Northern Oil and Gas Inc. Q1 2023 Earnings Call

Greetings and welcome to northern oil and gas first quarter 2023 conference call.

At this time all participants are in a listen only mode.

A 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.

A reminder, this conference is being recorded.

It is now my pleasure to introduce your host I've only in Florida, Vice President of Investor Relations.

Thank you you may begin.

Thank you operator, good morning, and welcome to our first quarter 2023 earnings Conference call yesterday. After the market closed we released our financial results for the first quarter.

To access our earnings release and presentation on our Investor Relations website, our Form 10-Q will be filed with the FCC, but in the next few days.

I'm joined this morning by Energy's Chief Executive Officer, Nick O'grady, Our President Adam Jeremy <unk>, Our Chief Financial Officer, Chad Allen, Our Chief Technical Officer, 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 and what Chad will review, our first quarter financials.

After our prepared remarks, the executive team will be available to answer any questions you.

Before we go any further let me cover our safe Harbor language. Please be advised that our remarks today, including the answers to our 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've 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.

Closest GAAP measures can be found in our earnings release.

With that let me turn the call over to Nick.

Yeah.

Thank you everyone welcome and good morning, everyone and thank you for your interest in our company.

Given the strong consistent results and lack of big changes this quarter I'll be more grief than usual I'll get right down to it was only three key points.

Number one.

Keller execution.

And our first quarter of the year Energy's National diversified model delivered once again better than expected production and cash flows.

We continue to fire on all cylinders.

Our mascot acquisition was closed on time and our assets are on track to deliver growth throughout 2023.

We generated record adjusted EBITDA in the quarter and record oil and total volumes despite significantly lower commodity prices.

With the closing of our mascot acquisition this quarter, our <unk> leverage ratio was down sequentially.

Our capital spending is right on track at about 20% at the midpoint of our guidance and in line with our anticipated 60% first half weighted.

And a year of notably weak gas pricing our oil properties have picked up the flash with our oil cut rising materially in the past few quarters.

Number two growth.

And our Midland year for commodity pricing.

Seeing tremendous opportunities on all fronts.

From our organic properties from our ground game and from an ever expanding variety of both prospects.

Given our size scale and diversity as the largest national non op franchise.

Unique in having access to the best of the best properties across both commodities and multiple basis.

Additionally, we've expanded our bolt on opportunities that beyond our traditional fractional non op asset acquisitions.

Are suing other growth avenues, including partnerships directly with the operating groups as seen with M. BDC co bidding in M&A as apartments operators with similar economic discipline and other unique structured solutions to deliver solid returns for our investors and drive the compounding of returns overtime.

Adam will talk about it further but we continue to make traction with our operating partners as a superior capital provider for the co development of oil and gas assets, we have the scale and the capital to provide solutions for these operators in ways, others can't and we pride ourselves on being a straightforward and reliable counterparty.

With a track record of execution.

Number three capital allocation.

Our goal is to provide our shareholders with the highest possible total return over the long term.

We have implemented a multi pronged approach, including a share repurchase program repurchasing debt securities that discounts and increasing the cash dividends for our common stockholders.

We recently announced a 9% increase to our common stock dividend for the second quarter of 2023, our ninth straight increase.

Additionally, we tactically repurchase common shares during periods of volatility.

Since we initiated our dividend program and share buyback in May 2021, we've returned well north of $200 million of investors in our view at N. O. G is that our scale should help us build a shareholder return program that can grow over time.

As always we will be mindful of risk and leverage but the power of what we built should continue to deliver an attractive risk adjusted total return as the company under our management has consistently done over the past five and a half years.

During our tenure Nrg's total return outperformance versus the upstream sector has been significant driven.

Driven by our capital allocation strategy rooted and dynamism.

The flexibility inherent in our strategy as well as our business model has allowed us to adjust our capital allocation to where the greatest opportunities exist at any point in time, all the while providing a solid and growing cash return via the dividend.

We continue to see this is superior to more dogmatic return programs and the results in the marketplace speak for themselves.

In closing 2023 is off to a strong start for the <unk> and we remain confident that we can continue to deliver growth opportunities in the coming years.

I'll remind you as I always do that we are a company run by investors for investors with that I will turn it over to Adam.

Thanks, Nick.

The first quarter was seasonally strong as we kicked off 2020 threes operations.

Turn in lines for the quarter as expected, adding approximately 13.1 net wells to production organically, which was up over 20% versus Q1 of last year, despite multiple periods of inclement weather.

The Williston made up approximately three quarters of the organic activity driven by larger working interest with several of our top operators.

The closing of our mascot joint development project in January added another 16.4 net wells of current production and we continue to be encouraged with the project's overall productivity. So.

So far on average actual production results.

Outperformed our internal estimates by 10% and the mascot project.

The productivity.

Performance across each basin.

Estimates show, our capital allocation process, where we target areas and operators that we believe will deliver a superior return on capital.

The drilling and completing less finished the first quarter with $59 three net wells.

Up from 55.4, net wells, where we started the year.

During the quarter, we added 14.1 net wells across the Williston and the Permian via organic and ground game activity.

An additional 9.2 net wells added from our mascot project as drilling continues.

First wave of mascot completions since we joined the project is slated to turn in line over the next couple of months with the second batch set to start completions in the fourth quarter.

Our D&C list grew during the quarter and our near term backlog of well proposals has also been consistent.

During the quarter, we received over 200, well proposals are highest on record, albeit with varying working interest.

Well cost inflation has been consistent with our recent IAF. These we're seeing leading indicators of deceleration.

Spec to realize that towards the back half of the year as operators continue to reset terms with service providers.

The quality of the proposed wells also remained high as we had over a 95% consent rate during the quarter.

The M&A landscape continue to evolve during the first three months of the year.

