Q3 2022 Northern Oil and Gas Inc Earnings Call
[music].
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 formal 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 Rum slow Chief legal officer. Thank.
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.
Nick will provide his remarks on the quarter and our recent accomplishments.
And Adam will give you an overview of operations.
Last Chad, who will review, our third quarter financials and updates to 2022 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.
We generated a company record $292 million of adjusted EBITDA, This quarter and well over $100 million in free cash flow the highest third highest in company history, respectively.
Just 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 'twenty to 'twenty two.
Leverage at the ended the quarter based on 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.
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 $509 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.
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 outperformed and E and 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 acquisition 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 our 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 <unk>.
<unk> 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.
During the third quarter and October we repurchased and retired another $10 million of our 8% 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 opportunities.
He used to repurchase the senior notes.
On the equity side, we've retired $109 million year to date, including $51 5 million of common stock the remainder being preferred stock.
As a reminder, we have $98 5 million remaining on our common stock buyback authorization.
C <unk>.
Lastly, we 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 spur.
Dividends structures, which can introduce unpredictability and volatility.
We announced yesterday that we have executed a mandatory conversion of our preferred stock into common stock.
It 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. This 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. Two net wells are 60% quarter over quarter increase.
Permian completions are the primary driver contributing over 70% of the addition.
We had a nearly 100% increase over the prior quarter.
Our operators in the Permian are driving efficiencies in order to keep well costs are 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 basin has increased our overall wells in process to 61 five net wells.
An 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 and 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 to date 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 III 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 highlights the expanding suite of opportunities available to northern as we reap the benefits of reaching a new scale and the non op states.
These J D add another arrow to the quiver, where we are.
Greater effective governance rights over the operating partnership include.
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 of 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 it's 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, it's kind of 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 NRG.
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 are at a premium the WTO.
As a result, we are updating our oil differential guidance to a range of $3 to $4 per barrel. Additionally, we are tightening our gas realization guidance as well by taking the low end of our expected range up to 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.
There are also expect to boost our 2022 production exit rate and reduce our 2023 maintenance capital requirements.
On slide seven of our earnings presentation on our website, we provided a walk from the prior midpoint to the current midpoint of guidance.
The balance sheet is in great shape.
Closed on a convertible notes offering shortly after quarter end that 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 potentially 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 notes and continue to monitor the interest rate environment as well as our bond levels.
We 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 that allow us downside protection with the opportunity to participate in upside if prices rally.
We continue to hedge oil 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 in October a full month from our two acquisitions that are expected to close in December .
But does not include our pending.
<unk> 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 LOE 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.
<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 and 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.
If anyone would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
We have our first question from the line of Neil <unk> with <unk> Securities. Please go ahead.
Good morning, Nick and team.
Guys. My first question is on 23, 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 latest increase in how <unk>.
Could shape 23 production and maybe more importantly, what type of Capex increase you all might entertain next year.
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.
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.
We have competitive reinvestment opportunities for that it 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.
Your prepared just just on sort of production or Capex guidance are you able to say just what youre able to lift that.
Maybe broaden comments on what that might go up.
We just talking about inflation.
Yeah.
Yes, driving that are you.
That would probably be a bit.
Mark.
Specific question.
Yes, 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 I think that's a deceleration certainly year over year.
I think we look forward to coming back 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 agree that it is somewhat.
Celebrating and operators are enterprising.
Enterprising folks and Theyre figuring out ways to to offset some of that internal Adam do you want to add to that.
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 caution at this point.
Okay, and then Nick something you just said.
On the growth versus shareholder return.
These days I don't think Brian on the call anymore, but I'm just wondering because you mentioned you are having the conversation going forward with the board when addressing 23 production growth versus shareholder return I'm, just wondering kind of how those conversations go I know.
For a long time at.
At times the board favored maybe more shareholder return, but 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 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 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 we 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 isn't a reckless decision.
Can't 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 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 of both the acceleration, we just announced today as well as the robust cash in the backend will play out for our investors.
Great answer thanks, Nick.
Thank you we have next question from the line of Scott <unk>.
RBC capital markets. Please go ahead.
Hey, Thanks, guys.
Nick maybe can you give us a sense of I guess joint venture acquisition you. All did I mean, how big do you think that opportunity is going forward say relative to what I would say more of the traditional kind of deals that <unk> 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 the drill co light.
We signed up late last year.
We're finishing up here and that's frankly been a homerun burden for both the operator as well as <unk>.
Northern I think it's unique to us because you need to be able to move the needle for some of these operators.
