Northern Oil & Gas, Inc. Q1 FY2024 Earnings Call

Good morning. Welcome to NOG's First Quarter 2024 Earnings Conference Call. Earlier this morning, we released our financial results for the first quarter. You can access our earnings release and presentation on our Investor Relations website at noginc.com. 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 Dirlam; our Chief Financial Officer, Chad Allen; and 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, then Adam will give you an overview of operations and business development activities. Chad will review our financial results, and after our prepared remarks, the 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. 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 have been 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. Reconciliation of these measures to the closest GAAP measures can be found in our earnings release. With that, I'll turn the call over to Nick.

Thank you, Evelyn. Welcome, and good morning, everyone, and thank you for your interest in our company. I'll get right to it with 4 key points: Number one, coming out strong right out of the gates. We saw significantly better-than-expected results in the first quarter, driven by 2 primary factors: strong well performance and a pull forward of activity with more wells turned in line than we expected. We had highlighted strong well performance last quarter as well, but it was less noticeable in Q4 results due to higher levels of curtailments. With the ramp at Mascot in full swing, our other JVs performing well and higher oil prices, we are seeing organic activity accelerate, which bodes well for our 2024 production overall. The larger-than-expected TIL count increased our overall capital but was more than made up for by higher cash flow and production, which will benefit us as we head into the second quarter. We expect modest additional pull forward in the second quarter, though not to the same extent as good pricing continues to bring value forward for our investors. This highlights one of the greatest facets of our nonoperated business model, which is the alignment with our operators. When prices are high, we typically see the economic incentives work their magic to bring forward value into the higher price periods like it did here. And additionally, as we talk about the asymmetry of hedging, we produce more barrels when prices are higher, leaving us more on hedge than we expected in a higher-priced period. While we've seen development accelerate into the highest price period of the strip for the year, boosting our profits for the quarter, our plans for all of 2024 remain largely unchanged with only very modest changes to the pace. Our hope would be, to the extent that commodity prices stay robust, that it warrants activity levels and returns that trend toward the middle or upper band of our guidance, which should translate into higher production as we exit the year and into 2025. With that said, we want to remain flexible with our capital as always, to ensure we're earning significant returns. Chad will highlight it further. But despite the lower headline free cash flow number, under the surface, we've made substantial progress on the working capital front and made better progress than we anticipated on our balance sheet year-to-date. After closing the last of our Q4 acquisitions, we paid about $40 million in dividends, spent about $20 million on share repurchases, and still paid down about $50 million worth of debt. All of this was during a period of hefty investment. So we expect our free cash flow base to pick up even more meaningfully in the second quarter and continue as the year progresses. Number two, waiting for the right opportunity. As we highlight nearly every year, our ground game business typically has a quiet first quarter, and this one was no different. We characteristically see people aggressively spending their budgets early in the year. Additionally, strong crude prices can have an effect on risk-taking from smaller competitors who may not have the wherewithal to invest in the down cycles. On the larger M&A front, we've been actively engaged. We've seen relatively wide bid-ask spreads, negative risk from high crude prices and asset quality that's kept us from being overly aggressive. The good news is that on the more scalable front, we continue to work on drilling partnerships, carve-outs and true non-op and JV fronts on larger, more impactful and bespoke processes. We shied away from some of the less value-added marketing processes that, in our view, have been both lower quality and saturated with returns that in many cases did not meet our thresholds. These market conditions ebb and flow and can change within a given year, so we stay active in all facets of business development to capture the right opportunity. Given the overall backlog, we're staying disciplined for the right transaction to grow our business, and I have the utmost confidence that over time, we will find great opportunities for growth. Number three, dynamic capital allocation 101. With the position acquisitions and relative weakness of our equity performance early in the year, we did elect to dynamically direct our capital towards share repurchases and simplifying our capital stack. Dynamic capital allocation is just that dynamic. Our flexible business model allows us to quickly adapt to changing circumstances. The contraction in our equity valuation in the first quarter, as I highlighted in our last earnings call, provided a favorable time for share repurchases, and we took advantage of the opportunity at attractive prices. We also cleaned up the last tranche of our remaining equity warrants, which were issued as part of an acquisition in 2022 at lower prices than current in a net exercise style exchange. This simplifying transaction both reduces short pressure on our equity as well as long-term dilution potential in another value-added move. Most of those warrants were already accounted for in our diluted share count, but over time, the potential dilution from stock performance and dividend payments could have grown meaningfully, and we're very bullish on our outlook. As we look forward, one of the primary goals for this year is to put the business in a position to have increased optionality as we head into 2025, whether that's to further increase the dividend, allocate more to buybacks, or allocate more to growth prospects. The key to dynamic capital allocation is to make decisions that maximize total return, while dogmatic, formulaic approaches may seem tempting, over time they are prone to miss opportunities. Given weak natural gas prices, high-interest rates, and an uncertain economic outlook in an election year, there's a high probability we will have market volatility events, which could potentially create great buyback acquisition opportunities or chances to grow the dividend for us. We want you to know that, as always, we are watching closely and are highly aligned with our shareholders to deliver. Number four, confidence for 2024 and '25. We recently issued and updated a much improved ESG report. In it, I talk a lot about our philosophy of Kaizen here at NOG. Kaizen is a Japanese term which means continuous improvement, and that's built into our culture here at NOG. After launching our AI-powered data lake system, trocar last year, we continue to enhance and expand functionality. And internally, we remain focused on improving data quality to further leverage our analytics, our underwriting, and predictive capabilities to help grow our business. Now the week goes by where I don't hear that one of our departments is building out new capabilities to exploit our massive probe data. What that data is showing us gives me tremendous confidence in the people at NOG, our assets, and our outlook for 2024, '25, and beyond. We continue to add systems, talent, and new processes to get better and better at what we do. As with Kaizen, we're never satisfied leaving well enough alone. For 2024, specifically, as I mentioned in my first point, our sound investment process and core tenant of focusing on high-quality assets is time and again proving itself out with better-than-expected well performance, and our culture of conservatism has delivered the strong results we've seen to date. While we reiterate our forecast for the year, we're working diligently to augment those results and find additional paths to growth. Before I hand it over to Adam, I'd like to thank the entire NOG team for their hard work and dedication for another great quarter and thank our analysts and all of you for your interest in our company today. Thanks also to our operators out there for their incredible fieldwork and the great partnerships we support. We've had another great start to the year, and while it's early, the assets are performing exceptionally well as we convert a lot of the money in the ground from the past 6 months into production and cash flow this year. As 2024 progresses, I also expect we will see more growth opportunities emerge. Given what is in front of us today, I remain confident that NOG remains a superior investment product to our peers and that our growth trajectory is unmatched in the upstream space. As a management team, we are aligned and incentivized to maximize total return for our investors year in and year out. That's because we are a company run by investors for investors. With that, I'll turn it over to Adam.

