Q3 2023 Northern Oil and Gas Inc Earnings Call
Greetings and welcome to the N O G 30 quiet there 'twenty 'twenty earnings conference call at this time.
Participants are in a listen only mode.
Question and then there's actually follow the formal presentation, if anyone should they required the operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Evelyn if we're not vice President Investor Relations.
Thank you.
You may begin.
Good morning, welcome to N O Gs third quarter 2023 earnings conference call yesterday. After the market closed we released our financial results for the third quarter you can access our press release and presentation on our Investor Relations website our form.
10-Q will be filed with the SEC within the next few days I'm.
I'm joined this morning by our Chief Executive Officer, Nick O'grady, Our President Adam Berlin, and 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 our operations and business development activities and Chad will review, our third quarter financials and walking through updates to our 2023 guidance.
After our prepared remarks, the executive team will be available to answer any questions.
Before we begin 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 each.
These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by our forward looking statements.
Those risks include among others matters that we have described in our earnings release as well as in our filings with the SEC, including our annual report on Form 10-K, and our quarterly reports on Form 10-Q.
We disclaim any obligation to update these forward looking statements.
During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA adjusted net income and free cash flow reconciliations of these measures to the closest GAAP measures can be found in our earnings release with that I'll turn the call over to Nick.
Thank you Evelyn welcome and good morning, everyone and thank you for your interest in our company.
Alright, I'll get right down to the five key points.
Number one all is well.
Operationally things are going swimmingly last quarter's activity slowdown became this quarter's acceleration.
And our mascot project well performance continues to impress.
Production was near the upper band of our guidance the oil cut was up significantly.
Our operating unit costs were lower.
Additionally, we're pleased to have raised our dividend again for the 11th straight quarter.
R. R O C. He picked up a 160 basis points this quarter to 24, 5%.
Even as we capitalized a large transaction and continue to invest heavily in our future.
It's a testament to the rigor of our investment process and the scale we built.
Number two.
We have entered harvest mode, but we're pursuing a dual path.
We generated significant free cash flow from our assets this quarter about two seven times the amount in the prior period and we head into Q4 looking towards a potential record quarterly figure.
Free cash flow has not empirically proven to be a driver or valuation marker for stock performance, but it is definitively a provider of shareholder returns and more importantly, it is a powerful convexity tool, which provides optionality for dynamic capital allocation.
We believe we've proven to be adept at doing.
When you have free cash flow you effectively can choose your destiny. Our choice has been and will continue to be to serve both masters deliver solid dependable and growing cash returns. While also driving total return by investing to grow our longer term profits.
Number three.
Opportunity and dominance.
We continue to see compelling investment opportunities big and small.
We had elevated ground game success in Q3, and larger and smaller packages are spooling in the Permian and Appalachia.
Oh Jeez capital allocation has benefited from the domination of our niche.
We find ourselves involved in nearly every operated and non operated M&A process, which is providing us an incredible range of opportunities. So even as we're larger we're finding that options in front of us allow for increased returns and more flexibility shorter Jeremy This is driven capital spending higher but spending today provides.
Returns for Tomorrow, Adam will give more details.
Number four bigger and stronger.
When we started this journey back in 2018, our board chair was clear and his belief that scale will drive powerful outcomes for energy.
Scale was the key to grow the company beyond the over Levered balance sheet, we inherited and scale will provide more stability and diversity to our asset base.
Would lower our long term cost of capital and provide access to a larger investor pool.
Over time scale would lead to higher return opportunities with more influence for us scale.
Scale with grant access to capital to purchase assets that our competitors could not because of size or concentration.
Scale has never been more important and our thesis is borne itself out over the past several years.
The perpetual challenge of this strategy was and always has been to maintain our high asset level return standards and to keep focus on core assets.
We could have simply bought lower quality assets to temporarily create scale, but the harder path was to actually improve our asset quality and return profile, while simultaneously growing the business.
We have achieved this and then some.
With interest rates and the overall cost of capital the highest in over a decade never has side has been more important.
What we're finding is that scale begets scale now that were bigger the opportunity set has grown in lockstep.
<unk>, a bigger and stronger ties into my final point.
Number five optionality leads to potentiality.
We recently raised $290 million of equity capital in a bought deal.
And many of you rightfully so might be asking why after all I. Just described how we're generating significant free cash flow and that our leverage levels are in good shape and set to improve further so.
Why did we raise capital.
