Q3 2022 Northern Oil and Gas Inc Earnings Call
Greetings and welcome to the northern oil third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formula presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce to your host Eric Rums slow Chief legal officer.
Thank you Eric Please go ahead.
And welcome to our third quarter 2022 earnings Conference call.
Yesterday after the market closed we released our financial results for the third quarter you can access our earnings release on our Investor Relations website, and our Form 10-Q will be filed with the SEC in the next few days.
We also posted a new investor deck on our website last night.
I'm joined here this morning by <unk>, Chief Executive Officer, Nick O'grady, Our President Adam Darla, Our Chief Financial Officer, Chad Allen, and our EVP and Chief engineer Jim Evans.
Our agenda for today's call is as follows.
First Nick will provide his remarks on the quarter and our recent accomplishments.
And Adam will give you an overview of operations.
Last Chad will review, our third quarter financials and updates to 'twenty to 'twenty two guidance.
After the conclusion of our prepared remarks, the 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 our 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 today's 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 our earnings release.
With that I will turn the call over to Nick.
Thank you, Eric and thanks, again to everyone joining us on today's call I'll get right down to it with five key points number one business is humming.
Generated a company record $292 million of adjusted EBITDA, this quarter and well over $100 million in free cash flow the highest in the third highest in company history, respectively.
Over 79000 Boe per day in the quarter and we have already generated a cumulative $370 million of free cash flow in the first nine months of 2022.
Leverage at the ended the quarter based on the LTM adjusted EBITDA dropped below one times, even with the closing of our Williston acquisition in August .
The increases to cash flow and decreases the leverage ratios quarter over quarter are even more impressive when you consider that oil prices were down substantially from the prior quarter.
Number two growth as evidenced by the increase to our production and Capex guidance, we are driving value creation through investment.
It is translating into more profits, but more importantly, the increase in capital for the year isn't being driven by inflation, which is something we had already built into our expectations.
Is that the increase in capital is truly incremental investment in additional activity that will in turn drive cash flows higher in the coming quarters.
With over $370 million in free cash flow generated so far this year, we are able to increase our investments in high return projects and are thrilled with the organic and ground game opportunities that we continue to see.
We expect our balanced total returns based approach will continue to drive superior total returns for our shareholders and we still expect to generate approximately $500 million of free cash flow for the year. We are extremely proud of this achievement given the decreases in oil prices and acceleration of near term capital spending.
Number three outperformance.
Fight high prices and inflation, we're seeing notable outperformance in all three basins.
Our Williston wells have thus far exceeded past years, even in an environment, where we would typically expect step out wells, our Marcellus assets continue to surprise as eqt's, new pads materially outperform and E. N PDP declines have been shallower than expected.
In the Permian costs realizations, and well performance are all exceeded internal estimates as I said earlier business is humming.
Number four acquisitions success as you've seen from a flurry of deal announcements over the last few months, we have been very busy on the M&A front.
Make no mistake about it our discipline remains and we continue to underwrite acquisitions with the same rigor.
Our success is a testament to our role as the preferred partner a company with a reputation of execution and consistency with the capital availability and the ability to negotiate and close and an honest straightforward manner. This often trumps price and I want to stress that we are buying assets that are not just accretive to fit.
All metrics, but accretive to asset quality and future growth prospects. This means resilient assets that have the ability to outperform our underwriting.
In short we're confident that our recent M&A success will deliver both near term results and long term value for our shareholders.
Number five shareholder returns.
Our goal is to provide our shareholders the highest possible total return over the long term.
We have implemented a multi pronged approach, including equity buybacks repurchasing high cost debt and increasing the cash dividends for our common shareholders.
Hey, during the third quarter and October we repurchased and retired another $10 million of our eight and eight notes at less than 95% of par this lowers fixed charges, which boost free cash flow permanently and retiring the notes at a discount to face value is accretive to enterprise value. We are prepared to continue to take advantage of opera.
<unk> to repurchase the senior notes.
On the equity side, we've retired $109 million year to date, including 51, and a half million of common stock the remainder being preferred stock.
As a reminder, we have 98 and a half million remaining on our common stock buyback authorization.
C <unk>.
Lastly.
Announced a 20% increase to our quarterly common stock dividend to <unk> 30 per share for the fourth quarter with the goal of providing an attractive yield for our investors. We strongly believe that the consistency of a stable and growing quarterly dividend is more valuable to investors and our equity value over time, then special dividends structures.
Which can introduce unpredictability and volatility.
D. We announced yesterday that we have executed a mandatory conversion of our preferred stock into common stock.
This will have no effect on the diluted share count because the preferred was already included on an as converted basis. The conversion will reduce annual cash dividend payments and also avoid future dilution through cash cash dividend adjustments made to the preferred stock each quarter.
The preferred stock was created with our bondholders in 2019 to accelerate essential deleveraging of the company and we are thrilled with the successful outcome for our common and preferred investors.
Conversion milestone will simplify our balance sheet and continue to underscore the strength of our company.
In closing I'll remind you as I always do that we are a company run by investors for investors and I want to thank each and every one of you for taking the time to listen to us today with that I'll turn it over to Adam.