Thanks, Nick. I'll come to some commentary on the first quarter's operational highlights and then shift gears to provide some additional color on what we're seeing on the M&A front. The first quarter picked up where '23 left off with continued acceleration of development and marking the fifth consecutive quarter of record production for NOG. Production increased 4% quarter-over-quarter driven by well productivity and a pull forward in the Permian, which accounted for 3/4 of our well additions in Q1. Partnering with top-tier operators across all of our respective basins, including Novo, Permian Resources, Ascent, and Continental that helped drive the beat on production. Unpacking this further, we saw 2023's ground game investments had nearly 5,000 barrels a day of production over the fourth quarter, while also seeing outperformance on our Novo and Utica assets. Turning lines topped expectations with 25.3 net wells added in Q1 as the Mascot project pulled forward 2.4 net wells that were expected to come online in the second quarter. The wells were added late in March, and as they clean up, we expect to receive the production benefit in the second and third quarters of the year. With higher conversions in Q1, we had an expected drag to our wells in process and ended the quarter with 52.4 net wells in process, 40 of them in our oil-weighted basins. The Permian now makes up 60% of our oil-weighted wells in process, and our exposure to top-tier operators remains consistent across all of our basins. Pace of AFEs was as active as in the fourth quarter, and we are seeing a healthy backlog of well proposals as we head into Q2. At the end of the quarter, well proposals not yet spud totaled 24.7 net wells. During the quarter, we were validated with over 180 AFEs and elected to over 90% of the proposals on a net basis. January and February kicked things off with robust gross activity on our organic acreage, offset by lower average working interest. Recently, we have seen that turnaround as March and April had 3x the net well activity than in January and February. New well proposals are showing moderate signs of deflation as absolute and normalized costs in the Permian have declined and have been the lowest that we've seen in the last 12 months. Estimated well cost in the Williston also ticked down 5% quarter-over-quarter. All that said, we continue to remain conservative with our forecast, especially in light of a higher-priced commodity environment and accelerated development. Turning to the M&A landscape and our business development efforts. Q1 was frothy as competition leaned in with new budgets, as is typical to start the year. And customarily, we are happy to let the Bull Run by and stay disciplined with our underwriting, waiting for the appropriate opportunities. Despite some elevated competition in our ground game, we were able to pick up over 1,700 net acres of longer-dated inventory and 0.6 net wells in process. In the Bakken, we also closed on a joint development agreement and will be kicking off development across 4 to 5 units in the third quarter. We continue to get creative with structuring, and we see significant upside with this project, having a site line to add up to 10 more drilling units to the program. There is no shortage of shots on goal as we evaluated over 120 transactions in Q1, and we're already seeing momentum in conversions through April. Shifting gears to the larger M&A landscape, we remain as busy as we've ever been evaluating opportunities for the right fit. In the first quarter alone, we reviewed over 30 potential transactions as the quality of properties has been variable at best. Quality has started to pick up, and the mix of prospects has included non-op packages, joint development programs, minority interest buydowns, and the co-purchasing of operated assets. Looking ahead, we are actively engaged in over 10 processes with asset values ranging from $100 million to over $1 billion, while continuing strategic discussions on other off-market opportunities. We're encouraged by the conversations that are taking place, but any potential transaction will need to have the right fit at an asset level, as well as from a risk-adjusted return perspective. With that, I'll turn it over to Chad.

