Q3 2023 Northern Oil and Gas Inc Earnings Call
Regions and wild caught them choose the N O G 30, quite there 2023 earnings conference call at this time all parts.
But in a listen only mode.
A question and answer actually follow the formal presentation, if anyone should require greater assistance. During the conference. Please press star zero on your telephone keypad.
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It is now my pleasure to introduce your host Evelyn if were not vice President Investor Relations.
Thank you.
You may begin.
Good morning, welcome to <unk> 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 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 walk you 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 <unk>.
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.
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.
<unk> 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 everyone 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 and our operating unit costs were lower.
Additionally, we're pleased to have raised our dividend again for the 11th straight quarter.
Our our oce ticked 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.
It is definitively a provider of shareholder returns and more importantly, it is a powerful convexity tool, which provides optionality for dynamic capital allocation something we believe we have 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.
Nrg's 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 term. This has driven capital spending higher spending today provides.
The returns for Tomorrow, Adam will give more details.
Number four bigger and stronger when.
When we started this journey back in 2018, our board chair was clear and his belief that scale will drive powerful outcomes for NRG.
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.
It 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.
<unk> would 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.
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've 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.
We are finding is that scale begets scale now that we are bigger the opportunity set has grown in lockstep.
The theme of 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.
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.
The options in front of us now carry less risk.
To the extent, we see a market meltdown, we can aggressively purchased 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 raise was not a call on our stock price and certainly not because of the capital was 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 and it's.
We delivered superior total return as.
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 turn in lines rebounded to a company record of $22 six net wells with 64% increase quarter over quarter.
Our organic assets did the heavy lifting with $18 nine 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 two 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 three net wells from the closing of our Novo transaction and the ground game accounted for an additional five five 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 D&C list.
As we have taken market share. We are also seeing our average working interest grow to 13%.
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.
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.
While 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.
E North of 30% on our 2023 ground game.
As I mentioned earlier we.
We closed our novo transaction in the middle of the quarter and are excited to get to work with our new operating partner Permian resources.
We know the Permian resources team, well and having greater exposure to PR will provide incremental benefits from the increased scale and cost synergies.
Governance through our joint operating agreement and our area of mutual interest with Earth's stone remain intact, and we expect nearly a decade of self funding 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 are reviewing ranging from traditional nana packages to minority interest sell downs from operators to 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.
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 to permits in 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.
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 strong, 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 would 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 net will spuds for the year in the range of 76 to 79 net 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 for oil differentials to arrange a $3 to $3 75 for the year.
As we exit drive in season and 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.
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And our first question came from.
Mmm.
Scott.
Note RBC capital markets. Please go ahead.
Yeah things are good morning, all.
Nick I can't help kind of thing back a few years ago and unite chatted with from 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 is there an optimal level you think you know.
There is for northern and if you could also kind of parlay into this answer.
How does the.
The the higher interest rates kind of impact your ability to kind of do.
Emanate 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.
That clearing discount rates have risen from a strategic perspective, it's definitely benefited us as our cost of capital has probably been more static than than that of our private peers and it just.
Acquired bank capital or things like that so it's definitely helped us but you see it particularly you saw kind of a wave in the last couple of years of people using asset backed securitization to finance TEP heavy acquisitions in that game. 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.
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.
While shale overall is maturing.
From a nonoperated 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 on the majority of the scale begets opportunity right.
On a 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 and banana packages that were beholden to.
Now we're looking at co building exercises minority interest Buydowns joint development agreements and all of that is that scale right and so I think we're a much larger.
Larger and better capital provider and partner so a lot of our other operating partners that gives us significantly more opportunity.
Mmk appreciate that and does my follow up my notes 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 you know the kids are 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.
While all covered 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 that.
The next major Vachon wells comes on sort of early in the second quarter adamant.
Performance is 13%.
Better overall versus kind of our forecasts, Scott and as far as kind of a modified schedule girls that we discussed last quarter, we'd expect production client a little bit.
And the fourth in the first quarter, and then began wrapping material in late March.
So next flight that some of the larger batch of wells.
Come online.
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 tales comment on the Max mascot project Yeah. We.
We typically see seasonal slowdown in the first quarter, particularly in the Wilson just around Canada, the winter weather piece, but that's been the pattern for almost every year.
Yeah.
Right. Okay. Thank you.
Mmm.
Our next question came from Neil Dengue Man, Chris Securities.
Quarter, Nick My first question is on M&A specifically.
That sounds to me like you all have more than I mean continue to have now more than ample M&A opportunities ahead heavy depth, 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 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 the deals are today. So I'm just wondering when you and Adam chatter looking at some of these deals how the requirements of shifted.
