Northern Oil & Gas, Inc. Q1 FY2023 Earnings Call

Greetings, and welcome to the Northern Oil and Gas First Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Evelyn Infurna, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Operator. Good morning and welcome to our first quarter 2023 earnings conference call. Yesterday, after the market closed, we released our financial results for the first quarter. You can access our earnings release and presentation on our Investor Relations website. Our Form 10-Q will be filed with the SEC in the next few days. I'm joined this morning by NOG's 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: Nick will provide his remarks on the quarter and on our recent accomplishments, then Adam will discuss an overview of operations and last, Chad will review our first quarter financials. After 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 discussed 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, Evelyn. Welcome, and good morning, everyone, and thank you for your interest in our company. Given the strong consistent results and lack of big changes this quarter, I'll be more brief than usual. I'll get right down to it with only three key points. Number one, stellar execution. In our first quarter of the year, NOG's national diversified model delivered once again with better than expected production and cash flows. We continue to fire on all cylinders. Our Mascot acquisition was closed on time and our assets are on track to deliver growth throughout 2023. We generated record adjusted EBITDA in the quarter and record oil and total volumes, despite significantly lower commodity prices. Even with the closing of our Mascot acquisition this quarter, our LQA leverage ratio was down sequentially. Our capital spending is right on track at about 28% at the midpoint of our guidance and in line with our anticipated 60% first half weighting. In a year of notably weak gas pricing, our oil properties have picked up the slack with our oil cut rising materially in the past few quarters. Number two, growth. In the middle of the year for commodity pricing, we are seeing tremendous opportunities on all fronts, from our organic properties, from our ground game, and from an ever-expanding variety of growth prospects. Given our size, scale, and diversity as the largest national non-op franchise, we are unique in having access to the best of the best properties across both commodities and multiple basins. Additionally, we've expanded our bolt-on opportunity set beyond our traditional fractional non-op asset acquisitions. We are pursuing other growth avenues, including partnerships directly with the operating groups, as seen with MPDC, co-bidding, and M&A as a partner to operators with similar economic discipline, and other unique structured solutions to deliver solid returns for our investors and drive the compounding of returns over time. Adam will talk about it further. But we continue to make traction with our operating partners as the superior capital provider for the co-development of oil and gas assets. We have the scale and the capital to provide solutions for these operators in ways others can't, and we pride ourselves on being a straightforward and reliable counterparty with a track record of execution. Number three, capital allocation. Our goal is to provide our shareholders with the highest possible total return over the long term. We have implemented a multi-pronged approach including a share repurchase program, repurchasing debt securities at discounts, and increasing the cash dividends for our common stockholders. We recently announced a 9% increase to our common stock dividend for the second quarter of 2023, our ninth straight increase. Additionally, we tactically repurchased common shares during periods of volatility. Since we initiated our dividend program and share buyback in mid-2021, we've returned well north of $200 million to investors. Our view at NOG is that our scale should help us build a shareholder return program that can grow over time. As always, we'll be mindful of risk and leverage, but the power of what we built should continue to deliver an attractive risk-adjusted total return as the company under our management has consistently done over the past five and a half years. During our tenure, NOG's total return outperformance versus the upstream sector has been significant. Driven by a capital allocation strategy that includes dynamism. The flexibility inherent in our strategy, as well as our business model has allowed us to adjust our capital allocation to where the greatest opportunities exist at any point in time, all the while providing a solid and growing cash return via the dividend. We continue to see this as superior to more dogmatic return programs, and the results in the marketplace speak for themselves. In closing, 2023 is off to a strong start for the NOG team, and we remain confident that we can continue to deliver growth opportunities in the coming years. I will remind you, as I always do, that we are a company run by investors, for investors. With that, I will turn it over to Adam.