As we discussed our future with the board, we highlighted to them that the investment opportunities big and small coming to us.
We also discussed how the economic and geopolitical situation in the World candidly is as complicated as it's been since the financial crisis 15 years ago.
And so knowing what's in front of us and also knowing the conflicting signals in the capital markets, we collectively decided to simply derisk the path to delivering growth to you in the future.
We now have the flexibility to act no matter what happens in the macro environment.
Options in front of us now carry less risk.
To the extent, we see a market meltdown, we can aggressively purchase securities are assets for sale to these.
Things stay the same or better we can continue to do what we've been doing while staying within our self imposed leverage constraints.
Our capital raised was not a call on our stock price and certainly not because the capital is needed at this very moment as you can see from the results today.
Rather we have shrewdly astutely and carefully found growth opportunities that have driven this business and our profits higher over time.
With the extra capital that you provided.
Trust that when the time is right, we will allocate it to benefit all stakeholders.
Doing this is why our corporate returns have been driven ever higher as risk has declined.
We delivered superior total return.
As I've said in the past we are a company run by investors with the goal of growing value for our investors, it's our fiduciary duty and it's how we are incentivized.
In the short term, we may make difficult decisions that aren't always popular but those decisions are focused on driving long term value.
And what is most exciting is that I am confident that we can continue on a similar path for the foreseeable future to drive growth for our investors we.
We will keep our focus on delivering strong results over time.
We thank you for taking the time to listen to us today Andrew.
And your continued trust in us and interest in our company with that I'll turn it over to Adam.
Thanks, Nick.
In the third quarter, we saw an acceleration of activity on all fronts setting up for a solid 2024 campaign.
I'll start by reviewing this quarter's operations and then turn to the M&A landscape.
And our business development efforts.
During the third quarter turned in lines rebounded to a company record of $22 six net wells are 64% increase quarter over quarter.
Our organic assets did the heavy lifting with 18.9 net well additions while our ground game turned in line three seven net wells the majority of which came online towards the end of the quarter.
Activity had a healthy balance between the Williston and the Permian and as we enter the fourth quarter, we expect to see elevated turn in lines before seasonal easing during the winter period.
Well performance has been encouraging as our mascot prospect continues to outperform expectations.
And while it is early our new operating partners and vital burrstone and soon to be Permian resources have all been making improvements to our recently acquired co developed assets.
Continuing with the theme of acceleration our wells in process again grew to an all time high as we ended the quarter at 74.2 net wells by nearly 10% increase quarter over quarter.
Driving activity levels, our organic acreage added $14 six net wells and.
And accounted for one third of our Permian activity.
Our acquired acreage over the last two years continues to show its value.
We added another 9.3 net wells from the closing of our Novo transaction and the ground game accounted for an additional 5.5 net wells.
In total the Williston and Permian combined to account for nearly 80% of our wells in process, while the Permian has grown to 60% of our oil weighted wells on the DNC list.
From under 10%.
This is a 34% increase relative to our producing wells, which will enable us to do more with less and less rig activity. If we so choose.
Inbound well proposals also saw an acceleration as we reviewed 194 <unk> up from 140 proposals in the second quarter.
This was driven by the Permian where activity levels more than doubled from Q2 to Q3 and also accounted for the highest number of net wells evaluated during the year.
Our Williston activity has remained stable and consistent as we have seen over 100, well proposals in every quarter. This year, while activity levels have increased across the board. The quality of wells continues to be strong with the expected rates of return far exceeding our hurdle rate.
Even as we sensitize, our evaluations for a lower commodity price environment.
This translated to a greater than 95% consent rate during the quarter as we partner with our top tier operators.
Turning to well costs.
We saw absolute well costs rise this quarter, primarily from higher cost Permian wells, making up a much greater proportion of the total activity.
Normalizing for lateral length and basin estimated well costs were relatively flat quarter over quarter.
Given the volatility in commodity markets, we remain conservative in our views on costs as we plan for 2024.
We continue to have conversations with our operating partners and we've seen some of our larger operators along with some of our more adept operators drive costs down.
Well seeing others get squeezed those contracts roll off.
Moving onto our business development efforts and the M&A landscape.
We continue to adapt to the ebbs and flows of the market.
As I alluded to on our second quarter call. There was a bit of a lull in quality large scale assets in the market over the past few months.
During that time, we were able to pivot early in the quarter and capitalized on the dislocation, we observed with lower commodity prices and stayed busy with our ground game.
