Q1 2021 Northern Oil and Gas Inc Earnings Call
[music].
Greetings and welcome to the northern oil first quarter, 2000, and 'twenty, one and earnings call.
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Please note this conference is being recorded.
I will now turn the conference over to your host Mike Kelly Chief Strategy Officer. Thank you you may begin.
Thanks, Diego and good morning, and thank you for joining us.
For a discussion northern first quarter 2021 earnings released this morning before of the market often released our financial results for the first quarter you can access our earnings release honor of Investor Relations website, and our form 10-Q will be filed with the SEC and the next few days, we also posted a new investor deck and the website. This morning, and that's more of a <unk>.
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I am joined here this morning, with northern CEO, Nick O'grady, our CFO, Adam Dirlam, our CFO, Chad Allen, our chief engineer of Jim Evans, our agenda for the day is as follows I will hand, the mic over to Nick here furnish comments regarding Q1, the do that and in a minute or two after Nick Adam will give you an overview of our operations and the.
Chad will review <unk> Q1 financials and 'twenty one guidance after that the executive team will be available to answer any questions. Before we go any further let me cover our safe Harbor language. Please be advised that our remarks today, including the answers to your questions may include forward looking statements with within the meaning of the private Securities Litigation Reform Act. These four.
We're looking statements are subject to the risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward looking statements those risk the amongst others and matters that we've described and the earnings release as well as our filings with the SEC include our annual report our form 10-K, and our quarterly report.
And on form 10-Q, we disclaim any obligation to update these forward looking statements. During this conference call and you may discuss certain non-GAAP financial net measures, including adjusted EBITDA and free cash flow. The reconciliations of these measures to the closest GAAP measure can be found and the earnings release that we issued this morning alright.
Alright with that taken care of I will now hand, the call over to northern CEO Nick O'grady.
Thanks, Mike and I would like to thank everyone for joining us this morning.
Hard to believe it's been over a year since the beginning of the pandemic.
Last year, we've seen the price of oil go from lessons zero back to $65 a barrel.
We're very fortunate that we've been able to thrive during this year and part because of our hedging strategies and also because of the support of our shareholders and the lenders I'm very proud of the northern team and how we've responded to the challenges as usual I'll get down to a level of four points.
Number one the quarter our results for the first quarter beat our internal forecasts as a result of improving well performance in conjunction with robust pricing for gas and solid oil differentials.
These improvements more than offset the workover spending associated with the costs, we incurred for getting our production back online that we highlighted in our fourth quarter release.
This is the third quarter in a row since the pandemic took hold that our production has risen.
The increased workover costs are largely transitory and thus we should see unit costs continue to trend down throughout 2021 of our Bakken assets continue to see strong oil output and increased gas capture and combined with robust NGL pricing resulted in northern and exceeding our internal revenue estimates.
Our capital spending was less than expected, which translated into free cash flow of $41 7 million for the quarter information as we enter mid year. We are well ahead of our 2021 plan as it stands today.
And number two the balance sheet.
As we've outlined in previous earnings calls one of our primary objectives as continual improvement of our balance sheet and to decrease our operating leverage our free cash flow enabled us to pay off and additional $24 million of debt and fund the 17 and half of million deposit for our Marcellus acquisition based on the current outlook, we expect to end the year with.
Less absolute debt and a leverage ratio of less than two times and we plan to further reduce the leverage ratio to the mid ones level by mid 2022.
Based on our internal forecasts, we expect to end the year with over $400 million of available liquidity, not including any potential increase to the revolver capacity.
And at the current strip the revolver is projected to be undrawn with significant cash on hand by maturity at the end of 2024.
These forecasts take into account of cash dividend with growth over time, which will get more into later.
I'd like to thank bank of America for their increased commitment to our facility and the flawless execution and advising us and the Marcellus transaction and along with Wells Fargo, leading our Q1 financings RBC truest citizens fifth third U S Bank and other members of our bank Syndicate had been truly great partners as we collectively and successfully navigated through the worst of the band.
And I'm, particularly thankful that we've had such an incredibly supportive lending syndicate that never wavered and their sponsorship of the company.
Number three acquisition pipeline.
We continue to enjoy a robust backlog of acquisition opportunities from acreage to ground game development and growing quantities of larger asset packages and our team has never been busier and we prosecute each opportunity with the same rigor and we remain optimistic that from small to large we can create value for our stakeholders going forward.
