Q4 2021 Northern Oil and Gas Inc Earnings Call
Greetings and welcome to the <unk> fourth quarter 2021 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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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.
Good morning, Thank you for joining us for our discussion of Northern's fourth quarter of 2021 earnings release yesterday. After the market closed we released our financial results for the fourth quarter you can access our earnings release on our website and our Form 10-K will be filed with the SEC within the next few days, we also posted a new investor deck on the website as well last night.
I'm joined here this morning, with northern CEO , Nick O'grady, our President Adam Dirlam, our CFO , Chad Allen, our EVP and Chief engineer, Jim Abbott's our agenda for today's call is as follows Nick will start us off with his comments regarding Q4 and our go forward strategy. After Nick Adam will give you an overview.
<unk> of our operations and then Chad will review dogs Q4 financials in 2022 guidance after that the executive team will be available to answer any questions. Before we go any further though let's 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 <unk>.
But 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.
<unk> Form 10-Q , we disclaim any obligation to update these forward looking statements. During the conference call. We may discuss certain non-GAAP financial measures, including adjusted EBITDA adjusted net income 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.
With that taken care of I will hand, the call over to northern CEO Nick O'grady.
Thanks, Mike and thank you for joining us this morning, as usual I will get down to it with five key points.
Number one execution, we closed out 2021, and a very strong fashion with record profits across the board record cash flow record free cash flow and we exceeded all material internal goals, we set at the beginning of the year.
We are particularly proud of exceeding our free cash flow target of $175 million by over $30 million higher than forecast production volumes and strong execution and integration of acquired properties.
Number two capital allocation at current strip prices over the next four years the company could generate its entire market cap and free cash flow.
This puts us in an incredible position to allocate capital, which we will do in the following four ways number one our organic development number two small scale and bolt on package M&A.
Number three.
Further debt retirement, and finally number four shareholder returns primarily in the form of growing dividends and we can also opportunistically repurchase stock, particularly if the valuation remains low even at mid cycle.
Want to emphasize one more time, what we said when we purchased Veritas. We believe the vast majority of bolt on M&A can be done within the confines of our balance sheet going forward, which will not likely require raising equity in the public markets.
The capital from our 2021 equity offerings was intended to provide us with enough dry powder for us to be able to take advantage of strategic acquisitions on a go forward basis.
We remain the largest and most active working interest consolidator Adam will discuss further the opportunities. We currently see in front of us.
Number three shareholder returns as mentioned above we have a tremendous amount of confidence in our business model, which has given us the ability to communicate a dividend plan for the next two years, we have already delivered higher than promised dividends and we are confident that we can continue to exceed our dividend plan.
Given the predictability of our free cash flow, we expect to retire all our bank debt in 2023, and then start building cash and returning more to our shareholders recently, our board has authorized a modest but important preferred stock repurchase program. We have already retired $7 2 million in face value of preferred stock. This has.
Multiple benefits it simplifies our balance sheet reduces our annual dividend payments by about a half a million dollars a year and effectively reduces the diluted share count by approximately 316000 shares.
Number four outlook Chad will go into our 2022 guidance in more detail, but there should be relatively few surprises for our investors as we integrate the various assets execute on the organic activity on our acreage and way additional ground game and redeployment opportunities as they become available.
We see significant and steady production growth on our properties throughout 2022.
Have tremendous optimism as we head into 2022 and 2023 that NRG is poised for some significant multiyear growth.
We feel that we're in an enviable position and our process remains unchanged disciplined and focused on the best opportunities.
Number five consistency.
You will notice if you've listened to our conference calls over the last three years, there's a lot of consistency.
Talked about capital allocation debt reduction and ultimate returns to shareholders consistently since mid 2018 if.
If you watch our actions we are carefully scaled the business from less than 15000 barrels equivalent per day, while continuing to cut the cost of our credit and materially lower leverage ratios all of the hard work for the past three years have given us the power of scale and our focus on asset quality should deliver consistent and predictable results for our.
<unk> <unk>.
We bought 56 acres in the Permian to begin our diversification in 2020, it might've seemed insignificant, but that position has grown to 9000 acres and substantial production less than two years later and it should account for almost half of our capital spending in 2022.
When we declared our first dividend in May of last year. It was small, but we told you. It was just the beginning the quarterly dividend has increased over four five times since then.
The coming quarters and years, we will work hard to execute in such a fashion. So that we can deliver and even exceed our dividend plan. The entire team at NRG is up to the challenge and we will continue to deliver superior results for our shareholders.
<unk> is a company run by investors for investors and I'd like to thank each and every one of you for taking the time to listen to US today with that let me turn it over to Adam.
Thanks, Nick <unk> continues to execute smoothly as we close out a transformational year during the fourth quarter, we saw a meaningful increase in completions and turned in line $12 one net wells.
There were a number of completions that were slated to come online in Q1 that were pulled forward during the quarter and our growing Permian position accounted for a third of our well additions as we continue to scale in Texas and New Mexico.
With the increased activity during the quarter, we expect a quieter Q on completion count to the tune of five to six net wells.
As we enter spring the cadence of completions is scheduled to pick up dramatically with a material step up in activity as we move through the second quarter and into the back half of the year.