Thanks, Adam. I'll start by reviewing our first quarter results and provide additional color on our operations. Average daily production in the quarter was more than 119,000 BOE per day, up over 5,000 BOE per day compared to Q4 and up 37% compared to Q1 of 2023, establishing a new NOG record. Oil production mix of our total volumes was in line with our guidance at just over 70,000 barrels a day, and gas was a larger contributor compared to the past, reflecting 2.3 net wells in Appalachia and a full quarter's contribution from the Utica acquisition. Adjusted EBITDA in the quarter was $387 million, up 19% over the same period last year, but modestly lower than the last quarter, mainly due to lower average realized prices per BOE in the quarter. Free cash flow of $54 million in the quarter was lower sequentially and from the same period last year due to the pull forward of activity in the quarter, but the peak of this growth capital should crest as we reach midyear. We anticipate an acceleration of free cash flow in the second quarter as TIL comes online and begins to contribute to production and revenue. Adjusted EPS was $1.28 per diluted share. Oil differentials were in line with our expectations at an average of $3.99 at the lower end of our guidance. Williston differentials range from a low of $6.60 in January to a high of $6.95 in February, while premium differentials saw a market widening from $0.69 in January to $2.26 in February on the heels of higher production from areas with higher deducts within the basin. We still expect oil differentials to moderate and have begun to see some evidence of that in late March and in April. For natural gas realizations were 118% of benchmark prices for the first quarter due to better winter NGL prices and in-season Appalachian differentials, but we are still anticipating an erosion in gas realizations as we close out the heating season. With Waha gas solidly negative combined with shoulder season gas and NGL pricing, we expect markedly lower realizations in the second quarter, perhaps as low as the mid-70% range. Overall, for the year, however, we believe our guidance remains solid. Law has been plagued by not only under capacity but by maintenance-driven outages, and we expect things to modestly improve later in the year. It's also worth noting our net exposure to Waha is minimal with approximately 60 million a day hedged through Waha basis and Waha gas swaps for the balance of 2024 at very attractive prices. LOE was flat sequentially at $9.70 per BOE, reflecting continued workover expenses, a pickup in activity of our Mascot project, and a $2.3 million firm transport charge in the Marcellus. The transportation expense should moderate to a quarterly charge of approximately $1.5 million per quarter through the end of Q1 2020. As we discussed on our fourth-quarter call, we anticipate LOE per BOE to be relatively flat through the second quarter before gradually declining as production ramps further in our Mascot project and the transportation charge falls to a lower run rate. Production taxes were 9.6%, in line with guidance as production ramped in the Permian, which has a higher production tax rate. On the CapEx front, we continue to experience a pull forward of organic activity driven by the strength in oil prices. This drove CapEx of $296 million, inclusive of ground gain capital, and was a bit higher than anticipated for the first quarter. Of the $296 million, 68% was allocated to the Permian, 26% to the Williston, and 6% to Appalachia. If we continue to see strength in oil prices, we expect to see CapEx trend toward the higher end of our guidance range for the year. With that said, the higher CapEx should be accompanied by higher production as our D&C list is actively converting pills and spuds and drawing down our working capital. Specifically, on the working capital front, excluding the impact of derivatives, we have seen an improvement of approximately $40 million on our working capital since the end of the year. At quarter end, we had over $1 billion of liquidity, comprised of $32 million of cash on hand and $987 million available on our revolving credit facility, which was expanded at the end of April as a part of our semiannual borrowing base redetermination. While our borrowing base remained constant at $1.8 billion, we increased our elected commitment to $1.5 billion and added 3 high-quality banks to our syndicate. At quarter end, net debt to EBITDA was 1.25x, and we expect this ratio to trend down throughout 2024, barring significant cash M&A activity. As Nick discussed earlier, we were actively repurchasing shares in the first quarter despite limited open window. We repurchased 549,000 shares for $20 million of our common equity at an average price of $6.42. We are committed to allocating capital to share buybacks where there is a market divergence between our absolute and relative performance. And finally, before we go to Q&A, I'd like to address a few adjustments to guidance. We anticipate production of 117,500 to 119,500 BOE per day in Q2, flat versus Q1 given the pull forward in March. Given continued pull forward, we should see CapEx down sequentially and a significant improvement in our free cash flow. Our Q2 expectation of oil volumes is also in line with Q1. We have tightened the range on production expenses, which are starting to come down as well as oil differentials, which quarter-to-date appear to be improving. We may make further adjustments when we report Q2 as needed. With that, I'll turn the call back over to the operator for Q&A.

Your first question comes from the line of Neal Dingmann of Truist Securities.

Nick, maybe to you my first question is just on what I would classify as maybe cycle time. It seems like your capital on the ground maybe has increased a little bit, but the setup, I think as you and Adam, the guys described it to me, it sounds like the future setup is better than ever. Is this just a product of cycle time for some of the producers being a little bit longer or what's driving this? Because again, it does seem like I think your second half and 25 look as good, if not better than ever. It seems like a little bit in the fourth quarter and the first quarter that was a little more on the ground. So if you can just maybe hit on that a little bit.

