas strip should lead to higher realizations as a percentage of Nymex in the fourth quarter due to fixed cost absorption.
Lease operating expenses for the third quarter came in at 24.2 million.
Down 9% on a total basis and down 27% on a per unit basis from the second quarter and we expect to continue to see basin wide cost savings during the remainder of the year and into 2021.
[noise] cashing it came in at $1.39 cents per BOE, we this quarter and continues to be one of the lowest in the industry.
Even with significant impacts to our production volumes for from curtailments shut in production and delayed development plans.
We significantly improved our leverage profile since the end of the year and our focus continues to be on debt reduction in these challenging times.
As we speak today, we've reduced our total debt by approximately $160 million or 14% since year end.
This reduction alone has reduced our run rate interest expense by over 45% compared to last year.
We finalized our fall fall borrowing base Redetermination this week, maintaining our borrowing base at the existing $660 million level with 100% approval from our lenders and our bank group.
This is a testament to our hedging strategy high quality PDP asset base and healthy leverage metrics.
We expect to have ample liquidity and will expand our liquidity profile through free cash flow generation over the next 12 to 18 months inclusive of the near term maturity.
We ended the quarter with 571 million outstanding on our revolving credit facility and have since further reduced our balance to 550 million inclusive or 8 million of interest coupon payments that were made on October onest.
On the working capital front, we continue to work down our operating current liabilities, which were down 45% since the beginning of the year and we expect to reduce overall revolving credit balance by another 15 to 30 million by the end of the year from its current levels.
Capital spending in the fourth in the third quarter was $43.8 million.
Which consisted of $27.7 million of organic DNC capital and $16.1 million on total discretionary acquisition capital inclusive of acquisition DNC capital.
As you saw in our earnings release. This morning, Northern has reiterated in its 2020 capital spending guidance to be in a range between 175 to 200 million.
A reduction of over 50% compared to our actual development capital expenditures in 2019.
With that I'll turn the call back over to Mike.
Great. Thanks, Jed Brocklin's, let's open up for today.
Thank you Sir.
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Our first question today comes from Duncan Mackintosh up Johnson Rice. Please proceed with your question.
Oh, sorry, sorry.
More Nick first question comes off the shelf, but your point is thought.
You all highlight a pipeline of a lot of drill ready prospects and I guess it is that where we should kind of expect the majority of development capex beyond the organic DNC to go to a kind of flow more towards the drill ready prospects going forward.
I I think that you know.
We talk about being an active manager all the time.
The organic base you know we built the company three years ago to have.
Generally larger cash flow than necessarily the organic asset whatever Paul.
So we moderate and throttle our activity based on that obviously in an environment like this.
You know.
The the sort of Frank answer is that operators simply can barely fund their own drilling obligations, let alone their non operated obligations.
And with their cash flows cramped, even if they wanted to and so we are inundated with those and we sift through them. They go.
Oh through our engineering and land processes.
And if the best ones can pass muster and we can agree on terms, we can buy the acreage and the development all in one.
And we view that it is no different than inorganic prospect, but.
But it goes to my point in my speech that I said before which is that anyone who is thinking about just sitting here waiting for it to get nafie in the mail or something like that is going to be certainly disappointed and this is Adam maybe just to give you. Some context I mean in Q3, we had about 45, well proposals sent our way and when I look at October.
We're looking at 22, so you've already got 50% of Q3's activity and in kind of the first month and so it's a process that our engineering and our land team are reviewing on a day to day real time basis right. So we're taking a look at what the economics are.
On what's coming in the door from from our organic footprint and then it's you know.
Comparing that to the active management in the ground game and feathering between that to get the right mix of the economics and opportunity sets.
Hi, great. Thanks, and then I guess just to dovetail off a little bit jumping over to slide 11, you know the production.
And on your new wells exceeding the type curve by 30% what what what are some of the drivers or is this more of a high grading location does it and high grading and operator or.
Maybe just some color around what you've seen and I would imagine pretty.
Pretty pleased with with with what you've got so far this year and I'd have to imagine there's more on the come for next year.
Hey, Dan This is Jim so what we're looking at here is what we always take a pretty conservative view of well performance in the area. You know, we've always been one where we'd like to see enough history before we kind of make the assumption that bigger completions that are operating well generate figure you ours and so what we're seeing here is.
Really just optimization body operators are kinda coring up in certain areas and then optimizing their completions optimizing the way that they produce these wells so not necessarily generating bigger you ours per se, but you know getting that oil out faster than kind of what we expected which helps drive some of those rates of return. So that's one.
The kind of whats driving this we would expect this to kind of continue on this kind of environment operators really focused more on their operations of current wells and a near term Wilder than just trying to running 10 rigs out there. So we would expect as kinda optimization to continue across our portfolio.
All right. Thank you.
The next question is from Jordan Levy of Truest. Please proceed with your question.