We closed on eight transactions, adding an estimated 5.7 net wells in process and 514 net acres weighted towards the Permian.
This brings our year to date activity to 31 transactions for an estimated 24.9 current or future net wells and approximately 1800 net acres.
Okay continuous development within our tier one inventory.
Through leveraging partnerships with our operators, we've been able to aggregate and high quality areas, while gaining line of sight to development.
We continued to reap the benefits of more opportunities to deploy capital to accretive transactions as we scale the business with Brazilian assets.
In the past 12 months, we have added over 25000 net acres and the Permian more than tripling our position.
Looking ahead, there are a number of high quality prospects that we're reviewing ranging from traditional nana packages to minority interest sell downs from operators.
Joint development programs.
Put simply we estimate that the universe of on and off market opportunities that are available to us has never been broader.
However, we will remain consistent in our underwriting focusing only on potential transactions that will benefit the business for the long term and that generate superior returns that are investors expect.
With that I'll turn it over to chat.
Thanks, Adam.
I'll start by reviewing our third quarter results and provide additional color on the operating update were released on October 25th.
R Q3 average daily production cost 100000 per day for the first time in company history.
A 13% increase compared to last quarter.
Oil volumes were up 16% over Q2, as we rolled in our forwards and noble acquisitions.
And benefited from the reversal of most of the prior deferments and the back half of the quarter.
But the real story is the addition of record level of turn in line wells and the continued strong well performance across all of our basis.
Our adjusted EBITDA was $385 $5 million in Q3.
Up 32% over the same period last year.
And our third quarter free cash flow was $127 $8 million despite.
Despite continued elevated levels of organic and inorganic investment <unk>.
Commodity price volatility and to a lesser extent until deferrals.
Just the EPS was $1.73 per diluted share.
Oil realizations, we're better than internally expected due to continued strong in based on pricing and a higher percentage of barrels coming from the Permian.
Which is typically priced tighter than the Williston.
Natural gas realisations, where 82% of benchmark prices for the third quarter.
Below our year to date run right.
With realized actuals in the Marcellus down over 30% from last quarter is basis spreads widened for the shoulder season.
The biggest driver is the NCL to natural gas ratio.
Which moved back to more normalised levels in the quarter.
NGL prices were relatively flat quarter over quarter.
And natural gas prices were higher.
Hello, He came in at $8.76 per Bowie.
Below are annual guidance range.
Primarily by increased Permian volumes, which have a lower cost structure than the Williston.
On the Capex front, we invested $216 $6 million in drilling development and ground game capital in the third quarter.
With roughly two thirds allocated to the Permian.
And one third of the Williston.
We had previously expected or cap ex cadence for the second half of the year will be equally weighted between Q3 and Q4.
However.
As a result of having access to high quality opportunities.
Success on the ground game, along with the pull forward of organic activity on higher commodity prices with shifted more investment into the third quarter.
This shift and spend let us to adjust our full year capex guidance, which I will discuss shortly.
After quarter, and we took the opportunity to further enhance our balance sheet.
In early October we completed a $290 million equity offering price down just 475 basis points from the closing price truly highlighting our access to capital.
More importantly, it was done in the banners that had minimal effect on our existing investors and provides us with capital to pursue significant M&A opportunities within the confines of our stated leverage goals.
Our expectation is at the near term dilution from the offering can be more than offset over time through value enhancing acquisitions.
In the meantime.
We have accelerated a path towards our stated leveraged target.
Now turning the annual guidance.
We have made a few adjustments which are highlighted on page 16 of our earnings presentation.
We are tightening our annual production guidance to 97000 to 99.
Per day.
The main drivers for Q4 will be the timing of completions, giving a record number of net wells in process.
And seasonal factors, particularly in the Williston or well timing can be highly sensitive to weather.
We now expect that will spuds for the year in the range of 76 to 79 that wells.
Which along with our till guidance should assistant modeling.
The higher level of net wells explain the bulk of the move in the Capex, which is ultimately just growing 2024 activity stacked under this year's capital.
Our annual Capex guidance has been revised to arrange a $790 million to $820 million for.
Afflicting your data vestment activity ahead of our prior forecast and as I, just mentioned to increase blood count.
Our full year gas realisation guidance has been improved to a range of 95% to 105% of Henry hub.
To reflect the year to date realizations, which implies more typical levels for the remainder of the year.
And lastly, we've also tightened expectations.
Oil differentials to arrange a $3 to $3 75 for the year.