Elevated drilling activity on our acreage has also remained consistent we ended the year with $42 five net wells in process, replacing the 12 net wells that were brought online during the quarter.
Our in process list continues to diversify as we scale in the Permian, which as of the end of the year made up about a third of our net wells that are in process across our oil centric basins.
This has only been bolstered in Q1 with the closing of our Veritas acquisition.
New well proposals swelled in the fourth quarter across northern footprint, bringing in 130, new <unk> 110 of which came from the Williston.
Our elected proposals accounted for $9 seven net wells and represents a 60% increase from Q3's activity.
Given the discipline, we're seeing among our operating partners and even when we sensitize our price decks for a lower commodity environment with consensus at 95% of our proposals during the quarter.
So as a testament to the shale three <unk> era, and a more disciplined approach to inventory development with a focus on returns from our operating partners.
From a well cost standpoint, we continue to keep an eye on inflation and labor.
Our new proposals averaged $7 1 million during the quarter.
Effectively in line with the third quarter and comfortably within the range of our internal estimates in the $7 million to $8 million range in the Williston, we expect to see more moderate levels of inflation, while seeing more pronounced levels in the Permian concentrated with some of the smaller operators.
We continue to review multiple ground game opportunities daily, but with elevated commodity prices and the corresponding increases in service costs for some operators, we have gotten significantly more selective in the opportunities that we plan on pursuing.
Given the increased levels of activity across our acreage position, we will actively manage both the inbound drilling proposals along with feathering, our ground game activity to augment returns and capital efficiencies.
During the quarter, we closed on nine acquisitions, bringing in nine six net wells and 317 net acres.
Given the success that we had on the acquisition front during 'twenty, one as well as the increase in drilling on our acreage much of our anticipated 22 activity has been taken care of and we will be focusing more of our efforts planning for the back half of the year and into 2023.
At a packaged level there are multiple opportunities that we've been reviewing both on and off market.
With the scale that we've been able to achieve over the last 12 months closing on over $800 million in acquisitions. Those opportunities are also expanding outside the typical asset package.
We've had multiple conversations with some of our operating partners, putting together drilling partnerships as well as exploring opportunities to work on acquisitions together.
The opportunity set has only expanded for us with over $1 billion of opportunities in the backlog. However.
However, the variability and asset quality is also elevated and we will continue to prosecute using the same methodology, we have in the past.
Are there to grow the business with discipline.
As we move into the new year, our scaled and diversified business model provides us the ability to optimize the deployment of capital across the portfolio and adjust to changing market conditions. We look forward to continuing to differentiate ourselves from our peers and build on last year's successes in 'twenty two.
Now I'll turn it over to Chad Allen.
Thanks, Adam I'll start by reviewing some of our key fourth quarter results.
Our Q4 production increased 11% sequentially over Q3, and increased 80% compared to Q4 of 2020.
Our adjusted EBITDA, and our free cash flow increased 29% and 28% respectively over Q3.
Ahead of Wall Street analysts and internal expectations.
We produced over $214 million of free cash flow for 2021.
Above our target of $175 million for the year.
Our adjusted EPS was $1 <unk> per share in the fourth quarter above.
Above consensus estimates.
Oil differentials were flat and gas realizations were 20% higher compared to Q3.
Lease operating costs were $50 6 million in the fourth quarter of 2021 were $8 57 per Boe.
An increase of 5% on a per unit basis compared to the third quarter.
The increase in unit cost was primarily driven by the acquisition of higher unit cost production in the Williston basin and higher NGL processing costs.
This was more than offset by higher natural gas revenues.
Capital spending for the third quarter was $83 7 million, excluding non budgeted corporate acquisitions.
Which was slightly above wall street expectations due to the pull forward of completion activity and additional ground game opportunities in Q4.
We exited the year in a great spot from a balance sheet perspective.
After closing of Veritas acquisition in late January we currently have approximately $400 million drawn on the revolver.
Leaving approximately $350 million in availability.
Given the cash flow, we expect to generate.
We plan to pay down additional borrowings on the revolver in Q1.
Based on our forecast and expected Capex spend.
We forecast our revolver to be Undrawn in Q1 of next year.
As we head into the spring borrowing base Redetermination.
We think our current asset base would support a substantially higher borrowing base should we desire more liquidity.
On the hedging front, we have added volume since our last report.
Also in connection with the recently closed <unk> acquisition.
We continue to target hedging, 60% to 65% of production on a rolling 18 month basis with select longer dated hedging tied to corporate acquisitions.
With respect to 2022 guidance, our production guidance of 70000 to 75000 Boe per day.
We expect our production to ramp as we move through the year and exit closer to the high end of our range.
As Adam mentioned.
Q1 is typically our slowest quarter.
So in terms of cadence of our capital spend.
We expect it to be more weighted towards the last three quarters of the year.
One note on our production expense guidance.
Firm transport commitments related to our Marcellus properties are paid in the first half of the year. So we expect that production expenses will be elevated and higher than our annual guidance ranges in Q1 and Q2.
This outlook to generate at current strip prices.
In excess of $375 million in free cash flow after our preferred stock dividends.
