Earnings Call Transcript - NOG Q1 2021

Operator, Operator

Greetings and welcome to the Northern Oil First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Mike Kelly, Chief Strategy Officer. Thank you. You may begin.

Mike Kelly, Chief Strategy Officer

Thanks, Diego. Good morning and thank you for joining us for a discussion of Northern's first quarter 2021 earnings released this morning. Before the market open, we released our financial results for the first quarter. You can access our earnings release on our Investor Relations website and our Form 10-Q will be filed with the SEC in the next few days. We also posted a new investor deck on the website this morning. I am joined here this morning with Northern's CEO, Nick O'Grady; our COO, Adam Dirlam; our CFO, Chad Allen; and our Chief Engineer, James Evans. Our agenda for the day is as follows: I will hand the mic over to Nick here for his comments regarding Q1. After Nick, Adam will give you an overview of our operations and then Chad will review NOG's Q1 financials and '21 guidance. After that, 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 the risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward-looking statements. Those risks, among others, are matters that we've described in the earnings release as well as our filings with the SEC, including our annual report, our Form 10-K, and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During this conference call, we may discuss certain non-GAAP financial measures including adjusted EBITDA and free cash flow. A reconciliation of these measures to the closest GAAP measure can be found in the earnings release that we issued this morning. All right, with that taken care of, I will now hand the call over to Northern's CEO, Nick O'Grady.

Nick O'Grady, CEO

Thanks, Mike. And I would like to thank everyone for joining us this morning. It's hard to believe it's been over a year since the beginning of the pandemic. This past year, we've seen the price of oil go from less than zero back to $65 a barrel. We're very fortunate that we've been able to thrive during this year, in part because of our hedging strategies and also because of the support of our shareholders and lenders. I'm very proud of the Northern team and how we've responded to the challenges. As usual, I'll get down to it with four points. Number one, the quarter. Our results for the first quarter beat our internal forecasts as a result of improving well performance in conjunction with robust pricing for gas and solid oil differentials. These improvements more than offset the workover spending associated with the costs we incurred for getting our production back online that we highlighted in our fourth quarter release. This is the third quarter in a row since the pandemic took hold that our production has risen. The increased workover costs are largely transitory, and thus we should see unit costs continue to trend down throughout 2021. Our Bakken assets continue to see strong oil output and increased gas capture, combined with robust NGL pricing, resulting in Northern exceeding our internal revenue estimates. Our capital spending was less than expected, which translated into free cash flow of $41.7 million for the quarter. In summation, as we enter midyear, we are well ahead of our 2021 plan as it stands today. Number two, the balance sheet. As we've outlined in previous earnings calls, one of our primary objectives is continual improvement of our balance sheet and to decrease our operating leverage. Our free cash flow enabled us to pay off an additional $24 million of debt and fund the $17.5 million deposit for our Marcellus acquisition. Based on the current outlook, we expect to end the year with less absolute debt and a leverage ratio of less than 2 times, and we plan to further reduce the leverage ratio to the mid 1s level by mid-2022. Based on our internal forecasts, we expect to end the year with over $400 million of available liquidity, not including any potential increase to the revolver capacity. At the current strip, the revolver is projected to be undrawn with significant cash on hand by maturity at the end of 2024. These forecasts take into account a cash dividend with growth over time, which we'll get more into later. I'd like to thank Bank of America for their increased commitment to our facility and for the flawless execution advising us in the Marcellus transaction, along with Wells Fargo leading our Q1 financings. RBC, Truist, Citizens, Fifth Third, US Bank and other members of our bank syndicate have been truly great partners as we collectively and successfully navigated through the worst of the pandemic. And I'm particularly thankful that we've had such an incredibly supportive lending syndicate that never wavered in their sponsorship of the company. Number three, acquisition pipeline. We continue to enjoy a robust backlog of acquisition opportunities from acreage to ground game development and growing quantities of larger asset packages. Our team has never been busier, and we prosecute each opportunity with the same rigor, and we remain optimistic that, from small to large, we can create value for our stakeholders going forward. We are currently evaluating 15 different package opportunities, 12 of which are not formally being marketed. The bulk of these prospects are focused on the Williston, Permian, as well as the Eagle Ford. As I've mentioned previously, the deep bench of opportunities out there in non-operated properties is, by our estimates, over $10 billion. We believe strongly in creating win-win scenarios for us and potential sellers, but our own stakeholders come first. We are the natural consolidator of non-operated interests now on a national level with an advantage cost of capital and unmatched size and scale. Number four, dividends and returns to our shareholders. Since we last spoke, we've spent a great deal of time with our Board of Directors researching the sector in regard to returning capital to our shareholders. We are pleased to announce our first-ever quarterly dividend of $0.03 per share about five months early from our initial plans. While it will be very modest to start for this program, this is just the beginning. Future increases will be tied directly to our reduction in overall leverage. I’m pleased to tell you that our analysis of where we are and where we are heading has provided a bright outlook. This means we can create a dividend that can grow faster than that of our overall company. So for longer-term investors, while it first be a starter dividend, it should consistently grow into something more meaningful over the next several years. Additionally, we might be able to increase our dividend even faster if we are successful on the acquisition front in a leverage-creative fashion. And to the extent that oil prices continue to be strong or rise even further, we might be able to accelerate the strategy or consider alternate forms of returns. As I wrote in our release, this is the culmination of over three years of work by our Board and my executive team to get to this point, and I'm very proud of their work and thankful to our stakeholders and bankers who helped us get here. In conclusion, the outlook is bright. Our opportunity set continues to grow with each passing day. And as I will remind you each and every quarter here on out, we are a company run by investors for investors, and I truly thank each and every one of you for your interest. With that, let me turn it over to Adam Dirlam.