Large asset packages were a bit slow coming out of the gate and the quality of what came to market was not particularly enticing.

As such we passed on a number of potential transactions, while continuing to search for opportunities that are better aligned with our strategic positioning and return profile.

We're being patient and are beginning to vet more compelling and higher quality opportunities.

N O Gs total addressable market has expanded given our size and scale and we have been invited to co bid on a number of operated prospects.

Well as explore sell downs from operators looking to partially monetize it remain as operator.

These opportunities are not necessarily available to smaller non ops, it's got size and scale are required to participate in these large asset packages.

This puts <unk> in a unique position, where we can have a seat at the table with our operating partners.

Determined a long dated development schedule and underwrite accordingly.

Looking at the entire landscape. There are currently 14 opportunities we are reviewing across our basins of interest.

Selling over $6 billion across large asset packages and joint development structures.

Volatility and commodity pricing.

It was also a headwind during the quarter and there are several M&A processes that were put on hold.

The bid ask spread was alive and well, we pivoted to our ground game to target drill ready opportunities and situations, where most sellers needed to transact to manage budgets and capital outlay.

Taking advantage of that backdrop, we reviewed over 140 opportunities and closed on 10 transactions during the quarter picking up to six net wells and 369 net acres.

We've maintained that momentum moving into the second quarter with a backlog of attractive deals under negotiation.

Our Midland Petro transaction last year as shown in the art of the possible, while we're exploring large joint development agreements.

So being able to bring this concept to our ground game, putting together worn out of operated units and bringing in operators to develop.

Well, our total addressable market for non us non operated properties is as large as ever we remain steadfast in our disciplined.

We will never be focused on growth just for growth's sake.

Our strict underwriting remains focused on returns.

With that I'll turn it over to Chad.

Thanks, Adam.

I'll start by reviewing key first quarter results, which outperformed our expectations, despite a volatile commodity price backdrop.

Our Q1 average daily production topped the high end of our expectations 87385 Boe per day.

11% increase over Q4 of 2022.

Oil volumes were up 12% sequentially over Q4.

As we experienced better well performance across all basins and the addition of our M. P. D C acquisition, which closed in early January .

Our adjusted EBITDA was $325 5 million in Q1.

A record for our company.

Our first quarter free cash flow was robust at $84 million despite growing activity.

And commodity price volatility.

Oil realizations continue to be better than internally expected as Q1 differentials came in at $2 67 per barrel.

Due to continued strong in basin pricing and having more barrels weighted towards the Permian, which are typically priced tighter.

Natural gas realizations were 142% of benchmark prices for the first quarter substantially higher than our stated guidance due to the stabilization of NGL prices.

Some of our Permian gas tied to west coast deliveries versus what.

Our balance sheet remains strong leverages trended in the right direction and it's down sequentially on an LTM basis versus year end, even with the closing of our M. P. D C acquisition.

Approximately $320 million to the balance sheet.

Our net leverage ratio should return to our target level by the end of 2023 is our acquisitions contribute to our operations and we are able to organically delever.

We still have over $1 billion of liquidity in the form of unused revolver and borrowing base capacity.

Since year end, we've retired $19 $1 billion of our 2028 notes at attractive prices and have reduced our outstanding revolver balance by approximately $50 million post closing up the M. P. D C acquisition.

Mindful of our net leverage target, we will continue to look for ways to efficiently reduce leverage if market opportunity arises.

We are reaffirming our capex guidance and reiterating the amount and cadence of our Capex spend.

As a refresher the range is 737 million to $778 million for 2023.

Our Q1, Capex investment was $212 million, representing approximately 28% of our capex guidance at the midpoint keeping with our.

Expectation of realizing 60% of our annual spend in the first half of the year.

With respect to cost inflation year to date, we are within our internal expectations, but as Adam mentioned, we are beginning to see early indications of stabilization.

And with the continuation of weak natural gas prices, we anticipate the potential for reduction in rig count and subsequent cost savings over the next six to nine months, if current trends stay in place.

We are not adjusting our 2023 production guidance and continue to expect a range of between 91090 6000 Boe per day for the full year.

Barring unexpected disruptions.

With respect to our production cadence for the year based on our current till schedules.

We still expect fairly ratable increases each quarter.

With slightly more modest volume growth in Q2.

And an acceleration into Q3 as the next wave of mascot wells come online.

We have made minor adjustments to our guidance on gas realizations and Louie.

On differentials, we are upping, our gas realizations, the 80% to 90% given stronger than expected Ngls, thus far but keeping our oil differentials. The same for the time being as in basin pricing in the Permian and Williston remains volatile.

Hello, He was adjusted for higher NGL prices realized year to date.

We'll update you in the coming quarters, if we anticipate material changes.

That I will turn the call back over to the operator for Q&A.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May 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 key.

Our first question comes from the line of Scott Hanold with RBC capital markets. Please proceed with your question.

Yes.

Yeah, Thanks, Yeah, Hey, Nick and team just a question on the shareholder returns. Obviously, you all were able to hit your dividend target you know much sooner than anticipated and you know you've <unk>.

<unk> you know several different aspects of shareholder returns.

How do you see that progressing like Judy you know through 2024 into and through 'twenty. 'twenty. Four is you are you looking to target maybe another you know dividend is that driven by rate or do you continue to look at buybacks as an option that increasingly becomes more important.

Good morning, Scott.

You know, we're obviously proud of having grown our base dividend and achieved and exceeded our target plan well in advance.

And as you know, we have active stock and debt repurchase authorizations that allow us to take advantage of market opportunities as they arise.

But I say it is virtually every quarter, but the dynamic capital allocation is critical and in our opinion to creating long term value.

And the ability and flexibility to act when when things change so I. Thank you.

