Q3 2021 Northern Oil and Gas Inc Earnings Call
Greetings, ladies and gentlemen.
And thank you for joining of the northern oil third quarter 2021 earnings call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
If anyone should require operator assistance. During this conference. Please press star zero on your telephone keypad.
Please note that this conference is being recorded.
I will now turn the conference over to our host Mike Kelly Chief Strategy Officer. Thank you you may begin.
Morning, and thank you for joining us for our discussion of Northern's third quarter 2021 earnings release. This morning before the market opened we released our financial results you could access this release on our website and our Form 10-Q will be filed with the SEC within the next few days.
We also posted a new investor deck on the website as well this morning.
I'm joined here with northern CEO, Nick O'grady, our CFO, Adam Dirlam, our CFO, Chad Allen and Chief engineer, Jim Evans, our agenda for today's call is as follows Nick will give us.
Starts off with his comments regarding Q3, and our overall strategy after Nick Adam will give you an overview of operations and the Chad will review dogs.
Q3 financials, and our updated 2021 guidance finally, our executive team will be available to answer any questions. Before we go any further though let me cover our safe Harbor language. Please be advised that our remarks today, including the answers to your questions may include forward looking statements within the meaning of 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 SEC, 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 EBITDA and free cash flow reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued this morning that thing.
Karabell now hand, the call over to northern CEO, Nick O'grady.
Good morning, everyone and thanks for joining US we continue to fire on all cylinders here at N O G alright.
Alright, let's get down to it with five key points.
Number one execution has been strong and our business model is shining Q3 is a testament to the work we put in year to date.
<unk> has signed three amazing transactions. So far in 2021. These transactions have allowed us to take the company to the next level, which is evident in our financial results for the quarter.
We are continuing to be very disciplined in our capital spending strategy and focus only on high return opportunities looking at Q3 specifics our production was higher than our internal forecasts and unit costs and realizations have improved which has allowed us to exceed our cash flow forecasts.
Insistent with last quarter, we once again achieved record adjusted EBITDA and free cash flow.
Number two we're not done the fourth quarter is setting up to be materially stronger than Q3, we will experience the full power of our Permian acquisition in Q4, and a partial contribution from the pending Williston acquisition.
Our completion count in both the Williston and the Permian will be up substantially in the fourth quarter, and we look for new record cash flow and even higher free cash flow as we close out the best year in the company's history.
Number three despite the incredible pipeline of M&A, we have evaluated this year. The list is only growing larger with active prospects still totaling north of $1 billion.
The window of opportunity for M&A opens and closes over the years and we will not squander the opportunity for our investors while the window is open.
I would add that with oil and gas prices up substantially risk management pertaining to any M&A transaction is more important than ever.
This translates into higher discount rates applied to our evaluations along with a thorough hedge strategy aimed at locking in a sizable portion of the economics of any deal, but also leaving room for considerable upside over time.
We continue to be thoughtful in how we evaluate future acquisition opportunities with the expectation that the acquisitions must meet the number one criterion that they are highly accretive to our stockholders.
Adam will discuss further were also expanding our reach on the ground with more avenues and creative structures to aid operating partners in development.
Number four the positive trajectory of our cash flow and balance sheet is noteworthy.
Even after our pending Williston acquisition, we still expect to end the year with a run rate leverage ratio of less than one five times and to fall below one times in the second half of 2022.
We are also far exceeding our free cash flow outlook for 2021 with over $140 million cumulative year to date versus prior estimates of 160 for the full year.
We are increasing our estimate to north of $175 million for the year, our third straight increase the fourth quarter of 2021 is set up to be the strongest quarter for cash flow and preliminary indications for 2022 point to even further upward momentum.
Number five dividends and returns to our shareholders are also increasing we will recommend to our board of directors a further increase in our quarterly dividend to <unk> <unk> per share for the fourth quarter. Upon closing of the Williston acquisition, if you're keeping score at home. This would increase our quarterly dividend, 100% since first acquiring one.
Only two quarters ago as I stated on our first quarter call that it was just the beginning and I meant it it's important to note that this is our base dividend only and while it has been growing rapidly our excess cash flow has continued to outpace the growth of the dividend, which currently represents less than 10% of our 2021 expected free cash flow for those seeking more.