We're currently evaluating 15 different package opportunities 12 of which are not formally being marketed the bulk of these prospects are focused on the Williston and Permian as well as the Eagle Ford.
As I've mentioned previously the deep bench of opportunities out there is non operated properties is by our estimates over $10 billion, we believes strongly and creating win win scenarios for us and potential sellers, but our own stakeholders come first we are the natural consolidator of non operated interests now on a national level within and an advantage.
The cost of capital and unmatched the size and scale.
The number for dividends and returns to our shareholders. Since we last spoke we've spent a great deal of time with our board of directors researching the sector in regards to returning capital to our shareholders. We are pleased to announce our first ever quarterly dividend of <unk> <unk> per share about five months early from our initial plans.
And it will be very modest start for this program. This is just the beginning future increases will be tied directly to a reduction and overall leverage and I'm pleased to tell you that our analysis of where we are and where we are heading has provided a bright outlook. This means we can create a dividend that can grow faster than that of our overall company so for longer term investors.
Well the first be a start of dividend should consistently grow into something more meaningful over the next several years. Additionally, we might be able to increase our dividend even faster. If we are successful on the acquisition front and of leverage accretive fashion and to the extent that oil prices continue to be strong or rise even further we might be able to accelerate the strategy or consider.
[laughter] alternate forms of returns.
As I wrote in our release. This is the culmination of over three years of work by our board and my executive team to get to this point and I'm very proud of their work and thankful to our stakeholders and bankers, who helped us get here.
In conclusion, the outlook is bright and our opportunity set continues to grow with each passing day and as I will remind you each and every quarter here on out we are a company run by investors for investors and I truly thank each and every one of you for your interest with that let me turn it over to Adam Darla. Thanks.
Thanks, Nick operationally northern was firing on all cylinders and the first quarter with production front. We continued the secret chairman's decline to the tune of 2000 barrels a day and even more encouraging was the fact that well productivity outperformed and internal estimates.
This was driven by certain operators and areas, where we are of higher concentration levels and we will continue to monitor of these improvements.
And the spending side the Capex came in at $38 $1 million per the quarter well costs realizations for certain operators came in under ASC is renegotiated costs during the downturn were realized.
Approximately 40, new well proposals were received during the first quarter and we elected to about half of them with an average well cost at around $7 million moving.
Moving forward, we expect average well cost to range between seven and seven and a half million dollars and depending on the mix of operators and completion methodologies.
The lower number of consented wells was largely driven by one of operators stepping out into areas, where we have seen some meaningful decreases and productivity over the last 18 months.
Actively managing our portfolio, we were able to reallocate the capital from the non consented wells to much higher rate of return ground game acquisitions, we executed on six transactions during the quarter and continue to take a barbell approach picking up exposure through additional drilling opportunities and both the Bakken and the Permian.
With shale three pouring on full swing the number of ground game deals available to us remain at elevated levels and.
And as operators focus on some of their best inventory the economics are certainly compelling.
And as Nick alluded to and his comments our business development team is busier than ever as we review several compelling asset packages across the lower 48.
And April we closed our Marcellus transaction and related financing generating several reverse inquiries.
Our approach to any acquisition will remain disciplined with a strict focus on hurdle rates out of an asset level, while checking the appropriate boxes out of corporate level.
Executing on any one of these will need to meet our specific criteria as we sensibly scaled the business and continue to consolidate.
Now I'll turn it over to our CFO Chad Allen Thanks, Adam I have a few highlights to go over this quarter, starting with a quick summary on northern its financial performance.
Our production averaged 38000, and 417 barrels of oil equivalent per day, and 8% increase over the fourth quarter, which was the strong start to the year.
Curtailments and shut in production and began to ease as we exited the quarter.
But we estimate it's still reduced our first quarter production volumes by approximately 2000 Boe per day.
Our adjusted EBITDA for the quarter was $98 $8 million and our free cash flow was $41 7 million up 5% and 43% respectively over the fourth quarter due in large part the increased production levels and better realized commodity prices.
Oil differentials were $6.56 during the quarter, which was an improvement of approximately 5% over the fourth quarter and 38% over the pandemic lows.
And as expected gas realizations saw a significant improvement over the fourth quarter due in large part of the strong natural gas and NGL pricing.
Lease operating expenses for the first quarter came in at $34 3 million or $9 92 per Boe.