Thanks, Nick. The first quarter was seasonally strong as we kicked off 2023's operations. Turning lines for the quarter were as expected, adding approximately 13.1 net wells to production organically, which was up over 20% versus Q1 of last year despite multiple periods of inclement weather. The Williston made up approximately three quarters of the organic activity driven by larger working interests with several of our top operators. The closing of our Mascot joint development project in January added another 16.4 net wells of current production and we continue to be encouraged with the project's overall productivity. So far, on average, actual production results have outperformed our internal estimates by 10% in the Mascot project. The productivity and outperformance across each basin are testaments to our capital allocation process where we target areas and operators that we believe will deliver a superior return on capital. The drilling and completing list finished the first quarter with 59.3 net wells, up from 55.4 net wells where we started the year. During the quarter, we added 14.1 net wells across the Williston and the Permian via organic and ground game activity with an additional 9.2 net wells added from our Mascot project as drilling continues. The first wave of Mascot completions since we joined the project is slated to turn in line over the next couple of months with the second batch set to start completions in the fourth quarter. Our D&C list grew during the quarter and our near-term backlog of well proposals has also been consistent. During the quarter, we received over 200 well proposals, our highest on record, albeit with varying working interests. Well cost inflation has been consistent with our recent AFEs. We are seeing leading indicators of deceleration and we expect to realize that towards the back half of the year as operators continue to reset terms with service providers. The quality of the proposed wells also remained high as we had over a 95% consent rate during the quarter. The M&A landscape continued to evolve during the first three months of the year. Large asset packages were a bit slow coming out of the gate and the quality of what came to market was not particularly enticing. As such, we passed on a number of potential transactions while continuing to search for opportunities that are better aligned with our strategic positioning and return profile. We are being patient and are beginning to vet in more compelling and higher quality opportunities. NOG's total addressable market has expanded given our size and scale, and we have been invited to co-bid on a number of operated prospects, as well as explore sell-downs from operators looking to partially monetize and remain as operator. These opportunities are not necessarily available to smaller non-ops as size and scale are required to participate in these large asset packages. This puts NOG in a unique position where we can have a seat at the table with our operating partners, determine a long-dated development schedule, and underwrite accordingly. Looking at the entire landscape, there are currently 14 opportunities we are reviewing across our basins of interest, totaling over $6 billion across large asset packages and joint development structures. Volatility in commodity pricing was also a headwind during the quarter and there were several M&A processes that were put on hold. While the Bid/Ask spread was alive and well, we pivoted to our ground game to target drill-ready opportunities in situations where most sellers needed to transact to manage budgets and capital outlay. Taking advantage of that backdrop, we reviewed over 140 opportunities and closed on 10 transactions during the quarter, picking up 2.6 net wells and 369 net acres. We've maintained that momentum moving into the second quarter for the backlog of attractive deals under negotiation. Our Midland Petro transaction last year has shown the art of the possible and while we're exploring large joint development agreements, we've also been able to bring this concept to our ground game, putting together one-off operated units and bringing in operators to develop. While our total addressable market for non-operated properties is as large as ever, we remain steadfast in our discipline. We will never be focused on growth just for growth's sake. Our strict underwriting remains focused on returns. With that, I'll turn it over to Chad.

