Q2 2023 Northern Oil and Gas Inc Earnings Call
Greetings and welcome to the northern oil and gas second quarter 2023 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.
Now my pleasure to introduce your host Evelyn and farmer, Vice President of Investor Relations.
After our prepared remarks, the executive team will be available to answer any questions before.
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 obligations to update those 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 not measures to the closest GAAP measure can be found in our earnings release.
With that I'll turn the call over to Nick.
Thank you everyone.
Welcome and good morning, everyone and thank you for your interest in our company.
As usual I'll get right to it with four key points.
Number one.
Our investment philosophy is driving tangible results.
Our second quarter, adjusted EBITDA was up 16% year over year.
Our quarterly cash flow from operations, excluding working cap was up 11% year over year.
Over this same period, our weighted average fully diluted share count was up only 3%.
Oil prices were down 32% and natural gas prices were down 69%.
Also this quarter's results included the impact from our recent share offering with no financial benefit from the acquisitions that had funded.
Suffice it to say, we've grown materially on a per share basis, while prices were down materially.
The point I am driving here is that our company is focused on a fairly simple philosophy.
Finding ways to grow profits per share to investors over time and through cycle.
We believe that is the path to driving sustainable share price outperformance.
While oil and gas prices go through down periods that can and will affect our profits. It is our job to find ways to grow the business through such times.
We are actively investing hedging and looking to drive consistent long term growth of profits and cash returns.
This has driven and will drive future dividend growth and share performance.
Number two.
Our investment cycle is pivoting to harvest mode.
As we entered 2023, we highlighted we would be spending approximately 60% of our capital in the first half of the year, even though the completion activity was somewhat back end loaded.
Our D&C list today is materially more complete meaning paid for than typical.
This means even as the number of wells turned online rises in the coming quarters. We are front end loaded much of the spending and we should see a market increase to free cash flow in the back half of the year.
Number three growth our growth continues on a strong pace turbocharged by the bolt on acquisitions of forge and Novo, which will come into play in the second half of 2023.
As we previously communicated Novo is expected to close on August 15th and will be financed with cash on hand and borrowings on our revolver we.
We anticipate an acceleration of free cash flow for the back half of 2023 and continuing on into 2024 importantly.
Importantly, as oil prices have improved in the third quarter at today's strip, we believe that energy can fully repay our revolving credit facility by mid 2024 materially earlier than our internal expectations. When we made the acquisitions.
We have added hedges recently and completed our targets for Novo as oil prices have rallied locking in higher levels than we underwrote.
To put the acquisition and subsequent financing into perspective by around this time next year based on our projections, we could have a business producing 20% to 30% greater amounts of cash flow than today with materially less debt than we just reported.
And this is at a backward aided pricing strip mind you.
This would imply from a total return perspective, when including our dividend yield.
We could deliver up to a 30 plus percent total return on our business, which compares favorably to the high payout low growth strategies, we've observed from some competitors and quite favorably with a long term returns of the stock market, which brings me to number four.
Capital allocation.
Our goal is to provide our shareholders with the highest possible total return over the long term.
We say this every quarter, but it's important to us and we believe it bears repeating.
We recently announced a 3% increase in our common stock dividend for the third quarter of 2023, our 10th straight increase.
Our view at N O G is that our scale should help us build a shareholder return program that can grow over time.
As a result, we're instituting a policy of annual reviews of the dividend with a potential for interim changes should we experienced significant sustained commodity repricing or if we execute on substantially accretive corporate actions.
As always we'll be mindful of risk and leverage while also providing an attractive risk adjusted total return.
Our capital allocation is about maximizing potential returns, making our dollars go the farthest they can from a value creation perspective.
The data overwhelmingly suggests N O G has thus far created more value and more long term dividend growth by acquiring assets at a significant discount to what we already view as a discounted value for our stock as you saw in the second quarter.
This is capital allocation 101.
But there have been and will be times, when these paradigm shifts, allowing us to create more value by pouncing on undervalued securities. We are continually evaluating all options and executing on what we believe to be the best path for the company and our shareholders.