Which was slightly higher than our full year guidance range. However, as I mentioned on our last earnings call. We expected our lease operating cost to be higher earlier and the year as we incurred costs from higher workover activity.
Cash G&A, excluding one time acquisition costs related to the Marcellus transaction came in at $1 one per Boe of this quarter about 12% better than the midpoint of our Q1 guide.
One thing to highlight is that we still expect to incur approximately $2 five to $3 $5 million of additional nonrecurring acquisition costs related to the closing of the Marcellus transaction and the second quarter.
I'd also like the highlight cash G&A costs and pro forma for the reliance for the Marcellus transaction and our growing oil volumes.
Are projected to be approximately 85 per Boe.
By far one of the lowest and the industry.
Capital spending for the first quarter was $38 1 million.
Or 'twenty or of 22% reduction compared to the fourth quarter, which consisted of $33 $1 million of organic D&C capital and.
And $4 4 million and total discretionary acquisition capital inclusive of acquisition D&C capital and.
In terms of cadence as it stands today, we expect the second and third quarters. The to have the highest levels of capex for 2020, one, particularly for the Marcellus assets, where the majority of the of the development is projected to take place mid year.
We strengthened our balance sheet and liquidity profile since the end of last year through debt and equity offerings with gross proceeds of approximately $690 million.
These transactions allowed us to fully equities of the Marcellus transaction, which closed on April one and extend our maturity wall by retiring the remaining $65 million of our Ven Bakken note and 95 per cent of our second lien notes of which the remaining $15 7 million will be called on May 15th of this year.
The remainder of the proceeds were used to pay down the road the revolving credit facility.
As of March 31 pro forma for the closing of the Marcellus transaction.
We had approximately 366 million outstanding on our revolving credit facility, leaving almost $300 million of available liquidity, including cash on hand.
We started the year ahead of our internal forecast and have a lot of confidence and our 2021 program both on our capital spending front as well as the pace of our production volumes.
We remain conservative on our outlook and we will look to reflect any upward adjustments on our second quarter call as warranted.
With that I'll turn the call back over to Mike Kelly, Thanks, Chad Alright, Diego, let's assemble the.
And the queue for Q&A. Thanks.
Thank you and at this time, we will open the call for a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is and the question queue.
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Our first question comes from John Freeman with Raymond James Please state your question.
Good afternoon guys.
John how has it gone John good thanks, and congrats on a on establishing the dividend.
<unk> accomplishment.
How do you all just wanted to sort of piggyback off of some of your comments, Nick and I realized as you said that the acquisition you can certainly impact the other patients of dividend growth and sort of X and.
The acquisitions just sort of.
Maybe why and how you all think about managing that and the growth of that dividend going forward in terms of do you think about establishing like a percentage of your free cash flow and it goes towards the balance sheet and then another percentage kind of earmarked for dividend growth just any additional color on kind of that long term dividend strategy would be helpful.
Yeah.
Not not being.
Triton and anyway, but we had we had called out sort of a one third of Doctor and a few years back when we were first contemplating this and I think that that's about the right place the end up where about a third of your distributable cash flow is going back to your stockholders.
Still the goal of that hasn't changed.
You know when we've done this analysis the average upstream E&P is paying out less than 15% of their distributable cash flow right. Now obviously, our start of dividend is a smaller portion of that.
And I think as my prepared comments said that.
As we hit our own internal leverage targets I think we can share more of that with our stockholders as we derisk the business.
And so as we kind of hit that one five times of milestone and I think we can see a substantial step up and that and as we get closer to one which is really where our forecast looks like over the next couple of years I think we can really get to that one area.
That's great and then.
Shifting gears.
And the AF fees, where we're down nicely again from the fourth quarter two out of two new low just below $7 million and.
Going forward you all indicated sort of expect kind of 7% to $7 5 million is what you are.
Planning for and since the budget was based on the seven 5 million on the <unk>.
A&P side does that mean, there is a sort of a downward bias to the the full year budget.
The potentially I think what we need to be mindful of just as the rig count picks up overall and I think the Williston rig count in particular is going to pick up some.
And that we want to leave some buffer, but certainly if it goes at the pace now and there would be some some downward pressure which would be great.
And we'll leave it as is for the time being.
It sounds good excellent quarter guys congrats.
Thanks, John and Jim.