You can trust us to be nimble as we evaluate where we deploy our free cash flow, but the obvious places for the future our dividends, you know share and debt repurchases and reinvestment in the business. So I think we'll take it all in stride.

Okay. Thanks for that and you know they get them you you had mentioned that a lot of opportunities coming in the door. You know you've turned down you know a number of these just because it.

No it sounds like maybe like a bid ask kind of a spread or.

Do you guys have a higher bar now with you. The success you've seen from mascot that fundamentally means that you know some of these opportunities that historically have come in need to really kind of do a little bit more to compete versus you know the JV opportunities or partnerships.

Yeah, I mean, we look at everything on a risk adjusted basis and so the specifics of any particular transaction.

And the assets and maybe some of the other kind of qualitative details are going to go into that underwriting I think the fact that we have so many of these opportunities in front of us and I feel like a broken record every quarter staying as much but it gives us the ability to be picky right and so that's going to come out and.

You know our conservative underwriting as well as the way that we approve.

Approach any given particular transaction is we're not going to fall in love with any deal because theres plenty for us to choose from.

Right and then maybe my underlying kind of question, but do these JV and partnerships do they tend to be better return opportunities than say the historical buying of non op working interest we'll see.

I think they're just different I would say in general the short answer would be yes.

But it's a combination of you know Adam uses the term risk adjusted I mean, you have to think about you have.

Concentration both benefit and rescue have a line of sight and development timing risk and when you combine all those things together, that's really what you know from an underwriting perspective, what really will drive the decision, making and so what I mean by that is that.

You could buy.

Nonoperating fractional business with 2% working interest across those things are all across the board and you can underwrite it to a very high discount rate, but ultimately it takes a lot of activity to be impactful on those assets. If you buy something with a 20 or 30% working interest that has different sets of risks.

But especially when you're working alongside the operator the <unk>.

<unk> and confidence in that underwritten value as it can be a lot higher.

But I would tell you that generally speaking when you're talking about bigger ticket items that discount rate is going to be wider you were just simply going to be able to have a oh.

Yeah, and that's a function of knowing who your competition is and as we see larger and larger.

Not all types of transactions, that's gonna effectively filter out a lot of the competition that we would otherwise see maybe you know some of the smaller ground game things that'll give us the opportunity to raise our discount rate and still get things across the finish line.

Not to beat your tongue in cheek, but anyone who tells you that you know we're picking up the small things that no. One else is paying attention to I think that's not true because I think the smaller and the lower the barriers to entry the more competitive any processes.

I appreciate that thanks.

Our next question comes from the line of Neal Dingmann with Truest. Please proceed with your question.

Hi, Good morning, guys. Thanks for the time My first question for you Adam just on the mouse got projects specifically could you discuss just since you did a I guess it closed not terribly long ago, but.

It's close any update on the development plan or just maybe what returns are looking like there.

And interesting project.

The first announced that he was mid last year now just wondering how that's progressed.

Scott I mean, I would just give an overall I'll, let Adam talk about the details, but I'd say overall, we're really pleased that you know we take everything you know day to day month to month, but everything so far has been wonderful I think that's a productivity. Obviously some of this is just conservatism on our end, but the productivity has been better than what we had certainly underwritten so far.

I'd say, they're there they've been hammering away in the field and doing a great job so far and everything is moving according to plan I don't know if you want to add I know that's right I mean, I alluded to the fact that Oh.

Outperforming expectations by about 10% on current production, we've got about nine net wells.

Process, you know the drilling and the slowing of the wells is humming along and that'll be ratable across the.

The rest of the year right that from a completion standpoint, you know in the next couple of months there'll be getting after that and so you know you were talking about excuse me about you don't have those webs give or take you know tailing in.

Late June early July and then kind of that next wave coming into.

And the 24 give or take so.

So on the fairway, no surprises and pretty much everything that we underwrote.

No that's great to hear I'm looking forward to that and then just.

Just on the Nic and it I think it was the press release you continue to talk about the record number of just proposals youre seeing maybe could you just speak to that I mean again I guess my question around it is.

Are you seeing more today than you did even a year ago and if so has is sort of.

What's your what's your restrictions are when you're looking at these you know maybe talk about what what the requirements are.

You know how much tougher they've gotten since you since the company is now much larger.

Sorry, I want to make sure I'm on it.

And the REIT question, Yeah, you're talking about like just well proposals or are you talking about like transactions and opportunities I just want to make sure I know I'm just wondering exactly just on well proposals like how many you're getting and you know when you would add about looking at it now is the bogey to hit you know how much higher would you say it is these days versus a you.

You know a couple of years ago.

Yeah, I mean I think.

I mean, I think what was it we had 200 gross proposals in the first quarter. Yeah. I mean, we had a record number and sometimes he's gonna be a you know a fraction of a percent of an interest to you know 40 or 50% in some cases and what I'd tell you as it goes into the same meat grinder. It goes right through the engineering group every single one goes through the same process.

It's a tiny bit of money or a large amount of money net to us.

And I'd say overall, you know the the fact that as we are expanding on what you're talking about a million gross acres now you know plus or minus for our assets So you're seeing tremendous.

Tremendous amounts of activity, even as commodity prices have weakened somewhat but you know if we're doing our job.

Like any portfolio manager, if you're buying lands in the right places you're going to see a consistent development and I think we've certainly seen that you know we continue to high grade and already high graded.

Instead of acres over the last several years and so I think we've seen activity that's been at or above our expectations.

The net interest and those can vary wildly wildly from quarter to quarter, but I don't know Adam you want to add anything else no. I think you nailed. It I think it's just a function of the fact that manage the portfolio of your working interests are going to vary and you've got your plan and so you can hit the gas where it where do you need to pump the brakes on the ground game when you need to and it's all going to depend.