Thanks, Nick.
We closed the third quarter accelerating our investment program across the board, including our organic activity ground game acquisitions and corporate M&A.
Overall, we picked up the pace as we entered the second half of the year turning in line 16.2, net wells are 60% quarter over quarter increase.
Permian completions are the primary driver contributing over 70% of the addition of <unk>.
Nearly 100% increase over the prior quarter.
Our operators in the Permian are driving efficiencies in order to keep well costs on budget and as a result, we continue to see shorter spud to sales times down roughly 25% from our wells spud in 2021.
Accelerated drilling activity and larger average working interest across most of our active basins has increased our overall wells in process to 61.5 net wells.
Increase of 10% from the second quarter.
Driving that increase we elected to a 190 well proposals during the quarter, which was up 65% from Q2 and accounting for 40% of our consented net wells on the year.
Our operators are drilling longer laterals to drive efficiencies in this environment.
In connection with that we saw the average AFB rise to $8 6 million.
But only up 5% from the prior quarter based on normalized lateral lengths.
Our weighted average well proposal remains well within our per well estimates that were already included in our Capex guidance.
Most importantly, the drilling opportunity set in front of US is expected to generate an average rate of return far north of a 100%.
Further supporting our top tier corporate level return on capital employed of 34% during the quarter.
With our ground game, we closed on two net wells and 965 net acres in Q3 and the acquisitions today are expected to generate a full cycle return on capital of 49% next year.
Strict emphasis put on targeting the right operators in order to maintain capital efficiency in this environment.
This stringent process, both from a planning perspective, and the execution within the business development function has enabled us to largely avoid inflation was affecting some of our peers.
As well as grow the investment opportunity set.
As competitors budgets have been exhausted in the back half of the year. We have continued to raise our full cycle hurdle rates.
This ground game success has played a meaningful part in our elective investments.
Regarding corporate M&A.
We've been extremely busy.
We have executed and signed up some of the highest quality asset packages, we have seen to date.
Tacking on meaningful production and even more impactful inventory across the Delaware and Midland basins.
On the heels of our radio transaction, we have recently announced three more premier acquisitions.
Looking back on the billions of dollars in M&A opportunity with Kansas. This year. These three all ranked at the very top in terms of quality operating partners and inventory depth.
The two Delaware acquisitions, we announced Paris with Nuvaring oil and gas one of the most active and cost efficient operators and located in the core of new Mexico.
As we close these in December northern will directly benefit from their best in class operating team and capital efficiency.
Our recently announced Midland Petro a joint development agreement.
The expanding suite of opportunities available to northern as we reap the benefits of reaching a new scale and Theyre not states.
These J D is at another arrow to the quiver, where we have greater effective governance rights over the operating partnership.
Including scheduling out the long term development programs of the assets as well as modification protections.
This Midland Petro acquisition is structurally similar to.
In an ideal follow on from our highly successful southern Midland Joint Development program signed in Q4, 2021.
In fact, we are establishing momentum with this structure.
Conversations with other operators have begun in earnest and we are actively screening and co bidding operated assets as well as discussing buy downs have operated interests using this model.
The expansion of the <unk> structure establishes a new set of opportunities that will be unique to a scaled northern and we will continue to drive value with a disciplined approach that is focused on returns.
With that I'll turn it over to Chad.
Thanks, Adam.
I'll start by reviewing some of our key third quarter results, which was again one of the strongest quarters in company history.
Our Q3 average daily production increased 9% sequentially over Q2, and top 79000 Boe per day.
37% increase compared to Q3 of 2021.
Oil volumes were up 8% sequentially over Q2, and a normalized after the spring storms in the Williston basin.
Which is where we have our highest oil cut assets.
Our adjusted EBITDA was $292 4 million, which exceeded consensus expectations and was a record for MLG.
Our free cash flow was robust at $110 6 million, despite increased capex capex spend driven by growing activity.
We have generated approximately $370 million of free cash flow year to date.
Most two times more than the entirety of 2021 despite the additional spending and lower oil prices.
Our adjusted EPS was $1 80 per share in Q3 above consensus estimates.
Oil differentials were again better than expected in Q3 and came in at <unk> 84 per barrel due to continued strong Bakken pricing and having more barrels weighted towards the Permian, which were at a premium the WTO.
As a result were updating our oil differential guidance to a range of $3 to $4 per barrel. Additionally, we're tightening our gas realization guidance as well by taking the low end of our expected range up to a 105%.
On the Capex front, we invested $154 5 million during the quarter roughly evenly split between the Williston and Permian basins.
Activity has been robust as.
As Adam mentioned Q3 turned in lines were up roughly 60% and spuds were up over 15% from the second quarter.
While days under development has been reduced roughly 25% from our 2021 levels.
This has resulted in a record D&C list of $61 five net wells and has contributed to the pull forward in our capital spending along with our continued success on our high return ground game investments.
While these accelerated investments have led to an increase in our 2020 to capex guidance.
They are also expected to boost our 2022 production exit rate and reduce our 2023 maintenance capital requirements.
On slide seven of our earnings presentation on our website.