I mean, look, Neal, this is a little bit of what we are and a little bit of how things are changing. We're a returns-based organization. As a nonoperator, the timing of capital expenditures can shift markedly. But as I said last quarter, and I'll say again, total capital expenditures are the same. To the extent it increases from one quarter to the next is because we're getting more activity. If we're getting more activity that meets our return holders, that's a good thing. What we've experienced in the last 9 months is an acceleration of development. I would tell you, in the last 18 months, our average spud TIL timing has gone from 234 days to 110 days. That is a significant move, and that's hard to perfectly model. I'd say the difference between last quarter and this quarter is that this quarter's acceleration also came with more tilt, which obviously translated into significantly more production. So you've got a lot more cash flow and benefit from it than last quarter. So it was a little bit less obvious last quarter. But I'd also say because we're an accrual shop and because these accruals roll off over an extended period of time, and as these invoices are received, it's not something that's done quarter-to-quarter. We don't run the business quarter-to-quarter, nor is capital spent quarter-to-quarter. It's spent over the life of the wells. And so over a 12-month period, generally, the capital and the returns you can see from our standout corporate returns tend to play out. And I want to be clear, this is a good thing. Corporate Finance would tell you bringing capital forward is ultimately bringing net present value forward. That's corporate finance model one. We just brought forward significant production into the highest-priced part of the strip. And yes, they brought forward some CapEx. Is the same CapEx that would have been spent later in the year at a backwardated strip, I would argue this isn't a bad pay at all.

And then just a quick follow-up on capital allocation. You haven't mentioned just the shots on goal, and I continue to think you all have more opportunities than almost anybody. How do you balance that in shareholder returns given you have more prospects than I think any company out there?

I would say that we don't see acquisitions and shareholder returns as mutually exclusive. We consider many acquisitions as potential enhancements to shareholder returns, particularly those that generate cash flow. The assets we evaluate often have the potential to improve our dividends over time. Specifically, we weigh the benefits of stock buybacks against acquisitions on a daily basis. At times, one option may appear more attractive long-term, but we take maximizing total return very seriously, as it's part of our responsibility. We need to consider the long-term implications of our decisions over a 3-, 5-, or 7-year period. Ultimately, we believe that both avenues can coexist effectively.

No. I mean, I think you touched on it in your prepared comments in terms of dynamic capital allocation. We're always actively managing the portfolio, reviewing what's in front of us, and we're going to allocate capital according to what dislocations perceive.

I mean I think even as it pertains to the stock buyback and admittedly, we had a relatively narrow window in the first quarter. We spent a lot of time about the mechanics and just with the Board of Directors about how we would do it and about what rules and regulations would be around it? And what would be the nuances about that and how we would weigh that against potential M&A and just the opportunity cost to make sure we left red for that. But I would just say this that we're not short of opportunities, that's for sure.

Your next question comes from the line of Phillips Johnston of Capital One.

So just a follow-up on the CapEx for the year, possibly landing in the upper half of the range, assuming oil prices and activity remain elevated. Chad, you sort of alluded to this in your comments, but would you think that your net well count and your production volume for the year might also be a little bit biased to the upper half of the range? Or do you think it's a little bit too early to tell just with the lag effects and whatnot?

Phil, this is Nick. I think I read your note, and I have to object to one of the things you said I think you misconstrued what we were saying. We're not suggesting that our CapEx assumes that oil prices will stay high for the rest of the year. It's quite the opposite. What we were saying was that since oil prices have increased, we've seen an increase of AFE activity on our acreage, and that AFE activity would translate into CapEx theoretically at later in the third and fourth quarters of the year. Our comment was that we're returns-driven, right? So our consent activity on those AFEs is driven by oil prices and underwriting those returns. If oil prices stay high, we'll consent to that activity and ultimately then the CapEx would be higher, not the other way around. We also know to be flexible because our business model is obviously inherently more flexible than an operated one. So to the extent that oil prices were to change, obviously, we pivot quickly. We're just suggesting that if things stayed as they are, we wanted to guide investors accordingly based on our status quo. So I would tell you that if oil prices stayed high, we would probably expect to see continued elevated AFE activity because what we noticed was that as oil prices rallied early this year, we started to see a notable pickup in activity, and that's going to translate particularly. That activity you see today is really going to be activity that's going to translate into well proposals that are going to start to come online towards the end of this year and point towards 2025. And so it would be turning lines that would likely be towards the end of this year in chatter.

And that dovetails into your comments in terms of the spud. I mean right now, we're getting well proposals, especially with elevated working interest, and depending on who those operators are and how they're developing it, whether it's a one to 2-well development program or if it's a full cube development program, and that's going to dictate building. So kind of on that trust as we see things socialized and development progresses, that's where we're at right now.

We're not deciding to spend the money and hoping oil prices are going to stay high. We're saying that if oil prices stay high, we're likely to see that kind of activity. That's what we were suggesting.

Shifting over, I guess, to your views on the gas market. We've seen 25 and 26 strip prices actually creep up since you guys reported Q4 despite super high inventories and weak pump prices. I saw your NYMEX gas hedges for '25, '26 are unchanged, but are you tempted to sort of layer in any more activity in the out years?