We're truly excited to have executed on two large scale joint development projects in the second quarter, specifically forging novo.
These two acquisitions are indicative of striking while the iron is hot.
On prior conference calls, we shared that the opportunity set for energy was the largest we had been presented with.
In both cases, forging novo were attractive and we're excited to be working with vital on Earth stone to create more value.
We believe energy is very well positioned from an asset and balance sheet perspective for the remainder of 2023 as well as for the year ahead.
Before I turn the call over to Adam I did want to bring a personal matter to our investors attention.
As you may have seen at <unk> five one plan I entered into about a year ago got executed last week and Additionally, I have entered into a modest monthly <unk> five one plan to sell some shares over the next year to address some personal needs.
Over my five and a half year tenure here with energy I had never sold a share of stock and had only been a net buyer with 15000 shares purchased with my own personal funds.
NRG is and will remain the vast majority of my net worth I believe in the company and by that fact, it shouldnt sure to all of you that I am aligned with you all and highly motivated to deliver results and stock performance.
I had myself on always being direct and honest with you. So I don't want anyone to think that means selling some shares I mean, something about my views on the company's future or trajectory.
Quite the contrary, our executive compensation incentive structures are driven by all the right things corporate return on capital targets, making more money for our shareholders and driving the stock price higher overtime.
A large proportion of our future compensation is directly achieved only through significant absolute long term upside in the stock. So it should be clear that we are is hungry and motivated as ever.
To find ways to drive share prices higher.
I just don't want this to be confused with personal decisions I may make from time to time.
So with that out of the way thanks for taking the time to listen today and a special thanks to the entire <unk> team from top to bottom.
Oh geez on an incredible upward path with a bright future ahead.
Driven by our unique investment focus culture.
I'll close by reminding you as I always do that we are a company run by investors for investors and with that I'll turn the call over to Adam.
Thanks, Nick.
I'd like to start by reviewing our quarterly operations and then we'll turn to our business development efforts in the M&A market.
Second quarter operations were down the fairway as we continued to find ways to optimize our development programs.
Maintaining capital efficiency.
And enhanced returns.
Turn in lines for the quarter were as expected, adding approximately 13 net wells to production on par with first quarter as well additions.
The Williston made up approximately two thirds of the organic activity driven by larger working interest with several of our top operators.
We exited the quarter with over 9000, producing wells and we.
We will continue to leverage our proprietary information to make well informed capital allocation decisions.
Looking forward, we have been working with our operating partners, mainly Midland Petro and our mascot project to adjust development schedules, which should drive long term returns and reduce both shut in times and costs as we prosecute the program.
This means that we will be deferring some of our completions into early 2024.
Were originally scheduled to turn in line during the back half of 2020 three.
The new plan, which contemplates drilling and completing an increased quantity of wells in a single batch will set up a more capital efficient 2024.
We incur a substantial portion of the development costs in 'twenty, three and reduce future costs related to shutting in wells for offset fracs.
Even more encouraging are the well results in outperformance that we had been seeing not only with our mascot project, but across all of our active basins.
Despite some curtailments in production and deferments of completions in the Bakken related to lower commodity prices during the quarter.
N O Gs a record production levels in the Williston.
We continue to actively manage our positions in North Dakota, and Montana, resulting in some of the highest well productivity. We have seen all of the basin to date.
In the Marcellus, we continue to see strong well performance with Q2 production exceeding our internal expectations by 6%.
Our wells in process continued to build as we added eight seven net wells quarter over quarter, which excludes the pending novo transaction.
As we look to close novo in the Middle of August we expect to add an additional 6.1 net wells to our in process list.
The activity across our scaled position in the Permian has been accelerating.
We're 50% of N O G 's activity now comes from.
From just 18% of our oil weighted activity at the beginning of the year.
This has driven our in process list to all time highs with an average working interest that is nearly 20% higher than that of our average working interest related to our producing wells.
This means that we can do more regardless of rig levels and provides us a seat at the table with our operating partners, giving us additional transparency as we prosecute our business.
Turning to well costs.
We continue to have discussions with both our large and small operators regarding a cooling of inflationary pressures, which has been encouraging.