[noise] Marinol the pipeline out of the Permian that you guys point is really impressive I just wanted to see if you guys could compare kind of what what the deal flow looks like in the Permian versus the wells on the third kind of contrasting dynamics at play that you're seeing over there.
I'll I'll give a little color then I'll, let Adam probably tell them better truth of that at all but what I would I would say from my observation is that.
The Permian is all over the map, we find ourselves very competitive in certain situations and then other times. We are seeing bids that are quadruple what we would be willing to pay we do still see some one of that we've been looking for a long time candidly there.
You know like anything else whether it be.
Any hot commodity and oil and gas at the moment minerals, the Permian basin when capital is being thrown into an area people are relatively on disciplined we definitely see the discipline coming.
I would say, it's spotty or so from a batting average perspective, our batting average has been relatively low although we continue to grind away and we've had some really good success, even since we did our initial deal.
In the Bakken, we really are the clearing house and so generally when we don't win something usually the person says I can accept that price and I'm, just not going to sell it at all.
And so that being said the difference in the Bakken is frankly, we know it so well at this point that a lot of the stuff doesn't even pass the smell test and the things that we wouldn't be interested in at any price.
To add to that yeah, I mean, I guess, if you're if were talking you know rig up opportunities looking at the Permian you got 10 times as many rigs and so you can just kind of extrapolate in terms of the deals that are walking themselves in the door.
That being said you have.
Much wider disbursement on on the overall economics.
And then to Nick's point, you've got a handful of sellers that are still living in the rearview mirror and so it's a matter of swinging the bat and getting the volume in order to make sure that we're deploying our capital towards the appropriate.
Projects with the appropriate operators at the right hurdle rates those types of things in North Dakota with 15 with 15.
Rigs running in the basin, they've all effectively retreated to the core and so when we're seeing opportunities there by and large it's stuff that's going to be penciling.
In this particular price environment of and really encouraged on the economics that we're seeing there and just the stuff that we've you know.
Effectively closed in.
Q4, largely that's been been Williston basin opportunities and then sprinkled in with the handful Permian stuff that we're looking at so encouraged on both fronts I'm just kind of different dynamics and we continue to just proactively look at things in both basins.
Yeah, and just you know it's not every day that we announced a small acquisition that is like 66 acres right and I'm sure. There are plenty in the peanut gallery with X snarky comments over that but the reality is that.
As much as we want our investors to understand that we're expanding it that's really not just for the investors but for for deal flow purposes to understand that we are actually active we've been looking for some time, but no were actually prosecuting on it I would just tell you.
The number of.
New prospects that came our way after that announcement, probably quadrupled overnight and Jim and Adam also got lots of resumes for what it's worth.
[laughter] tough times in the oil and gas space, but I would just tell you that that in alone that we are active now one thing I just want to and what is that if you look at what we do generally we're very careful so in the Permian basin. There is a lot of tier one and tier two stuff for sale and we have really kind of focused it zoomed in on the areas that we.
Thank our high quality and are very resilient and pricing and so there is a lot of stuff in the outskirts of the Delaware Basin, and you know the northern and southern Midland Basin that gets a bit sketchy, you're not going to see us transact there.
And so one of the reasons that we do it at a small ground game level deal by deal you know you've got we're in the middle of an election, there's risk of our federal acreage.
You are buying wells that are already permitted right in in federal areas and so you take that risk out you know we could go by 10000 acres in the Permian right now.
In leasing or or Eddy county, and if something changes in the regulatory environment in any year, you would have destroyed a lot of value.
Makes sense I really appreciate the color thanks, guys.
The next question is from Jeff Grampp of Northland Capital markets. Please proceed with your question.
Morning, guys.
Hey, Nick just kind of a strategic one for you can you talk about kind of the balancing act you guys kind of want to thread the needle with in terms of kind of I should say, you're using your free cash flow to de lever the balance sheet versus.
Some great buying opportunities that are out there.
Maybe if you could discuss the possibility of equity or maybe even preferred equity as a source to fund deals in order to preserve liquidity, which is important for you guys.
Yeah, I mean, I think look for anything.
Anything transformational you you've got to be sensitive to your balance sheet right. So anything of scale.
We build.
Our base capital budget to provide roughly a third of that budget and in this day and age for these acquisitions that we have plenty of firepower within that to do a really healthy amount of them, especially were actually aided by the fact that the organic activity at wilsons relatively low so it allows us to really follow that up some.
What I would tell you is that you know people ask me all the time, while the you know the stocks keep going down so doesn't that preclude you from doing M&A. My answer is if the stocks are going down so to a private valuations and so that doesn't preclude anything.
Listen we are we are extremely balance sheet sensitive a third of this company is owned by the founders and we always talk about the fact and something I think is oftentimes lost on investors is do you want to own.
100% of nothing or 80% or something and I think a lot of companies that have overly focused on.
Not diluting our shareholders I can think of a number of them that are in chapter 11 right now.