Thanks, Adam. I'll start by reviewing key first quarter results, which outperformed our expectations despite a volatile commodity pricing backdrop. Our Q1 average daily production topped the high end of our expectations of 87,385 Boe per day, an 11% increase over Q4 of 2022. Oil volumes were up 12% sequentially over Q4 as we experienced better well performance across all basins and the addition of our MPDC acquisition, which closed in early January. Our adjusted EBITDA was $325.5 million in Q1, a record for our company. Our first quarter free cash flow was robust at $84 million despite growing activity and commodity price volatility. Oil realizations continue to be better than internally expected as Q1 differentials came in at $2.57 per barrel due to continued strong in-basin pricing and having more barrels weighted towards the Permian, which are typically priced tighter. Natural gas realizations were 142% of benchmark prices for the first quarter, substantially higher than our stated guidance due to the stabilization of NGL prices and some of our Permian gas tied to West Coast deliveries versus Waha. The balance sheet remained strong. Leverage is trending in the right direction and is down sequentially on an LQA basis versus year-end even with the closing of our MPDC acquisition, which added approximately $320 million to the balance sheet. Our net leverage ratio should return to our target level by the end of 2023 as our acquisitions contribute to our operations and we are able to organically deleverage. We still have over $1 billion of liquidity in the form of unused revolver and borrowing base capacity. Since year-end, we have retired $19.1 million of our 2028 notes at attractive prices and have reduced our outstanding revolver balance by approximately $50 million post-closing of the MPDC acquisition. Mindful of our net leverage target, we will continue to look for ways to efficiently reduce leverage if market opportunities arise. We are reaffirming our CapEx guidance and reiterating the amount and cadence of our CapEx spend. As a refresher, the range is $737 million to $778 million for 2023. Our Q1 CapEx investment was $212 million, representing approximately 28% of our CapEx guidance at the midpoint, keeping with our expectation of realizing 60% of our annual spend in the first half of the year. With respect to cost inflation, year-to-date, we are within our internal expectations, but as Adam mentioned, we are beginning to see early indications of stabilization and with the continuation of weak natural gas prices, we anticipate the potential for a reduction in rig count and subsequent cost savings over the next six to nine months if current trends stay in place. We are not adjusting our 2023 production guidance and continue to expect a range of between 91,000 and 96,000 Boe per day for the full year, barring unexpected disruptions. With respect to our production case for the year based on our current TIL schedules, we still expect fairly ratable increases each quarter with slightly more modest volume growth in Q2 and an acceleration into Q3 as the next wave of Mascot wells come online. We have made minor adjustments to our guidance on gas realizations and LOE. On differentials, we are upping our gas realizations to 80% to 90% given stronger than expected NGLs thus far, but keeping our oil differentials the same for the time being as in-basin pricing in the Permian and Williston remains volatile. LOE was adjusted for higher NGL prices realized year-to-date. We'll update you in the coming quarters if we anticipate material changes. With that, I'll turn the call back over to the operator for Q&A.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Scott Hanold with RBC Capital Markets. Please proceed with your questions.

Yes, thanks. Hey, Nick and team. I have a question about shareholder returns. You've managed to reach your dividend target much earlier than expected, and you've adjusted various aspects of shareholder returns. How do you envision that evolving throughout 2024? Are you considering another dividend influenced by the rate, or do you plan to focus more on buybacks as a key strategy?

Morning, Scott. We're obviously proud of having grown our base dividend and achieved and exceeded our target plan well in advance. And as you know, we have active stock and debt repurchase authorizations that allow us to take advantage of market opportunities as they arise. But I say this virtually every quarter, but dynamic capital allocation is critical. In our opinion, it's about creating long-term value. And the ability and flexibility to act when things change. So I think you can trust us to be nimble as we evaluate where to deploy our free cash flow. But the obvious places for the future are dividends, share and debt repurchases and reinvestment in the business. So I think we'll take it all in stride.

Okay. Thanks for that. And I think Adam, you had mentioned that a lot of opportunities coming in the door. You've turned down a number of these just because it sounds like maybe like a Bid/Ask kind of a spread. Or do you guys have a higher bar now with the success you've seen from Mascot that fundamentally means that some of these opportunities that historically have come in need to really kind of do a little bit more to compete versus the JV opportunities or partnerships?

Yes. I mean, we look at everything on a risk-adjusted basis. And so, the specifics of any particular transaction and the assets and maybe some of the other kind of qualitative details are going to go into that underwriting. I think the fact that we have so many of these opportunities in front of us, and I feel like a broken record every quarter is saying as much, but it gives us the ability to be picky, right? And so, that's going to come out in our conservative underwriting as well as the way that we approach any given particular transaction, as we're not going all in love with any deal, because there's plenty for us to choose from.

Right. And maybe my underlying kind of question was. Do these JVs and partnerships, do they tend to be better return opportunities than say the historical buying of non-op working interest, we'll say?

I think they are simply different. In general, the short answer would be yes, but it's a combination of factors. You need to consider concentration, both benefits and risks, as well as line of sight and development timing risks. When you combine all these factors, that drives the decision-making from an underwriting perspective. For example, you could invest in a non-operated fractional business with a 2% working interest across the board and underwrite it to a very high discount rate. However, it requires significant activity to make an impact on those assets compared to buying something with a 20% or 30% working interest that carries different risks. Particularly when working alongside the operator, the timing and confidence in the underwritten value can be much higher. Generally speaking, with larger ticket items, the discount rate will be wider. You will have more flexibility.