You know what the organic asset is falling in on the opportunity set that we're seeing and we're just continue to manage it day in day out.

Perfect. Thanks, guys great work.

Thanks Neil.

Okay.

Our next question comes from the line of John Freeman with Raymond James. Please proceed with your question.

Thank you.

First of all I wanted to touch on was just on the cost inflation side I know you all had a.

Budgeted for kind of seven 5% cost inflation this year and I know that you know last quarter, you mentioned that you're really seeing more of the cost creep in the Bakken, where you had some operators that were seeing some longer term service contracts that are rolling off relative to the Permian, which which you had said it was a lot steadier and I guess I'm just one.

And I guess in the first quarter Wayne.

As Adam mentioned, you all were like three quarters of your activity was in the Bakken if that maybe it skews a little bit.

The cost inflation that you're seeing relative to the rest of the year. When it's obviously a lot more balanced with the.

The Permian and Bakken, especially the mascot continues to ramp.

I mean, maybe a touch John I'd say that.

You know we have to think about how fragile the overall.

I don't want to get on my macro horse here, but the overall market in general is quite fragile right now right and I'm not talking about the oil market per se I'm talking about the entire capital markets.

And so you know and you've had you know material selloffs in natural gas you've had oil you know go through probably too hard sell offs in the last five months.

But like anything else. It takes time and so you're correct. We definitely have seen you know costs, you know rising year over year and certainly even since you know, let's say last fall.

Adam pointed out you know the biggest challenge last year was not necessarily cost, but actually logistics like getting you know items and I think I remember on our prior calls, saying Hey, you know building.

Building, a steel pipe or our sand are not things that are going to be in long term shortage. It's just going to take time and those things those logistical things and shortages of materials have have largely past.

Where it goes from here is really going to be determined by as dumb as it may sound you know, it's gonna be determined by the price of crude but you find is that overall E&P margins stay relatively static over time, whether oil is 100 or if it's 65 and so if oil prices are down materially weaken I would expect over time youre going to see material reductions.

Margins for service providers is that overall activity falls.

If prices hang in there and do their end and do their thing where they are today I still think.

Through drilling efficiencies, we continue to see operators drilling longer and longer laterals and larger amounts of wells at a pad level at any given time and those will add up to a material kind of per lateral foot savings over time, and so I would expect you probably can see some relief as time goes on.

Yes, I think as our program moves to be more balanced over the year I think you've definitely seen a material slowdown in the Permian, specifically, an inflation of well costs and so I think that will ease it over time I think to the extent that we're going to see any relief is going to you know, we're gonna have to wait and see over time I think.

Everyone from our service provider to a to an operating group are going to have their chests puffed out when you see periods of volatility and we'll see how that plays out this year.

I think the only other dynamic that I would add to that is just kind of operator kind of cadence and flow in.

You mentioned the Williston.

Continental and Conoco, we've seen.

The most activity.

In the quarter and just looking at kind of there.

Weighted average.

It's certainly encouraging continental being one of our most active operators and being ratably lower than the overall based on average.

Great and then just my follow up you know.

Adam you you kind of gave US an idea of how the production cadence kind of look over these next few quarters and I wasn't clear on sort of the capex breakdown of that 60%.

In the first half of the year, but.

I was hoping to maybe get a little bit more color on on the til cadence.

Obviously last year it was.

Sort of averaged 10 till the first half and we haven't had the big step up in the second half of the year and then this year it sounds like it kind of build as you go throughout the year and.

Can we get any more of a breakdown on how you kind of get to that.

85, <unk> guidance for the full year kind of how that the remaining quarters look just rough numbers.

Yeah, I mean without going specifically into the numbers John just because I don't have those sitting right in front of me, but I would expect you'll see consistent to slightly higher activity this quarter and that should generate some modest growth in the third quarter. Obviously, you really in early in the third quarter you should have the bulk of the first wave of mascot wells.

So you're going to have a material step up in the third quarter and the Capex doesn't really track our tails like the money. We spent this quarter for 13th gels isn't really necessarily going to those wells those wells were largely done.

That money was spent last year.

And so that's why the the waiting is upfront because the way we accrue on a on a percentage of completion basis right to tell us your sort of the icing on the cake at the end.

So the capital we spent in the first and second quarter will really go towards that that weighting in the back half of the year.

And so I would imagine even from a production anatol cadence, which will be more closely aligned than that the capex cadence would be that youre going to see.

A more material step up in the third quarter and into the fourth quarter, then you wouldn't necessarily.

In the second even as as you're drilling a lot of those wells.

It also to be candid it depends on what time they come on in the quarter. If if we have a bunch of wells come online in June .

That's not going to have a huge impact on the second quarter necessarily so we try to be very mindful of that because those drill schedules move around all the time. So really I think you would see probably and Jim correct me, if I'm wrong, but I would say the third quarter is probably going to be the most active quarter from us from a til cadence.

This year with the fourth quarter not far behind.

That's perfect. Thanks, Nick.

Yep.

Our next question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.

Thanks, and good morning all.

Okay.

With with respect to the larger operator specific opportunities you may pursue how important his line of site activity and investment pacing and your evaluation process and would you generally require a modestly greater returned to offset operator concentration risk.

And Derik just to be clear, you're talking about like tow bidding assets or partnering in some sort of partial sell down is is that kind of where the questions base.

Yeah, no I'm thinking more like the mascot opportunity I was that was directionally. Yeah that was the 2014 larger packages you're referring to.

Yeah, I mean I I. The answer is all of those risks weigh into it you know what we really focus on is our alignment with the operator and that can be through governance. It can be through.

What share of what everyone owns you know and it could be a combination of all those things with concentration risk come you know pumps just that.