Clarity, we will answer in the same consistent fashion that we have previously we believe that the dividend will be able to grow more substantially as our leverage targets are achieved capital allocation as force ranked here at northern whether for acquisitions drilling capital acreage replenishment or stock buybacks and dividends, we are dedicated to providing our investors with a competitive dividend.
And we expect strong and steady dividend growth in the coming quarters and years I will reiterate my past comments that future dividend increases will be augmented and accelerated by smart M&A and continued leverage ratio reduction.
That's it for me this quarter. Thanks for listening, we are and always will be a company run by investors for our investors and I truly want to thank each and every one of you for joining us today with that let me turn it over to Adam. Thanks.
Thanks, Nick Northern continues its March forward operationally with disciplined capital spending stable and growing production and solid improvement in operating costs.
Our production was up quarter over quarter. Despite a quiet period for completions, we turn in line approximately $6 five net wells in the quarter and expect activity to keep ramping into the fourth quarter, notably driven by our Permian assets.
Drilling activity continues to pick up steam to.
Operators have dramatically drawn down their drilled but uncompleted well inventory and new drill activity is picking up markedly as we head into 2022.
During the third quarter, we elected to over <unk>, an increase of 44% from Q2, and we have already received over 40 <unk> in October.
The increase in well proposals is more a function of mlg's manage acreage footprint, rather than an overarching trend in rig activity.
We have also been encouraged with our operators discipline to remain in the core of our respective plays as the weighted average rate of return for our Q3 elections at strip.
Estimated to be well north of a 100%.
The.
For cost inflation has also been a hot topic.
During the quarter, new proposals averaged around $6 $9 million, an increase of approximately 5% compared to our Q2 average.
This increase was primarily driven by the operator mix and completion methodologies during the quarter.
We do expect with casing and other items rising costs to see moderate inflation as we head into 2022.
However, we continue to remain conservative with our internal assumptions modeling well cost at an average of $7 million to $8 million, a copy which should buffer cost inflation in regards to our spending plan.
Most operators, we speak with are reluctant to significantly accelerate drilling given tight labor and materials markets and the effect that would have on drilling cost, which means costs may rise, but will likely avoid the huge spikes we've seen in past high oil price environments.
In the Marcellus completions on our initial EQT well pad commenced in early July and production to date has been right in line with our expectations.
This asset is obviously enjoying much higher cash flows at today's commodity strip than we anticipated when we purchased the property.
The Marcellus properties valued using an October one strip have a total unhedged PV 10 value of 468 million compared to a purchase price further properties of approximately $140 million.
Turning to the Permian our outlook for <unk> future in the basin gets stronger and stronger we are screening multiple deals on a daily basis and continue to regularly pickup core interests in the Delaware.
We're excited to announce that our Permian expansion continues as we've recently signed a deal to drill over seven net wells in the Midland Basin, starting in the fourth quarter and moving into the first half of 2022 or.
Our M&A strategy continues to expand not only with our ability to buy acreage in assets with near term development.
Also formulate direct drilling partnerships with operators in need of drilling capital and with better align structures to the drill Kosovo with financial Counterparties.
We also continue to work with our operators to develop some of our operable acreage something that gives us unique insight into the timing of development and strong economics.
We continue to build out a top tier position partnering with the best operators in the basin and have line of sight for the Permian to reach roughly 10% of our total production volumes as we exit the year.
As it pertains the overall deal flow for MLG, we're extremely busy both at the ground game level and with larger M&A opportunities and there is no rest for the weary.
We continue to work through the backlog with the same methodology and discipline. We've always utilized on the ground game front, we closed on six transactions in Q3 roughly in line with what we completed in the second quarter in total we picked up two two net wells and over 1000 net acres.
We have transactions in both the Bakken and the Permian.
As we moved into the fourth quarter, our Permian ground game has begun to grow market share as a function of high levels of activity because.
As we mentioned in Q3 of last year, we've seen a pickup in deal flow in the latter part of the year at a time, when we often see our competitors and operators exhaust their budgets.
As it pertains to the potential for larger M&A. We are currently evaluating three new substantial opportunities focusing on high quality assets with robust low cost inventory in the top plays in the U S.