Our next question comes from Scott Hanold with RBC capital markets. Please state your question.
Thanks, and congrats to all of you Youll accomplished a lot and the very short period of time and and I think that dividend is certainly at this point the the the Cherry on top so and congrats.
We're gonna go as is you know kind of continuing down the path of of the dividend and and just shareholder returns obviously, Nick you you'd indicated you'd like to get to that one third payout ratio.
And when as you progressed of that point like how do you think about doing that through a base dividend versus you know some.
Some of the other mechanisms such as the variable dividend do you see theres value in a structure to make it very predictable and and have a variable bent to it just to mitigate commodity price volatility.
The impact.
Yeah, I mean I think someone.
Someone on Twitter said I had the worst I our game on the street, because I was sort of downplaying the concept of special dividends and the volatility of day and Sue So I'll try to do better this time.
Ah I think of special dividends have a role I think that we've been watching that carefully you know you've seen from the Devin and the pioneers of the world of formulaic structure kind of I believe the pioneer one of its kind of once a year and kind of backward looking.
I think that makes sense to some degree and so I think you have to think about the balance.
Don't want to go down a path of.
Where upstream Mlps, where where you have high fixed dividends and then you wind up cutting them, which is worse and so the special dividend definitely gives you the ability to navigate through the volatility of commodity prices and so I think it does have a role.
I think.
Our first plan is really to build of small and solid base dividend and continue to ratchet it up over time as we hit our targets and I think the special will play and to the extent that things are going the way. They are now which is that we continue to exceed our own internal targets and it gives room to move quicker and so I don't want to make a false promises.
Or or hopes, but I do think it has a possibility, particularly when.
And when we're in robust periods as we are today.
I think that's pretty clear thanks and into the my follow up question and you cited that you see over $10 billion of opportunities out there right now could you just to clarify.
Is is that specifically non op opportunities or is that you know everything you see out there and and secondarily of those half dozen or I'm, sorry dozen or so opportunities youre looking at can you describe just the size and scale of of some of those individually.
Yes.
And it's 100% non op of no nothing within kind of the population would be operated and so I'd say, it's primarily weighted towards the Permian and and the Bakken.
And a number of different Permian deals, we've seen kind of off market as of late and continue to kind of see them as well as some other formal processes that are are being run and I'd say, we're looking at stuff that's anywhere from you know of.
The 10 to 15 million of North of 500 debt at this point and kind of anywhere in between and I'd say kind of the sweet spot. Its been kind of 100, the 200 kind of give or take and I mean, I think the the way to think about it Scott is the.
Zero to $100 million and can be more competitive just because obviously its a smaller quantum of capital as you get north of $150 million of the companies, where the wherewithal to make those transactions and the non operated space start to shrink.
It doesn't mean, the sellers always enjoy the fact, but it tends to make those processes less competitive, but obviously the the larger it goes.
Capital becomes an issue and you want to make sure that youre not stretching the balance sheet or anything like that but I do think the.
And what we're referring to is is it really just a function of the amount of capital sunk into non op over the last 10 years, probably a third of it is looking for a home now and the other third the two thirds of half to be monetize over the next three to four years and.
And that's where we kind of come up with about that $10 million 10 billion.
Got it got it and and and I guess part of my question of excuse like.
How big of a deal like can you guys do like just operationally and financially with like what do you think that limit is for you guys.
Oh boy.
I think the answer is the you know I think the business could support and the capital markets. Good sort of certainly support a half a billion dollar transaction I don't think that's necessarily where we'd want to start.
I think that we find somewhere in between and and the more moderate.
It is generally our sweet spot.
But certainly the companies of the size and scale and what you can do meaningful transactions and I don't know Adam Yes, no. That's right I mean, the only other thing I was going to add as you know we're looking at a bunch of different non operated properties, but we've also had a number of different reverse inquiries from operators that are looking to pick down particular operated packages and and we've got the ability of the carve out and.
Non operated working interest kind of within that potentially put together kind of insurance development agreement and right size of the transaction for everybody and so that's another lever that we can pull in terms of kind of taking down certain acquisitions. So yeah, and I guess I'll just put a bow on that Scott and just say that you know as you saw with the real.
Lyons transaction.
Granted we started that transaction.
And the sector was really on its lows and and capital was fairly scarce, but we brought in.
The financial partner on that transaction and certainly for some of the really big and chunky stuff. That's always on the table and I can just tell you that we are inundated.