Adam Dirlam, COO

Thanks, Nick. Operationally, Northern was firing on all cylinders in the first quarter. On the production front, we continue to see curtailments decline to the tune of 2,000 barrels a day. Even more encouraging was the fact that well productivity outperformed the internal estimates. This is driven by certain operators and areas where we have higher concentration levels, and we will continue to monitor these improvements. On the spending side, CapEx came in at $38.1 million for the quarter. Well cost realizations for certain operators came in under ASE as renegotiated costs during the downturn were realized. Approximately 40 new well proposals were received during the first quarter, and we elected about half of them with an average well cost at around $7 million. Moving forward, we expect average well costs to range between $7 million and $7.5 million depending on the mix of operators and completion methodologies. The lower number of consented wells was largely driven by one operator stepping out into areas where we have seen some meaningful decreases in productivity over the last 18 months. Actively managing our portfolio, we were able to reallocate the capital from the non-consented wells to much higher rate of return ground game acquisitions. We executed on 6 transactions during the quarter and continue to take a barbell approach, picking up exposure to additional drilling opportunities in both the Bakken and the Permian. With Shale 3.0 in full swing, the number of ground game deals available to us remains at elevated levels. As operators focus on some of their best inventory, the economics are certainly compelling. As Nick alluded to in his comments, our business development team is busier than ever as we reveal several compelling asset packages across the lower 48. In April, we closed our Marcellus transaction and related financing, generating several reversed inquiries. Our approach to any acquisition will remain disciplined with a strict focus on hurdle rates at an asset level, while checking the appropriate boxes at a corporate level. Executing on any one of these will need to meet our specific criteria as we sensibly scale the business and continue to consolidate. Now I'll turn it over to our CFO, Chad Allen.