It will result in modestly increased production volumes and consistent growth in our common stock dividend.
As Nick mentioned, the steady volume rent, we expect throughout 2022 also bodes well for a strong setup for 2023.
I'd like to close out highlighted in our reserves, we noted in our release.
Most of the Veritas, our proved PV 10 at SEC pricing.
Is three 8 billion, which was over 20% higher than our current enterprise value.
And wed like to remind investors that as a non operator, we typically book a significantly less aggressive pud scheduled and operators, despite our robust inventory and activity.
This is simply to highlight the value that is not being recognized in the marketplace today.
With that I'll turn the call back over to the operator for Q&A.
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Our first question comes from the line of Neal Dingmann with truly Securities. Please proceed with your question.
Mr. Damon. Please go ahead.
Oh, sorry about that good morning, guys.
Nick maybe just jump to the top of the Jordan that of course shareholder return my question around that is especially for a smaller company. Your size you guys certainly when I look at the dividend and other things within that plan.
It could be one of the leaders in the smaller cap rates certainly distant mindset coverage group.
Question I guess is.
When you brought onboard a very positive about that.
Is that can you sort of coexist by doing that and creating value maybe give an overview of how you bet. Because again you guys have really turned this company around so I'm just sort of thinking into next.
The next earnings how do you sort of do bolt ons.
Yes.
Yes, thanks, Neil good morning.
Think the way I would I would couch it as if you look back at when we did the Comstock transaction in the fall.
Transactions like that that's a pretty run of the mill PDP asset that we purchased.
And while Youre capitalizing the cost of acquiring that property ultimately.
Immediately adds cash flow that can be returned back to shareholders. So it actually while youre spending money or actually accelerating your ability to repay shareholders and I think thats, how we think about it.
And I think it.
It's a function of how you capitalize those transactions.
And making sure you adjust for that risk factors see our borrowing some money when you buy a property like that and you need to make sure the asset can repay that money over time, but also that.
A good portion of that property can go back to the stockholders and so we see most of the bolt on stuff, we'll do over the next several years.
Generally speaking is something thats going to accelerate that path, especially where we are in the world of shale today I think it is maturing we saw an interesting banking report done.
A few months ago and which.
Five years ago about 80% of the average M&A transaction was for undeveloped land and today, it's roughly the opposite.
So with a lot of proved developed properties coming alongside every package. We look at it that means that that cash flow that can both self fund the undeveloped portion and also return some to shareholders.
Great No I think thats exactly right and be able to do both and then lastly.
Just don't want to have in that for some time that is really just on the non op model.
I look at it for a while you guys maybe were getting.
Getting a knock on basically premium low versus a discount because being a.
Non op and now I look at it and say you guys seem to have I'm looking out there and based on my numbers.
You could have some of the highest returns and certainly might not have as much stranded capital from other folks and so I guess my question around all of that is.
Do you think or how do you think.
Just a buyer and get the higher premium and show investors now.
Basically the new model.
Shelly.
Yes, I think there is a difference between.
Non op assets in the market and what they will sell for.
US as a company and a public security and what that should be valued by the market and so.
I would undoubtedly tell you that we believe we can purchase and you can just see it in the assets that we purchased versus operating peers, who have bought things in similar areas what they pay per location for the reserves et cetera, et cetera, and we don't we obviously don't have the same.
Level of G&A overhead on top of that.
Undoubtedly we are buying assets for less than others, but just because of non op asset in the market.
Trades for a discount it doesn't necessarily mean.
Non op business and a non op equity and public company should trade at a discount I mean that is my opinion I'm sure not everybody will agree with that but I think that that is the arbitrage that we ultimately have built with a large diversified model.
And I think it will take time I think it will be driven by cash returns, but I think when you have a business that can deliver better cash on cash returns better free cash flow per share better across the board ultimately that will translate into an equity that has a premium valuation I think I look at the minerals model that as a non operated business as well.
It is a pass through it's also a lower return business, but it's been given a premium in the marketplace because of the structure.
And I think it will take time, but I think we will get there.
Yeah, and just to add.
Add on to that I mean, I think the differentiation between NRG and a lot of other non operators out there as the active management right. So it's not just picking up a package and sitting on it and waiting for the rigs become it's bringing the top grossing up your interest getting in front of the rigs with the ground game and.
Really bringing all that together so that you've got all these different prongs of assets kind of coming through one filter and being able to identify being agnostic as to where youre going to allocate that capital. Yes, I mean I just use an example, Neil in real time, we have two existing mineral partnerships within our Williston basin assets in which we have teams.
Selling and buying minerals underneath our working interests constantly and grossing up our NRI. So you don't really reported as a separate asset.
But that's an example of the active management, where our <unk>.
Try and overall working interest are changing.
Just as I guess, what's the term ring the Tao I like that.
As we bring the tail on every single unit as it is being developed.
Great detail. Thank you all again.
Thank you.
Our next question comes from the line of John Freeman with Raymond James. Please proceed with your question.
Good morning, guys.
John .
Yeah, I just wanted to follow up a little bit on <unk>.
Neil's questions on the shareholder return front just to make sure that I understand the way you are thinking about it going forward suffering.
If we go back to the dividend framework put in place.
