Greetings and welcome to the Northern Oil Third Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Erik Romslo, Chief Legal Officer. Thank you, Erik. Please go ahead.

Good morning and welcome to our third quarter 2022 earnings conference call. Yesterday after the market closed, we released our financial results for the third quarter. You can access our earnings release on our Investor Relations website and our Form 10-Q will be filed with the SEC in the next few days. We also posted a new investor deck on our website last night. I'm joined here this morning by Northern Oil and Gas' Chief Executive Officer, Nick O'Grady; our President, Adam Dirlam; our Chief Financial Officer, Chad Allen; and our EVP and Chief Engineer, Jim Evans. Our agenda for today's call is as follows: First, Nick will provide his remarks on the quarter and our recent accomplishments, then Adam will give you an overview of operations. Lastly, Chad will review our third quarter financials and updates to 2022 guidance. After the conclusion of our prepared remarks, the executive team will be available to answer any questions. Before we go any further, let me cover our safe harbor language. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by our forward-looking statements. Those risks include, among others, matters that we have described in our earnings release as well as in our filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, and free cash flow. Reconciliations of these measures to the closest GAAP measures can be found in our earnings release. With that, I will turn the call over to Nick.

Thank you, Erik, and thanks again to everyone joining us on today's call. I'll get right down to it with five key points. Number 1, business is humming. We generated a company record $292 million of adjusted EBITDA this quarter and well over $100 million in free cash flow, marking the highest and third highest in company history, respectively. We produced over 79,000 BOE per day in the quarter and have already generated a cumulative $370 million of free cash flow in the first nine months of 2022. Leverage at the end of the quarter based on LQA adjusted EBITDA dropped below 1x even with the closing of our Williston acquisition in August. The increases to cash flow and decreases to leverage ratios quarter-over-quarter are even more impressive when you consider that oil prices were down substantially from the prior quarter. Number 2, growth. As evidenced by the increase to our production and CapEx guidance, we are driving value creation through investment. It is translating into more profits but, more importantly, the increase in capital for the year isn't being driven by inflation, which is something we had already built into our expectations. Instead, the increase in capital is truly incremental investment in additional activity that will, in turn, drive cash flows higher in the coming quarters. With over $370 million in free cash flow generated so far this year, we are able to increase our investments in high-return projects and are thrilled with the organic and ground game opportunities that we continue to see. We expect our balanced total returns-based approach will continue to drive superior total returns for our shareholders. And we still expect to generate approximately $500 million of free cash flow for the year. We are extremely proud of this achievement, given the decreases in oil prices and acceleration of near-term capital spending. Number 3, outperformance. Despite high prices and inflation, we're seeing notable outperformance in all three basins. Our Williston wells have thus far exceeded past years even in an environment where we would typically expect step-out wells. Our Marcellus assets continue to surprise as EQT's new pads materially outperformed and PDP declines have been shallower than expected. In the Permian, costs, realizations, and well performance have all exceeded internal estimates. As I said earlier, business is humming. Number 4, acquisition success. As you've seen from our flurry of deal announcements over the last few months, we have been very busy on the M&A front. Make no mistake about it, our discipline remains, and we continue to underwrite acquisitions with the same rigor. Our success is a testament to our role as the preferred partner, a company with a reputation for execution and consistency, with the capital availability and the ability to negotiate and close in an honest, straightforward manner. This often trumps price. I want to stress that we are buying assets that are not just accretive to financial metrics, but accretive to asset quality and future growth prospects. This means resilient assets that have the ability to outperform our underwriting. In short, we're confident that our recent M&A success will deliver both near-term results and long-term value for our shareholders. Number 5, shareholder returns. Our goal is to provide our shareholders the highest possible total return over the long term. We have implemented a multi-pronged approach, including equity buybacks, repurchasing high-cost debt, and increasing the cash dividends for our common shareholders. A) During the third quarter and October, we repurchased and retired another $10 million of our 8.125% notes at less than 95% of par. This lowers fixed charges, boosting free cash flow permanently, and retiring the notes at a discount to face value is accretive to enterprise value. We are prepared to continue to take advantage of opportunities to repurchase the senior notes. B) On the equity side, we've retired $109 million year-to-date, including $51.5 million of common stock, the remainder being preferred stock. As a reminder, we have $98.5 million remaining on our common stock buyback authorization. C) Last week we announced a 20% increase to our quarterly common stock dividend to $0.30 per share for the fourth quarter with the goal of providing an attractive yield for our investors. We strongly believe that the consistency of a stable and growing quarterly dividend is more valuable to investors and our equity value over time than special dividend structures, which can introduce unpredictability and volatility. D) We announced yesterday that we have executed a mandatory conversion of our preferred stock into common stock. This will have no effect on the diluted share count because the preferred was already included on an as-converted basis. The conversion will reduce annual cash dividend payments and also avoid future dilution through cash dividend adjustments made to the preferred stock each quarter. The preferred stock was created with our bondholders in 2019 to accelerate essential deleveraging of the company, and we are thrilled with the successful outcome for our common and preferred investors. This conversion milestone will simplify our balance sheet and continue to underscore the strength of our company. In closing, I'll remind you, as I always do, that we are a company run by investors, for investors, and I want to thank each and every one of you for taking the time to listen to us today. With that, I'll turn it over to Adam.