As we exit drive in season at oil prices have increased the began to see seasonally wider oil differentials starting at the end of the third quarter and expect that trend to continue through the winter.
As we finish up 2023.
We are extremely well positioned for another year of strong growth in 2024, given our recent acquisitions and record wells in process.
We're still working through our 2024 budget and look forward to providing guidance details on our year end call.
With that I'll turn it back over to the operator for Q&A.
Thank you.
At this time.
We will conduct a question and answer session. If you would like to ask a question. Please spreads Taiwan on your telephone keypad, a confirmation Tanya will indicate.
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And our first question came from.
Scott handled RBC capital markets. Please go ahead.
Yeah things are good morning, all.
Hey, Nick I can't help kind of thinking back a few years ago and.
I chatted with from you know about like.
Just growing scale what's important.
For the long term for northern and certainly you guys have.
Move quite a bit from that they pick up like somewhere around three fold when you kind of think about the future.
And the opportunities says you see in front of you and just in general the maturation of certain parts of the U S. Like is there a.
Is there an optimal level you think you know that there is for northern and if you could also kind of parlay into this answer how.
How does the.
The the higher interest rates kind of impact your ability to kind of you know.
M&A transactions are C just things out there.
Yeah, I mean, I think I'll answer the latter part first Scott when the cost of capital goes up so to do the discount rates and so we've observed.
Clearing discount rates have risen from a strategic perspective, it's definitely benefited us as our cost of capital is probably even more static than than that of our private peers and it just it just required bank capital or things like that so it's definitely helped us but you see it particularly you saw him.
A wave in the last couple of years of people using asset backed securitization stood to finance TEP heavy acquisitions in that game and you know it gets really tough win win base rates are over 5%.
To the other point I think I got asked this question recently by one of our investors and I think my answer would be our fiduciary responsibility as a company is not to decide what sizes. The right size. It's really our job is to earn high returns and grow the business and make more money for.
Our stockholders and I think that that's our path going forward.
And I think.
Well shale overall is maturing.
I'm a non operated perspective I think it's wide open for us the opportunity in front of us as as big relative to the sizes of our company as it was three or four years ago and so I.
I feel very confident that our team can continue the path that we have.
From a law of large numbers may be that percentage doesn't move quite at the same at the same pace, but.
An opportunity said.
Frankly, we're as busy as we've ever been I dunno, Adam if you want to add to that.
Touch the majority of the scale begets opportunity right.
Touchdown in my prepared remarks in terms of the different structures that are now available to us that gives us the optionality to deploy capital.
We see fit.
Rewind five years ago. It was really just the ground game banana packages that were beholden to.
Now we're looking at code bearing exercises minority interest Buydowns joint development agreements and all of that is that scale right. So I think we're a much larger and better capital provider and partner. So a lot of our other operating partners that gives us significantly more opportunity.
Mmk I appreciate that and does my follow up.
I know it can be a little bit early for 2014.
24, 2024 thoughts but.
I was kinda curious, especially with respect to the mascot, which was your first GB.
You talked about the world looking good can you talk about the pace of that going the pizza completions for that and production going into next year and you know and.
Just you're kind of thoughts on how that sets you up for 2024.
Well I'll cover just a little bit which is obviously, we shifted some of the development into 2024 and so it really would have been peeking I think both in terms of volumes in terms of capital in the fourth quarter and some of that shift. So I mean, I think that the next batch of wells is really it's obviously been performing extremely well.
And we would expect.
The next major batch of wells comes on sort of early in the second quarter adamant.
Performance is <unk>.
13%.
Better overall versus kind of our forecasts, Scott and as far as kind of modified schedule girls that we discussed last quarter, we'd expect production declined a little bit.
And the fourth in the first quarter, and then began wrapping materially in late March.
Next point that some of those larger batch of wells.
Come on line.
Okay. So then from an overall Acadians perspective, I mean, you guys should be starting next year at a at a in a pretty good spot overall.
Yeah, Yeah, I think Q2, Q3, Israeli where we see kind of the bulk of the chills comment on the Max mascot project Yeah.
We typically see is seasonal slowdown in the first quarter, particularly in the Wilson just around Canada.
Whether piece, but that's been the pattern for almost every year.
Yeah.
Our next question came from.
Quarter, Nick My first question is on M&A specifically.
Sounds to me like you all have more than I mean continue to have now more than ample M&A opportunities ahead added that's what I call. The non up market cornered I'm just wondering could you speak now when you look at your deal criteria. How these requirements have changed.