Nevada to walk from the prior midpoint to the current midpoint of guidance.
The balance sheet is in great shape.
We closed on our convertible notes offering shortly after quarter end largely cleared out our revolving credit facility borrowings to fund our closed and pending acquisitions.
The convertible notes offering had tremendous demand.
And the terms associated with it ultimately provide low risk unsecured term debt with an all in cost of borrowings below that of our current revolver.
And a further extended our maturity schedule at the same time.
Additionally, due to the features we selected there will be minimal to essentially zero dilution to our existing holders and to the extent that there is the company has options to manage this overtime.
We expect leverage will tick up slightly over the next couple of quarters with the closing of our pending acquisitions, but the ratio should be back below one times by the end of 2023.
Year to date, we retired $23 $4 million of our 2028 nodes and continue to monitor the interest rate environment as well as our bond levels.
Continue to look for ways to efficiently reduce leverage if the market opportunity arises.
With respect to hedging since our last report we opportunistically added hedges in the form of attractive costless collars, but allow us downside protection with the opportunity to participate in upside if prices rally.
We continue to hedge out volumes from each closed and pending acquisition based on our stated hedging strategy.
Finally, a few comments on our updated guidance, which we laid out on slide six of our earnings presentation.
We increased the midpoint of our full year 2022 production guidance by 1250 Boe per day.
And now expect to exit December at over 83000 Boe per day.
Which includes our Midland transaction that closed on October <unk>.
All months from our two acquisitions that are expected to close in December .
But does not include our pending M. P. D C transaction, which we expect to close in January .
We bumped the midpoint of our full year capex guidance by $42 million as a result of the factors I mentioned earlier.
Cost guidance has remained largely unchanged from prior guidance with a slight increase in <unk> from increased field level costs.
All in all we expect to generate approximately $500 million of free cash flow for the year and from a value creation perspective, the <unk> cash flow and production volumes are substantially higher.
With respect to 2023 guidance, we're hard at work and having board level discussions over the coming weeks I expect to be able to provide our plan by early next year.
With that I'll turn the call over to the operator for Q&A.
Thank you.
At this time, we will be conducting a question and answer session.
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We have our first question from the line up Neal Dingmann with <unk> Securities. Please go ahead.
Morning, Nicotine My guys. My first question is on twenty-three specifically you all highlighted in the press release and Nick in your prepared remarks, all the continued attractive opportunities driving the boost in this year not necessarily inflation I'm. Just wondering are you able to give I know you don't have specific twenty-three I don't want to press you too much on that but I'm, just hoping you could maybe give a little color on the law.
<unk> increase and how that could shape twenty-three production and maybe more importantly, what type of Capex increase you all might entertain next year.
Hum.
Good morning, Neil.
What I think what we will tell you is this and it won't be as simple as sort of well cost times the number of wells.
You know I think to grow too and sustained call. It 100000 barrels a day, we'd need to drill about 80 wells a year.
For 90000 around 65.
And.
The building and maintaining of the DNC list and the associated Capex accrual means the nuance timings total amount is far more complicated than just that.
Simple math.
And it will depend also on what region, we allocate capital to.
And what role the ground game plays into it if any but there should be helpful start for some bookends I think the bigger questions for us or as the windfall develops from the mascot project do.
Do we have competitive reinvestment opportunities for that or would rather harvest the cash windfall for our investors I think we'll spend a lot of time at the board level debating these topics in the coming weeks and months.
Okay. So I mean.
Are you prepared to I mean, you've just just on sort of a production or capex guidance are you able to say just what youre able to let that.
Maybe broaden comments on what that might go up.
So you're just talking about inflation.
Yeah sure.
Yes drive driving that are you. If you know that that would probably be the PURA vida.
The specific question.
Yeah, I mean I think.
As it pertains to inflation I think most of the reporting operators have been guiding to kind of 10% inflation rate you know I think that's a deceleration certainly year over year.
We look forward to coming back to you soon with our overall investment plan and kind of our own views on the accuracy of that I think but at current I don't think we really have a differing opinion.
So what I would tell you is that there is definitely leading edge inflation I would agree that it is somewhat decelerating and operators are enterprising.
Enterprising folks and they're figuring out ways to to offset Tonight I know Adam you want to add to that I think once we get through Q4 kind of understand what their overall mix as basin by basin, operator by operator will be able to narrow that down a little bit.
Better so that's kind of.
Our work cautioning you that at this point.
Okay, and then Nick something you just said.
On the growth versus shareholder return like I don't think any of these days I don't like Brahms on the call anymore, but I'm just wondering if because you mentioned, you're having a conversation going forward with the board when addressing twenty-three production grilled versus shareholder return I'm, just wondering kind of how those conversations go I know.
For a long time, you know a lot of times the board favored maybe more shareholder return, but you know you mentioned that the goal is to provide the highest total shareholder return total return over a long term. So I'm just wondering kind of how those conversations might go.
Yes, I mean, I think it's the age old question Neil of getting a dollar today versus making that dollar worth more tomorrow, it's a challenging debate.
With our board with investors and that's the crux of our capital allocation process.