Chad Allen, CFO

Thanks, Adam. I have a few highlights to go over this quarter, starting with a quick summary of Northern's financial performance. Our production averaged 38,417 barrels of oil equivalent per day, an 8% increase over the fourth which was a strong start to the year. Curtailments and shut-in production began to ease as we exited the quarter. But we estimate it still reduced our first quarter production volumes by approximately 2,000 BOE per day. Our adjusted EBITDA for the quarter was $98.8 million, and our free cash flow was $41.7 million, up 5% and 43%, respectively over the fourth quarter, due in large part to increased production levels and better realized commodity prices. Oil differentials were $6.56 during the quarter, which was an improvement of approximately 5% over the fourth quarter, and 38% over the pandemic lows. As expected, gas realizations saw significant improvement over the fourth quarter due in large part to strong natural gas and NGL pricing. Lease operating expenses for the first quarter came in at $34.3 million or $9.92 per BOE, which was slightly higher than our full year guidance range. However, as I mentioned on our last earnings call, we expect that our lease operating costs to be higher earlier in the year as we incurred costs from higher workover activity. Cash G&A, excluding one-time acquisition costs related to the Marcellus transaction came in at $1.01 per BOE this quarter, about 12% better than the midpoint of our Q1 guide. One thing to highlight is that we still expect to incur approximately $2.5 million to $3.5 million of additional non-recurring acquisition costs related to the closing of the Marcellus transaction in the second quarter. I'd also like to highlight cash G&A costs pro forma for the Marcellus transaction on our growing oil volumes are projected to be approximately $0.85 per BOE, by far one of the lowest in the industry. Capital spending for the first quarter was $38.1 million or a 22% reduction compared to the fourth quarter, which consists of $33.1 million of organic D&C capital, and $4.4 million in total discretionary acquisition capital, inclusive of acquisition D&C capital. In terms of cadence as it stands today, we expect the second and third quarters to have the highest levels of CapEx for 2021, particularly for the Marcellus assets, where the majority of the development is projected to take place midyear. We strengthened our balance sheet and liquidity profile since the end of last year through debt and equity offerings with gross proceeds of approximately $690 million. These transactions allow us to fully equitize the Marcellus transaction which closed on April 1st and extend our maturity well by retiring the remaining $65 million of our VEN Bakken Note and 95% of our second lien notes, of which, the remaining $15.7 million will be called on May 15th of this year. The remainder of the proceeds were used to pay down the revolving credit facility. As of March 31st, pro forma for the closing of the Marcellus transaction, we had approximately $366 million outstanding on our revolving credit facility, leaving almost $300 million of available liquidity, including cash on hand. We started the year ahead of our internal forecast and have a lot of confidence in our 2021 program, both on a capital spending front as well as the pace of our production volumes. We remain conservative on our outlook and we will look to reflect any upward adjustments on our second quarter call as warranted. With that, I'll turn the call back over to Mike Kelly.

Mike Kelly, Chief Strategy Officer

Thanks, Chad. All right, Diego, let's assemble the queue for Q&A. Thanks.

Operator, Operator

Thank you. And at this time, we will open the call for a question-and-answer session. Our first question comes from John Freeman with Raymond James. Please state your question.

John Freeman, Analyst

Good afternoon, guys.

Nick O'Grady, CEO

John, how's it going?

Chad Allen, CFO

Hi, John.

John Freeman, Analyst

Good. Thanks. Congrats on establishing the dividend. That's a great accomplishment. You know, how do you all, just want to sort of piggyback off of some of your comments, Nick. And I realized as you said that, that acquisition can certainly impact via the pace of dividend growth, that sort of ex-acquisition just sort of maybe wanted to - how you all think about managing the growth of that dividend going forward in terms of, do you think about establishing like a percentage of your free cash flow that goes toward the balance sheet and then another percent that's kind of earmarked for dividend growth? Just any additional color on that long-term dividend strategy would be helpful.

Nick O'Grady, CEO

Yeah. Not being trite in any way. But we had called it sort of a one-third doctrine a few years back when we were first contemplating this, and I think that that's about the right place to end up or about a third of your distributable cash flow is going back to your stockholders. That's still the goal; that hasn't changed. You know, when we've done this analysis, the average upstream E&P is paying out less than 15% of their distributable cash flow right now. Obviously, our starter dividend is a smaller portion of that. I think as my prepared comments said, as we hit our own internal leverage targets, I think we can share more of that with our stockholders as we derisk the business. And so as we kind of hit that 1.5 times milestone, I think we can see a substantial step up in that. As we get closer to 1, which is really where our forecast looks like over the next couple of years, I think we can really get to that one-third area.