Thanks, Nick. We closed the third quarter accelerating our investment program across the board, including our organic activity, ground game acquisitions, and corporate M&A. Overall, we picked up the pace as we entered the second half of the year, turning in 16.2 net wells, a 60% quarter-over-quarter increase. Permian completions were the primary driver, contributing over 70% of the additions at a nearly 100% increase over the prior quarter. Our operators in the Permian are driving efficiencies in order to keep well costs on budget. As a result, we continue to see shorter spud to sales, down roughly 25% from our well spud in 2021. Accelerated drilling activity and larger average working interest across most of our active basins has increased our overall wells in process to 61.5 net wells, an increase of 10% from the second quarter. Driving that increase, we elected to 190 well proposals during the quarter, which was up 65% from Q2 and accounted for 40% of our consented net wells on the year. Our operators are drilling longer laterals to drive efficiencies in this environment. In connection with that, we saw the average AFE rise to $8.6 million, but only up 5% from the prior quarter based on normalized lateral lengths. Our weighted average well proposal remains well within our per well estimates that were already included in our CapEx guidance. Most importantly, the drilling opportunity set in front of us is expected to generate an average rate of return far north of 100%, further supporting our top-tier corporate level return on capital employed of 34% during the quarter. With our ground game, we closed on 2 net wells and 965 net acres in Q3 and the acquisitions to date are expected to generate a full cycle return on capital of 49% next year. Strict emphasis is placed on targeting the right operators in order to maintain capital efficiency in this environment. This stringent process, both from a planning perspective and the execution within the business development function, has enabled us to largely avoid inflation wells affecting some of our peers, as well as grow the investment opportunity set. As competitors' budgets have been exhausted in the back half of the year, we have continued to raise our full-cycle hurdle rates. This ground game success has played a meaningful part in our elective investments. Regarding corporate M&A, we've been extremely busy. We have executed and signed up some of the highest quality asset packages we have seen to date, adding meaningful production and even more impactful inventory across the Delaware and Midland Basins. On the heels of our Laredo transaction, we have recently announced 3 more premier acquisitions. Looking back from the billions of dollars in M&A opportunity with Canvas this year, these three all ranked at the very top in terms of quality, operating partners, and inventory depth. The two Delaware acquisitions we announced with Mewbourne Oil and Gas, one of the most active and cost-efficient operators, are located in the core of New Mexico. As we close these in December, Northern will directly benefit from their best-in-class operating team and capital efficiency. Our recently announced Midland Petro joint development agreement highlights the expanding suite of opportunities available to Northern as we reap the benefits of reaching a new scale in the non-operating space. These JDAs add another arrow to the quiver where we have greater effective governance rights over the operating partnership, including scheduling out the long-term development programs of the assets, as well as modification protections. This Midland Petro acquisition is structurally similar to an ideal follow-on from our highly successful Southern Midland joint development program signed in Q4 of 2021. In fact, we are establishing momentum with this structure. Conversations with other operators have begun in earnest and we are actively screening and co-bidding operated assets as well as discussing buy-downs of operated interest using this model. The expansion of the JDA structure establishes a new set of opportunities that will be unique to a scaled Northern, and we will continue to drive value with a disciplined approach that is focused on returns. With that, I'll turn it over to Chad.