The biggest challenge you know as I read sell side notes as an example is is that at this point in the year much of the capital we're putting to work will translate into volumes and cash flows in next year not not necessarily right away.
I think also factor in that we're pretty conservative.
By nature, and so we certainly could give you a scenario that would give you immediate gratification, but we want to make sure. We achieve those things you know before just promising the moon and the stars so.
Trust is a big driver.
And investors should know and trust that these dollars are being put to good work and will drive stronger results and let's put it into perspective too.
We're still going to generate a half a billion dollars in cash this year, even with the extra elective investments. So this.
This isn't a reckless decision I cant tell you empirically that those companies that are focused exclusively on free cash flow have lagged over the short and the long term and those that have gone for broke in China spend and have outperformed certainly in the short term.
But admittedly that's a strategy that's way too risky for.
US and it's been bolstered by strong pricing. So you know over the long term I'm not sure that that's the right strategy either so.
We constantly repeat ourselves, but we're focused on balanced finding a way to generate growth.
And additional recycling of returns, but also never getting over our skis and delivering solid shareholder returns. So I think in the next several quarters I think the logic, both the acceleration, we just announced today as well as the robust cash in the back end will play out for investors.
Great answer thanks, Nick.
Yeah.
Thank you we have next question from the line of Scott Cornell.
RBC capital markets. Please go ahead.
Yeah, Hey, Thanks, guys I'm you know.
Nick maybe I mean can you give us a sense of you know this this I guess joint venture acquisition you. All did I mean, how big do you think that opportunity set is going forwards say relative to where I'd say more of the traditional kind of deals at NOG has done over the last several years.
Yes, I mean, I think it's early days, it's certainly been encouraging in terms of reverse inquiries that we've gotten after announcing the Midland Petro deal that's on the heels of.
Color, but drill cold light.
So we signed up late last year that we're finishing up here and that's frankly been a homerun burden for both the operator as well as northern I think it's unique to us because you need to be able to move the needle for some of these operators.
And you can frame it up in a couple of different ways. You can co bid assets operated assets that are on the market, maybe theres, an independent that doesn't want to issue equity or doesn't want to or can't wear it on their balance sheet and so you can carve out a non operated interest out anything and we can come in underwrite it with their technical team.
And effectively take down a minority interest in that and then subsequent or in parallel with that you can put together the joint development agreement.
Kind of plan the business around it.
Other operators that are out there that have run some failed processes.
Over the past year, whether its drilling obligations or whatever it might be.
In terms of getting kind of the right bid from other operators, where they've got a socialized that with the rest of their inventory and so I think theres, an opportunity to kind of come in and buy down again, an undivided interest minority interests and put together a joint development program.
We've got at.
At least two or three.
But our lives right now I don't know if they'll necessarily meet our return thresholds and we said.
Significant kind of reverse inquiries after the fact so.
It's certainly encouraging but we'll just have to see how that shakes out relative to some of the other.
Typical non op packages that we continue to screen.
Yeah, and do those typically because you know I know there's this reason when you all did had a pretty high working interest and they typically come with high working interest and how does it how do you think of that in terms of like a like a risk profile.
Yes, Sir.
Alright.
But.
I think Scott you have to think about it there's concentration risk and then theres control and timing risk grading. So each set of assets that have similar right. If you buy a traditional non op assets you certainly don't have the same concentration risk in most cases, but you have.
We have to really spend a lot of time on the art and the science of the timing of that development to ensure that we're earning our irr's and so the neat part about it is as we get larger.
More concentrate interests don't really rock the boat and so that timing factor can make up for a lot of those things and that's why you'll you'll notice we're spending a lot of time on Super high quality areas right Youre talking about the guts, probably that some of the best pieces of land in North America, which is why you can and are able to take those risks, but also a project that's over 30% complete so you have one.
Controlling an understanding of how that area is performing already.
And so that can give a lot of competency underwriting I would tell you we're not known for being optimistic here and so I think that Thats <unk>.
Critical to.
To that beginning base, but I think it's going to be in all of the above approach.
Recognize that these projects are a bit different, especially when you're thinking about it not as a 10 year asset, but as an asset youre going to go and go down, but I will tell you.
As it pertains to the Midland Petro project that has the highest underwritten return we've ever.
Ever done.
And so I think while it might seem weird and different and I think over time, it'll it'll prove its fruits to our investors.
Okay.
And when you look at you know obviously a lot of discussion. This this past.
The past quarter on unwell performance for various operators and you know look I know you guys do your diligence to take a look at.
Different types of permitting that your partners are going to do but you know how do you get comfort in sort of that you know kind of more mid to longer term.
Q1 on the quality of inventory that your operators have been in you know in and how do you kind of comfortable with that assessment and maybe I'll leave it with that.
Yeah.
Referring to that project in itself or in general just in general not not any specific project just in general in terms of you know your your partners depth of their world or in the quality of it yeah.
Yeah, Yeah, I mean, I think look we do our own work right.
Every piece of leasehold that we own we draw our own sticks, we have our own you RSV.
Nearly 400 type curves in the Williston alone So we certainly.