We have passed on a number of acquisitions in the past three months as we want the opportunities to focus on our core areas. The recent Williston transaction is a testament to this where we purchased assets that had direct overlap with existing operations and the overall integration is truly plug and play.
As I mentioned last quarter.
The largest non operator, we see consolidation as an important theme, but this has to be combined with our need to deliver strong asset returns to our investors.
For your time and I'll turn it over to our CFO Chad Allen.
Thanks, Adam I'll give a quick summary on northern's financial performance.
Our Q3 production was up 7% sequentially over Q2, and up 98% compared to Q3 of 2020.
Our adjusted EBITDA, and our free cash flow were up 2% and 22% respectively over Q2.
Head of Wall Street analysts and internal expectations.
Our adjusted EPS was <unk> 84 per share and on a comparative basis to wall Street analysts, which typically exclude the tax effect of adjustments.
Our adjusted EPS would have been even higher at $1 11 per share.
Oil and natural gas differentials were stronger during the quarter, which increased our cash flow.
Operating expenses also continued to trend down in the third quarter.
Lease operating expenses decreased 5% compared to Q2 on a per unit basis.
Cash G&A was about flat on a per unit basis, excluding acquisition related costs.
Capital spending for the third quarter was also below wall Street, and internal estimates at $63 2 million, excluding the non budgeted corporate acquisitions.
As Nick mentioned in the first nine months of 2021, we produced over $140 million of free cash flow near our estimate for the entire year and roughly doubled of what we generated in 2020.
We discussed in August on our Q2 call that the pro forma for the Permian deals.
Our revolver balance was approximately $350 million, yet we were able to pay down over another $30 million by quarter end.
On the hedging front.
We've added modest volume since our last report mostly in connection with the pending Comstock acquisition.
The de risk the high returns of our PDP cash flow stream.
But our net exposed barrels to the stockholder have increased providing additional upside.
2021 guidance has been updated.
We have increased the midpoint of our production guidance for the year, partly as a result of the pending Comstock acquisition.
And the rest from continued outperformance.
That points to a fairly significant ramp in our production profile in Q4.
While we expect significantly more well completions.
Cost guidance, including Capex ranges have all been lowered.
And our differential guidance substantially improved reflecting what we've experienced year to date.
With respect to 2022 guidance, we are hard at work looking towards 2022 and are currently formulating our financial plan and forecast for board approval.
But I will provide some goalposts.
Management currently sees no scenario, where capital expenditures would be greater than $350 million in 2022, assuming no material M&A.
This outlook should generate at current strip prices well in excess of $250 million of free cash flow and will result in modestly increased production volumes and consistent growth in our common stock dividend.
With that I'll turn the call over to the operator for Q&A.
Thank you.
And at this time it will be conducting our question and answer session.
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Our first question comes from Scott Hanold with RBC capital markets. Please state your question.
Hey, good morning, guys.
Adam You had mentioned something about I think you all will be participating in some Midland basin wells is that.
A new I guess initiative I know before you were a little bit more focused in the Delaware could you give us a little bit of color on.
Where that might be specifically in the Midland.
Yes.
With the <unk> in place with our operator, and the fact that we're working on a couple of others.
Things that are in process right now I can't necessarily get into the details in terms of kind of area.
And the structure, but what I'd say is net of the cost our overall rate of return materially exceeds kind of our typical ground game transaction.
From a structural standpoint.
It also gives us a lot more transparency and control over well design lateral lengths timing of the development cost controls and other various kind of off ramps.
From an operator's perspective, it's certainly a superior structure.
<unk> to the reversionary drill cost structure of old.
And so it gives us the ability to.
Flex our ground game strategy with higher returns.
And also it gives us the ability to do larger quantities in kind of one fell swoop.
Yeah, and Scott to your question about the Midland I would say we've been looking actively in the Midland as much as we have in the Delaware I think we've generally.
Struck out a lot more in terms of finding high quality opportunities and this one came to us directly from the operator and so that's right.
<unk> in the Midland has both been a focus I think the Delaware has been more.
Not coincidence, but focused on quality operators and opportunities there.
Got it and then are you all seeing.
More interest coming inbound from operators looking to either reduce.