Regardless of the size each has seen green shoots and reducing overall well costs.
Quarter over quarter, we saw average well costs down 6% on an absolute basis and.
9% normalized for lateral length.
This was driven both from longer laterals, and a stronger deceleration and inflation across the Williston.
Notwithstanding a further material upward move in commodity prices, we would expect to see the benefits begin to translate as we move into 2024.
On the business development front, we alluded to the record backlog of M&A opportunities, we were seeing on our Q1 call and executed on some of the highest quality opportunities.
We're in the market during the first half of the year.
Our size and scale create a competitive advantage in the non op space, where we now have a myriad of ways to allocate capital to M&A.
Our ability to contribute meaningful capital alongside our operating partners.
And the door to an expanded set of opportunities, which we've now shown we can thoughtfully execute on.
By partnering to co by an operated asset or buying down and minority interest from our operators, we build alignment long data transparency and can take an active role as operational decisions are made.
This is by no means a shift in our acquisition strategy as we continue to review non operated packages drilling ventures, and our ground game opportunities.
Simply put we have more opportunities to deploy capital than others, which gives us the ability to be more discerning.
As we look at the assets that are in the market today. The current mix is robust, albeit limited and quality.
That said things can change quickly because we continue to source multiple off market opportunities and others are brought to market.
Regardless, we will remain disciplined in both our approach and underwriting as we navigate the rest of the year.
Okay.
While our major acquisitions.
We're taking the headlines.
We remained extremely busy with our ground game during the second quarter.
We closed on 13 transactions through various structures that will set up for the drilling of an additional 16 seven net wells through 2024, and we're also able to add an additional 942 net acres.
Four of those transactions during the quarter were through drilling partnerships in the Delaware as operators continue to search for capital to fund our drilling projects and manage capital outlay.
These capital management situations are not limited to smaller operators either.
All in all we remain extremely busy on the business development front with asset opportunities available to N O G remaining at all time highs.
With that I'll turn it over to Chad.
Thanks, Adam.
I'll start by reviewing second quarter results and provide additional color on the operated update we released on July 25th.
Our Q2 average daily production topped the high end of our recently released estimates at 90878 Boe per day.
A 25% increase compared to Q2 of 2022.
Oil volumes were up slightly over Q1, as we experienced better well performance across all basins.
Which was partially offset by the permits in the Williston.
As a result of the volatile commodity price backdrop during the quarter.
Our adjusted EBITDA was $315 5 million in Q2 up 16% over the same period last year and our second quarter free cash flow was $47 6 million.
<unk> continued elevated levels of organic and inorganic investment till deferrals and commodity price volatility.
Adjusted EPS was $1 49 per share.
Budgeted capex to be in the range of $764 million to $800 million.
As we previously announced we anticipate capex cadence for the second half of the year to be equally weighted in the third and fourth quarters.
The balance sheet was further enhanced in the quarter, reflecting an active M&A season.
With a $500 million senior notes offering to term out a portion of our revolver.
Followed by a $225 million equity offering in between announcing forge and <unk> acquisitions.
Leverage at the end of the quarter was 134 times net debt to annualized second quarter EBITDA.
At the end of the quarter, we had zero borrowings on our revolver with ample liquidity of over $1 billion to support our business.
We will finance novo with borrowings on our revolver. So we're likely to see our leverage ratio tick up again in the third quarter.
That being said, we expect to return to our stated leverage targets in the next 12 months ahead of our initial forecast.
But the contribution of forge and novo as well as the current strip, we expect the revolver to be undrawn by the start of the third quarter of 2024, as we organically delever.
As we announced yesterday the elected commitment amount and the borrowing base will be upsized on our revolving credit facility to $1 25 billion and $1 8 billion, respectively. Once we close the <unk> acquisition.
Turning to our revised annual guidance.
We have adjusted our 2023 production guidance to a range of 96 to 100000 Boe per day.
And are anticipating production for the third quarter in the range of <unk> 99 to 103000 Boe per day.
Which contemplates a mid August closing for Novo.