Thanks, Adam. I'll start by reviewing some of our key third quarter results, which was again one of the strongest quarters in company history. Our Q3 average daily production increased 9% sequentially over Q2 and topped 79,000 BOE per day, a 37% increase compared to Q3 of 2021. Oil volumes were up 8% sequentially over Q2 and have normalized after the spring storms in the Williston Basin, which is where we have our highest oil cut assets. Our adjusted EBITDA was $292.4 million, which exceeded consensus expectations and was a record for Northern Oil and Gas. Our free cash flow was robust at $110.6 million despite increased CapEx spend driven by growing activity. We have generated approximately $370 million of free cash flow year-to-date, almost 2x more than the entirety of 2021, despite the additional spending and lower oil prices. Our adjusted EPS was $1.80 per share in Q3, above consensus estimates. Oil differentials were again better than expected in Q3 and came in at $0.84 per barrel due to continued strong Bakken pricing and having more barrels weighted towards the Permian, which are at a premium to WTI. As a result, we're updating our oil differential guidance to a range of $3 to $4 per barrel. Additionally, we're tightening our gas realization guidance as well by taking the low end of our expected range up to 105%. On the CapEx front, we invested $154.5 million during the quarter, roughly evenly split between the Williston and Permian Basins. Activity has been robust. As Adam mentioned, Q3 turn-in-lines were up roughly 60%, and spuds were up over 50% from the second quarter, while days under development have been reduced roughly 25% from our 2021 levels. This has resulted in a record D&C list of 61.5 net wells and has contributed to the pull forward in our capital spending, along with our continued success on our high-return ground game investments. While these accelerated investments have led to an increase in our 2022 CapEx guidance, they are also expected to boost our 2022 production exit rate and reduce our 2023 maintenance capital requirements. On Slide 7 of our earnings presentation on our website, we provided a walk from the prior midpoint to the current midpoint of guidance. The balance sheet is in great shape. We closed on a convertible notes offering shortly after quarter-end that largely cleared out our revolving credit facility borrowings to fund our closed and pending acquisitions. The convertible notes offering had tremendous demand, and the terms associated with it ultimately provide low-risk unsecured term debt with an all-in cost of borrowings below that of our current revolver and have further extended our maturity schedule at the same time. Additionally, due to the features we selected, there will be minimal to potentially no dilution to our existing holders, and to the extent that there is, the company has options to manage this over time. We expect leverage will tick up slightly over the next couple of quarters with the closing of our pending acquisitions, but the ratio should be back below 1x by the end of 2023. Year-to-date, we retired $23.4 million of our 2028 notes and continue to monitor the interest rate environment as well as our bond levels. We continue to look for ways to efficiently reduce leverage if the market opportunity arises. With respect to hedging, since our last report, we opportunistically added hedges in the form of attractive costless collars that allow us downside protection with the opportunity to participate in the upside of prices rally. We continue to hedge out volumes from each closed and pending acquisition based on our stated hedging strategy. Finally, a few comments on our updated guidance which we laid out on Slide 6 of our earnings presentation. We increased the midpoint of our full year 2022 production guidance by 1,250 BOE per day and now expect to exit December at over 83,000 BOE per day, which includes our Midland transaction that closed in October, a full month from our 2 acquisitions that are expected to close in December but does not include our pending MPDC transaction, which we expect to close in January. We bumped the midpoint of our full year CapEx guidance by $42 million as a result of the factors I mentioned earlier. Cost guidance has remained largely unchanged from prior guidance, with a slight increase in LOE from increased field-level costs. All in all, we expect to generate approximately $500 million of free cash flow for the year and from a value creation perspective, the exit rate cash flow and production volumes are substantially higher. With respect to 2023 guidance, we're hard at work and having board-level discussions over the coming weeks and expect to be able to provide our plan by early next year. With that, I'll turn the call over to the operator for Q&A.