Sort of working interest or probably more and more important to them. It's getting rid of non op. I mean, there is a prominent sized delaware operator that kind of mentioned that on their call that they are working with someone to do that or are you seeing more of those inbounds coming deal.
Yes, both and I think as we've gotten bigger and our financial wherewithal is greater.
Something that is taking up notably I would say in the last three or four months, we've had more phone calls and bankers looking to do introductions on this type of stuff than we've ever seen before yes, that's across all of our basins. I mean, I think we probably are getting three or four.
Kind of ones and twos the opportunities on a daily basis and that will have a more fulsome conversations with operators.
Our packages as they kind of continue to pickup operated packages or emerge.
Always non op that comes with that and so for.
For them to be able to kind of clean up some of that stuff, it's not small packages and so it's everywhere from kind of the ASC to ASC unit by unit stuff as well as kind of the larger packages and that seems to be picking up steam.
Yes.
Got it.
A lot of operators they're trying.
They are trying to keep their leverage in check they're trying to keep their spending in check, but they still have lands they need to develop whether it be extra risk or other things and so theyre looking for partnership structures and I think from our perspective similar to our Marcellus assets. If you. If you can have a higher degree of control and you can share in those risk.
And have good alignment, it's a superior structure and I think youll see more of it from us.
Got it and then if I could squeeze in one more on shareholder returns I mean, you've got obviously, some some goals out there on <unk>.
Increasing that dividend because you have your thoughts changed on buybacks variable.
Special dividends like.
What is your thoughts changed on that and where it is energy go from here.
Yes, I mean I think on the.
On the special dividend part I, just want to couch. It by saying, yes, we have a regularly scheduled board meeting in December I think there is going to be a hot topic about how.
As we ramp the dividend how the terminal structure. So I don't want to speak on it until we really have that whole conversation.
As it pertains to buybacks I think where our company is today and where it's headed I think we still think dividends make the most sense.
Deals like Comstock proved to us that we can create more value through growing the cash flows of the business and the potential per share trading benefit to the shares of a buyback, but thats, where we are today, where we're still relatively small over time I think it will be something we will inevitably look to do.
But I think for now we can continue to add assets and grow the dividend substantially and as I've said before buybacks carry significantly more cyclical risk to our investors and much less disciplined than a dedicated dividend strategy.
So for the time being dividends are the way to go my observation is that investors like them because they are tax efficient and because at least in the short term. They can make the stock go up. They are also a lot riskier than dividends from a timing standpoint, I mean, how many announcing buybacks today, we're doing so in 2020, when our stocks were actually low.
And I also think that it's a lot more fickle because companies can easily abandon them versus the consistency of dividends.
And I would add that while they might not have the same instantaneous impact on a share price that a buyback would they do help provide stability and floors and they do dis incentivize short selling.
And so I think Thats, where we are now but I think this is a fluid conversation I think we have to achieve those leverage targets and as we do I think that'll be a high class problem that.
Thanks.
Thank you. Our next question comes from John Freeman with Raymond James Please state your question.
Good morning, guys.
Good morning, John.
First of all I wanted to touch on chat and you sort of touched on kind of the upper bounds of what of what Capex could be in 2022, and just wanted to maybe get a little additional color on sort of the assumptions that go into that let's just say the upper bound of your of your loss expectations in 'twenty two in terms of.
To compare it to let's say the $38 40 wells.
Spectrum to add to production this year versus what maybe the upper bound of that Capex would assume next year and then what sort of like oil service inflation is sort of built into that number as well.
So.
I'll answer the last part which is.
On the inflation front, we never really cut our well estimates so we've been and we've been cutting capex all year as we've actually enjoyed lower costs, but we never really on a forward basis have ever really changed that so it's really more on an as incurred basis. So while.
We have been enjoying six to $6 5 million well cost on average.
We never really stopped from budgeting at $7 million to $8 million. So I think we will be relatively well insulated from an inflation perspective.
In terms of the let's call it $350 million upward bound I think the answer is that and I think Chad alluded to this is that our view is based on that we don't have a formal board approval.
But I would say that that.
That would be the upper bound which would include a fairly decent chunk of some growth capital.
And I think we certainly could grow modestly and spend somewhat less and so we just sort of wanted to set the upward bound so that people don't.