With no offense to any particular, operator, but we're not listening to their views on what they think those wells can do or what that inventory will do we do our own work and so.
Every acquisition, we do is bottoms up engineered by our own team I know, Jim do you want to add to that obviously.
Obviously, we are looking at the inventory that we think the operators have lap. We can go out there and we've got everything mapped across the entire basin. So we can look at units have an idea of how many how many years of inventory do you think.
Civic operator has lapsed.
How they might target that and that's part of our proactive.
Management, where we can go in and target specific skus that we know that the operator is going to have to move to.
And the next couple of years to get developed and so we use that to help augment and then on all the acquisitions that we do.
Again, we're using that to augment our inventory so.
All the acquisitions, we've done over the past couple of years I've been to improve the remaining inventory that we've got left in our portfolio.
Got it thanks for that.
Yeah.
Thank you.
Next question from the line of Charles Meade with Johnson Rice. Please go ahead.
Good morning, Nick to you and the whole the whole crew there.
I wanted to go back in and ask something about the Oh about what you're seeing in the Oh, the ground game and if and if there was a little bit of an uptick there. We saw a particular I guess I'm really interested.
How much of it not obviously, you've given the guide for for Cuba, but how much of that of of your four key guidance or you expect to see an uptick and more opportunities to too.
Two electing to wells or participate where other people now thank.
You mentioned in your press release, but I wanted to get an idea of the magnitude.
Yeah, I mean, I think a lot of the raising capex as ground game, that's already been really in process. So there's I would say beyond the normal course business I wouldn't say that there is an anticipation of a material increase.
From here going through the end of the year, Charles I would say this.
But adam or Jim chime in at any point, which is that.
We have found a big return disparity as well as.
Competitive disparity in what I would call a chunkier ground game opportunities. There are a lot of people chasing a 10th of a wellbore of five or 10 acres here or there. What we're seeing are at just tuned to what we were talking about with Scott before in larger.
Good game interests materially higher underwritten returns for us and.
A lot more success rate and so that's that's a good thing but it also means that when you have that success, it's obviously going to be actually more impactful.
Two our capital over time, which is one of the reasons that we sat down with our board and really had to make some tough decisions in terms of how much money. We wanted to spend in the last few months.
Yeah, that's right I mean, it's the competitive universe when you get into these larger more concentrated deals were sub scale non ops frankly don't have the wherewithal to spend the money or don't have the risk tolerance, because they don't have that base and so we've continued to raise our discount rate as we've moved through the end of the year as people have exhausted their budgets.
If successful in that regard.
Okay that is helpful color and then Nick going back to your your convertible bond offering can you can you give us a kind of narrative.
Of your evaluation of your your selection to go with that kind of financing rather than you.
There was some mix of straight equity.
Or and or straight debt and weather.
Whether this was something that did you decided was the solution you wanted and you would looking forward or whether it was the other way around that there may be yet you know the market came to you and said we've got.
We've got favorable terms.
Yeah, I mean, I think let's let's take a step back for like 30000, and so we've been looking at <unk>.
Convertible bonds for Chad and I haven't looked at it for four or five years.
And the various it is a very bespoke instrument.
I had a board member wants to tell me that it sounded like witchcraft, two up to them, which I appreciate.
And the complexity is interesting look the reality is that you can make the convertible bond whatever you want and obviously the embedded optionality and it provides a lower cost which is particularly sensitive in an interest rate.
<unk> environment like we're in today, but ultimately if you look at the instruments that we chose for this bond and Chad mentioned this in his prepared comments effectively we've been able to boost at 252, plus dollar conversion rate, but even at that conversion rate. There is no dilution effectively we pay back the bond and cash.
And so therefore, if you and Charles I think I provided you with some of the kind of sell metrics on how this works, but ultimately it provides all the good things of our convertible bond, which has a lower coupon.
With with really.
Minimal dilution on the backend and because we used a cap call where we can control. It we can always over time move and manage that Matt cap call to prevent any dilution that we so desire.
With a minimal impact to the overall cost of capital. So so we've really thread the needle here I will tell you.
The convertible bond market is heavy and checking and <unk>.
Biotech and so they're not used to profitable corporations being part of it to the demand was off the charts. We recognize when you do and priced this and just the mechanics of the derivative is going to hurt your stock for a day, but I think as you saw it was really a one and done type of scenario when it goes through there I mean, when you compare it to common equity we don't really feel like this one.
Isn't really a function that we felt like we needed to manage our leverage ratio is in fact, they'll flashed up for a quarter or two but we didn't really need an equity injection.
And I think that we feel like the high yield bond market is too expensive just simple and so this instrument provided all the good was really none of the bad and I think it was a fairly obvious choice admittedly a more complicated.
Thank you Nick.
Thank you.
Again to ask a question box Defense My press Star one on <unk> for now.
Next question from the line of Derrick Whitfield with Stifel. Please go ahead.
Oh, Thanks, good morning all.
Good morning.
Throughout earnings.
Thanks, Scott touched on this earlier, but couldn't element has been a subject of focus particularly in the Midland.
Based on industry commentary.
Regarding your basket project could you speak to the co development strategy there.
In terms of.