Thank you. At this time, we will be conducting a question-and-answer session. We have a first question from the line of Neal Dingmann with Truist Securities. Please go ahead.

Good morning, Nick and team. My first question is about 2023. You mentioned in the press release and in your remarks all the favorable opportunities that are boosting this year, rather than inflation. Can you provide some insight on the recent increase and how it might influence production for 2023? Additionally, what kind of CapEx increase might you consider for next year?

Good morning, Neal. I think what we'll tell you is this and it won't be as simple as sort of well cost times the number of wells. I think to grow to and sustain, call it, 100,000 barrels a day, we need to drill about 80 wells a year for 90,000, around 65%. And the building and maintaining of the D&C list and the associated CapEx accrual means the nuanced timing, total amount is far more complicated than just that simple math. It will also depend on what region we allocate capital to and what role the ground game plays into it, if any. But this should be a helpful start for some bookends. I think the bigger questions for us are as the windfall develops from the Mascot project, do we have competitive reinvestment opportunities for that? Or would we rather harvest the cash windfall for our investors? I think we'll spend a lot of time at the board level debating these topics in the coming weeks and months.

Okay. Are you able to provide any guidance on production or capital expenditures? Could you share your thoughts on how that might increase?

Are you just talking about inflation?

Yes, driving that. That would probably be the more specific question. As it relates to inflation, most reporting operators have been indicating a general inflation rate around 10%. That's definitely a deceleration compared to the previous year. We look forward to returning soon with our overall investment plan and our own views on its accuracy. Currently, I don't think we have a differing opinion. There is certainly leading-edge inflation, and I agree it seems to be decelerating. Operators are resourceful and finding ways to offset this. Adam, do you want to add anything?

I think once we get through Q4, kind of understand what that overall mix is basin by basin, operator by operator, we'll be able to nail that down a little bit better. So that's kind of how we're cautioning it at this point.

Okay. Nick, regarding the discussion on growth compared to shareholder return, I know Bob might not be on the call anymore, but I'm curious about your conversations with the Board about the 23% production growth in relation to shareholder return. It seems like there was a preference in the past for prioritizing shareholder return, but you mentioned a goal of achieving the highest total return in the long term. Can you share how those discussions typically unfold?

Yes. I mean, I think it's the age-old question, Neal, of getting $1 today versus making that dollar worth more tomorrow. It's a challenging debate with our Board, with investors, and it's the crux of our capital allocation process. The biggest challenge, as I read sell-side notes, as an example, is that at this point in the year, much of the capital we're putting to work will translate into volumes and cash flows next year, not necessarily right away. I also think that we are pretty conservative by nature. And so we certainly could give you a scenario that would give you immediate gratification, but we want to make sure we achieve those things before just promising the moon and the stars. So I think trust is a big driver. Investors should know and trust that these dollars are being put to good work and will drive stronger results. Let's put it into perspective too. We're still going to generate $0.5 billion in cash this year, even with the extra elective investment. This isn't a reckless decision. I can tell you empirically that those companies that have focused exclusively on free cash flow have lagged over the short and the long term. Those that have gone for broke and kind of spent have outperformed, certainly in the short term. But admittedly, that's a strategy that's way too risky for us, and it's been bolstered by strong pricing. So over the long term, I'm not sure that that's the right strategy either. We constantly repeat ourselves but we're focused on balance, finding a way to generate growth and additional recycling of returns without ever getting over our skis and delivering solid shareholder returns. I think in the next several quarters, the logic of both the acceleration we just announced today as well as the robust cash on the back end will play out for investors.

Great answer. Thanks, Nick.

Thank you. We have the next question from the line of Scott Hanold with RBC Capital Markets. Please go ahead.

Yes, thanks, everyone. Nick, could you provide us with some insights on the joint venture acquisition? How significant do you see that opportunity compared to the traditional deals that Northern Oil and Gas has engaged in over the past few years?