Fear that we're somehow going to have some massive blow out as we get to next year, Chad I don't know.
You said that you said it right that's exactly right.
I mean I think.
Does that answer your question John.
Yes, it absolutely does thanks, Nick and then just a follow up.
Some of it.
<unk> prepared remarks kind of alluded to this as well, but just looking at each of the last several quarters now.
Some.
Pretty sizable transactions or acquisitions on the bigger side on the go.
<unk> spend and obviously.
This quarter third quarter is about half what it was and.
<unk> and I'm curious just how much of that that dynamic is.
Some of what you've alluded to in the past Nick It looks like in this commodity environment. The smaller deals are still quite competitive versus when you're looking at the bigger deals are just not that many people out there that can write that check is it just sort of a shift at all.
Pension maybe on the bigger deals maybe more so than it has.
Past just any additional color on that.
Yes, I mean, I think the deals that we closed this quarter. Some of that is a function of timing I mean, if I'm looking at October we've already closed seven transactions.
Five of which.
We're in the Delaware.
We've got maybe commercial terms lined up on another five and so I think it's really just finding.
The deals and going through and we're probably batting.
Two to 300.
Deals come in given the hurdle rates and the operators in the areas and everything else and in this price environment Youre going to get a lot of variability in terms of quality. So when we start running sensitivities.
That stuff gets up to the side kind of.
Step one.
So.
In mid year, a lot of times, we'll see people start chasing things and so thats, where we will kind of sit back and so that's where we're able to kind of make hay in the fourth quarter.
Similar to what I alluded to Youre not wrong in terms of the overall competitive nature I mean, there's the smaller stuff theres certainly.
More folks chase and kind of the Onesies twosies. So if you start getting north of $50 million to $100 million in that buyer universe starts to shrink markedly and so.
It's really just taking a look and screening everything in our focus area that we can enforce raytheon amongst each other.
As it pertains to the strategy shift I think.
We remain.
The dustbuster.
We will still we still focus on opportunities large and small it's really comes down to economics, but to Adam's point I do think.
Capital still is relatively scarce and our business, except on a small scale and I would say in the kind of June July timeframe, which is that mid year. When you really first saw the big surge of oil kind of start to come.
Come through and we definitely saw some pretty aggressive behavior.
And even as we head into the fourth quarter, it's like Clockwork every year where that is.
Stuff starts to pass by and.
It gets more to a real dollars, but I would say this that.
From big to small the opportunity set is somewhat overwhelming.
I'm trying to make sure Adam doesn't want to kill me on a daily basis.
Okay, Thanks, guys and congrats on another really nice quarter.
Thanks, John.
Our next question comes from Neal Dingmann with <unk> Securities. Please go ahead.
Good morning, all.
Nick I just wanted to make sure.
Staying on shareholder return, obviously phenomenal job it looks like prior numbers, you're closing in on that one times, which going back a year or two it's just obviously a fantastic job.
Of getting down there I'm just wondering once you do get down under.
One times leverage do you think you were talking about kind of on different shareholder meeting with the board different shareholders options.
As well as sort of growth options with Adam's group and I'm. Just wondering once you sort of hit that one times does that change how you think about things or maybe just give us conceptually how you're thinking about it from that point forward.
Yes, I mean, I think the I think every target always is moving right I think.
If we at the rate, we're deleveraging and with M&A kind of always out there as a possible catalyst to accelerate that path.
Or at.
Some of the assets that we're looking at the cash yields and the Irr's are simply incredible.
So you never have any surety, but if you can get them at your on your terms, we can really accelerate that so we've talked about that one third doctrine as sort of a base plan could could we potentially get to a point, where youre not going to take your leverage to zero.
But could you get to a point that at mid cycle price. Your leverage is so low that you need to start to think about what to do with that fallow capital absolutely we have.
We have debt securities outstanding we have preferred securities outstanding we have common stock Securities Outstanding I think the thing that I would just plead as patients which is that we can grow the dividend substantially I think the overall terminal structure of it whether it includes.
Some sort of special mechanism or are we really feel comfortable enough to do it all through a base dividend I think that's a conversation at the board that we really haven't.