Yes. And that's a function of knowing who your competition is. And as we see larger and larger non-op types of transactions that's going to effectively filter out a lot of the competition that we would otherwise see maybe on some of the smaller ground game things. That'll give the opportunity to raise our discount rate and still get things across the finish line.

And I think not to be too tongue-in-cheek, but anyone who tells you that we're picking up the small things that no one else is paying attention to, I think that's not true. Because I think the smaller and the lower the barriers-to-entry, the more competitive with any processes.

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

Good morning, guys. Thanks for the time. Nick, my first question for, and Adam, just on the Mascot project. Specifically, could you discuss just since you did, I guess it closed out terribly long ago, but since closing any update on the development plan or just maybe what returns are looking like there? I know it's quite an interesting project when you first announced like it was mid last year now. Just wonder how that's progressed?

Yes. I mean, I would just give an overall. I'll let Adam talk about the details, but I'd say, overall, we're really pleased. We take everything day-to-day, month-to-month, but everything so far has been wonderful. I think the productivity, obviously, some of this is just conservatism on our end, but the productivity has been better than we had certainly underwritten so far. I'd say they've been hammering away in the field and doing a great job so far and everything moving according to plan. I don't know if you want to add to that.

No. That's correct. I mentioned that we are outperforming expectations by about 10% in current production. We have around 9 net wells in progress. The drilling and initiation of the wells are going smoothly and will continue steadily throughout the year. From a completion perspective, they will be actively working on that in the next couple of months. Approximately half of those work-in-progress wells will be completed by late June or early July, with the next wave expected to come in 2024. Everything is proceeding as planned, without any surprises, aligning with our initial projections.

No. That's good to hear. I'm looking forward to that. And then, just on, Nick, I think it was in the press release. You continue to talk about the record number of just proposals you're seeing. Maybe could you just speak to that? I mean, again, I guess my question around it is, are you seeing more today than you did even a year ago? And if so, has sort of what your restrictions are when you're looking at these maybe talk about what the requirements are? How much tougher they've gotten since the company is now much larger?

Yes. I mean, I think, while I mean, I think we had 200 gross proposals in the first quarter. Yes, I mean, we had a record number, and sometimes these could be a fraction of a percent of an interest, so 40%, 50% in some cases. And what I tell you is it goes into the same meat grinder. It goes right through the engineering group. Every single one goes through the same process, whether it's a tiny bit of money or a large amount of money net to us. And I'd say overall, the fact as we've span, you're talking about a million gross acres now, plus or minus our assets. So, you're seeing tremendous amounts of activity even as commodity prices have weakened somewhat. But if we're doing our job, just like any portfolio manager, if you're buying lands in the right places, you're going to see consistent development. And I think we've certainly seen that. We've continued to high grade and already high graded set of acres over the last several years. And so, I think we've seen activity that's been at or above our expectations. The net interest in those can vary wildly from quarter-to-quarter, but I don't know. Adam, you want to add anything else?

No. I think you nailed it. I think it's just a function of the effective management of the portfolio and your working interests are going to vary, and you've got your plan. And so you can hit the gas where it when you need to and you can bump the brakes on the ground game when you need to, and it's all going to depend on what the organic asset is pulling and then the opportunity set that we’re seeing, and we just continue to manage it day-in and day-out.

Perfect. Thanks, guys. Great work.

Thanks, Neal.

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

Thank you. First I want to touch on was just on the cost inflation side. I know you all had budgeting for kind of 7.5% cost inflation this year. And I know that last quarter, Nick, you mentioned that you're really seeing more of the cost creep in the Bakken. We had some operators that were seeing some longer-term service contracts that were rolling off relative with Permian, which you had said was a lot steadier. And I guess, I'm just wondering if in the first quarter when as Adam mentioned, you all were like three quarters of your activity was in the Bakken. If that maybe skews a little bit of the cost inflation that you're seeing relative to the rest of the year when it's obviously a lot more balanced with Permian and Bakken especially the Mascot continues to ramp?