Yes. I mean, I think it's early days. It's certainly been encouraging in terms of the reverse inquiries that we've gotten after announcing the Midland Petro deal. That's on the heels of, call it, a drill co-light that we signed up late last year that we're finishing up here and that's frankly been a home run for both the operator as well as Northern. I think it's unique to us because you need to be able to move the needle for some of these operators. You can frame it up in a couple of different ways. You can co-bid assets, operated assets that are on the market. Maybe there's an independent that doesn't want to issue equity or doesn't want to, or can't wear it on their balance sheet. And so you can carve out a non-operated interest out of anything. We can come in, underwrite it with our technical team, and effectively take down a minority interest in that, and then subsequent or in parallel with that, you can put together the joint development agreement and kind of plan the business around it. There are other operators out there that have run some failed processes over the past year, whether it's drilling obligations or whatever it might be in terms of getting the right bid from other operators where they've got to socialize that with the rest of their inventory, and so I think there's an opportunity to kind of come in and buy down again, an undivided interest, minority interest, and put together a joint development program. We've got at least 2 or 3 that are live right now. I don't know if they'll necessarily meet our return thresholds, and we've had significant reverse inquiries after the fact, so it's certainly encouraging but we'll just have to see how that shakes out relative to some of the other typical non-op packages that we continue to screen.

Yes. In those recent transactions you mentioned, did they generally involve a high working interest? How do you view that in relation to the risk profile?

Yes, I didn't mean to interrupt you. However, Scott, it's important to consider both concentration risk and control and timing risk. Each group of assets carries similar risks. When you buy traditional non-operational assets, you often don't face the same concentration risk, but we must focus on the timing of development to ensure we achieve our internal rate of return. The interesting aspect is that as we grow, concentrated interests do not significantly disrupt operations. The timing element can compensate for many of these concerns. That's why we are prioritizing high-quality areas, specifically some of the premier land in North America, which allows us to take calculated risks, especially on projects that are more than 30% complete. This provides a clear understanding of the area's performance, boosting our confidence in underwriting. We're not known for being overly optimistic, so this is a crucial factor in the early stages. Our strategy will involve a comprehensive approach, recognizing that these projects differ from typical 10-year assets. Regarding the Midland Petro project, it has the highest-underwritten return we've ever achieved. While it may seem unusual, I believe it will ultimately prove valuable to our investors.

Okay. There has been much discussion this past quarter regarding well performance for various operators. I know you conduct thorough research on the different types of permitting your partners will pursue. How do you gain confidence in the mid- to long-term quality of the inventory that your operators possess, and how do you feel reassured in that assessment? I'll leave it at that.

Yes. Are you referring to that project in itself or in general?

Just in general, not any specific project, just in general in terms of your partners' depth of their well inventory and the quality of it.

Yes. We do our own work, right? Every piece of leasehold that we own, we draw our own sticks. We have our own EURs. We have nearly 400 type curves in the Williston alone. We don’t listen to their views on what they think those wells can do or what that inventory will do. We do our own work. Every acquisition we do is bottoms-up engineered by our team. I don't know, Jim, if you want to add to that?

Yes. Obviously, we're looking at the inventory that we think the operators have left. We can go out there. We've got everything mapped across the entire basin. So we can look at units, have an idea of how many years of inventory we think a specific operator has left, how they might target that. That's part of our proactive management where we can go in, target specific issues that we know that the operators are going to have to move to within the next couple of years to get developed. We use that to help augment and then on all the acquisitions that we do, again, we're using that to augment our inventory. So all the acquisitions we've done over the past couple of years have been to improve the remaining inventory that we've got left in our portfolio.

Thank you. We have the next question from the line of Charles Meade with Johnson Rice. Please go ahead.

Good morning, Nick, and everyone at Northern Oil and Gas. I wanted to revisit what you're observing in the ground game and the slight increase we noted in Q3. I'm particularly curious about how much of your Q4 guidance you anticipate reflecting an increase in opportunities to engage in the wells or join in where others are participating. I believe you touched on this in your press release, but I would like to understand the extent of it.