We will spend you know pretty much every you know along are you just talking about in terms of structure Derrick or in terms of communication and all those sort of things.
More associated with how are you going to develop the the suite.
A intervals.
Yeah, Yeah. So you know.
We began negotiations and discussions with with.
With N P D C back in June .
And they laid out their view of development and optimal development and we spent a lot of time with our advisor and our technical team.
Reviewing that and it's candidly it's changed like anything else over time, and then ultimately be memorialized. It one was built a joint operating agreement.
Which you know both gives US you know obviously ripped.
Ripcord features and protections along the way, but also a strong level of confidence in how it's developed I think it's really important to and these units to really develop them all at once to maximize the <unk> and the ultimate Irr's on those wells and that was something that we very much reach you.
Both experiential event just in terms of how the Midland and communication between those units between those well bores.
So it's very important I'm sorry go ahead no no that's right I mean, the short answer is that's exactly what's going to happen and what they've done and you can see it on a gun barrel in the presentation.
Drilled the deep rights.
<unk> acreage then the offsets in order to mitigate any sort of frac communication with offset operators and then they are effectively just moving east to west across the board.
And you can see this is a four unit development. So one of the units is already fully developed across the entire suite of zones. So we can see the impact of the parent wells versus the child wells and going forward as co developed we can model that out with our expectations and obviously, we're now as Nick mentioned earlier were always a little bit conservative. So I think here in this area as well where we're being.
With our assumptions here and there's probably some upside to what we think the actual results will be.
That's great and maybe just to build on where you ended there in light of of how active you guys have been an A&D I wanted to ask if you've had a chance to perform look backs on your 2021 acquisitions and see how close your projections, where I'm sure as you guys submitted you've been quite conservative in your assessments.
I mean I can tell you universally I think we've destroyed every single.
Forecast that we put forth I mean, I think we mentioned it on our in my prepared comments about the Marcellus and just the overall performance remember, we underwrote that as a chevron still operated at I think both performance and cadence of development on our Veritas, which is our largest one has materially exceeded our estimates I mean, I think literally to go deal by deal.
Over the last year, and a half and frankly I think.
Almost every transaction we've done since 2018.
I think of you know, we don't talk about it at a time, but the flywheel transaction. We did lap back in 18, which is heavily leveraged vantiv has turned out to be a home run and they've been one of our marquee operators in the Williston over the last year or two.
Terrific. That's very helpful. Thanks for your time.
Thanks Derek.
Thank you we have next question from the line of John Freeman with Raymond James. Please go ahead.
Hey, good morning, guys.
Alright.
What's happening.
The first thing I wanted to touch on obviously you have done a remarkable job growing the base dividend over the.
Passenger plus and I, just you know a year ago roughly like last December you. All you all had a presentation, you'll put out that sort of gave them sort of more detail and kind of look around the base dividend growth plan and kind of how you all thought about.
The structure I, just sort of wanted to revisit that that kind of a neutral concept. So.
Initially that was based on $50 oil $3 gas and you basically said that price deck you'd be able to grow kind of 20%.
On average kind of quarter to quarter growth rate through 'twenty, three and then that was sort of a quaint and 23 into like one third of your free cash flow.
After maintenance capex at that price deck.
I'm just trying to get a sense for obviously are almost a year ahead of schedule combination.
Mainly yes, M&A has obviously been much more.
Our assuming you're not planning, which didn't assume any M&A, but when I think about like going forward. Obviously, you've made it clear kind of what your view is on the special dividend, but should we think that like on a go forward basis. The base dividend, it's always going to kind of run at kind of that.
Rough idea of a price tag it to 15, three a third of free cash flow post maintenance capex or is there maybe a bar.
Not at all about longer term, you know like English large caps do and having this kind of a fixed plus variable component or just assuming the base dividend.
It is what it is and as you do acquisitions, maybe that kind of goes up with it.
You keep the conservative price stack, and then you sort of layer on from time to time the buybacks.
Just trying to get some more color around how you think about long term could you. All are obviously been way ahead of when you all originally projected.
Yeah, I mean, I think we noted we noted in our.
Quarterly presentation I think this quarter's dividend is about 43% higher than what we promised last December when we.
Launched the plan.
I think it's a little more complicated John in the sense that.
We want to provide a solid and growing dividend I think the rules that you're discussing are are.
Our healthy and consistent and true.
But also.
We think about it too in terms of.
What is the yield you are providing to investors too much yield is not a good thing for the business long term and too little yield is not a good thing I mean, I think we're just sounds you know sort of boilerplate, but we really are focused on delivering that.
The best risk adjusted total return value proposition for the stockholders in this.
No. It means you know.
Consistent well under underwritten base dividend.
Premium cash flow growth. It is one of the highest base dividends.
In the space and that's partly because I think we have higher our oce than average.
And I think it's a disciplined approach from acquisitions over the last two years as well.
I think we can continue to drive capital allocation balancing current income with future cash flow growth.
And again targeting that superior total return.
But I think they are out in the public Forum and I think we've targeted by the end of next year to get to about 37 cents a share per quarter.
And we've fairly consistently accelerated upon those plans.