Solve for yet I think that the main plan has been grow the base dividend as fastest as we feel we can comfortably.
But I do think that you see.
I see what I am.
Keenly aware of what a lot of the large companies are doing are granted.
Out of 30 year $100 billion business, yet, but obviously theyre paying out really large sums of their cash flow and is that a possibility down the road of course I think the real question is that we just want to achieve these targets and then I think it really like I said earlier, it's a high class problem to have and which.
What I can promise you use and we'll try to put something very formulaic and very transparent. So that people can really understand what theyre going to get we just want to make sure. We do it in a thoughtful way I don't want to be keeping up with the Jones and because one company did something we do it that way I think we want to be a little more thoughtful than that and I think that's where our meeting with our board in December we're going to.
Prepare a lot of different scenarios and see what sticks.
No like the Optionality and then secondly, just.
A question for Adam I know you don't have the full sort of activity or quarterly guide out there but.
You mentioned just the limited completions just this last quarter.
I'm kind of surprised I guess, given some of the private activity both by some key guys. Obviously in the Bakken and then it sounds like what we're seeing in the.
Permian would you assume a little bit of step up activity and if so is that more coming from kind of just all around or more some of your privates. If you could talk a little bit about that.
Yes, I think it is a combination of two things that I think we had a pull forward in Q2 or some of the planned completions. In Q3 were pulled forward and then to your point I think Q4 is going to be pretty robust in terms of completions.
Quick look at that while October looks like.
I think we're going to see a step up there.
Thanks, just from activity levels based on kind of our acreage position.
Exposure to the various operators.
In the Delaware as well as the Williston I mentioned, we've got four years of fees.
In the month of October so.
We expect things to continue to keep cooking.
Very good thanks, guys.
Our next question comes from Charles Meade with Johnson Rice. Please state your question.
Good morning, Nick.
We'll not true there.
I wanted to go back to a comment you made in your prepared comments when you said.
The M&A window.
Opens and closes and right now it's open.
What does that look like to you.
How would you characterize the window being open and what would be the.
What would be some of the signals that disclosing.
Well.
The old adage that.
Bear markets and bond markets and when there are neither have any of them left so in a bear market. If you want to use a bear market that oil and gas where in by the middle of 2020, I Couldnt find anyone that was bullish and Lo and behold here. We are today in bull markets and when everyone's bullish and convinced that will be probably around 2014.
And so I would say that I think.
In General I would say there is a window over the next three three years I would say where a lot of capital that's been deployed into space for the last 10 years, and what I would call. It temporary hands kind of finally consolidating and transfers through I think we're in probably the third.
Third or maybe fourth inning of that in which there's a lot of money sitting in private equity hands family offices that never really intended to own it long term.
I also think that there are a lot of businesses just in general that need to either be consolidated or are subscale or.
Youre not going to be able to take a new company public anytime soon in this space and so I think people have to kind of really weigh those strategic alternatives and what they need to do.
Yeah.
I think that.
As it pertains to the to the market today I think.
It's as robust as we've seen in the last several years, our competitiveness, our competitiveness ebbs and flows but.
In general.
Our focus remains in kind of our core areas. We have looked at assets in other basins nothing that really got us too excited so far.
But we're I would and it is just say look.
We don't want to squander opportunities, where we can make meaningful.
Across the board whether it be total return on capital.
Every per share statistic, that's what's out there right now because.
Like any other market if this lasts long enough.
People will copycat and see that it is a it is a profitable business and they'll want to join in and then ultimately those arbitrage windows close.
But I don't think we're anywhere close to that point and I think that the overall macro pressures on the energy space in general, we'll keep a lid on that for some time.
So I think it's pretty goldilocks for us frankly.
The hardest part about this job.
For our entire team is keeping focus on keeping discipline and that's something that we just won't change our stripes.
Our way or the highway we're very mechanical on how we do this in one of the best comments I got from one of our bankers recently was like you are very different than most of our clients because youre totally willing to walk away and we are because we know theres a lot out there to do and if we can't get it on our terms, we'd rather not get into at all.
There have been plenty of transactions that we've looked at this year that we just Sweden by a few million dollars even on large transactions that could have an hours, but we're not willing to do that and thats. The discipline. It takes to be able to be consistent as in as a roll up strategy, which is what we are.