John Freeman, Analyst

That's great. And then shifting gears, you know, the AFEs were down nicely, again, from the fourth quarter to a new low, you know, just below $7 million and going forward. Y'all indicated sort of expect kind of $7 million to $7.5 million is what y'all are planning for. And since, you know, the budget was based on $7.5 million on the AFE side, does that mean there's a sort of a downward bias to the full year budget?

Nick O'Grady, CEO

Yeah. Potentially, I think we need to be mindful just as the rig count picks up overall. And I think the Williston rig count in particular is going to pick up some that we want to leave some buffer. But certainly if it goes at the pace now, there would be some downward pressure, which would be great. We'll leave it as is for the time being.

John Freeman, Analyst

Sounds good. Excellent quarter, guys. Congrats.

Adam Dirlam, COO

Thanks, John.

Chad Allen, CFO

Thanks, John.

Operator, Operator

Our next question comes from Scott Hanold with RBC Capital Markets. Please state your question.

Scott Hanold, Analyst

Thanks and congrats to all of you; y'all accomplished a lot in a very short period of time. And I think that dividend is certainly at this point, the cherry on top, so congrats. Where I want to go is, you know, kind of continuing down the path of the dividend and just shareholder returns. Obviously, Nick, you indicated you'd like to get to that one-third payout ratio. When - as you progress to that point, like how do you think about doing that through a base dividend versus, you know, some of the other mechanisms, you know, such as a variable dividend? Do you see there's value in a structure to make it very predictable and, you know, have a variable bent to it just to, you know, mitigate, you know, commodity prices, you know, volatility impact?

Nick O'Grady, CEO

Yeah, I mean, I think someone on Twitter said, I had the worst IR game on the Street, because I was sort of downplaying the concept of special dividends and the volatility that ensues, so I'll try to do better this time. I think special dividends have a role. I think that we've been watching that carefully. You know, you've seen from the Devon, the pioneers of the world, a formulaic structure, kind of, I believe the pioneer one is kind of once a year, kind of backward-looking. I think that makes sense to some degree. So I think you have to think about the balance. We don't want to go down a path where upstream MLPs have high fixed dividends, and then you wind up cutting them, which is worse. The special dividend definitely gives you the ability to navigate through the volatility of commodity prices. So I think it does have a role. I think our first plan is really to build a small and solid base dividend and continue to ratchet it up over time as we hit our targets. I think this special will play in to the extent that things are going the way they are now, which is that we continue to exceed our own internal targets, it gives room to move quicker. So I don't want to make false promises or hopes. But I do think it has a possibility, particularly when we're in robust periods as we are today.

Scott Hanold, Analyst

I think that's pretty clear. Thanks. And as a - my follow-up question, you said that you see over $10 billion of opportunities out there right now, could - just to clarify, you know, is that specifically non-op opportunities? Or is that, you know, everything you see out there? And secondarily, of those, you know, half a dozen or I'm sorry, dozen or so opportunities you're looking at, can you describe just the size and scale of some of those individually?

Adam Dirlam, COO

Yeah, it's, you know, I know it's a 100% non-op - no that's nothing within kind of that population would be operated. I'd say it's primarily weighted towards the Permian and the Bakken. You know, a number of different Permian, you know, deals we've seen kind of off market as of late and continue to kind of see as well as some other formal processes that are being run. I'd say, you know, we're looking at stuff that's anywhere from, you know, $10 million to $15 million north of $500 at this point, and kind of anywhere in between, I'd say kind of the sweet spot's been kind of, you know, $100 million to $200 million kind of give or take.

Nick O'Grady, CEO

Yeah, and I mean, I think the way to think about it, Scott, is that, zero to $100 million can be more competitive just because it’s a smaller quantum of capital, as you get north of $150 million, the companies with the wherewithal to make those transactions in the non-operated space start to shrink. It doesn't mean the sellers always enjoy that fact, but it tends to make those processes less competitive. Obviously, the larger it goes, capital becomes an issue. You want to make sure that you're not stretching your balance sheet or anything like that. I think we find somewhere in between in the more moderate where, you know, it’s generally our sweet spot. Certainly, the companies at a size and scale in which you can do meaningful transactions know that Adam has -

Adam Dirlam, COO

No, that's right. I mean, the only other thing I was going to add is, you know, we're looking at a bunch of different, you know, non-operated properties. We've also had a number of different reversed inquiries from operators that are looking to, you know, take down particular operated packages. We've got the ability to carve out a non-operated working interest kind of within that potentially put together kind of a joint development agreement and right-size the transaction for everybody. And so, that's, you know, another lever that we can pull in terms of kind of, you know, taking down certain acquisitions.