At the end of last year, where at that $50 oil $3 gas based commodity price selling season.
<unk> basically pad about a third of your free cash flow in the form of the base dividend.
And so I guess from here if we're just thinking about the next 12 to 24 months.
Obviously, the client environment, well north of that.
We think of it as a first objective with that excess free cash flow is just youre going to pay down debt.
The bank facility like Al said.
First quarter 'twenty, three I think what you're targeting and then after that Don.
<unk> has the option to start you could.
A potential layer on additional weather driven increases or special dividends buybacks or whatever quarter you start tackling the 28.
So just how you are thinking about it.
Yes.
I think.
The conclusion, we've come to us as we achieve higher prices than we run internally.
Just to give you some context at the pace, we're going right now in the business as it stands we're going to exit a year. We're not just looking out next quarter. We're looking out at the end of 2023 and by the end of 2023, Youre talking about having hundreds of millions of dollars of fallow cash on the balance sheet.
And that's good and bad I mean, I think in the sense that it's obviously not earning a return.
So.
As you noticed we bought back some preferred stock in the last month and I think we think we can kind of start to feather all of those things and along the way and so it means that we think we can get ahead of it a little bit which means I do believe if the environment stays as it is today, we will be able to accelerate forward. Some of that dividend plan. We said we would do.
<unk> 12 cents this quarter the board looked at where we were and decided that we could bring into 2014.
And I would hope that if the environment stays strong that we can continue to bring that forward.
But the inevitability is over time that even with all of those things Youre still talking about one hundreds of millions of dollars in cash now the bond as a bond.
It's not callable until 2025 I don't know if it's particularly is certainly a higher cost piece of debt than our revolver and so you do a little bit more damage buying it does trade at a premium to par.
So thats always an option to repurchase those overtime I would hope that we can either find a way to deliver some of that to the stockholders.
As well there.
There is some level of debt that we're going to want to keep to be capital efficient over time, I mean, I think being debt free as is great, but it creates other avenues and we would hope we can find ways to grow.
Value for the stockholders along that if you look at the preferred stock and I, just I want to highlight something which is that.
Preferred stock is in the money today and what that means is that the average.
Arbitrage convert holder is actually short stock against it. So when you look at our short interest a good portion of that is preferred holders that are hedging themselves and it's about 90 Delta today, so as we buy.
Preferred stock over time, it effectively creates a buyback in the marketplace as well.
So I think and it is our definitively are most expensive.
Cost of capital.
Particularly as the stock has rallied over time, and so I think where I'm going with this is I think we think we can do things all along the way not just get the debt done first and then go there. We think we can feather additional things for stockholders over time, along the way just because of the inevitability of the cash while we're building.
That's great I appreciate all the color my other question.
When I look at the 22 project you've got.
90% of the budget split equally between the Bakken the Permian and then the remaining amount in the Marcellus and so I guess when you are looking at.
M&A opportunities outside of those those three operating areas.
How important is.
Scale like in other words free all of that jump in select another basin.
Initial entry need to be pretty sizeable or would you be fine sort of methodically building our position in the sports space.
Yes, I mean I'll be very Frank we got to.
$25 million Eagle Ford package shopped to us the other day and I think the teaser went directly in the trash and it's not that it's a bad asset necessarily but.
We want to keep we want to stay focused and so if you were to go to another basin. It would have to be something significant enough. It is a tax on the organization to manage and evaluate and be an expert in all of these things. We've spent a lot of time money people to become an expert in the basins that we operate today and thats not something we do.
On a whim and so I would expect the vast majority of opportunities in front of us, particularly given.
I don't know what is it 90% of the rig count is in the Permian right now.
Yes, I mean, what I was going to say, it's largely solves for itself. When you talked about $1 billion backlog and if I'm looking at kind of the.
Call it 12% to 15 packages that are out there that make that up I mean, thats largely the Delaware and the Bakken.
At the end of the day, it's going to be.
Asset quality.
That's where the asset quality is in terms of the non op.
Again, our business model going back to Neil's question, we have the ability to pick up assets in the core of the base, regardless of where what inning.
Of these basins are in and so I think our focus will generally remain.
The Delaware Midland and.
In North Dakota that being said we're screening.
Asset packages across the Haynesville Eagle Ford.
Just how much higher bar relative to some of the other asset packages that we're seeing.
Thanks, guys and congratulations on a fantastic year.
Thanks, John .
Okay.
Our next question comes from the line of Scott Hanold with RBC capital markets. Please proceed with your question.
Yeah, Thanks, Sam I'm going to jump on the shareholder return bandwidth into here, but take a little bit different angle to the question. Obviously you guys have shown there is multitude of things you can do these commodity prices.
Taking out the preferred and.
As an option as well as.
Taking a bank debt, but can you just speak to especially as you embark on your.
Fixed dividend plan increases just the sustainability and durability.
Of being able to do that with your existing asset base, meaning.
If you didn't get ground game opportunities or acquisition opportunities what kind of.
Oil price deck do you need to make the current plan sustainable with your existing asset base.
Yes, I mean, I think what we put out we spent a lot of time with us at the board level. Scott. So we said 15 three.
And that plan was based on the assets we have today for 10.