Maybe you know <unk>.
Different standards today versus when you were looking at maybe a year or two ago because again it just seems like.
You know just how creative of deals are today. So I'm just wondering when you and Adam chatter looking at some of these kneels how the requirements of shifted.
Yes, they did.
And the last three or four years, probably even on the ground probably a thousand basis point increase in our own clearing price and that's a function of the cost of capital. It's also a function of where we are targeting and we've really changed some of our focus to where we we feel like we can get a much bigger.
Much more critical to that bar, that's generally through concentration of ours or scale and size.
I don't know.
Answer the other perks that yeah, I mean as far as the criteria qualitatively.
I think we're relatively agnostic in terms of overall structure, it's really going to boil down to the overall rate of return and asset level returns there Sir.
Going to change our stripes.
In that regard big deal small deal I'll take the same amount of time and so.
Where that probably comes into play a little bit more as the.
The ground game side right as a 1% working interest really going to move the needle for us and frankly.
You get into the larger ground game deals with the higher concentration. The competition is relatively limited right. When you think about your competition and what their capital pool is and how they want a diversified kind of their capital allocation.
So we've definitely stepped up in that regard but.
Far as overall structure or quality those types of things.
I think we're going to continue to stay the course with what we've done in the past.
As far as where where those opportunities are located that say.
Primarily that's going to be in the basins, where we're at permanent obviously with the regular will activities there in the Delaware to be a bit more specific is generally where we're seeing those opportunities.
We've been surprised about some of the things that I've come to market and we've been approached on in Appalachia.
As well as the Bakken.
Not to mention the Haynesville does that work in this particular price environment, maybe maybe not Jack the Eagle for that's been.
Area of interest, but given the maturity the way things are blocked up there. We just haven't found the right assets.
Great rock.
Alright got it obviously take into consideration a political environment.
There and so I think.
A lot of these other places.
I forgot the Utica that's been interesting obviously, you gotta be under the right operators there.
Those four areas are areas, where we're obviously keeping our ear to the ground, but they're gonna have a much higher bar that's ticket things time.
And you know I mean, I think the one that you have to take into account as commodity environment or enemies commodity prices are relatively high.
And so we generally stick to our netting we want Brazilian assets racing you really want to focus on lower breakeven.
That's especially in an environment like this because.
Whenever the discount rate is sensitivity on a discount rate is going to be very different depending on if you see a pullback in prices as well activity. So.
Not all returns are they might be underwritten alike, but the resiliency of them are different and that's why you generally CNS focus on higher quality assets in areas that are always active.
No. It makes total sense and then secondly.
Secondly.
Maybe I'm trying to get an idea of how do you you gave some good ground gained ground game update as well as your dividend growth. You recently, just talked about that and I'm. Just wondering you know.
Going forward, how do you sort of balance the production and show a return growth.
That is that is the special sauce, and I think that that in general.
We want to be where conservative by by nature.
<unk>.
In terms of raising the dividend early it's about $2 million additional capital this year than we previously plan I think the board was very confident that we were there.
And we've obviously done a ton of hedging and derisking of the assets, we bought over the past quarter.
But I think over time I think we view there is upside to dividends I mean, I think you can easily look at the environment. We're in today and say well why are you paying a lot more capital and I think it's because we're not just thinking about the environment. We're in we're thinking about the environment that could be.
Because I think.
There's a there's a fine balance in our business about giving everybody what they want right away versus being a good steward of capital and thinking about the potentiality of outcomes.
So I think we want to be purposeful I think there is there upside to our current dividend plan of course there is.
And it will take that in stride asked me achieve goals and as we get there but.
But I think we want to be careful I also think and you've heard me say this quarter after quarter, but we really do think about capital allocation in total return which is that.
At the same time, we want to see we want the flexibility to dynamically allocate that capital. So that we can create more dividends for the future not just as much as we can get today and so it's a fine balance.
Redone.
<unk> studies with our investors and I think that the.
The view is that one a dependable regular dividend is the way to go.
I think that's been proven out over the last year I didn't that wasn't very popular when I said that a few years ago, but I think people have come around to that and I think the second thing is that you want something that's sustainable and has a path to grow and they want to see a squirrel or profits because I think ultimately that's been the driver of why our stock has performed better than peers.
Not just because we're paying a dividend, but because we're providing a dividend and providing some growth and as a non operator, we don't really run the same risk. We don't have the same inventory concerns at some operators may have and we don't affect overall supply.