Yes, many discount rates are definitively gone up that doesn't always show up in the multiple and the other multiple is going to be a function of the longer term growth and value of the undeveloped piece rates of the short term multiple to the investors might not seem obvious but we've seen.
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 we've become much more critical to that part that's generally through concentration.
Or scale and size.
I don't know when I answer the other part.
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. So we're never 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 is.
The ground game inside right as a 1% working interest really going to move the needle for us and frankly, when you get into the larger ground game deals with a higher concentration. The competition is relatively limited right. When you think about your competition and what their capital pool is and how they wanna diversify their capital allocation.
<unk>.
So.
Definitely stepped up in that regard, but as 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 and as far as where where those opportunities are located that would say.
Primarily that's going to be in the basins, where we're at permanent obviously with the rig level activities. There in the Delaware that'd be a bit more specific is generally where we're seeing those opportunities.
Been surprised about some of the things that have 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 an error.
Interest, but given the maturity.
And the way things are locked up there we just haven't found the right assets.
Great rock.
Alright got it obviously take into consideration a political environment.
So I think a.
A lot of these other places probably.
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.
Yes, I think the one day 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 next year 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 kind of going forward, how do you sort of balance the production and show a return growth.
Yeah, I mean I think.
That is that is the special sauce, and I think that that in general.
We want to be where conservative by by nature.
And so I think that you know.
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 out a lot more capital and I think it's because we're not just thinking about the environment over and 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 and so I think we want to be purposeful I think there's is there upside to our current dividend plan of course, there is and.
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 every but personally I love dividends I Love every time, we pay a dividend significant stockholder.
But 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 until it's a fine balance.
I think redone empirical 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 draw.
Diver of why our stock has performed better than peers.
Not just because we're paying a dividend, but because we are 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 that some operators may have and we don't affect overall supply.
Perfect. Thanks, guys.
And our next question came from John Albert Bank of America. Please Sir go ahead.
Good morning, and thank you for taking our questions on a very busy morning.
Yeah. So in the opening remarks, there was some commentary related to you know seeing some contracts potential.
Potential cost going lower to contra.
Moving lower as well as some.
Operators potentially being squeezed as contracts sort of rock and roll off 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's color cost play out next year operators.
Yeah.
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 piece the fracking piece.
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 cost of 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 Don always flirt 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 let.
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 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.
Count on that.
And so I think that where we are now I think things are stable.
Costs were up quarter over quarter, but that's a bit of a misnomer because it's really a function of the Permian.
Making up a higher proportion Permian wells cost more.
Secondarily, the lateral length on our walls were much longer so on our kind of curved lateral flip based on agnostic basis, they were relatively flat.
I know 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.
And in an effort to kind of keep costs low and if you're running 17 to 22 rigs or whatever it might be.
You can still keep and maintain.
Operations plan.
But still kind of flex your muscle <unk>, we've got to manage the volatility mentioned it <unk>.
Last quarter on the call.
Commodity prices go higher than will expect to see well costs.
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 the three their chat is just.
Now with the acquisition with it with the deals that you've done how do you see the trajectory of cash taxes over a multi year basis at this period of time for an order.
Yeah, I talked a little bit about on the last call.
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 item, it's going to be to a lesser extent in 2024, and then obviously, it's gonna be a bit more fully loaded and twenty-five and beyond.
Alright, very very helpful. Thank you.
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[noise].
Ladies and gentlemen, I apologize to 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 just a quick one for me talk a little bit about the shipping Capex I just wanted to get your.
Any idea on how that goes I hope. It goes 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 sprawl brought that block forward.
It's a little bit of both balsa amazingly he saw some kind of 2024 pull forward and obviously some AD hoc capital.
I think.
So in a sort of in a vacuum it's in many ways of pull forward of 2024 activity I think we still look at 2024 and our target Capex is sort of what we want to target and I think you know look I I I.
We can we can address 2024 without explicitly endorsing we've not guided or anything like that but you know.
We've looked at the 2024 ranges of consensus from from sell side analysts I think it's around.
111 to 170000 barrels a day equivalent call.
Call it around $840 million Capex, and I said I would.
Based on.
Current pricing et cetera, I think those are a very plausible I think.
The reason that we you know.
Until the reporting year and before we share guidance as you know first I think 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.
Two two overall cost to provide the optimal plan uhm I do think those those numbers are achievable, though.
And.
To the extent that we produce less and spend less obviously, we generate more cash that extent, we spend more we'd likely produce more but let generate less in near term cash so.
We will make allocation judgments for optimal total return.