We have tightened expectations for our oil cut to a range of 62% to 63%, reflecting year to date pricing and adjusting for recent M&A, particularly novo.
Our til estimates for 2023 were reset to a range of $75 to 78 net wells, reflecting changes to the mascot drilling plan and previously discussed deferrals experienced in the second quarter.
We made modest guidance revisions to low <unk>.
G&A and realizations, mostly related to anticipated contribution and the lower cost structure associated with our increased exposure to the Permian.
We have tightened the range for alloy keeping the low end at $9 35, and tightened the high end to $9 55.
For anticipated production expenses associated with <unk> and Novo.
On differentials, we're upping, our gas realizations to 85% to 95%.
We have tightened oil differentials to a range of $3 25 to $4 25.
Reflecting better pricing year to date.
The increased gas realizations are tied to pricing cost embedded within our LOE.
Our expected cash and noncash G&A ranges were tightened by bringing down the high end of the respective ranges by <unk> <unk> per Boe.
In an effort to provide better transparency to our adjusted EPS calculation, we introduced guidance on our DD&A rate per BOE for 2023 in the range of $13 to $13 80.
In the second quarter DD&A was $12 87.
Which reflects the addition of <unk> to our asset base with no corresponding production volumes.
The higher rate for the year reflects the addition of <unk> and novo to our asset base.
So we gave a fairly detailed operations and guidance update we did not discuss taxes and we are frequently asked about the timing of the expected amount.
We continue to expect to be a cash taxpayer in 2024, and our preliminary estimates as of today is the expectation of a $10 million to $15 million 2020 for tax outlay.
With a more fulsome outlay in the following years.
Changes in oil and gas prices could have a substantive impact on this estimate.
So we'll keep you informed as time goes on.
With that I'll turn the call back over to the operator for Q&A.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we poll for questions.
Thank you. Our first question is from Scott Hanold with RBC. Please proceed with your question.
Yeah. Thanks, Hey, I was wondering if you could discuss.
How you think about like the M&A landscape going forward I know, Nick you had said you strike with iron part, but.
I guess from Adam's commentary it looks like the quality is made of cooling a little bit and as you kind of think about that.
Relative to that free cash flow being deployed to debt reduction and our buybacks can you can you just give us your view of the landscape of M&A and.
Kind of managing the balance sheet over the next year.
Good morning, Scott, Yes, I mean I think.
I think I also in my prepared comments talked a lot about capital allocation right. I mean, I think we want to do what's right for the business and we.
We weigh all of these decisions against each other I would agree that as.
As we pointed out I think.
Large scale M&A landscape for the moment.
But it looks less exciting to us.
Adam also pointed out that could change over time, and we get phone calls every day from things that may or may not be on the market and we'll take those in stride.
That being said.
I think when we look at this and these dollars are fighting and I mean, I think that the adage I would give you is if you have a car loan at 2% and you're earning 5% in your savings account. It makes no sense to pay off that loan even if you want to have no debt. So we think about it the same way, which is that the extent we're focused on improving returns.
To stockholders and allocating capital.
In stride and so to that point, we have allocated obviously to M&A because it's provided a higher return to our.
Stockholders than almost anything else that does change, though is that fair.
Ronen can shift and so for the moment I don't think we see a lot of.
Compelling large scale M&A opportunities in the default cases, which is to repay debt and then ultimately as we reach our targets you start to pivot and I think we have a slide deck at slide 13 in our presentation that should stay pretty succinctly I think we're willing to take leverage to about one five turns for the right opportunities and I think when we.
Really get below one times that tends to lead to.
Accelerated shareholder returns right and I think that.
That in and of itself should kind of give you the governors of how we're going to look at this going forward.
Yes.
Pretty clear thanks for that.
And my follow up just.
You're just a view of what Youre seeing out there from operators in the Bakken and Permian I think there may have been some modest deferrals.
Of your operators completions.
Completions in the Bakken are you still seeing that and how is the Permian setting up in terms of like just the normal non op opportunities outside of Matt mascot.
I think the Bakken some of the deferrals that we alluded to in our pre releases.
Really representative of maybe one or two operators, where we've got some outsize working interests.