Perfect. Thanks, guys.
Good morning, and thank you for taking our questions on a very busy morning.
Yeah. So in the opening remarks, there's some commentary related to seeing some contracts potential.
Potential costs going lower to contra.
Moving lower as well as some.
Operators potentially being squeezed as contracts would arrive roelof. So how do you think about what are your thoughts that you sort of look at the at the Permian in the park and and maybe the Marcellus.
As far as how you think Clarke cost play out next year operators.
Yeah, I mean, I think that operators are always finding ways to be more efficient drove faster and find ways to to get more bang for their buck and I think thats productivity improvement never really stops and so there's always some benefit to that I think that you have to take the practical reality, which is that you've had the rig count come down the completion.
The fracking pieces the most.
70% of the well cost rates a rig rates are down.
Ancillary costs on Tubulars cassander down water handling down.
But at the end of the day, those really don't move the needle all that much unless the Costco completions go down and that's really going to be dictated by the number of wells being drilled in the rig count and the number of wells being drilled down always flipped with one another certainly there's a lot of static costs in between there and so you have to think about the commodity environment that we're in right we've seen.
Commodity prices drop this year, and then come back up and so if if overall levels are stable and you do have inflation to labor and other costs over time.
I think we view that costs are going to be relatively static unless something materially changes if gas prices for example, where to stay weak for another year and esca gas activity falling off those those those completion Cruz may have to move and compete for services and you could see some further cost, but I don't think we necessarily want to.
On that.
And so I think that where we are now I think things are stable.
Our costs were up quarter over quarter, but that's a bit of a misnomer because it's really a function of the Permian may.
Making up a higher proportion Permian wells cost more than <unk>.
Secondarily, the lateral length on our walls.
<unk> August so on our kind of curved lateral slip based on agnostic basis, they were relatively flat.
You want to add to that.
That's the reason why we focus on partnering with the larger operators the conversations that we're having right now I'm in a reg levels fall out of those guys are going back and service providers laying down Riggs.
You can still keep and maintain your operations plan.
But still be able to kind of flex your muscle <unk>, we've got to manage the volatility mentioned that <unk>.
Quarter on the call <unk>.
Commodity prices go higher than will expect to see Wildcats.
And likewise will see a gap downs and then Something's Gotta give there and I think as we manage all of this volatility we're gonna stay conservative, especially for going into 2024 planning.
Appreciate it and then for a follow up question I think is three there Chad is just.
Now with the acquisition lifted with the deals that you've done.
Do you see the trajectory of cash taxes over a multiyear basis at this period of time or northern.
Yeah, I'd I talked a little bit about on the last call. Adjusted my prepared remarks, I mean, it hasn't really moved.
We contemplated novo in that in that last year, we kind of knew what we had so.
I think it's still of 2024 items, it's going to be to a lesser extent in 2024, and then obviously, it's going to be a bit more fully loaded and twenty-five and beyond.
Alright, very very helpful. Thank you.
<unk>.
[noise].
Ladies and gentlemen, I apologize for the technical difficulty we will move onto our next question, which comes from the line of Paul Diamond, which city. Please proceed with your question.
Hi, Good morning, all and thanks for taking my call I just a quick one for me talk a little bit about the shipping capex. They just wanted to get your.
Any idea on how that goes I had like it was 42024 should we think about this is more of a.
Quickening of cadence over the course of the year or is it something that's more there was you know that one time opportunity, it's kind of broke out block forward.
It's a little bit of both Paul So amazingly he saw some kind of 2024 pull forward and obviously some AD hoc capital.
I think.
Or anything like that but.
We've looked at the 2024 ranges of consensus from you know from sell side analysts you know I think it's around.
111 to 170000 barrels a day equivalent.
Call it around $840 million, a capex and I said I would say based on.
The reason that we.
Until the reporting year and before we share guidance is first.
And foremost and this is important to your question is that were returned driven not growth or production driven.
So we want the time to take a look at all the drilling proposals and projects in front of US and then look at the timing of those in everything from completions to overall cost to provide the optimal plan I do thank those those numbers are achievable, though.
To the extent that we produce lessons spend less obviously, we generate more cash that extent, we spend more we'd likely produce more.
Generate less in near term cash so.
We will make allocation judgments for optimal total return.
Whether we feel we have those projects that meter hurdles.