Nick O'Grady, CEO

Yeah, and I guess I'll just put a bow on that, Scott. And just say that, you know, as you saw with the Reliance transaction, Grant, we started that transaction, you know, when the sector was really on its lows and capital was fairly scarce. But we brought in a financial partner on that transaction, and certainly, for some of the really big and chunky stuff that's always on the table. I can just tell you that we are inundated from everyone from private equity groups to large family offices looking to partner with us every day.

Operator, Operator

Our next question comes from Brian Downey with Citigroup. Please state your question.

Brian Downey, Analyst

Good morning and thanks for taking the questions. The first, solid production performance to start the year. You mentioned rig count earlier, but I'm curious on the DUC front. Has your sense of operator DUC completion cadence changed at all on the Williston as commodity prices risen?

Adam Dirlam, COO

Yeah, I mean, we certainly saw DUC count get worked on in the first quarter. I think we're seeing the same thing kind of go on into April, you know, we're looking at, you know, 40 AFEs that came in, in the first quarter, I'm looking at April activity and we had 30 come in. So as the operator center worked on those DUCs, I think you're going to kind of see, you know, potential rigs and new well proposals kind of following through that. We're monitoring that as we move through kind of the second quarter and what that means. And then obviously, you know, we're looking at our hurdle rates and seeing you know, what makes sense, the thing that you got to be careful about when you get into this kind of commodity price range is, you know, certain operators like to start stepping out into Tier II and Tier III stuff. We're running sensitivities at every particular, you know, oil price range, you know, to kind of understand what that means, should we see any sort of pullback. So depending on kind of how operators act in that regard, we'll be using that lever and then obviously, using kind of our ground game to backfill anything, but I think from a net well standpoint, even in April, we've seen kind of double the net wells that we saw in Q1 alone. So all signs are certainly pointing to a general uptick in overall activity in the Williston.

Brian Downey, Analyst

Great. And then as a follow-up on the acquisition front, in areas, you know, particularly the Permian, we've seen private operator rig count rebound more so versus public operators being a little more disciplined. Has that private operator dynamic changed how you're thinking about A&D opportunities at all or creating any interesting opportunities?

Nick O'Grady, CEO

Yeah, I mean, I think there are a handful of private operators, high-quality ones in the Permian in particular that we have targeted a lot of our acquisitions around. So names that might not be household names to public investors, but ones that are well-renowned and we're not talking about the small, you know, sponsor-backed company with one rig, we're talking about big, large, private, you know, legacy Permian companies. And so they've definitely been the most active. A lot of the acreage that we're targeting, which is really for near-term development, has been targeted around those guys.

Operator, Operator

Our next question comes from Neal Dingmann with Truist Securities. Please state your question.

Neal Dingmann, Analyst

Good morning, all. And, Nick, I just want to say you and the team are still top of my book, despite that IR ranking.

Nick O'Grady, CEO

Thanks, Neal.

Neal Dingmann, Analyst

My first question, really - my first question, Nick for you or Adam. I'm just wondered, you know, again, given the sort of rise in price and, you know, everything that's going on, that change your, you know, requirement, you know, what I would call a sort of return requirement now, when you're looking at, I don't know, either one-offs or even, you know, larger sort of pads that you can, you know, do whether that's in Bakken, Perm, you know, gas, any of those. Can you talk about that a little bit?