I think we need to consider how fragile the overall market is right now. I'm not just referring to the oil market, but to the entire capital markets. We've seen significant selloffs in natural gas and oil over the past few months. This situation requires time to stabilize. You're right that we've experienced rising costs year-over-year and even since last fall. As Adam mentioned, last year's biggest challenge was not just costs but also logistics, like sourcing materials. On previous calls, I mentioned that issues related to building materials have largely subsided. The future direction will largely depend on crude prices. Generally, exploration and production margins remain stable, whether oil is priced at $100 or $65. If oil prices drop significantly, I would anticipate a decline in margins for service providers over time as overall activity diminishes. However, if prices remain steady, I believe we can continue to observe efficiencies in drilling, with operators drilling longer laterals and more wells simultaneously, which will contribute to cost savings over time. I expect some relief as time progresses. Additionally, as our program becomes more balanced throughout the year, we are noticing a slowdown in the increase of well costs specifically in the Permian, which I believe will result in easing cost pressures over time. The extent of any relief we experience will depend on how things unfold in the coming months. Service providers and operating groups tend to respond strongly to periods of volatility, so we'll need to see how it all plays out.

Yes. John, I think the only other dynamic that I'd add to that is just kind of operator cadence and flow. You mentioned the Williston, Continental and Conoco, we've seen the most activity within the quarter and just looking at their weighted average AFEs, it's certainly encouraging. And Continental being one of our most active operators and being ratably lower than the overall based on average.

Great. And then just my follow-up. Adam, you kind of gave us an idea of how the production cadence looks over these next few quarters and gotten clear on the CapEx breakdown of that 60% in the first half of the year. But I was hoping to maybe get a little bit more color on the TIL cadence, obviously last year, it was sort of averaged 10 TILs the first half of the year and had the big step up in the second half of the year. And then, this year, it sounds like you're building that you go throughout the year. Can we get any more of a breakdown on how you kind of get to that 80 to 85 TIL guidance for the full year? Kind of how the remaining quarters look, just rough numbers?

Yes, I can’t provide specific numbers at the moment, but I expect to see consistent to slightly increased activity this quarter, which should result in modest growth in the third quarter. By early in the third quarter, we should have the majority of the first wave of Mascot wells completed, leading to a significant increase in activity. The capital expenditures don’t directly correlate with our total independent laterals. The funds we spent this quarter for 13 TILs were mostly allocated to wells last year. This explains the upfront waiting, as we account for it on a percentage of completion basis, making the TILs more of a finishing touch. Thus, I believe the third quarter will likely be the most active in terms of TIL cadence this year, with the fourth quarter following closely behind.

That's perfect. Thanks, Nick. Our next question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.

Thanks, and good morning all.

Morning.

With respect to the larger operator-specific opportunities you may pursue, how important is line of sight activity and investment pacing in your evaluation process? And would you generally require a modestly greater return to offset operator concentration risk?

And Derrick, just to be clear, you're talking about, like, co-bidding assets or partnering in some sort of partial sell down. Is that kind of where the question is based?

Yes. And I'm thinking more like the Mascot opportunity. I was directionally seeing that was the 14 larger packages as you're referring to?

Yes, the response involves considering various risks. Our main focus is on aligning with the operator, which can involve governance, ownership shares, or a mix of those elements. With concentration risk, we also prioritize our company's focus on internal rate of return, net present value, and risk-adjusted returns. It's essential to have visibility into the projects, but it's equally important to ensure that governance structures are in place so that decisions can’t be reversed, as that could jeopardize value. We aim to contractually align interests to ensure that the operator shares our goals for investment.

Yes. And I think it's understanding the needs and the wants of the operating partner, right? Because each individual operator is solving for something different. We've had conversations with operators that say, hey, Northern, choose your own adventure. You tell us what you want to drill in order to come up with the best number that you can. And then you've got other operators that want more autonomy in terms of what that drill schedule looks like and we'll underwrite it accordingly and take those factors into consideration.

That's great. And then, building on John's earlier question on service prices, are you guys seeing any improvement in well cost across any categories on a leading edge basis? And then separately, regarding your Continental commentary, does that price advantage appear to be efficiency or market pricing based?