10 year period, right. So effectively if we didn't if we never bought another thing.
That's what that's based on it.
I can tell you.
The Williston is a mature base and many people think it's fastest Brian I would tell you. We are we see a 60% increase in activity.
Activity in Q4 of our asset is quite young and.
The way we have built it and we are about as busy as we can be we've had on the Veritas assets. As an example, we've already had.
An entire net well proposed that we didn't even underwrite or put in our inventory since we purchased the properties.
And so I would say, we're conservative guys by nature, but we didn't do this lightly we spent a lot of time and effort to make sure that especially when you're doing it as a base dividend, which you know is effectively a commitment as opposed to a special which you can kind of come on or off.
And we see a lot of durability to that.
Got it great and Thats and Thats down to 50, right. So 50 can continue down that path and feel pretty good for the next 10 years is that right.
That's right.
Okay. So my follow up question and Nick I know, you and I talked about this a bit.
Just about your technical team and how you all look at the assets and do some work and with that influx of a lot more proposals in a number of acquisition opportunities out there.
Could you just speak to with all with all of that stuff coming in.
How does your team kind of approach going through all that stuff I know your consent rate it sounded like it was around 95%, but it seems like a lot of work to do in a short period of time can you give us a sense of.
The depth of your technical team and how you guys approach that to kind of get through all of that and making sure you are.
Maintaining the quality of your investments.
Yes, that's right I mean, I think we've spent a lot of time and money Scott over the last couple of years and we've added a fairly substantial number of people relatively relative to our size I think we're up to.
30 <unk>.
Bragging our revenue per employee, but we are up to about 30 people. Our engineering Department is the largest group in this company and it is obviously the lifeblood and the most important.
On the ASC front that is that funnel is very simple in the sense that we have a team of professionals that go through every single AAV and then theyre individually approved by our chief engineer and Adam.
Over time that part.
<unk> is relatively old hat, whether we were still in the Williston only are today that part is quite easy because all of those type curves are built out on the evaluation front.
That is the part where we have continued to add and I would also add on the on the engineering side before I get to that.
On the technician side you know we have two engineering technician is dedicated now that have continued to build out systems to automate as many of these processes as possible. We just signed a five year contract on a data warehouse project thats going to effectively integrate almost every system we have.
And then going to be evaluation part that is the trick I think given the volume oils $90 right. So you can imagine even.
And the worst assets are all coming to market right now.
Trying to monetize.
On assets that May as I've told you in past conference calls that probably needed to be sold three or four years ago and now finally, the market is high enough that they can get out above water.
The part that that is the art of what what Adam Gemini and Mike spent a lot of time on which is filtering through those things and seeing what is worth our time.
And when Theyre thing that when there are things in our existing areas. It's obviously very easy and those answers can generally come in 24 hours when its something new or something in an expansion with even within basins we operate.
We have to make a judgment call internally about whether we want to dedicate resources to it but I would say on the technical front.
That is really.
If there is a huge shift in northern over over my tenure here and over the last five years is that really the technical focus is everything and everything starts and ends with that.
Key thing is the volume of transactions is somewhat overwhelming and we really solved for that by only focusing on things. We both know we have a high probability of winning if we want to and secondly that meet our criteria.
And I don't know Adam you want to add to that no that's right I mean.
I feel like a broken record, but it largely solves for itself first we're taking a look at whether the asset itself is going to solve in Australia than if it makes sense at a corporate level, it's probably not something that worked necessarily interested in because we're looking at resilient assets.
The rocks are the rocks, but the operators can differentiate that significantly and that's where we leverage but 350 type curves that we've got in North Dakota and building out our proprietary database and new Mexico, and Texas, because we've got all of the lease operating expense data. We've got this stuff that.
It comes through on the chips and the revenue checks that you can't necessarily get through a subscription service and so it's building out those based on wide databases. So that we can meticulously go through this stuff, but do it in a fashion, where we can filter out three quarters of these things upfront and focus on.
Thats that are going to trade based on the social issues.
Are effectively in place at the same time that often influenced these processes.
That's great. Thank you.
Our next question comes from the line of Charles Meade with Johnson Rice. Please proceed with your question.
Good morning, Nick you and the rest of the crew there.
Alright, you actually just touched on this just a little while ago.
The Veritas deal and what has changed since you guys evaluated it.
You mentioned there has been one more net will proposed but.
I'm also curious about if the schedule has changed because going back to your comments on <unk>.
Your comments on inflation.
In the Permian versus the.
Versus the Bakken, but also.
Service availability is a as I.
I guess, a growing concern as well so can you talk about maybe not just the total number of wells.
That you are looking at with Veritas, but also the schedule there and if anything has changed.
I mean, I think as a non op. The schedule is always moving around particularly this time of year right.
In the winter in the spring things move around I would say if you look at the operator mix on the Veritas assets service availability is not an issue youre talking about some of the largest and best capitalized companies and I can tell you what we see in real time from our 50, plus operators or small one and two rig operators are really struggling frac crews or not.
Showing up when they are supposed to they can't source drill pipe all those sort of things if you are.