Yes. I think a lot of the raise in CapEx is ground game that's already been really in process. I wouldn't say that there's an anticipation of a material increase from here going through the end of the year, Charles. I'll let Adam or Jim chime in at any point, which is that we have found a big return disparity as well as competitive disparity in what I would call chunkier ground game opportunities. There are a lot of people chasing at tenths of a wellbore or 5 or 10 acres here or there. What we're seeing are just attuned to what we were talking about with Scott before in larger ground game interests, materially higher underwritten returns for us and a lot more success rate. That success is obviously going to be more impactful to our capital over time, which is one of the reasons that we sat down with our Board and really had to make some tough decisions in terms of how much money we wanted to spend in the last few months.

Yes, that's right. I mean, it's the competitive universe when you get into these larger, more concentrated deals where subscale players frankly don't have the wherewithal to spend the money or don't have the risk tolerance because they don't have that base. So we've continued to raise our discount rate as we move through the end of the year as people have exhausted their budgets, and have been successful in that regard.

That is helpful color. And then, Nick, going back to your convertible bond offering, can you give us kind of a narrative of your evaluation, your selection to go with that kind of financing route rather than either some mix of straight equity and/or straight debt? And whether this was something that you decided was the solution you wanted, you were looking forward to; or whether it was the other way around that maybe the market came to you and said, we've got favorable terms.

Yes. I mean, I think let's take a step back for like the 30,000-foot view. We've been looking at convertible bonds, or Chad and I've been looking at them for 4 or 5 years. It is a very bespoke instrument. I had a board member once tell me that it sounds like witchcraft to them, which I appreciate. The complexity is interesting. Look, the reality is that you can make a convertible bond whatever you want. The embedded optionality provides a lower cost, which is particularly sensitive in an interest rate rising environment like we're in today. If you look at the instruments that we chose for this bond, effectively we've been able to boost it to a $52-plus conversion rate. Even at that conversion rate, there is no dilution. Effectively, we pay back the bond in cash. So, to the extent that you compare it to common equity, we don't feel like this wasn't really a function of needing to manage our leverage ratios. In fact, they'll flex up for a quarter or two, but we didn't need an equity injection. The high-yield bond market is simply too expensive. This instrument provided all the good with really none of the bad, and I think it was a fairly obvious choice, admittedly a more complicated one.

Thank you. We have the next question from the line of Derrick Whitfield with Stifel. Please go ahead.

Thanks. Good morning, all.

Good morning.

Good morning.

Throughout earnings, I think Scott touched on this earlier but co-development has been a subject of focus, particularly in the Midland based on industry commentary. Regarding your Mascot project, could you speak to the co-development strategy there?

Are you referring to structure, Derrick, or are you talking about communication and related aspects?

More associated with how you're going to develop the suite of intervals.

Yes, yes. So we began negotiations and discussions with MPDC back in June. They laid out their view of development and optimal development and we spent a lot of time with our adviser and our technical team reviewing that. Candidly, it's changed like anything else over time. Ultimately, we memorialized it when we built a joint operating agreement, which gives us RipCord features and protections along the way but also a strong level of confidence in how it's developed. It’s very important to develop these units all at once to maximize the EURs and ultimate IRRs on those wells; that was something we very much agreed to both experientially and in terms of how the Midland in communication between those units — between those wellbores works. So it's very important. I'm sorry, go ahead, Adam.

No, that’s right. The short answer is that’s exactly what's going to happen. They drilled the deep rights to HBP acreage and then the offsets in order to mitigate any sort of frac communication with offset operators and then they're effectively just moving east to west across the board.

Yes. You can see this is a 4-unit development. One of the units is already fully developed across the entire suite of zones. We can see the impact of the parent wells versus the child wells. As we co-develop, we can model that out with our expectations. We're being conservative, so I think here as well, we're being conservative with our assumptions and there's probably some upside to what we think the actual results will be.

That's great. And maybe just to build on where you ended there in light of how active you've been in A&D. I wanted to ask if you've had a chance to perform work back on your 2021 acquisitions to see how close your projections were. I'm sure as you've noted, you've been quite conservative in your assessments.