Nick O'Grady, CEO

Yeah, I mean, I think, you know, this is my second time since I've been here, where we've seen a big spike in oil, the last was in the fall of '18. What I tell you is, you know, people get, you know, their tolerance for risk actually goes up the more price goes up, and we kind of work the opposite here. So as prices go up, we tend to become more selective, not the other way around, not just, hey, this works. Now, let's do it. We've seen, you know, in the Permian, in particular, people bidding more aggressively on certain properties as prices have gone up with lower discount rates, which is, you know, we're happy to miss on that stuff. Because you want to buy properties that are going to work at $40 oil, as well as $65. If you're going to miss, you're going to miss them all, by marginal properties or in Tier II areas is a recipe for, you know, setting yourself up for poor returns, if anything was to change.

Adam Dirlam, COO

That's right. I mean, our batting average as of late has certainly gone down. But I guess that would be offset by the overall number of opportunities that we're seeing. So net-net, you're probably about, you know, similar in that regard. From a ground game standpoint or even packages, I mean, we're running different sensitivities, you know, different commodity prices, and then taking a look at higher discount rates to see, you know, what that means and in terms of how we can get things done. Fortunately, what we've seen, you know, with the stuff that we've been able to get in the boat, we've been able to capitalize on that at much higher discount rates.

Neal Dingmann, Analyst

Okay. Then just a follow-up. I don't know if Bahram's on, but I guess my question, Nick, would be kind of when you talked about the third and what you think about, you know, dealing with the excess. It's nice to know we'll ask that question about what to do going forward the excess shareholder return. I mean, is that I guess the decision more just what you think for the business? Is it more driven by what Bahram and the Board say, you know, you and the rest of the Board are saying, I'm just wondering how that's, again, I liked the answer prior. I think that makes a lot of sense. I'm just kind of curious to know what you know anything else behind that?

Nick O'Grady, CEO

Yeah. I mean, look, we've made tremendous progress; we still have what to chop on our balance sheet. I still, you know, we still want lower overall leverage; it looks we're on a glide path at this point, it seems easily achievable. But you got to achieve those milestones before you start to get ahead of yourself. We want to stay humble. I think this is a Board decision, truly. I think we had some roof built. Frankly, in the event of this one, you'd be surprised to know that the Board, frankly came to us and said, you know, you're well ahead of where you were, don't you think this is time where as we've sort of stayed on that path as a management team. I would definitively tell you that the Board is very active in these discussions, they're watching, they're using our own metrics and our own targets to help solve for that. To the extent that we continue to be successful that we continue to chip away at the leverage, we see those ratios fall, it should be relatively mechanical in fashion of how we get there.

Neal Dingmann, Analyst

It's nice, good decision. Great operation, guys.

Nick O'Grady, CEO

Thanks, Neal.

Operator, Operator

Our next question comes from Phillips Johnston with Capital One. Please state your question.

Phillips Johnston, Analyst

Hey, guys. Thanks and congrats from me as well. Just one question is really a follow-up to Scott's question. So obviously, you know, early to start talking about variable dividends, as you mentioned, and I'm sure you'll be watching to see how the market responds to the structures and policies that a few companies have adopted. But, Nick, you know, once we get to a point where the base dividend is sort of maxed out, and you start to evaluate other options. At this point, do you think special or variable dividends would be preferable to share buybacks or is it still a sort of a TBD type of thing?

Nick O'Grady, CEO

I do, I think, you know, the E&P sector has been a horrible buyer of stocks. How many E&P companies were buying stock back last October when their stocks were actually at the lows? They're all turning them back on now. I don't get it. So, I think symbolically, I want people to have the cash in their hand as a proof of return, no different than a private business.

Operator, Operator

Our next question comes from John Daniel with Daniel Energy Partners. Please state your question.

John Daniel, Analyst

Hey, guys. Thanks for letting the dumb question on the call. I appreciate it.

Nick O'Grady, CEO

Big risk. Totally down, John.

John Daniel, Analyst

I'm going to really dumb this down. So I got really three questions. The first one is on the comments about workover costs and activity. Was that really a function of just bringing back a bunch of rigs early on in the year? And does that fade as you go through the course of this year? I'm trying to distinguish between workover and drilling rigs.