Devin or mewbourne or or one of the largest and most active operators youre not having those same types of issues. So in terms of that Hasnt changed the schedule is moving around all the time and that's the art of how we guide and you can look through our history, we've gotten pretty good at being very careful and meticulous and playing for those things as things move from.
A month.
Around and particularly in the Williston around this time of year, given given winter weather, whether things are going to get completed before the freeze or not.
But in terms of Veritas overall, I don't I mean, Jim I don't know if you want to comment on otherwise, but I don't really think theres been any material changes I think what I was trying to highlight Charles it's more of that.
We said we saw another 40 net locations on there we were trying to be about as conservative as possible.
And on the small working interest stuff, we didn't even underwrite it and so we're already seeing the benefits from that.
That's all helpful and then.
And then if I could ask a question about the ground game historically I'm curious how it may it may be changing or.
You might see changes going forward at my understand historically is that was about.
Like you like you said earlier, you were getting in front of the rig and picking up working interest.
In properties, where you already had an interest in just trying to accrete your interest in front of some activity.
It sounds like you guys may also be kind of lumping in just some.
Little deals that you're just funding that out of cash that maybe or maybe.
Our little deals on properties, where you don't currently have an interesting is that the case.
Is the opportunity set shifting that way.
I'll, let Adam talk about this a little bit more than me, but I would say.
I think it's always sort of been a combination of those things sometimes it'll be.
It'll come with a little bit of PDP youre buying an interest in a unit that has two wells that have already been drilled another eight coming on and stuff. So it's always moving around in that respect I think it's really changed I think the difference in 2022 versus the last several years is I would say the explosion in organic.
Development on our properties has.
Probably made us a little less active than we've been in the last few years is that fair yes.
Exactly and then I think theres probably.
The three of us to kind of ground game opportunities coming in the door on a daily basis in.
A lot of these were in just by nature of our acreage position, but there is a number of them that arent and thats been the case for the.
The past call it five years.
So it's really just kind of high grade and what's your opportunity set is in and Thats kind of what I was alluding to.
The prepared remarks in terms of we've got an explosion in terms of activity levels operators are staying disciplined and so.
You can feather the ground game based on the activity that youre seeing on kind of your organic acreage and given the fact that.
Where we're at in terms of the commodity pricing and operator activity as well as the ground game activity that we were able to get done in the third and the fourth quarter, it's effectively set up 2020 twos.
Activity, where we're comfortable at and so as we kind of move through the first quarter and into the second we'll continue to keep a beat on all this stuff and start planning for the back half and into 2023.
That's helpful insight. Thank you.
Our next question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.
Thanks, and good morning all.
Alright.
Picking up with Charles last question just there.
With regard to the ground game opportunities could.
Could you comment on if youre seeing additional competition in the current higher price commodity environment.
I mean, theres always competition, especially the smaller the dollar amount the <unk>.
Our competition there is right. So theres always competition I would say and I Wouldnt I don't know if I would say it any more or less.
And in the past.
I think viewpoints change with maybe some of our competition in new money and Theyre kind of scrambling to put it to work, but maybe they are stretching but I think it also you've got some variability between basins as well and next point.
Oh, well pad that comes with four.
<unk> hundred five.
Well proposals, but.
Working interest is 30% to 40%.
Versus let's say well with 2% to 3% working interest.
Or your competition set is wildly different in that regard.
That's where we can.
Do a bit more damage with maybe some of the higher concentrated opportunities on a ground game basis, because some of our smaller counterparts aren't necessarily comfortable with that level of concentration, whereas when you look at our base.
Relative to everything we're throwing off it doesn't necessarily move the needle nearly as much.
That makes sense.
With you Adam.
With the material increase in rig count there, particularly with private.
Could you speak to your private exposure and how that has trended over the last few quarters.
Yes, I mean, we've always kind of look to I guess, the true private so I would say.
The ones that are focused on making money slawson in North Dakota.
Continued to.
To be active in this particular environment.
We've made it.
0.2.
Get underneath.
Burn oil in the Delaware side of things and so between kind of those two.
Two of the most cost efficient operators as well as two of the most active operators in our respective basins. We continue to have.
That activity level.
Flex forward in this particular environment as far as some of the private equity groups.
We typically stay away from from those guys. So you solve for that more on the acquisition.
Side of things.
I would say, that's largely burned and slawson as it pertains to the private exposure.
That's great. Thanks for your time.
Our next question comes from the line of John Abbott with Bank of America. Please proceed with your question.
Good morning, and thank you for taking our questions.
First question John .
You gave the free cash flow outlook here over the potential next four years equal to your market cap could.
Could you just sort of speak about the cash tax trajectory over a multiyear horizon.
Yes.
I'll, let Chad cover that I mean, the answer is.
Eventually we will have to pay taxes.
Yeah. Thanks, Jon I mean, obviously you saw us pay some fairly immaterial state taxes in Pennsylvania, and Texas into Mexico, because we don't have any.
Nols established there but.
In the past, we've been elected not to fully deduct abcs or bonus depreciation for the past several years to kind of preserve future reductions for us.
Clearly clearly it's based on our drilling activity in commodity price, but I think.
Based on our current model there'll be some small amount of taxes that will pay and at.
At the end of 2023.