That is all really helpful. Nick Thank you for that and then just one quick discreet follow up Adam you mentioned that.
You guys I think you said saw 80.
Are you elected in <unk> in <unk> and that you've seen.
<unk> seen some 40 in October can you give us a sense how many did you opt out of <unk>.
<unk> and.
How do you see that.
How do you see that same ratio for the full year <unk> seen in October.
Yes so.
Call It 80 or wherever they are about three that we ended up non consenting and I think it goes back to my comments.
Being pretty encouraged with our operators disciplined in this particular environment I think in years past.
Prior kind of high oil price environment, you saw a lot of operators step out and start getting after some of the science experiments and that's where he is.
A lot of our non consents.
Based on the position that we've been able to put together.
To keep managing things.
Our average rate of return at the strip.
The wells that we elected to do is north of 100% so.
That's been the biggest thing that I think we've been.
Encouraged encouraged on and it's really kind of youre seeing similar operators.
We've been partnering with.
In the past Youre Continental's and <unk>.
Moving to the Delaware EOG is in newborns make up a large majority of that.
Stock put.
To the rocks.
We're certainly comfortable with participating in here and any sort of level of pullback.
Thanks for that detail.
Thank you.
Our next question comes from Derrick Whitfield with Stifel. Please state your question.
Thanks, Good morning to all and great update.
Thanks, Eric.
With my first question I wanted to focus on your deal flow on the larger side over the last few quarters, you've steadily evaluated 10 to 15 larger A&D deals could you comment on the quality side and focus on what Youre seeing and how that's trending in a higher price environment.
Yes.
It's funny in 2020, we were we are hell bent on buying as many assets as we can.
Could.
To be a countercyclical investor and see what we could and the funny thing is it's challenging to buy quality assets in a down market unless theres. Some some form of significant distress.
So it kind of cuts both ways the best quality assets come to market generally in an environment such as this one I mean make no mistake. There is a lot of garbage hitting the market too.
The issue you have is that the convexity and the risk changes when oil is $80 versus when it was in the <unk>.
No.
That convexity is something we're very mindful of and so what that tends to translate and I think we talked a little bit about this in our prepared comments is about discount rates risk management strategies.
Fact that incremental moves in oil at this point, probably get less credence from us than typical.
And if you look at the Comstock transaction and the implied discount.
Ultimately sellers are often focused on the total proceeds and so on.
The discount rate may in fact increase substantially as prices go up a function of that risk that that happens in higher price environments and the fact that people are oftentimes solving for total dollar amounts versus their invested capital right and so if you're if you invested $100 million in something and you can sell it for 200 day here.
Less focused on the PV discount and the IRR than you are on the fact that you are making money.
And I think that Thats, something thats very helpful but.
But I would say the quality of assets that are coming to market now, especially on the larger side is better than what we've seen in the last few years I would say that being in terms of our mix, we do see a lot of.
Garbage for lack of a better term as well and it just goes right in the trash is Adam let's say.
I mean, we're certainly seeing the good the bad ugly.
I think.
As important as the asset quality is also a kind of a social dynamic right because a lot of the counterparties that we have dealt with.
Wanted or needed to pivot towards other things and based on kind of the hurdle rates. So we're underwriting to triangulating between the.
Yes that quality is kind of the recipe for success.
And we've had plenty of counterparties that.
Want some sort of participation agreement, where they looked at our multiple and say well I'm not.
I'm not telling you that for two five times.
Sit there and say well that's irrelevant, whether we're buying your assets and how your company and we want to know.
What's the what's the implied return on those assets and that's what's going to dictate what we can pay.
And so the multiple or where we trade or any of that stuff is irrelevant and those are those social issues that oftentimes break these things down.
Great Great color guys and then my follow up perhaps for Adam as we understand there were fairly material production events in the Bakken and in Q3, including processing outages and dapple line fill impacts.
Could you comment on your sense and your estimates on your exposure to those.
Yeah, Hey, Eric This is Jim I'll go ahead and answer that one for Adam Yes, we did a look back we heard that continental and marathon had some shut in production due to.
Midstream downtime and wanted to reduce their flaring, we did a look back on what we had estimated for Q3 production versus where actuals came in and we maybe saw about a 10000 barrel.