But I will say you know given the opportunities we're seeing everyday it's always a balance of meaning what we say, we're going to do and juxtaposing now with our fiduciary duties to Rowan deliver profits.
So I also just as a side note one of the things that I always I'm concerned about is that we will report a year and in February and a lack of change in the commodity market between now and then and so I don't think we want to be in a position where we have to do this twice and given how volatile it's been given how wacky to match.
<unk> has been has never been more important to do this once and to do it right.
Thank you and move on to my next question, which is coming from the line of Triumph need Wisconsin Rice. Please proceed with your question.
Good morning via Academy chat and the rest of the the energy team there Nick I want to go back I I'm not sure. It was coming said, you've made or or the Adam made either prepare comments or earlier in the day, but you referenced about how you know interest rates are higher.
And that moves the hurdle rate up across the board.
Curious I've talked to some other some other companies who are active in the market and they have mentioned that.
There's a little bit of a of an issue between with what they were saying that a little bit of issue in the bid ask spread in that.
And that to ask the S. I it hasn't really had not really adjusted for this higher interest rate environment.
When would you need to use a higher discount rate on the P. B PS and so I'm curious if you are seeing that and and if so if there's any kind of movement to a resolution to any other any anything other.
The other dynamics that may be surprising given the the move and the risk free rate.
Yeah, I mean, I don't think I've ever met anyone who didn't think their children are more beautiful than everybody else [laughter].
So is that a surprise me that the social issues around Andy are the most important and most difficult to come over with just that.
We feel like we generally have a pretty good pulse of where things are going to trade for and what they're worth.
But you can lead a horse to water you can't make it drink and we spend a lotta time banging our heads against the wall with people who have wildly unrealistic expectations.
You've seen a flurry of M&A this year at the operated in operated side, but.
But there have actually been a number of sale processes that we've seen go dormant just because people had completely ridiculous assumptions of what their assets were worth.
And so that is the <unk> the thing we have to navigate and honestly a lot of times on the front end.
Will decide or or not decided to participate in something because of the counterparty and whether we think they're realistic cellar, maybe look really good assets are gonna still sell for good prices and weaker assets are going to get weaker prices, but I.
I don't know that's the art of the deal different basic stuff right.
Our current parties as to where we're coming from.
That's the way that.
Hell Bridge some of that bid ask spread in terms of the overall expectations that make a minute or two but yeah that works, yeah, I mean, 90% 10% of that yeah.
60% of the time.
I'd be remiss, if I didn't feel a movie or something so you know I'm always reminded that the movie trading places and.
China pawn his watch and he says well Philadelphia's worth 50 Bucks.
So we deal with that every day.
Thank you. Our next question is coming from the lineup are nothing changed.
Please proceed with your question.
Hey, guys. Thanks for taking my questions I want to start off with the ground game. So you know it seems like you see simultaneously a lot of opportunity there while also not a lot of competition. So it so it's kind of economics and opportunities.
Really attractively all at the same time look what you've talked about with larger.
Larger kind of more of a little larger package deals.
And you know some of those bid ask spread stuff on larger probably M&A.
So I'm I'm curious.
Like from my understanding is.
Maybe what's going on with the ground game is it's like.
You know people get in AFB and they've got to make a decision quickly and if it's an operator for someone.
With a lot of kind of different irons in the fire in a in a limited.
<unk> they planned for this year, if there's an acceleration and activity then they're not ready to pull the trigger on all of those fees or consent to them and so it kind of economy becomes almost like a scramble.
So maybe there's more of this.
Scramble, that's relevant to like the ground game kind of iffy market.
And then.
People dealing with limited budgets go maybe some of that runs up against the S G stuff or less capital.
Maybe not as quick to respond to.
To a better commodity prices and all that so that's kind of my understanding was so can you confirm like is that what you're seeing and that's kind of what is happening with the ground game or are there other dynamics that are making it so particularly strong right now.
Directionally, you've got one of the themes there right you've got operators that shareholder return requirements riveted by Baxter wanted to drill their own wells whatever it might be.
Then they've got their own set budget.
Current operators handle their nana.
In different ways.
Those folks are packaging, it up and selling it some of them are selling.
Oh, well proposals as they get then.
And then you've got other operators in order to manage everything.
What I kind of alluded to.
The second quarter call, where they've got maybe two obligation wells, but it makes more sense to do cube development and they wanted grill six well how do you manage a capital there you can find it on our partner salt on your interests.
Mccary or whatever or promote or whatever it might be.