And once we pay taxes there'll be kind of a mid 20% overall tax rate, but obviously adjusted for any changes in tax law and obviously, we also have also have the IDC deductions in future tangible drilling bonus depreciation stuff that we can take there as well so and so our overall effective rate will be well below that and the number that I threw out when I.
Talked about that is net of that and we have internally we run it so it's it's.
It's running it at the strip. So it is going to adjust for any changes in commodity prices as to the timing of that so.
That's very helpful. And then just sticking with cost here looking at LOE expense it.
Looks like that's taking a little bit higher at 2022.
NGL pricing.
You had some hefty that year and I guess at Ft would roll off and then maybe sort of into 2023, just thinking about LOE expense.
Ft in general how does.
Ben will trend over a multiyear horizon.
Yes, I mean, it really depends on the price of Ngls. So so first of all.
Each for the next two years, our ft associated with them ourselves, we'll pay that in the first half of the year. So it has a way of elevating sort of your front half low.
And then it doesn't go in smoothly it really goes to pay it kind of twice a year and you can't accrue throughout the year.
And the first six months of the next two years that FTE and then it will roll off over time.
We're trying to be conservative in the sense that you have a lot of pop contracts, particularly in the Williston amongst our largest operators and some in the Permian.
And so it's really high NGL prices.
We run our processing charges, which will adjust for that.
Through there you. Obviously also notice we did tick up our gas realizations as part of that but we're trying to be conservative on both fronts and so.
It's not a function of actually operating costs really materially going up I mean, obviously as well as age out there low does ryzen, so as our production matures, you're going to see some of that offset by by new well activity, but the big driver John to that is just that.
The NGL basket, particularly propane as high as it is youre going to see some of that in those charges on there and so we're trying to adjust for where we are today, obviously, if oil and NGL prices were to go materially down it would have a downward pressure on that and also on the revenue side, but I would tell you on an EBITDA basis on a cash flow basis. It is a net positive to say where you might have.
And otherwise.
<unk>. Thank you for taking our questions.
Okay.
Our next question comes from the line of Nicholas Pope with Seaport. Please proceed with your question.
Good morning, guys.
Nick.
I went out and I told you I could just go on the market and by the preferred stock and I did it.
The year right.
It's exciting I am happy to model it.
Yes.
I was.
I was hoping you guys could talk a little bit about.
You look at this.
Portfolio and I think a lot of the focus is.
On the newer wells on the acquisition front.
Now you've got these interesting.
8000 9000 wells.
How are you all thinking about in this market.
Central divestitures or kind of choline.
Weaker performers in kind of the existing <unk>.
Producing asset or is that a focus I'm just kind of curious how you all think about the hierarchy of kind of the existing producing asset and if theres ever.
If theres ever kind of a shift to look at that opportunity set and maybe selling into the strong M&A market.
Yes, I think to the last point.
You have to think about our corn oil prices there for a second because even if you sell a PDP asset as an example at PV 10, Youre still talking about a 10% cost of capital right Youre borrowing money at 3%. So you are saying, they're saying if I needed money thats, a pretty expensive way to do it that being said, we have particularly in the Williston seen a handful of operators buying and non operated assets.
That said, what we view as fairly elevated values.
And so would we consider going to some of our operating partners and divesting of our working interest in their properties. If it was worth more to them than US, yes, and maybe you could form that in the way of a trade in which we're taking other nonoperating properties that they don't want.
And so this is a trend we've been watching for the last year or so.
So I would say I would never say never I would say to be candid we have never in my time here at northern we've never sold a material asset except to farm inoperable acreage.
Two operators.
And so we've never really been a material seller, but I do think it's something we're looking at particularly as you said there may be operators that we don't necessarily want exposure to when we.
If the prices right, we'd happily either sell or trade MRI or assets for perhaps other assets. They don't want to throw in the price for an operated acreage at least the way that some of our operators see it might be worth one five times, what they are and.
Our non op.
I have nothing to do with the actual economics, but more of a control and so if you could leverage.
Exploit the tradeoff so that everybody is kind of getting what they want and it's mutually beneficial it's something that we'll explore obviously a bit more complicated than typical asset package, but.
Those are the conversations we're having.
Got it that's actually really helpful.
But.
And as you look at the existing portfolio base I mean is there a ranking process you look at either operating cost.
H.
Kind of well performance.
How do you think about that existing portfolio base is that is that how does how it should be thought about I mean is that where the focus is on I mean, it's a lot of wells now look more obviously than it was two years ago, yes.
You mean, just mean in terms of the ranking if you were to divest them.
Yes, I mean does that is that how you guys think about it I mean if that.
Yes.
If you'll humor me I'll give you a little history lesson that I watched a lot of operators in 2010 to 2017 sell PDP assets that had higher operating costs.
To go find new drilling wells and so they could show really low.
But what they were really do is just deepening their decline curve materially and so I think higher operating costs, yes.
Lower margin, but it's also lower decline and so there it's not sort of one for one.
I would say, where we would look at potentially divesting assets is which.
As of period more on which the upside on those assets is worth less to us than it might be to the operator or to somebody else.