But the light you know we are a <unk> and IRR and N. P V and you know risk adjusted return on capital weighted company. That's how we evaluate these projects and so a line of sight is also incredibly important but that like just because you have line of sight. You know you need to make sure that you have governance that they can't change their mind and not do that because.

It's obviously, an easy way to destroy value. So we try to weigh all of those things contractually and to ensure that the operator's aligned to do the same thing that we would want to do with our money.

Yeah, and I think it's understanding the needs and the wants or the operating partner right because each individual operator solving for something you know different we've had conversations with operators that say hey, northern choose your own adventure you tell us what you know what you want to drill in order to come up with you all the best number that you can.

And then you've got other operators that want more autonomy.

In terms of.

What that drill schedule looks like and we'll underwrite it accordingly.

And take those factors into consideration.

That's great and then building on John's earlier question on service prices are you guys seeing any improvement in well costs across many categories on a leading edge basis, and then separately regarding your continental commentary does.

That price advantage appear to be efficiency or market pricing based.

On the latter part of what I can tell you is that there's a huge difference you know between a one or two rig private company.

You know and a you know large several hundred thousand barrel a day company from both a technical perspective and from just a sourcing I mean, you're talking in some cases millions of dollars per well and that mean, it's because the small guy is.

Borrowing a frac crew in between times and sourcing their tubular is on the spot and all those sorts of things and so.

That's why you know the bulk of our operations General were a smaller company by a public standards, but are operated group is mostly large companies. It doesn't mean there aren't private companies that are incredibly good drillers and can make up for it in other ways. There are there are exceptions to every rule, but by and large scale is incredibly important from a sourcing perspective.

You know Theres, just a big difference between a company like Mewborn that operates a lot of our Permian assets with 20 rigs running versus someone with a standup Reagan sourcing things on the spot everything from midstream contracts to drilling costs are to every every ancillary costs along the chain.

That's right I think you know.

Conversations with our operators, they're seeing some relief on the tangibles.

Yeah.

Surely haven't put down deposits in order to secure.

Was all of that kind of comes through from a pricing standpoint as well.

From an inflationary standpoint, and on the leading edge or anything worth discussing.

I think it's it's the tangibles.

That really we've seen the relief.

So the drilling contracts and those sorts of things that we've seen does that make up the largest percentage of the overall F E. No doesn't help yes.

Yeah.

It makes sense very helpful guys.

Okay.

Sure.

Our next question comes from the line of Donovan Schafer with Northland Capital markets. Please proceed with your question.

Hey, guys. Thanks for taking my questions.

I wanted to start off talking about its a little bit kind of further looking you know what I mean, this would be talking about you know.

One two maybe even like three year time horizon, we want to focus on infrastructure and you know pipelines and so forth. So yeah.

Obviously, a pretty big stakes in some of the major basins. The Permian the Williston and then you know you've got a certain amount of involvement in Appalachia and these are all areas that you don't have potentially meaningful benefits from some some.

You know additional pipeline infrastructure, maybe you know LNG capacity in the Gulf with other other types of developments like that and then you've got the situation right now like I also cover a lot of the kind of clean energy names.

And I was at a conference this week in California, with commercial fleets are getting forced to like electrified or do something.

And they're freaking out because the infrastructure like they are I mean, it was like just shy of panic in terms of being able to hit targets that are being legislators and so forth that you've got Democrats and Republicans like what mansion tried to do you know trying to get like a permitting reform something where it seems like they might be.

To get Republicans on board or what are the key to it could be.

Giving concessions on.

Traditional for oil and gas type infrastructure, making it easier for all that to happen.

So I'm just curious if you guys have any kind of unique insights. If this is something you follow you know theres kind of the bigger picture macro political stuff, but but even anything worth pointing out like you know you've been nearer term at the regional level I think some.

A couple of pipelines are coming on in the south and in parts of Texas.

But like the Williston or Appalachia, you know.

Anything out of the regional or national but just kind of bigger picture, what you pay attention to and what you think could be beneficial from a pipeline infrastructure standpoint.

Well, we do spend a decent amount of time and money on understanding the political landscape and as it pertains to infrastructure because.

As it pertains to traditional energy and oil and gas you know the bulk of of the.

The bulk of the impediments to the business had been attacking infrastructure projects in order to choke off supply and generally to the detriment of American citizens, that's a larger a larger conversation.

But I would tell you is as it pertains to the three basins that we're active in today.

Williston is candidly oversupplied from a takeaway capacity you've seen that in better pricing over time.

And the basin as a whole while our volumes are set to hit records. The basin as a whole is not growing tremendously.

And so I don't think we have a ton of concerns in the Williston.

In terms of the Marcellus well there you have mountain valley pipeline and other things that that could potentially change the game, there or or or even LNG expansions.

Our base case assumption has been nothing gets better ever and that's how we generally underwrite there that's generally our view its just been challenge it's both.

Political geographical all of those things going into above do I hold some optimism that at some point.

Logic will prevail sure, but we're not counting on it.

In the case of the Permian you know you you do have a ton of LNG expansions coming on there.

The gas infrastructure in particular was quite tight right now and we've had that view internally for some time, but.

But those are those logistical issues are getting solved in real time and I have no doubt in my mind that that we've even seen operators find ways around it as Chad mentioned rerouting gas, especially because the bulk of our Permian assets are in new Mexico, which has more options.

And so you know monies and the amazing thing that motivates people to solve problems and where theres capital and so I don't think we have a ton of long term worries.

Worries within the Permian Basin, and I think given its proximity to the Gulf coast relative to the other places where business is largely still open I think LNG expansion overtime will both help.

He's.

The glut of natural gas over not necessarily this year or next year, but over a multi year base basis.

As well as infrastructure projects getting ahead of it.