And your drill additional wells in that regard. So I think that's definitely a theme that we see and I don't know that it's necessarily change in the short term we've seen that.
Forever I'd also add uhm competition side of things, there's definitely competition, that's just what level of competition or you're dealing with what size.
Transactions and that goes back to the comments that were made earlier on the concentration number of wells.
Average working interest.
All that good stuff, so you've got a handful of different dynamics that better plan. You've also got it you know.
What funds are coming in of the year like Gangbusters generally we're not nearly as successful on the ground game on front end of the year, where everybody's kind of flush with.
Dash and they've got their budget set and they wanted to deploy it and then by the end of the year everybody's kind of shot their bullets, but the a F. As in the drilling rigs dot com and you've seen some of that.
R Q3 reporting here sucks, it ebbs and flows right and it it's going to be the same thing.
Commodity pricing I think it's.
It's almost comical when we see oil <unk> north of 90 to 95 Bucks a barrel or competition, we're getting outbid two to three times and then as soon as everything pulls back you know everybody starts running for the hills, but it's just a function of the market.
Some things can be explained Something's cat, yeah, I mean I think.
Third quarter success in the ground Donovan is really predicated on the second quarter weakness in oil prices. So the bulk of those transactions are being worked on in the second quarter and likely close in early third quarter.
You really see the lights of the eyes of people. When crude is 60 here you know in the sixties or low seventies and today's cost environment and that's when we tend to be the most successful and then Conversely to Adam's point L. A month ago, let's put it in the nineties were or.
Shaking R headset, and where are we see things transaction and that's just the way it goes.
Thank you. Our next question is coming from the line I've Charles meet Wisconsin right. Please proceed with your question.
Apparently I had a a copyright infringement by quoting trading places and the operator cut me off so sorry for that [laughter].
[laughter] Hey, the follow up question I wanted to ask was you I think Adam mentioned in when you were talking about the the a and the opportunity said I think he said that something surprised you of what you are seeing coming out of Appalachian, especially in like you guys have been really active and the Permian and the last call at 12, or 18 months, but but what what is surprise.
Think about what you're seeing in in Appalachia. Now is that is is is that maybe.
It may be moving back into focus for you guys.
Yeah, I mean, I don't think it ever went out of focus I think last year, we bought the asset and gas basically ripped from day one.
Which made it more challenging panic, when frankly, especially gas, which is even frankly more volatile than than oil more cyclical.
You know buying we looked at a handful of things last year, and just could never get comfortable that buying stuff in the six dollar environment was a good idea.
But like the fact that it's been bad for the bulk of this year and suddenly.
Start to become a lot more precious to those those counterparties and it's shaken loose some activity and there are a lot of exciting things out there there are also.
A lot of sort of special situations there were.
Some of the more creative structures that we've we've done in recent times can be very.
Appealing to groups that may or may not want to sell themselves entirely and things like that but I do think we have to be.
Naturally more.
Structured in Appalachia, the land structure.
Pennsylvania in particular is very different than in say, new Mexico or North Dakota.
So it does quote narrow the field in terms of how we restructure these things, but I think at the end of the day.
When it comes to Nonoperated interests. So many operators may want to control all of that but then when they are bleeding money suddenly those interests become a real thrown on their side and they need a source of capital.
So I think we've we've been reviewing I think every everything under the Sun in terms of structure, there, but I think we're we're probably a little bit more optimistic and I think we take it each day. So don't don't take it with a grain of salt, but that that we can find ways to grow that position over time, Yeah. I think there is interest last year, but going back to the home.
There are spread Brian volatilities going to widen that significantly from a seller's viewpoint.
Here's an <unk>.
And settled down a little bit.
Be a little bit of a backlog and somehow I think we're having some additional conversations with counterparties, where it really didn't even make sense to have those conversations in the past periods.
I think we want things that you know if gas goes back to two 250 still work I mean, it doesn't have to be pretty but they will work.
And a lot of assets that tend to come for sale and gas is $6 look great but.
You know there's the undeveloped has no value in an environment like this I think that's been obviously the challenge and the Haynesville, It's an amazing place.
But ultimately you Wanna be in an environment, where you can have some confidence in the outlook and I think the strip certainly gives you that confidence, but the spot price that's not I mean, obviously, it's been a little bit stronger of late but I think that should.
Get you there if that makes sense.
Got it I appreciate that a detailed thanks guys.
Yeah.
Cleaning remarks.
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