Our view on the future development possibilities, we have we have acreage in some noncore parts of the Williston that might be worth more to the operator than it would be to us because we frankly wouldn't want even if it was to be developed that wouldn't necessarily be where we want to put our capital I'd throw like divide county out there or something like that.
But but it would mean, it's uneconomic it just wouldn't be our choice to put our capital. There. So I think it's less to do with where the assets are now probably more to do with the upside associated with future development on those properties.
Got you.
That's all very helpful very interesting thanks for indulging me.
Appreciate it.
Yes.
Our next question comes from the line of Noel Parks with Tuohy Brothers. Please proceed with your question.
Hi, good morning.
Alright.
Okay.
Just a couple of things.
No.
Continuing on the conversation about <unk>.
Operators you.
Are happier being involved with us.
Close to those.
More look to avoid I'm just curious in your basins are you aware of.
Is there anything significant that's on the market as far as.
Operated acreage in a package.
That that would benefit us.
Wood.
Lead to a meaningful shift.
In your operator ship profile.
And any other basin.
I think in the Williston, there's going to be some large operated packages that change hands in the next couple of years and I would say, we would view that as a huge positive for us if it was to transpire.
Yes, I mean as far as North Dakota goes I think we're in 40% of all Bakken and three forks wells that have ever been drilled in soybean regardless of kind of those packages coming to market. The non op nature, it's not going to move around all that much and it's also going to depend on the average working interest for a lot of these packages that we're seeing have average working interest that are probably half of what <unk>.
Yes.
Obviously, there was a large operator package sold at the beginning it was either late 'twenty or beginning of last year.
And a private operator took it over and we've seen a meaningful improvement as they actually are focused on the asset right and so you can imagine there are other large operator packages both in the Williston and the Permian I'd use to.
Our Marcellus properties is the poster child for that which is you have a focused operator that takes over and does it a huge improvement both the well design cost structure well performance all of those things and we would see a lot of meat on the bone on some of the properties that we exist.
Particularly when assets are non core and to that operator, and theyre, just not putting development dollars towards them. So we have a lot of undeveloped assets under some of the operators that if they were to change chance it would be a huge benefit to us even if there wasn't a change in cost structure, which usually there is.
Hi.
Interesting thanks and.
Another sort of similar question, but.
Looking more at the Marcellus.
I just was trying to get a sense.
I feel like I'm kind of hearing from some.
<unk> signals from some of the.
Marcellus and operators the public ones.
Around what they are thinking about inventory and I'm just wondering.
You see an overall trend either.
Inventory.
Concentrating itself into into fewer hands.
Your hands, but bigger operators.
Through either consolidation, that's underway or that you think might happen.
I was wondering if you see any sort.
Sort of opposite force of people.
Being down sort of paring down there.
Their positions because some of the larger ones of course.
Decades of inventory at this point that it's not so likely that they're going to get around the funding.
Yes, I mean, I think consolidation has continued theme I think I'm on the record and on I'll repeat what I've said publicly before which is that.
There's a lot of focus on shale three <unk> and a slowdown in the lack of acceleration in drilling and I've told people that it is as much about inventory preservation as anything else, which is that there is a limited amount of shale and if you go to the Marcellus is an example that region has been getting hit hard for 15 years and some of the best areas Marcellus that we've looked at are very drilled up.
Now when it comes to our properties in the Marcellus there were less than 450 wells drilled over 10 years. There. It has 30 years of inventory and it was less hit hard partly because of the the prior operator and partly because there were better regions to drill at the time, but it is highly economic and so I don't see that as an issue for our.
Asset, but do I see.
Further consolidation within the region, yes, particularly as infrastructure is a challenge in the region in general it means that only the big companies can really be able to navigate through there. It's not like you could pick up acreage in and get easy access.
Access to transportation, you really have to have that scale and you've already seen that rate <unk> seen Alta trade hands, you've seen <unk> chief.
<unk> seen a significant amount of consolidation already of will there be more I can't say I can't say, if there will or they won't but I don't think it's the type of thing where youre going to see a small group go and pick up a rig and run in there because I don't think it would really be conducive to that I will say for our asset in particular, one of the things. We identified was just it has decades of.
Inventory on it and it has been barely touch.
Not to mention the fact that we bought a half a decade's worth of Ducks, when we got when we bought the property.
And just to extend.
<unk> extended out a little bit so is it safe to say that and I'm thinking, particularly about the Marcellus that there there isn't really.
Fresh money looking.
Attracted by.
Higher gas prices.
Looking to sort of come in and start something new from the ground up there.
People are kind of getting squeezed out in other words.
I would say that's a fair assessment.
I think capital in general no new capital, that's going to put a significant long term.
Operated footprint in areas in the United States is waning I think that it is turning into a larger consolidation wave I think for every new dollar being raised their $2 need to mature and go out and Thats, obviously created the environment. That's allowed our company to grow over the last few years.
Great. Thanks, a lot.
Thank you.
Ladies and gentlemen, we have reached the end of our question and answer session. I will now turn the call over to Nick O'grady <unk> CEO for closing remarks.
Thanks to everyone for listening to US today, we'll work hard to put a phenomenal.
Phenomenal results over the next several years and again, thank you for your time and interest.
Thank you.
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