Okay. That's helpful perspective.

Good to know you're not you're not baking anything and that's a good thing for for me to know as I look at things.

Is the conservatism there I'm optimistic I mean like are I'm hopeful let's call. It hopeful [laughter], but okay. That's helpful to know at least you're not you're not baking anything in there which is good and so I want to ask for the you know.

Our record level of M&A opportunity.

You guys talked a lot about this you gave out the number of $6 billion kind of an opportunity.

I don't remember getting you know like a dollar number maybe you did I'm just blanking on it before you know like last quarter. So can you give us a sense of like the magnitude of how that's changed since the last update you know as it was a $5 billion, you know a quarter ago or or like what's the.

Magnitude change over the kind of near term or short term time frame.

And then with respect to magnitude.

That mean like if the opportunity set doubled should we think of it as like that kind of like doubles your appetite and you're like Oh, you know we can we can scoop up to X. The amount of things, we wanted to scoop up or does it translate more into.

Or just skew more towards quality, where you're like well no. You can just you know it doesn't change as much of our appetite per se, but like Wow now, we can really be guys up in bargain and negotiate and get some good economic terms.

I think like any business. The more optionality you have are generally the more opportunity you have so if you have access to more opportunities and you have scale to participate in more opportunities and those barriers to entry rise in those opportunities youre going to have better return prospects.

And as we scale, we've seen nothing but a benefit but in terms of that we have in the past talked about our pipeline and it is certainly probably a record level, but.

But I I used an analogy to this which is like take a you know the real estate market to take commercial real estate as an example.

Whatever that total addressable market is in the United States, There's only a smaller portion of minority interest owners across all of those all of those commercial buildings there might be.

Billions of people that own 20% of a building or something like that.

But if you are large enough and you have the scale enough to talk about working with the majority owners of those buildings to own at your addressable market is growing in kind and I'd say that that's where we are in the lifecycle of our company.

And so frankly I don't think we could even really tangibly you you've got hundreds of billions of dollars worth of oil assets in the United States and we're really just scratching the surface.

But as Adam and I tell our investors a lot you can carve a working interest out of anything you can carve out a minority interest out of any ace assets in oil and gas and so what we're finding is that that that.

That total addressable market has increased markedly.

From our our our sizing, but if you wanted to go back to kind of how we select the stuff you know M&A is one of those things. It is about having 1000 yard stare we don't fall in love with anything we don't do something just because strategically we want to do it we do it because when we can earn as much money as we we require ourselves two or more.

And when you do that you can make good decisions and the thing is if youre going to have to take a lot of swings that bad I mean, I think our success rate on the ground. This task order was about 5%.

But that's still adds up to tens of millions of dollars and so no differential corporate M&A it might seem like it's easy because we've obviously done a billion seven in just the last two years, but it really masks a lot of failure, which is you're probably looking at you know.

Three or four times multiplier to that when you back into the success, but I will say, we're moving to avenues in which we remain one of the few people that can participate in those and that allows us to target. The returns that we want and also broaden our horizons I don't know if you want to add to that.

You covered it.

Okay, and then just one last question and I'll take the rest offline as you know the NGL to gas ratio I know as you know.

Above historical levels and that was that shut up kind of nicely in this quarter.

I also know you know that that's a hard thing to predict and know exactly where that's headed I mean, the only one I know, we'd rusty Brazil.

The only one I know who like actually wrote a book on it and that was the stuff inside and out but kind of beyond my beyond my scope, but can you tell us like what you look at you know I know, it's like the next to impossible for you guys to kind of guide on anything like this but just.

You don't control over it right like when the operators are electing to go to ethane rejection or keep it do the extraction and so forth, but yeah. What are you watching and how are the trends and what you're watching that.

Their lives. This Ah yeah. If you can just elaborate at all on that and it wasn't anything like we could watch or monitor that helps give us a sense of where it's going.

Well I mean, the NGL basket trades every day, the mix of which we receive varies from day to day you mentioned the ethane.

And that same injections, probably at a high there are limits to how much you can do in <unk>.

Some operators extract it one way or the other because of contracts they might have entered and youre going to get a worst realization in a market like that but when that happens.

But ultimately.

You're talking about you know probably about four variables you've got the in basin differential you have the NGL basket as a ratio to gas and then you have to fix gathering and transportation costs and in some cases you have the percentage of proceeds piece in which there is an added cost as those go up.

I don't know you want to add to that I think here et cetera.

We would expect our guidance as adjusted would be more realistic going forward.

Obviously gas differentials are volatile.

And then the recent weakening in oil prices.

In fact on kind of the Gulf War price we believe.

Then rejections will obviously play a role this quarter.

As well as kind of the takeaway to the west versus what the Permian for us so.

Okay. That's helpful. Thanks, guys.

Our next question comes from the line of John Habit with Bank of America. Please proceed with your question.

Oh, Hey, Thank you very much for taking our questions. First question is on capital allocation I appreciate you've got a dynamic process here allocating towards growing the dividend paying down debt buybacks.

But when you sort of see what investors can sort of earn as far as a return on cash does that change the calculus at all does it make.

Grabbing baby may makes potentially buying back shares or reducing debt more attractive in the near term is how do you think about that.

I think we think about it as you know you you mentioned the word dynamic we think about a dynamically because those you know those inputs change every day right you know that our R.

The stock price versus R. R.

Our ability to reinvest capital versus you know taking risk off by paying off debt to ever increasing dividends in that that balance matters and I also think that.

You know like anything in life too much if anything is a is not a good thing right and so we've really tried to keep it balanced I think.

In the coming months, we're going to spend a lot of a lot of timing that we've laid out what we viewed as a long term plan you know a couple of years ago.