Or or on their way for that matter and so if we can do things that are a win win for the existing holders and we can structure something there we will do that especially anything of scale I don't think you're going to see us.
You know do a sanchez and lever up when were already Levered up that's just not it's not my style I don't think that we're going to do that.
But would that mean sort of as a default is anything that would involve any form of equity security whether it be prefer to comment.
It's going to have to be net beneficial to every holder right now where they are going to be happy that we're doing and I think that thats easy for us to tell you that because our board of directors are the owners of this business.
That's good to hear thank you and for my follow up just on the cost side they'll take a big Big dropdown, India. They have fees I think in the prepared remarks, you guys talked about things headed even lower.
How sustainable do you guys think that is and as we think into kind of the 21 budget. What can you tell us what's kind of assumed there in terms of where well costs are headed.
We don't assume any of those well costs that were so I think we're still running like seven to seven and a half million dollars.
In that budget.
But I think the reason that you want we're doing that conservatively is because the fact of the matter is that if.
For whatever reason if the God speak in oil prices rallied really hard there may be a scramble we may see.
The vast majority of the cost are in completion on what you're seeing now is disposal costs water costs are all falling obviously, both rig rates and ER and pressure pumping rates are at significant lows and those can fluctuate. So I think some of this stuff is going to be every time, we've had a downturn. It feels like we have a downturn every two years.
In the space over the last decade, but every time you have one of these downturns there theres going to be a portion of its got that's going to be structural and a portion of it that's going to be sensitive to price. What I'd tell you is I think.
I don't personally see in this environment that you're going to see a lot of inflation. There is so much slack in the service system is going to be very hard to push pricing, but I would expect that if you have a real scramble if oil if the oil strip goes about 50 and you start to have people for us to put completion crews to work to go to those docs you could you could have some of that cost come back.
Jack just simply because most of these people have been furloughed laid off and you're going to have to pay people to come back to actually join Frac crews. So I think caution is of the order, but I do think most likely in most scenarios and we're going to be able to keep most of those savings over the next several years.
All right that makes sense okay.
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Next question is from John White of Roth Capital. Please proceed with your question.
Good morning, Thanks for taking my question.
Looking at slide nine the map of the.
Permian and Delaware, Midland and Delaware basins.
And reflecting back on your previous comments regarding this region.
And Mike correct did I hear you correct.
How about you are going to be focused on the Delaware basin and not really focused on the Midland basin.
No not at all I mean, we've looked at several deals in the Midland I would say.
Particularly in the core of the Midland, It's pretty blocked up right. I mean, you have like for operators that control a vast majority of it. So we don't see as much stuff in the Midland frankly added added deal level. When we do see it it tends to be in the outskirts we have seen a handful of some some really good non operated properties in good areas in the Midland.
I think what what I would tell you is we are snobs and so we're going to be focused on the places where the wells are the most economic and the most resilient.
So that could be in the Midland it could be anywhere frankly, I mean, we're just economic creatures.
It's about focusing on rate of return your cost of entry that affect that rate of return, which is sometimes forgotten by people and then really running different price decks and seeing how resilient those assets are because.
There are assets that have very similar rate of returns at $60 oil when you run 30 that that answering the very different and so we try to focus on things that can make and it's easier for us today frankly, because the strip is so low it.
Sort of by default kicks out a good portion of stuff that would otherwise work in a normal environment.
Thanks, and I believe you just answered my follow up.
And that it what you just said.
You're not necessarily focused on the NIM, new Mexico side or.
The Delaware you are looking all over the basin.
We're looking everywhere, but I would tell you that what we have to zero in on is that there's sort of a football shaved area and Lionetti and then some a loving county and it does spread out in some other areas, but you have to go area by area. There hqs issues in parts of the Delaware or that you have good properties, but that can be a major problem from a development.
Active but it's it's a pretty complicated analysis as we go through it. We're looking you know yeah, I mean, it's no different than the North Dakota right. We're triangulating the areas in the operators and then ultimately the economics and so we're looking at Texas on both sides of the fence and we're looking at new Mexico, just happens to be that we've got.
And a handful of things done in new Mexico, that's not to say that we have submitted bids in the lender or the Texas the door yeah.
Okay. So it sounds like the fragmentation in the Delaware is.
Suited to your your operating start your Greg your advantage.
That's right and I think also you know frankly from a from on an ROI perspective, you know given that some of those things are federal records. It really helps the economics that the fact that the royalty rates are lower.
And so that can have a material impact on those wells, but obviously you also get that federal risk with it. So we focused on buying acres that are being developed and permitted not not going and buying 10000 acres that could be thrown away, if something materially changes and that sort of level.
Thanks, very much for all the detail and congratulations on your continued progress.
Thanks, John.
There are no additional questions at this time I would like to turn the call back to Mike Kelly for closing remarks.
Yeah. Thanks, Bracken, thanks to all our investors.
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