And so if and as we inch achieve those internal goals.
We hope to keep delivering better returns, we may shift our capital allocation over time, though because of the factors that will drive that will be the valuation of the stock the yield of the stock and the opportunity set in front of us in totality I'll I'll take dynamism over kind of dogmatic plans any Dave from a long term value creation perspective I think.
People Love formulas and I think there are formulas you can set us baselines, but I think flexibility and making the best decision for the business over the medium and long term will Trump that overtime.
No I appreciate that Nick and then just my follow up.
Just touching back on M&A again.
Last quarter.
In August he mentioned that there was just a number of sellers out there with with unrealistic expectations you talked about how they can know the bid ask spread was very real.
It's just I guess sort of remarkable Justin from from August .
Now what you all did with those three pretty meaningful acquisitions during the quarter I'm just trying to get a sense of like what do you think sort of changed like is it.
Back entities, it just need to monetize or just.
Just something that caused all of a sudden for a bunch of things that kind of a domino for you all to be a success.
Successful as you all were on the on the M&A front.
Yes.
I'll give my my 50 commentary and let Adam finish it up but I think my view is a lot of this is timing youll get a lot of bluster and then people you know.
Threatened and say, we're going to go run a process. Let me say sure go ahead, and then we come into the process and we realize whether we had the highest price or not we're certainly the most viable and likely to close.
I would say that in the recent transactions when you do one.
It's kind of funny, you do one and it actually seems to exert pressures on the others because they're afraid that then you're going to be out of the market and suddenly people are willing to negotiate.
So I would say that as we've had success in those few it has tended to actually bring down the expectations from others in our opinion.
But honestly we were always.
Guys might be surprised at how many transactions we were able to accomplish I think we would be just as equally surprised.
We don't go into this with a fairly not I don't want to call. It mean spirited, but fairly mechanical approach sometimes it works most of the time it doesn't and when it works and in rapid succession.
Color are surprised and we certainly don't go looking for this.
To finish out two.
Two of the three so effectively six to nine months from now.
Start to finish and so.
The next point a bit unexpected we would've been thrilled to have one of these.
So the fact that we're able to tuck in all three is a bit coincidental in terms of that.
Signing them up on top of each other the third acquisition was frankly, a group that we have done.
Prior acquisition with.
The prior years and so that was.
Easy in terms of prosecuting a negotiating the PSA in particular just to take the same one off shelf.
And as we look forward.
I think.
Or look back in terms of the tracking list last quarter or.
This year. These were ranked one two and three is called the most desirable in terms of.
Asset quality and balance.
As it stands today theres, probably another $2 billion worth of.
Five opportunities that are out there.
But the quality of the assets I think is hard to compare with what we've been able to sign up to date and all of that said these come in in a linear fashion and so to the extent that there is something compelling, we'll certainly be screening yeah, and I mean, just to give you a frame like how how much of a crap shoot this can be sometimes.
You know there was at Williston asset for sale this summer and I think so.
Someone outbid us by close to 50% or 40% for it and it's an asset that we were in two thirds of the properties and so you know people have different views on value.
If someone wants to.
We're happy for the seller, if they can get that value and we're certainly happy not to have it if it's going to trade for that value and so like I said, we're pretty mechanical and sometimes we have success in a lot of times, you're a failure and it's just the way the cookie crumbles.
Thanks, guys well done.
Thanks, John .
Thank you.
We have next question from the line of Donovan Schafer with Northland Capital markets go ahead.
Hey, guys. Thanks for taking the questions.
And the Q2 call you guys talked about I think as an example, you mentioned an assay that came across your desk for a two mile lateral that was like $16 million and you went non consent seems sort of like a no brainer, but I've also heard that sometimes operators might inflate their your fees is a way.
<unk> two <unk>.
Hmm.
Sort of discourage the non operated interest holder.
From participating so I guess first my question is just is that kind of true where you might get some inflated if you use where they're trying to kind of tricky.
Participating.
And if it if it is then how do you.
No.
Difference in those cases, whether you should go non consent or whether they're just kind of trying to fool you and then I guess also if theres a competitive advantage, there where someone that might get scared away.
By a pad it out for you, but you can look at it and say no no no. We know we can see through this so just any clarification on that or if that's even a thing.
Yes.
We certainly see it from time to time, what I would tell you is that's a very slippery slope. Because these operators are legally obligated to give us their best estimate and so they're doing that they're going to create a whole host of other problems for themselves.
It's a small universe people talk.
We've had that happen.
Even though it's been a few years at this point, we approached the operator.
They kind of went about face and reissued.
So I think you know buying.
By and large they are certainly contingencies within <unk>.
And those are things that our engineers are looking at on a line by line.
Acis.
But generally not seeing that sort of trickery.
Going on in the space because.
The ramifications are.
Hi.
How did you say Don it okay. That's it for an almost or almost 9000 wells you have 100 operators to generate $1 billion in cash flow here.
I don't think that.
High cost A&P spend that scare us because we are in all of those wells. If we see something that looks out of school or data is kind of tell us in advance.
All right.
And we'll see you can look at it on the flip side youre going to have a certain operators that have.