There's a significant difference between a small private company with one or two rigs and a large company producing several hundred thousand barrels a day, both in terms of technical capabilities and sourcing. In some cases, the cost per well can reach millions of dollars. The smaller companies often have to rely on borrowing equipment on an interim basis and sourcing their materials in the spot market. This is why, although we may be considered a smaller company by public standards, our operations primarily involve larger companies. While there are some private companies that excel in drilling, generally, having scale is crucial for effective sourcing. For instance, there's a stark contrast between a company like Amubert, which runs about 20 rigs on our Permian assets, and a smaller operation using a single rig and acquiring resources on a temporary basis. This difference affects everything from midstream contracts to drilling costs and other associated expenses.

No. That's right. I think, having conversations with our operators, they're seeing some really fundamental tangibles. Not necessarily having to put down deposits in order to secure supplies, all of that kind of comes through from a pricing standpoint as well, from an inflationary standpoint.

And on the leading edge, is there anything worth discussing?

No. I mean, I think it's the tangibles that really we've seen in the release. There's been some drilling contract and those sets of things that we've seen that make up the largest percentage of the overall AFE? No. Does it help? Yes.

Makes sense. Very helpful, guys.

Thanks Derrick.

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

Thank you for taking my question. I'd like to discuss the future outlook, specifically considering a one to three-year time frame. My focus is on infrastructure and pipelines. You have substantial interests in key regions like the Permian and Williston basins, as well as some involvement in the Appalachian area. These regions could greatly benefit from enhancements to pipeline infrastructure and possibly LNG capacity in the Gulf, along with other developments. Additionally, I follow clean energy initiatives, and I recently attended a conference in California where commercial fleets are being pressured to electrify. There’s significant concern regarding the existing infrastructure, with some attendees expressing near panic about meeting legislative targets. The current political climate includes efforts from both parties to address this issue, similar to what Senator Manchin attempted with permitting reforms. They might find common ground by easing regulations around traditional oil and gas infrastructure. I'm interested to hear if you have any insights on this topic, including any noteworthy regional developments. I understand there are pipelines coming online in parts of South Texas, but I'm curious about the Williston and Appalachian regions and what you consider essential from a pipeline infrastructure perspective.

Well, we do spend a decent amount of time and money on understanding the political landscape and as it pertains to infrastructure. Because as it pertains to traditional energy and oil and gas, the bulk of the impediments to the business have been attacking infrastructure projects in order to choke off supply. And generally, to the detriment of American citizens, that's a larger conversation. But I tell you as it pertains to the three basins that were active in today, the Williston is candidly oversupplied from a takeaway capacity. You've seen that in better pricing over time. And the basin as a whole, while our volumes are set to hit records, the basin as a whole is not growing tremendously. And so, I don't think we have a ton of concerns in the Williston. In terms of the Marcellus, while there you have Mountain Valley pipeline and other things that could potentially change the game there or even LNG expansions. Our base case assumption has been nothing gets better ever. And that's how we generally underwrite there. That's generally our view. It's just been challenged. It's both political, geographical, all of those things going into above. Do I hold some optimism that at some point, logic will prevail? Sure, but we're not counting on it. And in the case of the Permian, you do have a ton of LNG expansions coming on that the gas infrastructure in particular is quite tight right now, and we've had that view internally for some time. But those logistical issues are getting solved in real-time. I have no doubt in my mind that we've even seen operators find ways around it. As Chad mentioned, rerouting gas especially because the bulk of our Permian assets are in New Mexico, which has more options. And so, money is an amazing thing and motivates people to solve problems and where there's capital. And so, I don't think we have a ton of long-term worries within the Permian Basin. And I think given its proximity to the Gulf Coast relative to other places where business is largely still open. I think LNG expansion over time will both help ease the glut of natural gas over not necessarily this year or next year, but over a multi-year basis, as well as infrastructure projects getting ahead of it.

Okay. That's helpful perspectives. It's good to know you're not baking anything in and that's a good thing for me to know as I look at things.

Yes. I mean it.

It's reassuring to see the level of caution. I'm feeling optimistic, or perhaps hopeful would be a better term. It's helpful to know that nothing is being artificially inflated, which is a positive aspect. I would like to ask about the current level of M&A opportunities. You've mentioned this before and indicated a figure of $6 million, but I don't recall you providing an actual dollar amount previously. Can you clarify how this has changed since the last update? Was it around $5 billion a quarter ago? What has the change in magnitude been in the short term? Additionally, when considering the magnitude, does that imply that the opportunity has doubled? Should we interpret that as an increased capacity to acquire? Or does it lean more towards improving quality, where you can negotiate better terms without necessarily changing your overall appetite for acquisitions?