From everyone from private equity groups to large family offices looking to partner with US every day so.
Thank you.
Our next question comes from Brian Downey with Citigroup. Please state your question.
Good morning, and thanks for taking the questions. The first the solid production performance and start the year you you mentioned rig count earlier, but I'm curious on the DUC count as your sense of operator, DUC completion cadence changed at all and the Williston is of commodity prices have risen.
Yeah, I mean, and we certainly saw the DUC count get worked down and the first quarter and I think we're seeing the same thing kind of going into the into April.
April.
You know, we're looking at 40 F fees that came in and the first quarter I'm looking at April activity, and we had 30 come in and so as the operators kind of worked out and those those ducks.
Docs, I think youre going to kind of see potential.
The potential rigs and and new well proposals of kind of following through that and so we're monitoring that as we move through kind of the second quarter and and what that means and then obviously you know we're looking at our hurdle rates and see and you know what makes sense. The thing that you got to be careful about when you get into this kind of commodity price range is as you know certain operators like.
The start stepping out and the tier two and tier three stuff and and so we're running sensitivities that every particular oil price range.
And you know to kind of understand what that means should we see any sort of pullback so depending on kind of how operators act in that regard.
We'll be using that lever and then obviously using and kind of our ground game to backfill anything but think of from a net well standpoint, even and and in April we've seen kind of a <unk>.
Double the net wells that we saw and <unk>.
And Q1 alone and so all signs are certainly pointing to a of general uptick and and overall activity in the Williston.
Great and then as a follow up on the acquisition front and areas, particularly the Permian and we've seen private operator rig count and rebound more so versus public operators are seeing a little more disciplined is that private operator dynamic changed how youre thinking about A&D opportunities of all or a free of any any interesting opportunities.
Yeah, I mean, I think there are a handful of private operators.
The high quality ones and the Permian in particular that we have targeted a lot of our acquisitions around.
So of the names that might not be household names to the public investors, but ones that are well renowned and and we're not talking about the small you know of sponsor backed company with one rig we're talking about big large private.
And I guess, the Permian companies and so they have definitely been the most active and and a lot of the.
Acreage that we're targeting which is really for near term development has been targeted around those guys.
Great I appreciate the comments.
Our next question comes from Neal Dingmann with true of Securities. Please state your question.
Good morning, and.
And I just wanted to say you and the team are still top of my book Despite that IR ranking.
[laughter] Thanks Neal.
My first question really.
My first question Nick for you Adam I'm, just wondering you know again, given the sort of rise and price and you know everything that's going on and does that change. Your requirement you know what I would call of sort of return requirement now when youre looking at are either.
Either one offs or even larger sort of pads that you can do whether that's in the Bakken Perm.
And any of those you talked about that a little bit.
Yeah, I mean, I think I think.
This is my second time since Ive been here, where we've seen a big spike in oil and all of the last of US and the fall of 18, and what I'd tell you as you know people get.
Their tolerance of risk actually goes up and the more price goes up and and we kind of work the opposite here.
So as prices go up we tend to become more selective and not the other way around not just hey, this works and outlets do it and we've seen.
And the Permian and particular people bidding more aggressively on certain properties as prices have gone up with lower discount rates, which we're happy to miss on that stuff because you want to buy properties that are going to work at $40 oil as well of 65, So if you're going to Miss you are going to Miss small.
Buying margin all properties are and and tier two areas is a recipe for the.
Setting yourself up for poor returns if anything was to change and that's right I mean, I think our batting average as of late has certainly gone down, but I guess that would be offset by the overall number of opportunities that we're seeing so net net you're probably about the same similar and in that regard and then from the ground game standpoint, or even packages I mean, we're running different.
<unk>.
Different commodity prices and then taking a look at higher discount rates to see what that means and in terms of how we can get things done and.
And Fortunately, what we've seen with the stuff that we've been able to get in the boat.
And being able to capitalize that at much higher discount rates.
Okay, and then just a follow up I don't know if the barometer of it I guess my question and there could be kind of what you talked about the third and what you think about it.
Deal with the excess it's nice to know I'll be I'll ask that question about what to do going forward with the.
Ex the shareholder return and is that I guess the decision more of just what you think for the business is it more driven by what Brian and the board, saying you know you and the rest of the board are saying I'm just wondering how that's.