Maybe more sensitive from a commodity pricing standpoint, we're having those conversations with the operators right now where we stand today.
<unk> thresholds are being met.
So as far as anticipated completions and whatnot, we've got that couched all.
Q4 timing, but that's also going to be dependent on logistics and everything else and so that could get pulled that could potentially get pushed depending on kind of that volatility.
And then as far as.
Texas and New Mexico goes it's steady as it goes obviously, we had some commentary around the mascot project.
Obviously very specific just given the stacked pay in and the overall kind of co completion activities that were run into ground with Midland Petro in that group, but everything else is generally steady as it goes and then I think you might have alluded to the ground game opportunities we.
Let's see.
Those come in in the door.
Every single day, and the size and the scope of what those look like are all very different.
I think that gives us the ability to get picky.
Terms of ore and employ our capital dollars.
I appreciate the color. Thanks.
Cash.
Thank you. Our next question is from John Freeman with Raymond James. Please proceed with your question.
Yes, good morning, guys.
John .
Correct.
First question.
<unk>.
On the AFP is how we went from $9 6 million in the first quarter down to $9 million in the second quarter, and we're sort of seeing some.
Deflation is starting to kick in or is there any color you can give on just where we stand on <unk>, maybe on a leading edge basis.
Yes, I mean I.
I think I would just caveat all of this I mean I think that.
Our view and I think it's one that's been proven by the test time is that.
Oil prices and service costs will move in sync with each other from a margin perspective.
And you've had a kind of unique environment over the last year, where you have seen.
Oil prices go down pretty materially natural gas prices stay down materially and activity has been coming down but costs. So we're taking some time to come down to meet that.
And I'm bleeding edge, you're starting to see that that's also juxtaposed against a period, where we've started to see oil prices rally.
So I think as we look forward.
I just want to caveat, it and say that.
While the last shoe to fall really where youre going to see and where you would see a material change the savings is going to be completions and the completion cost is only going to materially come down to the extent that the rig count.
Ultimately stays down if prices rise I would anticipate you're going to see the rig count come up modestly industrial that I think you are.
The same materials savings from here are going to be reduced so I would say as I've said to a lot of our investors.
Don't need to look really any farther than to the price of oil to think ultimately where the direction of service costs are going to go but more specifically to your tier.
I'll, let Jim talk specifically to any leading edge changes versus that $9 million.
I think anecdotally the conversations that we've had with our operators generally see that in more of a tangible casing. For example, even some of our smaller operators have seen a reduction in anywhere from call it 20% to 40%.
Based on some of the conversations that we're having earlier in the year.
So I think some of that's got a little bit of room to give some of that also has to do with logistics and some of the issues that were running into from a sourcing standpoint last year. Some of the other larger operators that we've been talking to.
Have been laying down rigs and some of that is strategic.
And going back to the service providers in order to kind of cut better deals drilling rates seem to be coming down marginally as well.
Next point I think we're going to stay relatively conservative, especially with the volatility that we're seeing in the commodity market.
Great and then just my other question on the leverage slide.
You referenced that slide 13.
Yes sure.
Where do you all sort of view leveraging that zero to one five times range and how do we talk about kind of flexing leverage.
The near term Canadian for certain growth opportunities, which obviously all you have done.
And in Spain here recently with a number of big transactions.
So.
In that slide talks about on the lower end of kind of harvest mode towards the zero leverage upper end is invest.
And Nick you used the word harvest in your prepared remarks, so I guess, it's kind of two parts.
Should we assume that that means you start targeting the lower end just given what you said about large scale M&A et cetera.
Comments on harvest, but then also what's not on that side is just the commodity environment.
Environment kind of overlay on this chart if you are not.
$90 World I assume that your leverage what you view as acceptable leverage is probably different than a cure in a $60 world.
Yeah, I mean, I would say that generally speaking, we don't were not running our leverage kind of just the one thing that this doesn't really point out two which probably should is that.
We're not taking any more thinking about this on a normalized ratio right, we're not running spot $80 through and making the assumption of a one five times at one times Levered at $80 Forever right.