Whether we feel we have those projects that meet our hurdles.
But I will say you know given the opportunities we're seeing everyday it's always a balance it meaning what we say, we're going to do and juxtaposing that with our fiduciary duties to row and 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 our year end in February.
And a lot can 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 the macro what's been it's never been more important to do this once and to do it right.
Thank you we'll move on to my next question what is coming from the line of Charles meet with Johnson Rice. Please proceed with your question.
Good morning, the Academy chat and the rest of the the energy team there Nick I Wanna go back I I'm not sure it was.
Said, you made or is it Adam made either prepare comments or earlier in the day, but you reference about how you know interest rates are higher and and that moves. The you know the hurdle rate up across the board and I'm 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.
A little bit of issue in the bid ask spread in that in that.
To ask the S side hasn't really had not really adjusted for this higher interest rate environment, and consequently, you need to use a higher discount rate on the P. D. 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 or any other any anything.
Other.
Any other dynamics that may be surprising given the 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].
You know so.
<unk> is that a surprise me that the social issues around Andy are the most important and most difficult to come over which is that you.
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 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 Navicert thing, we have to navigate and honestly a lot of times on the front end will.
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 going to still sell for.
Good prices and weaker assets are going to get weaker prices.
But I think I don't know if that's the art of the deal different basic stuff.
We try to be as transparent as we can in order to use it.
J R.
Our current parties as to where we're coming from.
That's the way that.
<unk> 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 is that yes.
60% of the time.
I'd be remiss, if I didn't feel a movie or something so you know I'm always reminded of the movie trading places.
China pawn his watch and he says well Philadelphia's were 50 Bucks and so we deal with that every day.
Thank you know our next question is coming from the line upon haven't changed.
<unk>. Please proceed with your question.
Hey, guys. Thanks for taking the questions I want to start off with the ground game.
So you know it seems like you see.
Opinions to see a lot of opportunity there while also not a lot of competition. So it so it's kind of economics and opportunities.
Practically all at the same time look what you've talked about with you.
Larger you know 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.
What's going on with the ground game is it's like.
People get in AFB, and they've got to make a decision quickly and if it's an operator or someone with a lot of kind of different irons in the fire in a in a limited.
Budget they planned for this year.
If there is an acceleration and activity.
Pull the trigger on all of those fees or consent to them and so it kind of it kind of becomes almost like a scramble.
So maybe there's more of this <unk>.
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 does that kind of my understanding what 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 scenes there right you've got operators that have shareholder return requirements dividend buybacks, there on a drill their own wells whatever it might be.
Then they've got their own set budget.
Current operators handle their nana.
In different ways.
Some of those folks are packaging, it up and selling it some of them are selling on the.
The world 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 them on our partner salt on your interests.
Ah carry 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 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 that what size you know.
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 and so you've got a handful of different dynamics that are playing you've also got it you know.
What funds are coming into the year gangbuster generally we're not nearly as successful on the ground game on the front end of the year, where everybody's kind of flush with it you know.
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 a fees and the drilling rigs dotcom and you'd see some of that and.
R Q3 reported here sucks, it ebbs and flows right and it's gonna 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 excellent Something's cat, yeah, I mean, I think that.
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 whites of the eyes of people when crude is 60 year, 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 and I put in the nineties word or.
Shaking her headset at where we see things transaction and that's just the way it goes.
Thank you. Our next question is coming from the line of Charles meet with Johnson 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 we 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 in the last 12 or 18 months, but but what what is surprised.
Think about what you're seeing in Appalachia. Now is that is is is that maybe moving back into focus for you guys.
Yeah, I mean, I don't think I'd ever went out of focus I think last year, we bought the acid and gas basically ripped from day one.
Which made it more challenging.
One fry, 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 and a six dollar environment was a good idea.
But the fact is it's been bad for the bulk of this year and suddenly.
Dollars 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 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 far on their side and they need a source of capital.
So I think 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 physician overtime. Yeah. I think there is interest last year, but going back at all.
<unk> spread right volatilities going to widen that significantly from a seller's viewpoint.
<unk> and so I kind of had things settled down a little bit.
Having a little bit of a backlog and somehow I think we're having some additional conversations with counter parties, 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 that that will work.
And a lot of assets that tend to come for sale and gas is $6 look great but.
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.
But ultimately you want to 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 is not I mean, obviously, it's been a little bit stronger of late.
I think that should you know.
Get you there if that makes sense.
I appreciate that a detailed thanks guys.
Okay.
Thank you, ladies and gentlemen that concludes that question and answer session I would like to pass the fly back over to Nick.
Cleaning remark.
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