Nick O'Grady, CEO

Yeah, I mean - so the way that curtailments work, and I kind of talked about this last call, but a lot of the actual physical curtailments were eased. But those wells need to be repressurized, worked over. We saw a slew of workover rigs; one of our operators had 7 alone in January, going on to the acreage, flushing out and repairing those wells and doing basic maintenance to get them to produce what they should be producing. That's why it's really quick turnaround. So we saw it start in earnest, really in December. And all indications looked like it was peeking out about March. Sequentially, it should be slowly coming down; it'll still be somewhat elevated because operators really want to cut their LOE as fast as they can during the downturn. When you curtail a well, you stop maintaining it. But that's not a sustainable practice. The first thing is really to get the wells back to maximum production; we're getting, we're almost there. We should see that expense fade materially.

John Daniel, Analyst

Okay, sounds good. And then on the - you noted all of the acquisition opportunities that are out there and, you know, gave a pretty wide range. This is a bit of a follow-on to another person's question. But help me understand, I don't know this, sorry again, it's a dumb question, but the managerial time commitment on your part and the team's part that you have $20 million deal versus a $200 million, not just the time to look at it. But also, once you close that deal on a go forward basis, the time allocation, if you could just give me that tutorial, would be appreciated.

Nick O'Grady, CEO

Yeah, I mean, I think you'll take some comfort that the company is effectively built to acquire properties. The entire organization is built around this. The numbers change but the workflow really doesn't. Whereas, you know, four or five years ago, this was built around doing $1 million deals. The same team does it, you know, with a $300 million deal; it doesn't really change the overall output and tax on the organization. But business development, per our business model, is the primary function of a good portion of our employees.

Adam Dirlam, COO

That's right, I mean, you know, in the Williston, we've looked at a number of different transactions where we're already in 60% to 70% of the value associated with those acquisitions. It's literally just moving your working interest in your NRI, and you're off to the races. It's not terribly dissimilar to some of the deals that we've seen in the Delaware, as of late; the concentration of value and some of those packages and stuff that we're already in. From an engineering standpoint, all the way through to the title and the due diligence phase, you can start moving quicker and rolling those things in.

John Daniel, Analyst

Okay, guys, that was helpful to me. And then a final one, Nick, just you've been doing this a long time. All of you guys have. I'm just curious if you could speak from an industry perspective. What in the world do you think happens with the E&P spending in 2022 if the strip stays where it is? I mean, I know everyone is toeing the line with capital discipline in '21. But what do you envision next year?

Nick O'Grady, CEO

Yeah, I mean, I think my view broadly at the macro level is a couple of things. One, this reminds me a lot of when I started in the industry at the end of the 90s. It had been a bruising 15-year downturn for the sector. Oil went from $10 to $40. People really didn't respond, you know, except a handful of notorious E&P CEOs, which we all know their names. Eventually, after it lasted three or four years, you saw the sector take off and get rewarded for being undisciplined. I think that's really going to be predicated on the overall markets; those that aren't disciplined if they're rewarded by the markets, that can start to feed itself into other companies. One thing I think we're aided by this go-round, which was very similar to that kind of 2001 to 2004 period is that primary reservoir is shrinking in the Lower 48. The ability for US companies to cap on capital efficient basis really grow at the same rates they have the last few years without drinking their entire milkshake of inventory is getting more challenging. Decline rates may moderate some, but with lower decline rates come higher fixed costs. I do think, one governor will play into all of this is that, overall, I think, it's going to be harder for people to have the inventory and capital efficiency to drill at the same speeds they have. Even in the Permian, we see a lot of maturity in areas that are largely, you know, the best stuff has already been drilled. To sum up your question, I think it really depends. I think we like kind of nice oil prices, but not super high because that discipline can start to waver. If oil prices are $70, I can't promise the US industry won't lose discipline; I would push that back to Wall Street and say, make sure you keep them honest because that's going to be a challenge.

John Daniel, Analyst

Yeah. Okay. Fair enough. I appreciate your candor. And thanks again for letting me in.

Nick O'Grady, CEO

Thanks, John.

Operator, Operator

Our next question comes from Charles Meade with Johnson Rice. Please state your question.

Charles Meade, Analyst

Good morning, Nick.