And again I like the answer prior I think that makes a lot of sense I'm, just kind of curious to know and.
Anything else behind that.
Yeah, I mean look we've made tremendous progress we still have wood to chop on our balance sheet I still we still want lower over the all leverage it looks we're on the glide path at this point it seems.
Easily achievable, but you got to achieve those milestones before you start to get ahead of yourself.
And now we want to stay humble and and I think.
So really I think the.
This is a board decision and truly and so I think we had the we had some improved bill.
And frankly in the event of this one you'd be surprised to know that the board frankly came to US and said you know you're well ahead of where you were don't you think this is time, whereas we had sort of stayed on that path as the management team and so I would definitively tell you that the board is very active and these discussions they are watching the they they're using our own metrics.
And our own targets to help solve for that so to the extent that we continue to be successful that we continue to chip away at the leverage we see those ratios fall it should be relatively mechanical and fashion of how we get there.
Nice good decision great operations guys.
Yeah.
Thanks Neil.
Thank you. Our next question comes from Phillips Johnston with capital one.
Hey, guys. Thanks, and congrats from me as well just just one question, it's really a follow up the Scotts question.
So obviously you know.
Early to start talking about variable dividends as you mentioned and I'm sure you'll be watching to see how the market responds to the structures and policies that a few companies have adopted but Nick you know once we get to a point, where the base dividend and sort of maxed out and use and you start of Evaluable evaluate other options.
At this point do you think you know special or variable dividends would be preferable to the share buybacks or is it still at the sort of TBD type of thing.
I do I think you.
You know the E&P sector has been a horrible buyer of of stock how many E&P companies were buying stock back last October when their stocks were actually at the lows and they're all turning them back on now and I don't get it so.
And I think symbolically I want people to have the cash and their hand as a proof of return no different than that of private business.
Yep Okay.
Okay, great. Thank you.
Our next question comes from John Daniel with Daniel Energy Partners. Please state your question.
Hey, guys. Thanks for letting the demo of best Guy on the call and I appreciate it.
[laughter] big risk.
And now Jonathan.
I'm Gonna really dumb this down.
Really three questions. The first one is on the comments about workover costs and activity was that really a function of just bringing back a bunch of rigs early on and the year and does that fade as you got through the through the course of this year and I'm trying to distinguish and work over and drilling rigs because I know you talked about Williston going off.
Yeah I mean.
So so the way the curtailments work and I kind of talk about this last call but.
A lot of the the actual physical curtailments were eased.
But those wells need to be re pressurize worked over.
And so you saw a slew of Workover rigs one of our operators had seven alone and January go.
And onto the acreage and basically flushing out and and repairing those wells and doing basic maintenance to get them to produce what they should be producing so right.
Alright, Thats why its really quick turnaround. So we saw it start in earnest really in December.
And all indications look like it was peaking out about March and so I think sequentially it should be slowly coming down and it will still be somewhat elevated because.
Operators really want to cut their low as fast as they can during the downturn. So when you curtail of while you just simply stop and maintaining it but that's not a price not a sustainable practice and so so the.
First thing is really to get the wells back to maximum production and we're getting we're almost there.
And then we should see that expense fade materially.
Okay and.
Sounds good and then on the you noted all of the acquisition opportunities that are out there and.
Gave a pretty wide range and this is a bit of a follow on to another person's question, but hell.
Help me understand I don't know the side again, it's a dumb question, but the managerial time commitment on your part and the team's partner and $20 million deal versus the 200 million dollar and not just the time to look at it but also once you. Once you close that deal on a go forward basis of the time allocation. If you could just give me that tutorial would be appreciated.
Yeah, I mean, I think I think you'll take some comfort that the company is effectively built to acquire properties. So the entire organization is built around and so it's pretty much old hat. So the numbers change, but the workflow really doesn't and so whereas you know four of five years ago. This was all built around doing million dollar deals now the same team.
If you know where the 300 on and it doesn't really change the overall output and and tax on the organization, but business development.
Okay.
Per our business model is is the primary function of a good portion of our employees and.
That's right I mean.
And the Williston and we've looked at the number of different transactions, where the where are you in 60% to 70% of of the value associated with those acquisitions.
Literally just moving your working interest and your NRI and you're off to the races, and it's actually not terribly dissimilar to some of the deals that we've seen in the Delaware as of late and the concentration of of value and some of those packages and stuff.