And we really need to think about what's next for us in the next couple of years and I think it's gonna be a balanced approach to all of those things right and I think we'll spend a lot of time with our board and our advisors to really go through because ultimately I think.

Certain things come in and out of Vogue, a from you know from.

From special dividends to dividends to buybacks and they tend to oftentimes.

A fever pitch and we've really tried to issue that and think really long term because when oil was $100 last year, a special dividend and sounded like an awesome plan.

Until prices pull back and then those special dividends go down.

And you May have you may have foregone other opportunities that might have created more value for the long term and so we really try to be very very careful and methodical about this that's why we've really stuck to our base dividend. We do believe we have a path to grow it over time.

As well as to leave enough meat on the bone in enough excess cash flow to allocate it to things that are going to drive that dividend growth.

In a solid fashion over that long term period.

That's driven in part yes. It does.

And then it's a broader question.

More on on.

On production you know you've had it looks like you had a beat here on the Bakken.

Also if we sort of look back earlier during the week you know there was another operator had relatively strong performance out of Bakken.

Some prepared remarks on productivity in the Bakken, but could you provide any more color on how you see productivity trends sort of in the box.

Speaking what I would tell you is that what I've been impressed at when I get showing the raw data and I'd rather Jim answer. Most of this question is that stuff, we would've viewed as tier two three or four years ago is performing about as well as tier one stuff now and so.

The one thing about the Bakken is a higher cost.

Basin, let's say than the Permian. It is a higher breakeven. It's also a lot more consistent and Ah and because the activity has been relatively muted you know there'd been about 50 rigs consistently for.

For the past couple of years.

You've seen a lot of discipline to that development you have you don't see the wild variations you see the best of the best in the Permian and you see the worst of the worst.

It's a much more consistent.

Both adullamite a graft that is more consistent as well as you know consistent behavior from the operators I don't know.

I would say John honestly, we saw better than expected productivity in all three of our basins, including the Marcellus I mean, the decline in the Marcellus have been have been notably better than we would've expected I don't if you want to add to that is yes.

Right.

With this latest completions and operations, we have seen some improvement where you used to say tier two to tier three was on economics.

As a tier one in some cases, the operators or try and longer laterals. So three mile laterals. That's that's helping on the productivity as well and then part of it for us.

Again, just going back to the active management, we focus on the areas that are that are highly productive within the core.

That's kind of how we manage the business.

Very helpful. Thank you for taking our questions.

Our next question comes from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Good morning, near Kid, and Chad and add them in.

Oh Gee team there Nick you you've made a couple of comments I.

I guess in the Q&A section about the importance of operators and.

I think you've made a comment or two about the importance of having the operators that are that have scale.

For for the mascot project, you're talking with that to investors.

What is what is your what's the message of what's the context, you could give to people when they say.

You know Permian deep rock or never heard of them.

Well as I said there are exceptions to every rule I think there's also there's an operator piece theres a geology piece, but I would tell you that this is a company with a team and a history a long history of excellent performance.

Multiple rigs operating not just on our lands, but also on his other properties we.

We had a good look at a multi year. He had built out all the infrastructure directly on our properties, which is atypical for a company of their size.

And that all went into the into the primordial superbar decision, making but I can tell you. They know how to drill wells that's been doing this for years that we're in.

We went in to underwrite. This there is a number of wells, obviously that they are already.

Drilled and completed and brought online and that gave us the conviction.

With David's team that they could put down highly productive wells and keep well costs under control and so you know when we're going into these types of things we need to make sure that our analysis is bespoke.

I'd say you know you're talking about a company that has everything from redundant in excess.

Water disposal access gathering for crude and gas takeaway.

And you know long term contracts in place for the operations and we've been thrilled at how they do it but you are right in the sense of that is if you think we werent worried or thinking about that when we went into this you'd be mistaken we definitely that that was a big part of that.

The analysis that we wanted to.

Got it so is it reasonable question, but you know that's that's helpful detail that that you gave.

Nick if I could go back to your your prepared comments and you are.

Talking about the.

Not just the size of the opportunity in front of you, but also the nature of the kinds of opportunities more of these as you said like you know bespoke carve outs.

I recognize that it's it's the role of all management across companies is to it.

It's to allocate capital, so everyone's doing that but it but.

Hearing your comments it seems to me like you're.

Maybe there's a shift in how you guys are thinking about yourselves you know away from way from being a you know the oil and gas company has to be happens to be focused on non op and more towards that.

You know our capital provider to the industry is is that is that a shift that's going on in Europe .

In your mind or in the in the minds of the management team and the board and.

If so what what how should we.

Change would we expect from you guys.

And maybe it's a change in how we explain it but I'd say, we've always been both were both a capital provider, but we're an investment company and we're an oil and gas company and what I'd tell you is that for operators that require capital to develop and these arent necessarily you know small we hear from the biggest independents and quasi majors in the country.

About needs for capital for certain reasons or another.

But what I'd tell you is at the end of the day as a non op you are a capital provider and it really but the differences we are an oil and gas company, we do our own engineering, we do our own technical work.

We have the infrastructure to manage those assets ourselves.

So what we found as you know five to 10 years ago, you had a lot of true financial you know whether it be private equity groups. There are others that provided capital in non operated ways to our operators and what we found is that.

Ultimately the need to securitize or find some you know buy and then exit path for those capital providers.

Made it very untenable for the operators and we find them seeking us out not just you know we are still like the concept that we've we would ever abandoned or that were leaving for others are traditional non operated business is far from the truth. We are as active Ah in just our normal course of business as we've ever been.

But what I would tell you is that we have a lot of operators, who come to US who say I did a deal with X Y Z financial firm.

And I don't want to do that ever again, I want to deal with someone who understands the oil and gas who's willing to take the risk and who's a permanent owner of these assets and in that respect.