I believe that, similar to any business, having more options typically leads to greater opportunities. When you have access to more possibilities and the scale to engage with them, especially as barriers to entry increase, your potential for returns improves. Our growth has consistently brought us advantages. In the past, we have discussed our pipeline, which is currently at what may be a record level. To illustrate, consider the commercial real estate market in the United States: while there’s a large total addressable market, only a small fraction consists of minority interest owners in those buildings. Many individuals might own a small percentage of a building, but if you have enough scale to partner with the majority owners, your market potential expands accordingly. This reflects our current position in our company’s life cycle. To put it simply, we are only beginning to tap into the hundreds of billions of dollars worth of oil assets in the United States. As Adam and I often tell our investors, you can carve a working interest from any asset in oil and gas, and we’ve noticed a significant increase in our total addressable market. Regarding our selection process, M&A requires a long-term perspective. We avoid getting attached to specific deals and only pursue those that meet our financial requirements. This approach allows us to make sound decisions without needing to take too many risks. Our success rate on the ground last quarter was about 5%, but this still translates into tens of millions of dollars. Corporate M&A may seem straightforward given our $1.7 billion in dealings over the last two years, but it actually conceals many failures; the true success rate is likely three to four times less than what it appears. However, we are navigating towards areas where we remain one of the few able to participate, thereby achieving our targeted returns while also broadening our opportunities. Would you like to add anything?

No. You covered it.

Okay, I have one last question, and I'll take the rest offline. The NGL to gas ratio is currently above historical levels, which was evident this quarter. I understand it's difficult to predict its future trajectory. I think Rusty Braziel is the only expert I know of who has actually written a book on it and truly understands the nuances, but it's beyond my expertise. Can you explain what you monitor in this area? I realize it's nearly impossible for you to provide guidance on this topic since it's out of your control when operators decide to go for ethane rejection or extraction. What trends are you observing that might help us understand this better? Is there anything we should keep an eye on that could indicate where it's heading?

Well, I mean, the NGL basket trades every day, the mix of which we receive varies from day-to-day, you mentioned ethane. And I think rejection is probably at a high. There are limits to how much you can do. Some operators extract it one way or the other because of contracts they might have entered and you're going to get a worse realization in a market like that when that happens. But ultimately, you're talking about probably about four variables. You've got in-basin differentials, you have the NGL basket as a ratio to gas, and then you have to fix gathering and transportation costs. And then in some cases, you have the percentage of proceeds piece, in which there is an added cost as those go up. Chad, I don't know you want to add to that?

No. I think you said it right. I think we would expect our guidance just be more realistic going forward. Obviously, gas differentials are volatile. And then the recent weakening in oil prices will have effects on kind of the go-forward price, we believe. I think rejection, obviously played a role this quarter. As well as kind of the takeaway to the West versus Waha in the Permian for us.

Okay. That's helpful. Thanks, guys.

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

Hey, thank you very much for taking our questions. First question is on capital allocation. Appreciate you got a dynamic process here of allocating towards growing the dividend, paying down debt, buybacks. But when you sort of see what investors can sort of earn as far as a return on cash, does that change the calculus at all? Does it make grabbing maybe makes potentially buying back shares or reducing debt more attractive in the near-term. So, how do you think about that?

We consider our approach to be dynamic because the inputs we work with change daily. This includes the stock price, our ability to reinvest capital, and the decision to reduce risk by paying down debt while also increasing dividends. It's important for us to find the right balance in these areas. We believe that moderation is key, as excessive focus on any single aspect can be detrimental. In the coming months, we will dedicate time to reassess our long-term plan, which we laid out a couple of years ago, and determine the next steps over the next couple of years. Our strategy will maintain balance across all these elements, and we plan to engage extensively with our board and advisors during this process. Trends in capital allocation, such as special dividends or buybacks, can fluctuate significantly. For example, when oil prices were high last year, special dividends seemed appealing, but when prices dropped, those dividends could lead to missed opportunities for long-term value creation. Therefore, we are very cautious and deliberate in our decision-making. This careful approach is why we have focused on maintaining a stable base dividend, with a belief that we can grow it over time while ensuring we have sufficient excess cash flow to invest in initiatives that will support sustainable dividend growth in the long run.