Using a discounted price to that we're kind of using a mid cycle price in our mind, but.
So I mean, I think that to answer your question is the one thing I would point out to you.
Specifically look I think when you think about the uses of cash flow as you kind of reach those.
So.
Going back to my car loan analogy, whether or not that.
You're just you're just getting a better return for the investors by doing so, but obviously to the extent that the environment winds up being less so that's an obvious default mechanic for it but I think you need to have.
The risk metrics and kind of it at both the cyclical an oil price perspective, as well as an aggregate leverage perspective to a point, where you really want to do that and obviously the depth that we have to have a view internally that that is a good use of that capital. Because there is also the default always have just piling cash and waiting for a better day I don't think we're afraid to do that either I don't know if that.
It answers it specifically, Jonathan it's Tom here.
Didn't get there.
It does not appreciate it thanks a lot Nick.
In the interest of time, we ask the participants limit themselves to one question and one follow up.
Our next question is from Neal Dingmann with Securities. Please proceed with your question.
Good morning, guys. My question is on the second half and possibly 24 activity it sounds like.
I forget which slide this is on the it sounds like based on your prepared remarks, when looking at the slide.
You'll have a number of a material number of wells in progress.
Do you have confidence in your tools will ramp through the remainder of 2024 I'm just wondering.
It sounds like this is the case can you give us idea in.
Just the degree of that in which areas you will see the most activity.
Hey, Neal I think as far as kind of the areas that you reference.
I think it's going to be largely split kind of 50 50.
Maybe that gets pushed and pulled in your goalposts are kind of 40 60, depending on what's going on in the Permian versus the.
The Williston.
And maybe some of the larger working interest.
Or units that we have I.
I guess drilling down in that regard.
You'll see some activity on the Texas, Delaware side.
As well as the Midland Basin, We've also got.
The majority of our.
Delaware Wells in process are weighted towards Eddy and Lea County, and so to the extent that we see any sort of acceleration there.
We see some some additional exposure there from the Bakken standpoint, it's the big four counties Mckenzie, Montreal, Dunn and Williams that Hasnt changed for years.
Awesome and then just a follow up maybe for you or Nick I noticed you guys.
This in a while just wondering it seems like now on M&A you guys continue now really just a number of different types of deals versus you know early years. When you just take sort of a mineral interest in a well I'm just wondering going forward now you all have a preferred structure on M&A or does it matter and what type of deal you overseen thanks a lot.
Yeah.
Well all of the above I think where economic creatures I think we want to extract the best.
It sounds corny, but risk adjusted return rates. So there is the raw return then obviously any.
Engineering deck is going to run through but then you have to adjust that for the specific risks to the assets. So sometimes it requires governance.
I think Adam talked about this in his comments and I think this is something that I would want to.
Reiterate to our investors, which is that just because we've done it several partnerships in sort of bite on structures of late doesn't mean that we're not still very active in our traditional non op markets. In fact, I think that I wouldn't say, there's a preference one way or the other I would say the key things are that our capabilities are a lot larger than they were in that.
Mike B Y from happen stance perspective that you've seen that as well as the ebbs and flows of the <unk>.
Quality of assets to come to market I mean, we've seen several traditional nonoperating assets come to market. This year and they just happen to be pretty poor quality and you passed on them.
And so I think that it's going to come but that's not going to be the case every day.
And so I don't think Theres, a preferred structure I think we adjust.
Our return thresholds.
Need for governance or or other things depending on the concentration in a specific risk assets.
It's building on.
It's definitely going to be asset specific, especially when you get into the drilling partnerships in some of the co buy stuff right and so you kind of need to understand what the runway is.
On a prospective basis, Australia, you can buy an asset at a time, but then what kind of governors do you have in place in order to maintain that alignment so that it's going to boil down to the social issues.
How those discussions are going with the particular operator.
We've had operators come to us and propose buying an asset and it's something where they're gonna be renting the asset for a period of time and so is that the right partner for us.
Maybe maybe not depending on what we can put in those joint operating agreements and what everybody can kind of live with so.
It's as much the social issues when we are talking about some of these partner.