Yes. I think it's been proven time and time again that contango is a bearish formation. Right? I think we will probably act accordingly. When the curve wanted to see contango over 2024 last year, we began to hedge, and I think you'll probably see us act accordingly. So I think the answer is yes. I mean, I think contango tends to give a perverse incentive to producers, right? So it will tell them to keep producing. I know you're seeing curtailments right now, but curtailments are not necessarily a panacea because ultimately, you just turn something off that you can turn right back on and you keep drilling like if you'll notice most natural gas producers right now are not cutting CapEx. They're actually still drilling and curtailing production. So effectively, they're going to be able to turn it back on at a moment's notice. That's not filling the market, in my opinion. To me, it does not make me feel overly bullish on the market like the market seems to want to be. A backwardated market is a much healthier market. So what it's telling me is that you likely want to sell in that market. I think gas is going to be $1.80 or $2, that's not a sustainable price. Those high prices are likely and those are obviously very profitable levels for us. So I'd be very happy to sell into those levels.

Phillips, just on the hedging comment, I think we have been adding some call options out in those years. So flip that in the 10-Q. But yes.

Your next question comes from the line of Scott Hanold of RBC.

Look, I'm going to kind of come back to the CapEx conversation, if we could, but take a little bit different angle on it. I guess, correct me if I'm wrong, but your back half CapEx, the implied quarterly run rate is around $160 million to $170 million. And could you just give us a high-level view, I think your production probably is going to peak somewhere in that 120-plus range in the third quarter? When you fundamentally think about like what CapEx run rate needs to occur to maintain production by your non-ops, is $160 million to $170 million adequate? Or does that sort of create a little bit of a tail-off in production heading into '25?

Our decline rate is moderating as our overall maintenance capital is decreasing. We are experiencing about a 5-point decline rate throughout the year. As the year progresses, our maintenance capital continues to come down. The exact figures are somewhat unclear, but it really hinges on the capital perspective. At this point, we haven't finalized our 2025 plans. We have a strong history of growth, and we are motivated to continue expanding. Therefore, we expect to explore various ways to grow in the coming year. Regarding this year, our overall capital is expected to decrease, and while production might peak and then slightly decline in the fourth quarter, it won't drop significantly, even with a substantial reduction in capital.

You all had discussed in some of your prepared comments that some of the stronger production results were due to some pull-in of activity, but also some well outperformance. Could you be a little more specific on that? I mean you obviously have a couple of large joint ventures with Mascot and Novo. Can you kind of qualify or quantify what you're seeing with some of those wells? And is that what's really driven the performance? Or is it more broad-based than that?

I think it's a combination of the 2. As far as the projects go, they're all at or above expectations in terms of new development activity that we've been seeing of Novo with the New Mexico assets. Our Utica assets are outperforming. We've seen some meaningful performance in Williston as well with the likes of Continental and Conoco and exposure to Slawson and Marathon. They're all kind of sticking into the core where we've got some outsized working interest. So it seems to be a combination of all the above.

Your next question comes from the line of Charles Meade of Johnson Rice.

I want to continue where we left off regarding the source of the production. Could you explain this in a different context? In late February, you anticipated a slight decline, but then reported a 4% growth for the quarter. What specifically changed in March that contributed to that outcome, as opposed to what you expected at the end of February?

Well, I think if you're talking about what changed in what we were seeing, it's going to be a combination of what wells came online in March as well as these wells are cleaning up in January and February. You've got very limited data in terms of what you're seeing. And so you've got to let it play out over an extended period of time. And then, Jim, I don't know if you want to comment on anything else in particular.

Yes, Chad, obviously, we saw a pull-forward of activity as well, right? So we had 3 extra net wells that we weren't really accounting for, so that added some production there too. Like Adam mentioned, the used assets, they continue to clean up, performed better than we had expected at that time. As well as we have some new wells come online kind of mid-February on the Novo asset that has significantly outperformed our expectations. So that's another driver as well. Then we showed in the Williston on new Continental wells that looked really good compared to our expectations. So just kind of a combination of all those things really drove Q1 performance versus what we were modeling kind of that mid-late February timeframe.

Yes, on just a lag of information, right? I mean we might be getting this information on a daily basis, but you need to be able to bring it in, how it impacts it against the model and then put all the pieces together. Because you're going to have pushes in bold everywhere, and then it's just going to depend on what your working interests are and the timing of that development and information.

And there are certain things too, Charles, like from an assumption perspective, like using the fleet up event in the bulletin. We were very concerned not necessarily about the fees off of that in and of itself, we had a pretty good handle of that, but we were pretty concerned that it was going to push particularly a lot of the completions out. So we have scheduled the assumption that a lot of the completions will be pushed out multiple weeks. Later on in February and March, we came to find out that a lot of that stuff had actually come right on schedule, right? So then you're going back and rejiggering that as you actually get the well status and reports in. So a lot of the stuff we had anticipated kind of getting the playpen of not being delayed. So then ultimately, it's not just the TILs themselves having more TILs themselves. But even within the quarter, cans being more on time and being accelerated in than you thought. So you're getting the benefit of time within a quarter, not just the actual additional activity on top of that. Just I will tell you like I mentioned this in my prepared comments, we are seeing better well performance. I mean, you saw that in our times. And you may not see it because obviously, our Permian mix this year is more Midland basin so is obviously maybe a bit lower than our average last year year-to-date, but certainly better than what our internal forecast has been. And so in general, we've been doing a bit better than we anticipated coming out of the gate.