Different than what we expected versus actual so we didn't really have the impact that some of our operators are talking about it may just be a function of where our wells are located versus where they were seeing.
Pat.
It's just a testament to the diversified strategy of our portfolio right now no one thing ever makes that big of an impact.
Yes.
Very helpful. Thanks for your time.
Our next question comes from Alex <unk> with Bank of America. Please state your question.
Hey, guys good morning.
Alright.
Good.
I wanted to ask I mean, I saw you guys added some oil hedges didnt.
It didn't do that on the gas side and it looks like you're kind of maintaining that.
18 months forward.
Outlook on hedging.
Kind of curious I mean like you mentioned in your prepared remarks, I mean, the Marcellus obviously it looks like that are still early time.
Acquisition I mean, how are you thinking.
On a go forward about gas and then I mean as far as hedging I mean, we've heard from other operators and seeing and actually you can do some pretty attractive collars and whatnot. So.
Any kind of color on how you think about gas and then.
The mechanics of how you'd think about hedging on that go forward.
Yes, we actually did add about I think 20 million a day of collars Theyre just not in the swap schedule that you probably saw.
I think they're four by 775 and $3 50 by 750 I think is what they are so agreed I think the gas market hedging it.
For next year has been a little bit challenging just because of the steepness of the curve and so you're either kind of forced to take.
On average year hedge which is going to be significantly lower in the front and better in the back or you can obviously you hedge it month by month.
But given you're going into the winter, which is going to be really volatile one way or the other we wanted to make sure that we were very careful about how we did it and so the collars we have added those colors. So.
Very thoughtful on that side and on the.
On the oil front, we're just plodding along very steadily I don't think were quite at our 60% to 65% target for next year, just yet, but I think as we exit the year, we should likely be there. Obviously the average price will continue to go up I think it's north of 57, now and I would expect to see it meaningfully go up between now and then.
Sure.
Got it very helpful.
Yes.
Speaking of average prices going up I am curious right.
That generated it looks like about $140 million of free cash in the first three quarters of the year, you're telling us greater than a 175.
For full year I mean.
Capex looks pretty ratable prices are higher than <unk>.
Why is it not a lot higher than that.
Again very.
Very simple maybe dumb question.
Our internal term for that here is not economics.
Which is that we try to under promise and over deliver.
Very clear thanks, guys.
Thank you and just a reminder to ask a question press star one.
Our next question comes from Phillips Johnston with capital one please state your question.
Hey, guys. Thanks, just to follow up on John's prior question on 'twenty two.
I'm curious what the geographic mix might look like whether it's net wells are absolute capex dollars.
We're assuming 75%, 80% or so net well count is in the Bakken with a balanced pretty evenly split between Permian and Appalachia.
It sounded like it sounded like ballpark.
Yes, I mean, the plans are obviously kind of still in flux I mean as it stands today.
Notwithstanding kind of the Marcellus wells that are in process. We've got about a court between kind of the Bakken and the Delaware, We've got about a quarter.
Of the wells allocated towards the Delaware you take the Midland program that will get underway I think we received our <unk>.
First slug here and those will all be coming online.
Between Q1 and Q3.
And then.
Got it.
Call it.
<unk> 20, net wells give or take.
In the Bakken so still influx, we're still kind of finalizing finalizing all of that but thats kind of how it stands today.
Okay. Thanks, and then.
Obviously theres been a few acquisitions I'm just kind of looking for.
I guess, an updated net well count that can sort of keep your I guess your pro forma production flat going forward.
Yes were still kind of modeling somewhere in that $40 to 45 net wells to kind of hold production flat, obviously with the Comstock acquisition. The decline rate on that is fairly low lower than kind of our corporate decline rate, which is in the low 30. So.
Adding that kind of volume, we only need an additional one to two net wells to hold that production flat. So as Chad mentioned kind of the $300 million to $350 million Capex range is what we had modeled for maintenance capex to slight growth.
Yes, okay perfect.
Perfect. Thanks, guys.
Okay.
Thank you.
There are no further questions at this time I'll turn it back to management for closing remarks.
Thanks, everyone for joining us this quarter, we will see on the next one.
Thank you.
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