You can frame it up in a couple of different ways. You can co bid assets operated assets that are on the market. Maybe there is 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 and underwrite it with our technical team.
And effectively take down the minority interest in that and then subsequent or in parallel with that you can put together the joint development agreement and kind of plan the business around it.
Other operators that are out there that have run some failed processes.
Over the past year, whether it's drilling obligations or whatever it might be.
In terms of getting kind of the right bid from other operators, where they've got to socialize 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 joint development program.
We've got at.
At least two or three.
But our lives right now I don't know if Phil necessarily meet our return thresholds and we said.
Significant kind of reverse inquiries after the fact so.
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.
And do those typically because I know there's this reason when you all did had a pretty high working interest and they typically come with higher working interest and how does it how do you think of that in terms of like a like a risk profile.
Yes.
Sorry.
But I.
I think Scott you have to think about it there's concentration risk and then there is control and timing risk right and so each set of assets that have similar right. If you buy a traditional non op asset you certainly don't have the same concentration risk in most cases that you have.
We have to really spend a lot of time on the art and a science at the timing of that development and ensure that we're earning our IRR.
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 Thats why youll notice. We are 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.
Ill controlling an understanding of how that area is performing already.
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.
Critical to.
To that beginning phase, but I think it's going to be in all of the above approach.
Recognize that these projects are a bit different, especially when youre 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 returns ever.
Ever done.
And so I think while it might seem weird and different and I think over time, it'll prove its fruits to our investors.
Okay.
And when you look at obviously a lot of discussion this.
Past quarter on well performance for various operators and 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 how do you get comfort in sort of that kind of more mid to longer term view.
<unk> on the quality of inventory that your operators have in.
And how do you kind of comfortable with that assessment and maybe I'll leave it with that.
Yes, you're referring to that project in itself in general.
In general not any specific project just in general in terms of.
Your partners depth of their well during the quality of it.
Yes, 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. We will do we do our own work and so.
Every acquisition, we do is bottoms up engineered by our own team and Rajiv you want to add to that.
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 a spin.
<unk> operator has last holiday.
How they might target that and that's part of our.
Proactive management, where we can go and target specific skus that we know that the operator is going to have to move to.
In 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 have been to improve the remaining inventory that we've got left in our portfolio.
Got it thanks for that.
Yes.
Thank you.
Next question is from the line of Charles Meade with Johnson Rice. Please go ahead.
Yes, good morning, Nick.
The whole crew there.
I wanted to.
Go back and ask something about the about what youre seeing in the ground game.
There was a little bit of an uptick there we saw in <unk> I guess I'm really interested.
How much of it obviously, given the guide for <unk>, but how much of that.
Of your <unk> guidance are you expect to see an uptick and more opportunities to.
Two electing the wells or participate where other people know.
I think you mentioned this in your press release, but I wanted to get an idea of the magnitude.
Yes, I mean, I think a lot of the.
<unk> Capex is ground game, that's already been really in process. So there is I would say beyond the normal course business I wouldn't say that there is an anticipation of a material increase from.
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 well bore five or 10 acres here or there.
What we're seeing are.
Attuned to what we were talking about with Scott before in larger ground game interests materially higher underwritten returns for us.
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.
Yes, 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.
<unk> successful in that regard.
Okay.
Helpful Color and then Nick going back to your your convertible bond offering can you.
Can you give us.
Kind of narrative.
Of your evaluation of your selection to go with that kind of financing rather than either some mix of straight equity.
Or <unk> straight debt and weather.
Whether this was something that did you decided was a solution. You wanted you would looking forward or whether it was the other way around that that maybe the market came to you and said we've got <unk>.
We've got favorable terms.
Yes, 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 have been looking at for four five years.
And the various it is a very bespoke instrument.
I had a board member once tell me that it sounded like witchcraft to it which I appreciate.
<unk>.
And the complexity is interesting look the reality is that you can make a convertible bond whatever you want and obviously the embedded optionality and it provides a lower cost which is particularly sensitive in an interest rate.
Rising 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 payback 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 of 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 overtime to 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 in tech.
In biotech.
Biotech and so they are not used to profitable corporations being part of it to the demand was off the charts. We recognize when you do an price 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 scenario and it goes through there I mean, when you compare it to common equity we don't really feel like this.
Isn't really a function that we felt like we needed to manage our leverage ratio is in fact, the flagship for a quarter or two but we didn't really need an equity injection.
And I think 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.