And then, Nick, another question on the CapEx. And I want to get the benefit because I'm sure you participated in a lot of internal discussions. And I want to make sure I understand what you're saying and I'm thinking about the right implications going forward. I mean, in 4Q, you guys had a big CapEx; it came in a lot higher than expected you pre-released that. We got another one here this quarter. If I understood you correctly, the 2 main drivers appear to be reduced cycle time, so increased pace and a higher oil price, which leads to more AFE proposals. If that's correct, what are those 2 vectors? Are they flat going forward?

I'm not sure I followed, Charles.

If those are the 2 big drivers, you go a different direction, if you want. But the question is, as we look at 2Q and 3Q, are those errors still pointed up or are we going to have further decreased cycle time? The oil price isn't going up, but is there a building wave of AFEs? Or is this kind of a situation that's given?

I got a question like 2018 when I first started here being like, okay, it's a productivity improvement in the Bakken done because well cost wells have done so much better and gotten so much better. I got the same question last year and I got the same question a year before. The answer is, the industry is amazing. They found ways to go faster and faster and faster. Candidly, we have struggled to keep up with the pace. I mean, I don't view it necessarily as a bad thing, but the speed at which our operator has gone has obviously taken a smart surprise to some degree. But at the same time, I don't really see this as the total cap line on our weighted average cost of a well. We're not blowing through; we're not having inflationary pressures. If you look at the overall capital delta, we drilled 3 extra wells this quarter, right? You saw it in the top line results. Again, I don't see a major disconnect here. The delta of last quarter is masked by the fact that ultimately, it's really a percentage of completion things as opposed to additional TILs. Ultimately, yes, you're seeing cycle times. Can I predict if the operators are going to stop going faster? I don't know if I can make that prediction because that would be predicting something that I don't control. Operators are incentivized to make more money.

It's just going to depend on the operator mix and the development and the working interest that we're getting in the door, right? You don't necessarily have that view of AFEs because they might balance to AFEs one week and then they followed up with 6 more, and they all end up being on the same path. Those are things that we need to digest and truly understand. I think the AFE activity has picked up. We've seen that in March and April, and we would expect in this environment, all things remaining the same that development cadence and everything else will continue, but that can change on a dime.

Your next question comes from the line of Derrick Whitfield with Stifel.

Regarding the larger asset packages, how would you characterize the competition you're experiencing in that market at present? Aside from the quality and wider bid-ask spreads you saw in Q1, is that still a robust market and opportunity for you?

Yes, it's a larger package. Derrick, I don't think we felt like there's a lot of competition. We have certainly noticed some bankers trying to create an illusion of competition in a few cases, but in reality, we haven't experienced much competition. The bigger challenge has been finding the right assets to invest in, specifically those where we understand the clearing price and feel comfortable paying what is necessary to secure them.

I guess bringing it up a different way for you. I mean we're certainly seeing more entrants from family offices and private equity groups crossover from the minerals side, which is obviously validating in terms of other sources recognizing the power of the business model, but that's largely limited to smaller funds. Where I think you see a little more elevation in competition is on the smaller ground game side. We're playing in different sandboxes. When you're starting to talk about asset packages that are north of $150 million in terms of funds that are being raised and being able to handle potential concentration, those types of things. So what we're seeing in that regard is generally status quo. Obviously, that can also change. But based on kind of what we're seeing and the feedback that we're getting, I don't see a material change on the large end.

I'd say where we see people we've definitely seen buyers of PDP-centric assets. And we're very happy to see that because it's just not where we're generally focused.

From time to time, I think we see some groups that raised capital, deploy it in a meaningful way. It was one group that we saw ended up paying north of 75% of where we were coming out at, we're happy to let them have it. Frankly, they shut their on an old bullet, and we haven't heard from them again. So they can digest that for as long as they do. If they want to sell it, then maybe at that point, it's worth taking another look at it, but not at those prices.

I would just say this: I don't think there's been an asset that we've coveted yet that we really felt was very attractive to us that we haven't built out. We're really in the quality that you've seen us execute on where we really had to stretch or go out of our comfort zone. I think that's a testament to where we are in the marketplace.

And as my follow-up, really thinking about Permian macro. Regarding the pipeline outages and tighter egress you expect, do you think the industry will adjust turn-in-line activity to match supply growth with egress group?

You're definitely seeing especially for some of the smaller operators, they're having to navigate around it. I think we're blessed with the fact that most of our operators in the Permian are bigger operators with more integrated midstream systems and better access points. But even they have to navigate around these issues, Derrick. It's not a small issue, and I don't want to sugarcoat it. I'd like to say we were geniuses, but we basically have almost 0 exposure this year. Financially speaking, at least, we effectively hedged all of it away. I'd love to say we did it completely on purpose, but we just really were a little bit concerned coming into the year, and I think we just had a heavy hand on it when we were hedging it probably because we were so acquisitive last year. But I think it's going to take some time to make some of it if you rightly highlighted. Some of it is been made worse by maintenance. I don't think it's necessarily going to get magically better this year. So next year, I think it's still going to be a wide issue for some time. I think it's going to take a couple of years; you're going to need more and more to be built out. I think it's going to limit some growth, particularly in the Delaware, for the next year or so.