Drinking your own Kool aid.
From a well cost standpoint.
Having that data.
Really understand which operators have the propensity to overrun is probably even more important.
Okay. Okay. That's helpful and then as a follow up it looks like you had some good Marcellus production that came in during the quarter.
I'm just curious was that you know on acreage that you already had in place at the end of the second quarter or was some of that from you know incremental non op opportunities. They have to use or things that you were able to sort of pick up during the quarter.
No. It's all it's all organic we we don't we have not really had an active ground game.
Our Marcellus properties, it's a large REIT joint development with EQT.
Okay, and then if I could just squeeze one more in real quick so the in the M. P. D C. The mascot project.
You know, it's you know and I may be completely off the mark on this but my you know my intuition or just sort of you know, Texas is a super friendly jurisdictions. So that's all really positive but it did it did it you could see that you sort of drilling under the city of Midland There and I'm wondering.
You know are you guys in a better position to kind of underwrite that if there are any you know is that the type of thing that would discourage other potential bidders, but you can look at it and think through it and say well you.
There's.
I don't know, if there's any kind of risk or concern.
Maybe other people have a superficial reaction the same way I'm kind of thinking about it on the face of it.
I'll give you the easy answer to that which the answer is no I think that while it's under the city of Midland The landed service, where it's being drilled from us outside of the city of Midland Pi.
Ryanair endeavor, but these acreage and are doing the exact same thing I think what gave US an advantage in this was that the operator did not want to sell the entire project. They wanted to stay in it.
And so I think it's just as simple as that and that ultimately gave us a strategic advantage.
And believe me there were plenty of operators.
Ultra circling hoping to take the entire project.
Okay, Alright, great. That's very helpful. Thank you guys and congratulations on the quarter I will take the rest offline.
Okay.
Thank you we have a next question from the line of Noel Parks with Tuohy Brothers. Please go ahead.
Hi, good morning.
Good morning Noah.
Just a couple of things.
You know what are you talking about the process of coming up with what 'twenty 'twenty threes are going to look like on the budget side I'm just curious about your degree of visibility.
And I'm just wondering if you are in the position of waiting for more.
The input into your your own.
Calculations.
And whether what you're seeing for AF needs are looking relatively stable or in line with your expectations or or sort of trending up and I just ask about the A&P tiny because.
Operator.
Been pretty unanimously reluctant to give much of an idea of budgets.
With many many deferring until until early 'twenty me. So I was wondering if that was rippling through into sort of your information flow.
I mean, I would say from a visibility perspective, we'll enter 'twenty three with the highest level of visibility we've ever had as a company.
Oh anchored by a bunch of CT projects, but also just given the levels of A&P activity, we're seeing right now that it's really targeted towards 2023.
I think the question that really surrounds our 2023 budgeting knoll as is very simple, which is what level of activity and production do we want to target like what do we think is the appropriate way and I think that there are various schools of thought within the business and I think that's what's driving why we want as much time as we do.
I don't know Adam or Jim if you want to add to that.
No I mean from an activity standpoint, I think we get double the gross fees.
Sure.
You know kind of quarter over quarter.
No.
Relatively flat average working interest in a lot of that is driven by the Williston.
Operators kind of get ahead of things before winter weather sets in and all of that is because the 2023 activity and then the next one I think we need to be dynamic in terms of the acquisitions that we.
Signed up the joint development agreements that we've got in place and then.
What role does the ground game and the opportunities look like as we move into 2023, so it's a matter of balancing.
All of those three pronged actively managing it all in high grading.
For that matter.
Great. Thanks, and then I just wanted to sort of in a bit of a housekeeping turned to the the hedges and you mentioned. The addition of some really attractive collars and I.
I think with the different deal announcements you've done you updated the hedge in full accordingly.
I'm a little.
Unclear about sort of the adds over the year.
Dave.
The numbers you put out because it does seem to me that there was maybe a little bit of shifting in the numbers in the presentation.
I don't know if it was a little bit of trimming here and a little bit of adding there but.
Any any insight on that would be great.
Yeah, I don't know, what you're talking about there Noel but.
We did add some pretty attractive.
Maybe it's just the timing of the presentations that we did.
I don't recall I don't know what you're talking about.
Yes.
Now the things that I saw were just like Super minor so maybe navies.
Just been you know a.
Rounding error you have though we do have one small brent linked hedge which could maybe improve the dollar figures ever so slightly that's the only thing I can think of I mean, I think it's like a thousand barrels a day or something next year right. So yeah. That's the only thing right.
Oh right I think that was just.
So when I saw on the Brent Ti spread I don't know.
We're talking about pennies, though yes.
Totally I totally to use what's in what's in our release.
Okay, great and those are all us of as of 930 right.
Those will be as of now.
Good day.
Oh, Okay. So a couple of days ago, yes.
Great finish, though okay. Thanks, a lot that's all for me.
Thank you ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to Nick O'grady CEO for closing remarks over to you Sir.
Thanks, everyone for joining us this quarter.
Work extremely hard and we'll see you on the next one.
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Ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time and thank you for your time.
Okay.
Yeah.
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