Yes. I can tell you, universally, I think we've exceeded every single forecast that we put forth. I mean, we mentioned it in my prepared comments about the Marcellus and just the overall performance. Remember, we underwrote that as if Chevron still operated it. Performance and cadence of development on Veritas, which is our largest one, has materially exceeded our estimates. Honestly, if you go deal by deal over the last 1.5 years. Almost every transaction we've done since 2018 has turned out to be a home run; they've been one of our marquee operators in the Williston over the last year or two.

Terrific. It's very helpful. Thanks for your time.

Thanks, Derrick.

Thank you. We have the next question from the line of John Freeman with Raymond James. Please go ahead.

Hey, good morning, guys.

Good morning, John.

I want to start by acknowledging the impressive job you’ve done in increasing the base dividend over the past year. About a year ago, in December, you presented a detailed look at your base dividend growth plan and your thinking around its structure. I’d like to revisit that. Initially, it was based on $50 oil and $3 gas, and you indicated that at that price point, you could achieve an average growth of about 20% quarter-to-quarter through 2023, which would mean that in 2023, one-third of your free cash flow after maintenance capital expenditures would come from that price scenario. I'm trying to understand your perspective, especially since you're nearly a year ahead of schedule. It seems that M&A has played a larger role than anticipated in your plan, which did not factor in any acquisitions. Looking ahead, while you’ve clarified your stance on special dividends, should we expect the base dividend to continue aligning with this price scenario of roughly 5.3% and one-third of free cash flow after maintenance CapEx? Or are you considering a model similar to larger companies that have a fixed plus variable component for dividends? Or should we assume the base dividend will remain stable and possibly increase with acquisitions, while you maintain a conservative price deck and layer in buybacks as needed? I'm seeking more insight into your long-term vision, especially since you've exceeded your original projections.

Yes. I think we noted in our quarterly presentation that this quarter's dividend is about 43% higher than what we promised last December when we launched the plan. I think it's a little more complicated, John, in the sense that we want to provide a solid and growing dividend. I think the rules that you're discussing are healthy and consistent and true. But we also think about it in terms of what yield you're providing to investors. Too much yield is not a good thing for the business long term, and too little yield is not good either. This sounds sort of boilerplate, but we really are focused on delivering the best risk-adjusted total return value proposition for the stockholders. It means consistent well-underwritten base dividend, premium cash flow growth. It is one of the highest base dividends in the space, partly because I think we have higher ROCE than average. It's a disciplined approach from acquisitions over the last two years. We can continue to drive capital allocation, balancing current income with future cash flow growth, targeting that superior total return. We’ve targeted by the end of next year to get to about $0.37 a share per quarter; we've accelerated upon those plans. If and as we achieve those internal goals, we hope to keep delivering better returns. We may shift our capital allocation over time, but the factors that drive that will be the valuation of the stock, the yield of the stock, and the opportunity set in front of us. I'll take dynamism over dogmatic plans any day from a long-term value creation perspective. I think people love formulas, and I think there are formulas you can set as baselines, but I think flexibility in making the best decision for business over the medium and long term will trump that over time.

I appreciate that, Nick. And then just my follow-up, touching back on M&A again. Last quarter, in August, you mentioned that there were just a number of sellers out there with unrealistic expectations. You talked about how the bid-ask spread was very real. I'm just trying to get a sense of like what you think sort of changed. Is it, I don't know, private-backed entities that just need to monetize or just something that caused all of a sudden for a bunch of things to kind of dominate for you to be successful as you were on the M&A front?

Yes. I'll give my commentary and let Adam finish it up. A lot of this is timing. You get a lot of bluster, and then people threaten and say we're going to run a process, and we say, sure, go ahead. Then we come into the process, we realize, whether we have the highest price or not, we're certainly the most viable and likely to close. I would say that in the recent transactions, when you do one, it seems to exert pressure on the others because they're afraid you're going to be out of the market, and suddenly people are willing to negotiate. As we've had success on those few, it tends to actually bring down the expectations with others in our opinion. Honestly, we are always surprised at how many transactions we were able to accomplish. We go into this with a fairly mechanical approach. Sometimes it works, most of the time it doesn't; when it works in rapid succession, it's certainly a surprise that we don’t go searching for.