Your next question comes to the line of Donovan Schafer from Northland Capital.

I want to ask about the better-than-expected well performance. It's like beating a dead horse, but should we care? Let's set aside the welding being pulled forward and just discuss the well performance compared to your own expectations. You mentioned that the well performance is better. Who deserves the credit for that? Is it just a random occurrence, or can you point to changes in well design? Do you believe this indicates strength due to conservative underwriting? Should we view this as an achievement linked to human effort, or is it merely a matter of luck? If it is an achievement, who should get the credit? Is it a reflection of your business model or your operators?

I want to commend the operators for their excellent performance. They do the majority of the hard work, and I believe it's important to give credit where it’s due. Our engineering team also puts in a lot of effort to establish a standard and approach underwriting carefully, aiming to meet or exceed expectations. We strive to underpromise and overdeliver, not to minimize expectations, but because this is a risky business. The oil and gas sector tends to attract optimists, but I often joke that as a non-operator, one should adopt a more cautious perspective. Many operators may change well designs and see improved initial production rates, thinking this will always be the case, or they may have one successful refracturing and believe all refracs will yield similar results, only to find that outcomes can vary greatly based on location. We work hard to maintain a skeptical view and take a conservative approach. This is reflected in our generally conservative reserves, which has served us well. I want to acknowledge our team for producing better results, which is largely a matter of philosophy. I mentioned in my comments that you can't engineer poor asset quality; you can pay a high price for bad assets, but they won't be resilient in the long run. During my time as a stock analyst, I preferred to pay a premium for a solid management team and a reputable company rather than settle for a cheap price on a poor stock that was likely to underperform. The same principle applies to oil and gas assets: investing in high-quality reservoirs and excellent operators while focusing on the best regions tends to yield positive surprises.

I think the other thing to think about, too, is that operators are always trying to innovate and be more efficient. It's not just about getting more EUR more reserves out of it. They're also trying to optimize their artificial lift operations. That's constantly changing, and we're constantly updating our tide curve based on what the operators are doing. Some of it is they're just getting oil out faster. It's not necessarily that they're going to get more EUR over the life of it; they just found a way to get more of, which is a big driver of NPV and IRR, which is what we want. We're constantly taking that into down like I said, we want to make sure that more often than not the wells are healthy. We do constant look backs on performance, how wells are doing versus what we originally underwrote. Over the last 3, 4 years, we've been less than 5% off in terms of that, so we feel very confident about our underwriting here. This is just a pleasant surprise by some of our operators in really good areas, and they came to a way to just do better than what we had expected.

And then as a follow-up. So Nick, in your prepared remarks, you called out, and I thought this was a good thing to call out and a good insight, is the potential for increased volatility. And you're talking about with respect to your own positioning as a company and the importance of kind of financial flexibility because of opportunities. But I'm curious just specifically because I think you were saying, well, with such low gas prices, and also I think maybe you mentioned just that it's an election year or maybe it's like a setup that we could see more volatility between now and November, December. I'm curious, were you specifically talking about like in terms of thinking about what might happen with the volatility of stock and like other securities you could potentially bring in? Or are you talking more broadly like any type of wild swings around anything like that? I want to be clear because I thought that was a good point. I'm just curious with your thinking, what things are the volatility you're talking about, price commodities, stocks, bonds, all of it?

I believe that volatility is simply volatility. We have been actively purchasing our stock along with various assets, including gas and oil assets. In 2020, we spent around $200 million acquiring distressed assets, which constituted 90% of our capital investments. Our organic capital essentially dropped to zero that year. It's important to be positioned to act during extreme fluctuations in asset pricing, although we haven't seen significant distress in gas assets. If there are changes in the interest rate cycle or similar factors, we could see various developments. We need to monitor the overall economy, especially with it being an election year. We always aim to be prepared to adapt, and I describe this approach as dynamic because we want the flexibility to alter our decisions. Having sufficient cash flow to make those agile decisions is vital. We have managed to buy our bonds at low prices in the 90s and now they are trading significantly above par, which offers us those opportunities.

Your next question comes from the line of Lloyd Byrne from Jefferies.

Talking about the CapEx differently. It seems like there's a lot of concern. But if I look at the CapEx versus the TILs, it feels like the AFEs are either in line or coming down? Maybe you can comment on that. Then also, you talked about a little bit of deflation at Mascot and Novo. So maybe you can just comment on that as well.

Lloyd, this is Adam. Made some comments in my prepared remarks; we're definitely seeing it across the board, both from an absolute and normalized on a lateral foot basis. We've certainly seen that with our Mascot assets as well as our Novo assets. I think that's both a function of what we're seeing in terms of drilling, as well as just kind of spud to fill timing as well. I think some of the tangibles chasing those types of things are still pretty sticky, but operators are doing a pretty good job of being able to pick away around the edges and see that persisting.

Yes. I mean, we still target around 1x. I think we were about 1.1% last quarter; we're about just over 1.2 this quarter, and that's just a function that we closed our Northern Delaware acquisition. We did that. We should see, absent any material changes, again, we're already close to May here, a material step down this quarter, again, after some unforeseen change in commodity prices over the next couple of months. Just given the fact that CapEx is scheduled to step down some, we should see a material step down in the revolver balances in the second quarter. We said we should be right now on the trend within the quarter or 2.