We're already in and so from an engineering standpoint, and all the way through of kind of to the the title and the due diligence phase you can start.
Moving quicker and enrolling those things and.
Okay.
And that was helpful to me and then the final one Nick just you've been doing this a long time and all of you guys have I'm just curious if you could speak from an industry perspective.
And the World do you think happens with the E&P spending in 2020 two of the strip stays where it is I mean I know everyone is.
The line of capital discipline, and 'twenty one day.
What do you what would you envision next.
And next year.
Yeah, I mean, I think my view broadly at the macro level. There's a couple of things one. The this reminds me a lot of when I started and the industry at the end of the nineties.
And it had been of bruising 15 year downturn for the sector.
And oil went from 10 Bucks to 40, and and people really didn't respond to accept the.
A handful of of notorious E&P, Ceos, which we all know their names.
And then eventually after it lasted three or four years, you saw the sector take off and get rewarded for being on disciplined.
And so I think that's really going to be predicated on a on the overall markets those that arent disciplined if they're rewarded by the markets that can start to feed itself into the other companies, but the one thing I think we're aided by this go round, which was very similar to that kind of 2000 and wanted 2004 period is that.
Primary.
<unk> is shrinking and the lower 48, and so the ability for U S companies to Capex on a capital efficient basis really grow at the same rates. They have the last few years without.
Drinking you know their entire milkshake of inventory is getting more challenging.
And then decline rates may moderate some but with lower decline rates come higher fixed costs and so I do think.
One governor of that will the will play into all of this is that debt overall, I think it's going to be harder for people.
To have the inventory and capital efficiency to drill at the same speed they have and even the Permian and we see a lot of maturity and areas that are largely.
And the best stuff has already been drilled.
So with that and I guess to sum up your question is that.
I think it really depends I think.
And we like kind of nice oil prices, but not super high because of that discipline can start to waver.
So if oil prices of $70 I can't promise. The you are the U S industry won't lose discipline I would push that back to wall Street, and say make sure you keep them honest because I think that that's going to be you know people are <unk>.
Enterprising and if they get rewarded for certain behavior of theyre going to do it like of like elaborate and trying to get us as the water right. So yeah.
Okay Fair.
Fair enough I appreciate your candor and thanks again for letting me in.
Yeah. Thanks, John.
Our next question comes from Charles Meade with Johnson Rice. Please state your question.
Good morning, Nick.
I'm wondering of letting really really anybody and now.
Hmm.
Yeah.
Yeah I wanted to ask you you talked about those are those 15.
The 15 deals and it to me.
It was notable that the the Marcellus wasn't one of those areas, where you mentioned deals and I know, it's newer area of for you, but its also my sense that that each operating in the area has a little different rhythm.
The rhythm of them and compositions of the way A&D.
And it comes about whether you know from from identifying opportunities to.
Closing all of them. So can you give a sense of what you think the the outlook for ground game kind of stuff is and in the Marcellus.
And so far we've had a handful of little things show up here and there it's relatively blocked up compared to other areas. There are two very large high quality non.
Non op assets that we know of and the Marcellus that we've kind of.
And looked at but they're not for sale, but they are really nice properties and.
Certainly if they ever went to market. We would we would take a look I mean, Adam you want to talk about the.
Screen, the number of them and they just didn't necessarily check the box so that didn't make it into our 15th so it's sort of this call of about two weeks earlier, it might've been and 17 or 18, but.
And there's certainly opportunities out there.
Just Scott of.
Check boxes, both from a qualitative and quantitative standpoint, and some of those ones didn't necessarily do that.
Got it and then my follow up out of them. This is goes to a comment you made about about reverse enquiries and I can imagine those ticking.
A few different forms of when you first mentioned it I thought that it was a it was maybe non op sellers for non op.
The non op assets.
Coming to you as the new entrant in and an area, but it sounds like it it's it could be debt, but it's also more of reverse inquiries from financial partners. So can you can you kind of give a sense of are both happening do you just mean, one and whats the low.
The little more detail and would you be yes, no. It's certainly all of the above.
The number of different financial partners that have reached out and it's broadened our overall.
Opportunity set in that regard, we've got operators, reaching out to us in order to kind of rightsize certain transactions and we've screened.
Three or four.
At this point and.
And then you've got just kind of of your classic 100% non operated packages coming from the family offices the.