Cost of capital matters, but really what matters is alignment and risk sharing and an understanding of what we're actually doing not that needs to just scrape a return and then move on.

Thank you for that comment those comments I appreciate it.

Sure.

Our next question comes from the line of Paul Diamond with Citi. Please proceed with your question.

Thank you and good morning, all thanks for taking my call I just wanted to touch quickly on you guys talked about hitting a kind of hit rate of like 10 of 140 gravity of opportunities.

As of late.

Puts it in a.

Kind of a low to mid single digits or mid single digit.

Hit rate is that the cause that'd be thought of as kind of your target for the longer term or is that just is that going to shift quarter to quarter, depending on what's in front of you.

Yeah, it's gonna shift quarter to quarter, it's all going to depend on the quality and other qualitative factors in terms of you know what the average size working interest is is it going to move the needle. So it's all going to be rig and seller dependent.

You know we've got our hurdle rates, that's what we're sticking to and then from there. It's a matter of just distilling down the quality opportunities. You know, we mentioned 140 opportunities 70 of those probably went on a garbage as soon as they hit the inbox.

So it's all dependent on overall activity flows because this stuff all comes in in a linear fashion.

Yeah.

Got it understood and then just one more kind of circling on M&A as well you discussed 14 opportunities you're currently looking at.

Is there anything we should expect that the departure from scale from the ones. We've seen over the past 18 months or are they all relatively within that same.

That same range.

Yeah, I mean, the the range generally are at the kind of package level is kind of like 100 million to up to 1 billion I'd say the average size is still probably less than $200 million. I think there is a point at which you know a big deal and a small deal will take the same amount of time and so obviously you want something that's significant enough.

To be worthwhile of your time and to be impactful to the bottom line.

Have a lot of costs associated with these evaluations legal costs, all sorts of stuff and so you want to make sure that it's going to be meaningful.

222 of the Investor, but we're still the Dustbuster, we're still picking up tiny tiny interest every single day.

And going back to your last question just for a second you know I think its worth.

I think it's worth noting that we're pretty robotic in terms of how we look at this right. When you have 10 times the amount of things coming at you that you would ever want to tip to underwrite or go through you can afford to be right and so it's pretty robotic and what we've found is that there's a lot of cyclicality within all of the different businesses that we business lines that we have.

And we that hit rate goes up and down and oftentimes it really comes down to risk we find when oil prices are 100, and convexity is weak we're highly uncompetitive in most things.

When things get ugly.

And crude break $60 I promise you it will be the last game in town and there you can if youre dealing with situations, where we can extract some more value. So that convexity plays into that decision, making and our own competitiveness.

Got it so.

It makes more sense to take it more or think of it more as a counter cyclical to the aggregate price of the commodities.

I like to think of us as a countercyclical investor in general I mean, I think that the most active we ever were as a percentage of our size on the ground was in 2020.

Alright, when things were pretty ugly.

Understood makes perfect sense. Thanks for your time.

Yep.

Our next question comes from the line of Phillips Johnston with capital. One. Please proceed with your question.

Hey, guys. Thanks for squeezing me in I'll I'll keep it short with just one more question on the 14 opportunities just wondering if any of those are located outside of your existing three regions.

The majority of them are across the Delaware, Midland and Bakken as well as our boys. So we've seen a number of properties and.

The Eagle Ford as well.

You know we have it we've been looking at the Eagle Ford of as we've alluded to in <unk>.

Prior calls haven't necessarily found.

The appropriate fit or assets for us, but it's definitely you know one basin that we keep an eye on.

Yeah, Okay and then.

I I realize you guys don't typically view PDP only types of deals with no real upside, but you guys ever look at conventional non shield types of packages with low PDP decline rate.

It'd be accretive.

We're also.

You know who help keep your overall PDP decline rates down.

Yeah, I mean, we we have bought a handful of PDP assets. It you may remember, we bought some assets from Comstock a few years ago that we owned about 90% of already and they were low to client P. P and so the decline rate for our PDP only as it is really important I would say on the conventional side. The one challenge there are that typically you know if you took.

Our C O two flood asset or something like that it might have low declines, but it also probably as 2025 dollar low cost. So it's going to be much more sensitive to oil prices and so that's another risk factor. It may have less you know operating risk or need for growth from an underwriting perspective, but it's going to be more sensitive to the you know one of the things that.

We talked to our investors a lot about and particularly as it pertains to PDP assets.

Or that you really have no upside to your returns besides pricing when you buy a PDP asset and so you really need to think about where you are in the cycle. You know ultimately what we find is that undeveloped assets become in a in a period of <unk>.

Traumatic pricing.

NPV of those undeveloped assets becomes very low and that's why you can ultimately underwrite things based on PDP and get that upside for relatively de minimis amount.

Firstly buying a PDP asset wind all the crude strip is $100 you really don't have a ton of anything but downside and at a lower price environment, it's gonna be seller dependent.

You know what is their balance sheet and financial health look like right, because you're going to be looking at a pretty big bid.

Bid ask spread.

Geordie or the time to the extent that they're healthy yeah. I mean, I think we think in general there are better bought buyers for PDP assets than us.

But there are occasions, where it makes a ton of sense Phillips and I'd just tell you in terms of what we see we get sent everything I mean, I'm talking we've been sent the Alaska Gulf of Mexico, Tuscaloosa, Tuscaloosa Marine shale, Alabama, a conventional production we've been set everything but it you know.

I wouldn't say anything has made it past the email inbox as it pertains to those types of opportunities.

Alright sounds good thanks, guys.

There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.

Thank you guys for joining us today, we'll continue to work to execute on our plan this year.

We're dedicated to providing a superior return to the marketplace and again. Thank you for your interest.

This is a way.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.