Your next question comes from the line of Paul Diamond of Citi.

Just a quick one on the M&A purchase cadence. So you had a pretty good except in Q1. Are you seeing the take-up of opportunity given current pricing levels and as you look forward through with expect to be a relatively volatile period in the market.

There's certainly no shortage of opportunities. I think it's always about balancing the risk. It's just about I think, I would just tell you, the lower the price goes, I think our risk appetite increases. I think the higher the price oil goes, it's probably the more wary we're going to become. You have sort of, I'd say, from a $65 to $85 range; it's probably better than above those. I'd say, below $70, I think you're going to find that sellers are probably going to dry up because they're going to feel that they're not getting good value for their assets. But I think that in that range, that's sort of a good enough environment from a pricing perspective. I think we're in a relatively decent market; I think that, again, the beginning of the year is always tricky. If you look at our pattern, generally, we've done less M&A in the first half of any year, historically speaking, for whatever reason. If you go back historically speaking, we have done very little stuff in the calendar going back my time here. It tends to be something that happens towards the middle or the back half of the year. So stay tuned. But I do think that we're not short opportunities. I can tell you that, no; I don't know if I have that.

No. I think, Nick, you nailed it. I think it's a function of banks and organizations bringing these packages to market and what the lead time is on a lot of that stuff. You've got the smaller competition coming in with the bullish view on oil pricing, which creates some volatility in terms of the ground gain, what I'd say; even just looking at some of our April activity as we've been making some pretty strong headway in that regard, being able to pick things up across all 3 of our respective basins. To Nick's point, it's really just going to be a balance of what that quality looks like; seller expectations can be wildly different, especially in a volatile commodity environment. So for bone along at relatively static pricing for an extended period of time that generally level sets expectations and narrowed spread. If you have a material step up or a material step down in the short term, that will just widen it.

And just a quick follow-up. You've talked pretty at length about the product improvements on the oil side, what does your perspective sit on the net gas side of I know it's a much smaller perspective or a much smaller piece going forward? Should we expect to see a similar cadence in your view?

Yes. I'll just tell you from my perspective, and I'm not an engineer here, but our Marcellus assets have outperformed really from the get-go. They have outperformed our internal modeling. They have really every quarter since we've owned them. Literally, I think there's not a month. Tell me I'm wrong, but they have done an excellent job, and I think we've had a little bit less development than we had initially modeled. But the decline rates have been shallower. They have just consistently outperformed, no wonder if gas is $1.80, because they just simply don't decline. I don't know if you want to add to that?

Yes, that's right. At EQT, we completely changed the design of these wells from when we originally hockey assets. They've widened spacing, changed the completion of time, changed the pullback methodology. So these will just continue to hang in much better than we had expected. Obviously, there's not a ton of activity that has been happening out there. Our modeling is still based on old methodology, and we continue to update that as we go and see more. But yes, the Marcellus stuff just continues to outperform. The Utica was in the first quarter as well. Those wells continue to clean out better than we had expected. So that was a nice outperformance there as well.

While it's not huge for us, if you actually model out our Appalachian asset, just how much cash flow it has generated for us over the life of its ownership, it has been an amazing investment for us. It is paid out paid out in less than a year and then just continues for, very little capital investment, to generate significant cash flow for us. It's been a great investment.

Your next question comes from the line of Noel Parks from Tuohy Brothers.

Just had a couple. I was wondering, do you have any sense of maybe where incremental service cost trends are heading in your basin? It feels like so far in the earnings season, we've been getting sort of a mixed picture just depending on location and type of service? So any thoughts here would be great.

I would say no, very modest deflation we've seen year-to-date, but I would imagine as oil prices have increased, I would guess that's a flattening trend.

I was just wondering, you did mention what you've all seen was your gas in the Permian and so forth. I believe over time, you've discussed that you are pretty vigilant about the state of infrastructure when you're looking at potential deals out there and look to steer clear of areas where you have many questions or doubts. I'm just wondering, are you getting deals brought to you that fall into that category these days?

Yes. I think specifically, a lot of assets in parts of the Delaware, you have to be very wary around, particularly as you get parts that New Mexico and other parts where they might be in. They might not have access to midstream systems, and you have to understand that going into it. You need to know who your operator is. So absolutely, all of that goes into the equation. Do you know who your operators are? Do they have firm access? Are they interruptible? Can they be kicked off the system? All that stuff. That's why you hear us talk a lot about this: knowing who your operator is knowing what kind of midstream access they're going to have is critical. I think as an issue overall, I think it's something that it's the Permian Basin. So it will, over time, get solved, but I think it's going to be chronic for some time. In the end, it's a minor economic none, meaning it doesn't really destroy the economics of the wells. It just is something that we can model in and still make the level economic, but it certainly doesn't help.

That's right. You just make sure that you're modeling it, the costs, as well as the development time stand.

We were trying to buy something in helping or something like that; it might be a different equation, but that's helpful.

That concludes our Q&A session. I will now turn the conference back over to Nick O'Grady for closing remarks.

Thank you all for joining us today. We appreciate your continued support and look forward to touching base with you in the coming weeks.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.