Yes. I think two of the three took effectively 6 to 9 months from start to finish and sell. I think the next point a bit unexpected. We would have been thrilled to have one of these, and the fact that we were able to tuck in all three is a bit coincidental in terms of signing them up on top of each other. The third acquisition was frankly a group that we had done a prior acquisition with the previous year. As we look back, these were ranked 1, 2, and 3 in terms of the most desirable asset quality and balance. As it stands today, there’s probably another $2 billion worth of live opportunities out there, but the quality of the assets is hard to compare with what we've signed up to date. All that said, if these come in linear fashion, to the extent that there's something compelling, we'll certainly be screening them.

To give you a frame of how much of a crapshoot this can be sometimes, there was a Williston asset for sale this summer. I think someone somewhat outbid us by close to 50% or 40% for it, and it's an asset that we were in two-thirds of the properties. People have different views on value. If someone can get that value, we're happy for the seller, and we’re certainly happy not to have it if it’s going to trade for that value. We're pretty mechanical. Sometimes we have success, and a lot of times we have failures; it’s just the way it is.

Thanks, guys. Well done.

Thanks, John.

Thank you. We have the next question from the line of Donovan Schafer with Northland Capital Markets. Please go ahead.

Hey, guys. Thanks for taking my questions. In the Q2 call, you talked about, I think, an AFE that came across your desk for a 2-mile lateral that was like $16 million, and you went non-consent. It seems sort of like a no-brainer. But I've also heard that sometimes operators might inflate their AFEs as a way to sort of discourage the non-operated interest holder from participating. So, my first question is just, is that kind of true where you might get some inflated AFEs where they’re trying to trick you into not participating? And if it is, then how do you know the difference in those cases, whether you should go non-consent, or whether they're just trying to fool you? Also, is there a competitive advantage where someone might get scared away by a pad at AFE, but you can look at it and say, no, we can see through this?

We certainly see it from time to time. What I would tell you is that it's a slippery slope because these operators are legally obligated to give us their best estimates. If they're caught doing that, they're going to create a whole host of other problems for themselves, and it’s a small universe; people talk. We've had it happen, probably it's been a few years at this point. We approached the operator, and they went about faced and reissued the AFEs. By and large, you're not seeing that sort of trigger going on in the space because the ramifications are high.

I would say, Donovan, we're in almost 9,000 wells with 100 operators and we generate $1 billion in cash flow a year. I don't think the high-cost AFE will scare us. Because we're in all those wells, if we see something that looks out of school, our data tells us in advance.

Yes, that's right. You have certain operators that have drunk their own Kool-Aid from a well cost standpoint. Having that data to really understand which operators have the propensity to overrun is probably more important.

Okay. That’s helpful. And then as a follow-up, it looks like you had some good Marcellus production that came in during the quarter. So I'm just curious, was that on acreage that you already had in place at the end of the second quarter? Or was some of that from incremental non-op opportunities, AFEs, or things that you were able to sort of pick up during the quarter?

No, Donovan, it's all organic. We have not really had an active ground game in our Marcellus properties; it’s a large joint development with EQT.

Okay. If I could just quickly ask one more question. Regarding the Mascot project, I believe Texas is a very favorable area for this sort of endeavor. That's encouraging. However, I notice that you are drilling beneath the city of Midland. I'm curious if you are in a position to assess any potential concerns related to that. Could this deter other bidders? Do you think others might have a similar initial reaction to the situation as I do?

The answer is no. While it's under the city of Midland, the land and service where it's being drilled from is outside of the city of Midland, both Pioneer and Endeavor about these acreages are doing the exact same thing. What gave us an advantage in this was that the operator did not want to sell the entire project; they wanted to stay in it. That ultimately gave us a strategic mandate. Believe me, there were plenty of operators circling, hoping to take the entire concept.

Okay. All right, great. That's very helpful. Well, thank you guys, and congratulations on the quarter. I'll take the rest offline.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Nick O'Grady, CEO, for closing remarks. Over to you, sir.

Thanks, everyone, for joining us this quarter. We'll work extremely hard, and we'll see you on the next one. Thanks.

Thank you. To access the digital replay, please dial 877-660-6853 or 201-612-7415 and enter access code 13733042. I repeat, 13733042. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.