Yep. It does. And then, as a broader question, more on production, you had – it looks like you had a beat here from the Bakken. Also, if we sort of look back earlier during the week, there was another operator that said relatively strong performance out of Bakken. There were some prepared remarks on productivity in the Bakken. But could you provide any more color on how you see productivity trends sort of in the Bakken?

What I can tell you is that I've been impressed with the raw data I've seen. Many of the assets we would have classified as Tier 2 three or four years ago are now performing at a level comparable to Tier 1. The Bakken is a higher-cost basin compared to the Permian, and it has a higher breakeven point. However, it also shows much more consistency. The activity has been relatively stable, with about 50 rigs operating consistently for the past couple of years. This stability has led to disciplined development without extreme fluctuations; while the Permian shows a wide variance in performance, the Bakken offers a more uniform quality in both the dolomitic rock and the behavior of the operators. To be honest, we have seen better-than-expected productivity across all three of our basins, including the Marcellus, where the declines have been noticeably better than anticipated.

Yes, that's right. With the place completions and operations, we have seen some improvement where you used to take Tier 2, Tier 3 was uneconomic. Now we view it as Tier 1 in some cases. Obviously, operators are trying longer laterals, so that's helping on the production as well. And then part of it for us, again, is going back to the active management, we focus on areas that are highly productive within the core. So that's kind of how we manage the business.

Very helpful. Thank you for taking our questions.

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

Good morning, Nick, Ed, Chad, Adam, and the entire NOG team. Nick, you've mentioned a few times during the Q&A about the significance of operators, particularly those with scale. When discussing the Mascot project with investors, how do you convey the message or context when they express unfamiliarity with Permian and Deep Rock?

There are always exceptions to every rule. I believe there are operational and geological aspects to consider. However, I want to emphasize that this company has a strong team and a long track record of excellent performance. They have multiple rigs in operation, not only on our lands but also on their other properties. We've had a thorough assessment over several years. They have developed all the infrastructure directly on-site, which is unusual for a company of their size. All of this played a critical role in our decision-making process, but rest assured, they have proven expertise in drilling wells.

Yes. Dave has been doing this for years. And when we went into underwrite this, there's a number of wells obviously that they had already drilled and completed and brought online and that gave us the conviction with David team that they could put down highly productive wells and keep well costs under control. And so, when we're going into these types of things, we need to make sure that our analysis is bespoke.

Yes. I would say that we are dealing with a company that has everything needed for efficient operations, including redundant water disposal, effective gathering for crude and gas takeaway, and long-term contracts. We have been very pleased with their performance. However, you are correct that we were concerned about these factors from the beginning. This was a significant aspect of our analysis.

I understand your question, and I appreciate the details you provided. Nick, referring back to your earlier comments about not only the size of the opportunities ahead but also the nature of those opportunities, particularly bespoke carve-outs, I see that every company is focused on capital allocation. However, from your remarks, it seems like there might be a shift in how your team perceives its role, moving from just being an oil and gas company that happens to focus on non-operated assets to positioning yourselves as a capital provider for the industry. Is this a shift that's occurring in your perspective or among the management team and the Board? If so, how should we adjust our expectations of your company?

I believe we have always been both an investment company and an oil and gas company that provides capital. Our operators, including some of the largest independent and quasi-major companies, need capital for various reasons. As a non-operated entity, we primarily provide capital, but we also have our own engineering and technical capabilities, along with the infrastructure to manage our assets. Historically, about five to ten years ago, many financial groups offered capital to operators in non-operated ways. However, the necessity for those capital providers to secure an exit strategy often made things difficult for operators. As a result, many operators are now approaching us, expressing dissatisfaction with past dealings where they worked with purely financial firms. They prefer to partner with someone who truly understands the oil and gas sector, is willing to take risks, and can serve as a long-term owner of these assets. While cost of capital is important, the key factors are alignment, risk-sharing, and a mutual understanding of our operations, rather than simply seeking short-term returns.

Thank you for that comments. Thanks. Appreciate it.

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