To ask a question participants May press star one on your Touchstone for now we have next question from the line of Derrick Whitfield with Stifel. Please go ahead.
Thanks, Good morning all.
Good morning.
Throughout earnings I.
I think Scott touched on this earlier, but kind of element has been a subject of focus particularly in the Midland.
Based on industry commentary.
Regarding your mascot project could you speak to the co development strategy there.
In terms of.
We will spend.
Pretty much every.
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 youre going to develop.
The suite.
A intervals.
Yes, yes, yes, so we began negotiations and discussions with.
With MPC 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 we memorialized. It one was built a joint operating agreement.
Which both gives us obviously.
<unk> 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 in these units to really develop them all at once to maximize the <unk> and the ultimate IRR on those wells and that was something that we very much <unk>.
Experiential event, just in terms of how the Midland and communication between those units.
Those well bores.
So it's very important I'm sorry go ahead, no thats right I mean, the short answer is thats exactly whats going to happen and what they've done and you can see it on a gun barrel in the presentation.
Drilled the deep rights.
PLE 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, but one of the units is already fully developed across the entire suite of zones. So we can see the impact of the parent wells.
The child wells and going forward as co developed we can model that out with our expectations and obviously we are now as Nick mentioned earlier, we are always a little bit conservative. So I think here in this area is while we're being conservative 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 acquisition you can see how close your projections, where I'm sure as you guys had noted.
<unk> been quite conservative in your assessments.
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 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 literally if you go deal by deal.
For the last year, and a half and frankly I think.
Almost every transaction we've done since 2018.
We don't talk about it at a time, but the flywheel transaction, we did back in <unk>, 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 Thats 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, good morning, Jonathan Chaplin.
The first thing I wanted to touch on obviously you have done a remarkable job growing the base dividend over the.
The past year plus.
A year ago, roughly like off to somebody else.
Presentation, you'll put out sort of game.
More detailed kind of look around the base dividend kind of growth plan and kind of how you all thought about.
The structure and I'm, just sort of wanted to revisit that kind of initial concepts. So.
Initially that was based on $50 oil $3 gas.
Basically said at that price that keeps able to grow kind of 20% on average kind of quarter to quarter growth rate through 'twenty, three and then that would sort of equate 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.
Mainly M&A has obviously been much more.
Our assuming that plan, which didn't assume any M&A.
Think about going forward, obviously, you've made it clear kind of what your view is on the special dividends, but should we think 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 to <unk> 53, a third of free cash flow post maintenance capex or is there.
Any thought at all about longer term with the large caps do and having this kind of 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 back 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 because you all have obviously been way ahead of when you all.
Originally projected.
Yes, 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 promise 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 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 are.
It sounds sort of boilerplate, but we really are focused on delivering that.
The best risk adjusted total return value proposition for the stockholders in this.
It means.
Consistent well under underwritten base dividend.
Premium cash flow growth. It is one of the highest based dividends.
The space and that's partly because I think we have higher <unk> 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 you've targeted by the end of next year to get to about 37 a share per quarter.
And we've fairly consistently accelerated upon those plans.
And so if and as we 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 take dynamism over kind of dogmatic plans any Dave from a long term value creation perspective I think.
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.
I appreciate that Nick and then just my follow up.
Just touching back on M&A again.
Last quarter.
August you mentioned that there was just a number of sellers out there with unrealistic expectations you talked about how the bid ask spread was very real.
Just I guess sort of remarkable just in 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.
Private backed entities, it just need to monetize or just.
Something that caused all of a sudden for a bunch of things that kind of a dominant on for alethia.
Success with you all were on the on the M&A front.
Yes.
Ill 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.
Threatened and say, we're going to run a process. Let me say sure go ahead and then we can.
Come into the process and we realized whether we have the highest price or not we are certainly the most viable 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 are afraid that then you are going to be out of the market and suddenly people are willing to negotiate.
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 are always with you.
You 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 end when it works.
Rapid succession that.
Color are surprised we certainly don't go looking for this.
To finish out two.
Two of the three so effectively six to nine months from.
Start to finish 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 in negotiating the PSA in particular just to take the same one off shelf.
<unk>.
We look forward.
I think.
Back in terms of the tracking list.
Yes.
Or.
This year. These were ranked one two and three is call. It the most desirable in terms of <unk>.
Asset quality and balance.
As it stands today, there is probably another $2 billion worth of <unk>.
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.
All of that said these come in in a linear fashion and so.
But there is something compelling, we'll certainly be screening.
Just to give you a framework.