The private equity groups that maybe a little bit longer and the two of those types of things. So it truly is all of the above at this stage and so we've got the ability to be picky, and and we're going to stick to kind of of the script of how we underwrite things and and focus on the quality assets the quality of rock and Macquarie.
The operators.
And I think.
And to keep it simple to Adam's point.
You can create and non operating interest out of any.
Right I mean, it's not like these are distinct asset classes that theres operated and non operated.
To Adam's point, we've been approached by multiple operators that are trying to buy properties and are happy to have us carve out a working interest and those properties alongside them.
And you know to the extent of the properties meet our meet our investment criteria, we're happy to do so.
And in some ways, that's what our reliance transaction was.
Tied to a really high quality operator.
So we talk about $10 billion, but frankly, the really the limit is really the greater lower 48 in terms of all of operated properties. Because these ultimately can be synthetically created and tenants and what Theyre just not just.
One set of non operated properties that happened to be so.
Right.
Thanks for that insight net.
Our next question comes from Nicholas Pope with Seaport Global Please state your question.
Good morning, guys.
Good morning, Nick.
And.
And I was hoping you could talk a little bit and I know you guys of spend a couple of years.
And kind of hammering away at the.
At the various debt instruments that you had and kind of where and a good place right now.
And you still have the preferred the convertible preferreds out there and I was kind of curious what.
Your thoughts are about debt instrument.
Today, and going forward and maybe kind of what do you think and.
Optimal.
Capital structure looks like for for this model and what you are kind of trying to achieve longer term.
Of that aspect.
Well.
One thing I would like to clarify and in regards to of the preferred because this is really important and I think that as equity analysts and I was a form of equity analysts I understand it.
The concept of the treatment of that preferred.
Most preferred stock has a term on it and so it might be called preferred stock, but its really debt. It has a term it has a coupon and you cannot pay that coupon. It's not an event of default, but ultimately it has to be paid back at some point in time. So theoretically it is worth the liquidation preference.
And our preferred stock is perpetual in nature and that means that it is perpetual like our equity. It is true equity it does have a dividend yield associated with it.
But ultimately it is a permanent and instrument and so the ideal path is that we will continue to create value.
We will drive the stock price higher and someday down the road it will convert out and everybody's happy.
<unk>.
I kind of talked about that I'm, not I'm not a big fan of stock buybacks, but the preferred does have a coupon and so if we're ever and the position and which we really feel like our leverages there and we're just.
Driving a lot of cash.
Driving so much cash flow that debt, we don't know what to do with it certainly and it.
It can be bought back and terminate in that regard, especially as our own cost of capital falls and if it winds up being on the higher end of that it is not today, but if it if it does.
And that is a form of buyback and and certainly one that has some tangible benefits.
And is are the options for buyback I mean is that a.
I'm, assuming that's the premium associated or is there something available outside of just the conversion of it.
Nick It's just like stock I can go and the market and buy it tomorrow.
Got it.
Alright.
That's all I wanted to talk about [laughter] alright, thanks, Nick.
And just sort of minor to ask the question Press Star one.
Our next question comes from Jim Bureau, and please go ahead.
Good morning, I, just have an overarching question about the derivatives that were.
Mark.
Get a mark to market on those are they are.
Are there expiration dates of some of those derivatives, where you're hedging against the price of energy going down and just curious about what that was.
Our mark to market out of our derivatives is simply the change and the value.
So for example, and the other stock portfolio and you buy a bunch of stocks and then at the end of the quarter. They lost value you take of Mark to market, but you never really took a loss until you actually go and sell those stocks. So it's just a moment in time. So ultimately all of it is is our hedge portfolio, where we lock in our oil prices and as the price of oil has it.
There is and the value of those has gone down and that's just it but obviously the actual cash monetize which is about a $7 million loss represented the actual monetization. So its just simply the reflection of value and not a loss necessarily no different than we took a $350 million gain one year ago and that that gain.
And was just simply that the value of that portfolio of went way up but ultimately whether or not we actually realized all of those gains or not is really going to be determined as they mature over time and our hedge schedule as published both and are filed.
<unk> filings as well as and our presentations.
Very good thank you.
Thank you there appear to be no further questions at this time I'll turn it back to management for closing remarks.
Alright, well that's the.
And thanks, everybody for dialing in this morning. A reminder, we've got the presentation on the website and feel free to give US call. If you of any follow ups. Thanks a lot.
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