Partnerships as it is the assets themselves.
Thank you. Our next question is from Charles Meade with Johnson Rice. Please proceed with your question.
Good morning, Nick Academy, and Chad into the hole and O G crew there.
I think that I think I have just one question and it's on slide 10.
And first of all I want to say, thank you for giving US. This detail about you know about how the you know the actuals are comparing to your.
Your acquisition case, but my question is this.
How much it seems to me that.
Most of the Delta between your acquisition case and this new.
And the new I guess completion plan.
It seems like we've seen some of it in Q2, but most of it is still in front of us and and if Thats. The case is there anything that we can you is there anything that that the way that you know at the end of Q2. Your actuals were ahead of the plan does that suggest that we.
We're going to see that.
Well, we're going to see that gap grow in the back half of 'twenty three.
Certainly I mean to the extent that it continues at the pace. It has of course I mean, I think we take it.
One well at a time Charles So I think we've been pretty conservative in when I think we I'll give Jim a 100% credit and his team but.
Softball, maybe I'll take credit on top of that.
But seriously I think the answer is that we try really hard to take a conservative tact on performance.
And and timing for that matter because timing doesn't move all along.
Moves all around all the time, but I do think that we've been really encouraged really through every producing period on these assets of how the wells have performed even when there had been issues here and there like there always are on these things.
Really I think.
The old adage as you know in real estate is location location location and I think it's the same thing when it as it pertains to this asset which is this is just a this is a ferrari asset sitting right in the heart of Midland County, No virtually no vertical penetrations on our properties.
Just Virgin incredible rock and so the well performance are we surprised not really.
But also as a large project and Theres a lot of logistical things going on as you've noticed and that's why we've had to move some stuff around the <unk>.
And as we go and try to find better ways.
Improve the returns, but overall from a well performance perspective, I certainly think.
And I'll, let Jim add anything he wants but I certainly think that we're optimistic that we can see continued performance on the assets.
Yes, I would just add you know the original expectation was that there was going to be another batch of wells getting completed in the third quarter coming online kind of towards the end of the third quarter. So what you see on that graph there or the daily production is ramping that's kind of the last batch of wells for this year. So even though it is exceeding the original forecast you'd kind of expect that to just switch.
As you get into that kind of towards Q3, Q4, where we originally thought there would be another batch of wells up ramp production. Further we will continue to see production kind of decline until we get to the end of 'twenty three and then that next big batch of wells will start coming online in Q1, and Q2 of next year, which will drive the capital efficiency going into 2024.
That's helpful color Jim Thanks, Nick.
Thank you. Our next question is from Donovan Schafer with Northland Capital markets. Please proceed with your question.
Hey, guys. Thanks for taking the questions.
First I wanted to ask.
Talking about well costs I know for operators they have the real direct relationship with the <unk>.
Service providers in a lot of times, they negotiate that pricing.
At a time before you guys would even get there if he is from them.
I am curious.
Being.
That you guys are really kind of charting the path on the non operator business model.
Yeah, and reaching such large scale and you've talked a lot about scale advantages that you get.
I'm curious if you know as things stand today or or maybe it's the case for this as a potential thing in the future.
Could there be an evolution here or maybe you already here, where you're able to get better pricing.
With service providers is as far as what ends up strong flowing through the if you can imagine a case, where maybe an operator's dealing directly with the service providers, but if you add up.
Your smaller minority interest.
Across all of your wells in your your huge footprint you could have a service provider that actually has more exposure to U in aggregate than they do to a single specific operator. So I'm. Just wondering are you ever are you ever able to bring that to bear and get involved in that kind of level.
Conversation and negotiating pricing with our service providers.
And if maybe not yeah is that something you would ever aspire to is there a way where that ever make sense kind of evolving the business model.
I mean, it's an interesting concept the answer the short answer is no I mean, I think the one thing I want to tell you that the AAV is not necessarily like that.
If exxon is drilling a well for us for example, the A&P is just an estimate right. So it's not always tied directly to their latest service contract to cost, which is why oftentimes you can take the AAP at face value with the assumption that maybe in today's environment that we will see savings on the back end or in a period like last year, where we.