How much of a crap shoot this can be sometimes.
There was at Williston asset for sale this summer and I think.
Someone outbid us by close to 50%, 40% for it and it's an app.
Asset that we were in two thirds of the properties and so 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 have a failure and it's just the way the cookie crumbles.
Thanks, guys well done.
Thanks, John .
<unk>.
We have next question from the line of Donovan Schafer with Northland Capital markets. Please go ahead.
Hey, guys. Thanks for taking the questions.
In 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.
As a way to.
Sort of discourage the non operated interest holder.
From participating.
So I guess first my question is that kind of true where you might get some inflated if you use where they're trying to kind of <unk> not participating.
And 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 there is a competitive advantage, there where someone that might get scared away.
By a pad at AFP, but you can look at it and say no no no. We know we can see through this.
Any clarity 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.
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.
It's been a few years at this point, we approached the operator.
They kind of went about face and reissued.
So I think by.
By and large they are certainly contingencies within <unk>.
And those are things that our engineers are looking at on a line by line.
<unk>.
But generally not seeing that sort of trickery.
Going on in the space because.
The ramifications are.
Hi, how are you.
Say don't.
Earn almost.
Almost 9000 wells they have 100 operators to generate a $1 billion in cash flow here.
I think that the high cost A&P spend that scare us because we are in all of those wells. If we see something that looks at a school or data is kind of tell us in advance.
That's right I mean, I would almost you can look at it on the flip side youre going to have certain operators.
Drinking your own Kool aid.
From a well cost standpoint.
Having that data to really understand which operators have the propensity to overrun is probably even more important.
Yeah.
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.
So I'm just curious was that on acreage that you already had in place.
The end of the second quarter or was some of that from incremental non op opportunities. They have to use or things that you were able to sort of pick up during the quarter.
No Don it's all it's all organic.
We don't we have not really had an active ground game.
In our Marcellus properties, it's a large rate joint development with EQT.
Okay.
If I could just squeeze one more in real quick so the and the MPD see the mascot project.
Yes.
<unk>.
I may be completely off the mark on this but my intuition or just sort of.
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 into 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.
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.
There is.
I don't know if theres any kind of risk.
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.
And year 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 Thats very helpful. Thank you guys and congratulations on the quarter I will take the rest offline.
Okay.
Thank you next question from the lineup Noel Parks with Tuohy Brothers. Please go ahead.
Hi, good morning.
Turning now.
Just a couple of things.
You know what are you talking about the process of coming up with what 2023 is.
We're going to look like on the budget side I'm just curious about your degree of visibility this year and I'm. Just wondering if you are in a position of waiting for more.
The input into your your own.
Calculation.
And whether what you're seeing for these are looking relatively stable or in line with your expectations or or sort of trending up and I just ask about the A&P timing because.
Operator.
Pretty unanimously.
To give much of an idea of budgets.
With many many deferring until until early 2000, <unk>. So I was wondering if that was rippling through and to sort of your information flow.
And now I would say from a visibility perspective will enter 'twenty three with the highest level of visibility we've ever had as a company.
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 Noel is very simple, which is what level of activity in production and we want to target. 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 ASP.
Activity standpoint, I think we are done.
Well, the gross fees or close to it.
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 all of that is 2023 activity and then the next one I think we need to be dynamic in terms of the acquisitions that we do.
Signed up joint development agreements that we've got in place and then.
What role does the ground game and the opportunity set 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.
Just wanted to sort of in a bit of housekeeping turning to the hedges.
And you mentioned the addition of some really attractive collars.
<unk>.
I think with the different deal announcements you've done you updated the hedge in full accordingly.
I'm a little unclear about.
As ever.
The effective date of that.
The numbers you put out.
To me if 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.
Yes, I don't know, what you're talking about there Noel but.
We did add some pretty attractive collars.
Maybe it's just the timing of the presentations that we did.
I don't.
I don't know what Youre talking about.
Yes.
Now the things I saw were just like Super minor so Nate maybe.
Just Ben.
Rounding error, you have though with you.
One small Brent linked <unk>, 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 1000 barrels a day or something next year right. Yes, that's the only thing right.
I think that was just so when I saw on the Brent Ti spread I don't know if thats.
We're talking about pennies, though yes.
I would tell you use what's in what's in our release.
Okay, great and those are all.
As of 930 right.
Those will be as of.
Good day.
Oh, okay, Okay yeah.
Great. 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 will work extremely hard and we'll see on the next one.
Okay.
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Okay.
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