It might have a different assumption of where that well is ultimately going to cost versus the A&P. So it is really an estimate of needs and they try to have contingency pieces in them and all of those things, but they're not necessarily always leading edge.
Just like we didn't really see in the first quarter that debt.
The big.
A big change to those AEP costs, but there was an assumption that perhaps by those wells being cut.
Come in under budget effectively.
As to whether we could aggregate our interests and go to other service providers to do something the answer is no I will tell you where were significant.
Non operators oftentimes our credit profile is used to help the operating groups.
Get a better term just because obviously, we're a creditworthy counterparty, where a rated entity and stuff like that so in that respect we have kind of flex our muscle of time, especially into some of our smaller groups.
But I don't know if we could sit there and say hey, we owned 10% interest across all your wells and go to Nabors and lowered the rig rates I don't know if we're there yet.
I think the more realistic concept has to do with the drilling partnerships that we have in place.
It's all going to be again situational specific but.
If we put together.
Drilling program with an operator, and you kind of have those guardrails as to how many wells are going to be drilled and those sorts of things a lot of times, what will build into those contracts our covenants.
For cooperation with the service company and so the operators, obviously, taking the lead on that but when we're getting into water and takeaway and other midstream contracts.
Got it.
Our covenant with us that they need to provide those contracts to us we'll provide our input compare that to our underwriting and you don't move things along accordingly.
Okay, and just to be clear on that.
Or there's some cases, where you talk about the benefit of door credit kind of being brought into the picture are there some cases, where it's sort of a joint and several.
What are they called joint and.
Suffered or several liability.
That yeah that gives added weight to your credit because under certain contracts or something if the operator were to for whatever reason you know worst case scenario default then you guys you know.
Provide some of that to Paul.
Sure.
Or is it pretty much always like a joint and separate.
Liability, where youre the value of your credit goes just as far as your your.
And your minority interest.
Yeah everything is several.
Okay. None of these operators like dark development agreements or anything like that or joint ventures everything has got it got it wrong.
And then.
And then Mike and Thats why the.
Otherwise the operator under those contracts were not viable if they default that's right.
Georgia working interest owner in the tank.
Sizable chunk of the joint interest billings.
That kind of qualitative information is something that helps facilitate the process.
Sure, Okay, and then as a follow up with the Marcellus you know it looks like you guys had strong production there.
Adam I think you talked about I'm curious with the mountain Valley pipeline.
Provable happening with the debt ceiling, you know that happened at the end of May.
And I know there's been some holdouts just like the fourth circuit court, but it looks like just yesterday the U S Supreme Court.
You know the stuff gets all consensus and so the fourth circuit Court I tried to put a temporary hold on things U S. Supreme Court I guess yesterday said no you can't even do a temporary hold we're going to give these guys the benefit of the doubt and let them proceed with everything.
So it seems like the waves of the courts and everything is in Congress.
Yes at this point is really getting thrown behind getting the mountain valley pipeline done.
To service the Appalachian Basin I'm, just curious if that's if any of these news events.
If you have any color or commentary or thoughts related to that and your interests current interest and potentially the perspective interest in the Marcellus.
Not really dominant I mean, I think the big.
I think you asked something similar last quarter to the extent that it has a long term improvement for basis differentials OSM will probably see more development on our lands.
We don't really buy things in anticipation of events like this.
Obviously that would have some improvement on the basin as a whole.
Nick.
And I have been in the past that maybe we can actually.
Get infrastructure built without Kowtowing to special interest in this country, but that's a longer conversation.
It just takes longer.
It just takes Congress and the Supreme Court.
No I got it right in similar situations.
The access pipeline right I mean, it was all fits and starts and so I don't think we're gonna be planning on anything to Nick's point.
Obviously optimistic, but we're not making any business decisions around it.
Okay Alright. Thank you guys appreciate it.
Yes.
All right.
Thank you.
No further questions at this time I'd like to pass the floor back over to Mr. <unk> for any closing remarks.
Thank you all for your interest in our company and listening today, we'll see on the next quarter.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.