Nick O'Grady, CEO

Good morning -

Charles Meade, Analyst

I wanted to ask, you know, you talked about those 15 deals, and, to me, it was notable that the Marcellus wasn't one of those areas where you mentioned I guess, and that was a newer area for you. But it's also my sense that each operating area has a little different, you know, rhythm and composition to the way A&D comes about whether you know, from identifying opportunities to closing on them. So can you give us a sense of what you think the outlook for ground game kind of stuff is in the Marcellus?

Nick O'Grady, CEO

You know, so far, we've had a handful of little things show up here and there. It's relatively blocked up compared to other areas; there are two very large, high-quality, non-op assets that we know of in the Marcellus that we've looked at, but they're not for sale. They are really nice properties. Adam, do you want to talk about the ground -

Adam Dirlam, COO

Yeah, I mean, we've screened a number of them, and they just didn't necessarily check the box. They didn't make it into our 15. If we were to have this call about two weeks earlier, it might have been 17 or 18. But, you know, there are certainly opportunities out there, they just gotta, you know, check boxes, both from a qualitative and a quantitative standpoint, and those ones didn't necessarily do that.

Nick O'Grady, CEO

Got it. And then my follow-up, Adam, this goes to a comment you made about reverse inquiries. I can imagine those taking a few different forms. When you first mentioned it, I thought that it was maybe non-op sellers or non-op, you know, holders of non-op assets coming to you as a new entrant in an area but it sounds like it could be that, but it's also more of reverse inquiries from financial partners. So can you kind of give a sense that are both happening? Do you just mean one? And what's the little more detail on what you mean -

Adam Dirlam, COO

Yeah, it's certainly all of the above. We've got a number of different financial partners that have reached out, and it's broadened our overall opportunity set in that regard. We've got operators reaching out to us in order to kind of right-size certain transactions and we've screened, you know, three or four at this point. You've got just kind of your classic, you know, 100% non-operated packages coming from the family offices, the private equity groups that may be a little bit longer in the tooth, those types of things. So, it truly is all of the above at this stage. We've got the ability to be picky and we're going to stick to the script of how we underwrite things and focus on the quality assets, the quality of arc, and the quality operators.

Nick O'Grady, CEO

Yeah, I mean, I think, you know, to keep it simple, to Adam's point, you can create a non-operating interest out of anything, right? It's not like these are distinct asset classes that there's operated and non-operated. To Adam's point, we've been approached by multiple operators that are trying to buy properties and are happy to have us carve out a working interest in those properties alongside them. To the extent those properties meet our investment criteria, we're happy to do so. In some ways, that's what our Reliance transaction was tied to a really high-quality operator. We talked about $10 billion, but frankly, really the limit is really the greater Lower 48 in terms of all of operated properties because these ultimately can be synthetically created and to Adam's point, they're not just one set of non-operated properties that happened to be.

Charles Meade, Analyst

Right. Thanks for that insight, Nick.

Operator, Operator

Our next question comes from Nicholas Pope with Seaport Global. Please state your question.

Nicholas Pope, Analyst

Good morning, guys.

Adam Dirlam, COO

Good morning, Nick.

Nicholas Pope, Analyst

I was hoping you could talk a little bit. I know you guys have spent a couple of years kind of hammering away at the various debt instruments that you had, and kind of we're in a good place right now. You still have the preferred, the convertible preferreds out there. I was kind of curious what your thoughts are about that instrument today and going forward? And maybe kind of what do you think an optimal capital structure looks like for this model? And what you're trying to achieve longer-term on that aspect?

Nick O'Grady, CEO

Well, one thing I would like to clarify, in regards to the preferred, because this is really important, and I think that, you know, as equity analysts, I was a former equity analyst, I understand it, the concept of the treatment of that preferred. Most preferred stock has a term on it. It might be called preferred stock, but it's really debt. It has a term, it has a coupon; you cannot pay that coupon. It's not an event of default. Ultimately, it has to be paid back at some point in time. So theoretically, it is worth the liquidation preference. Our preferred stock is perpetual in nature. It means it is perpetual like our equity; it is true equity. It does have a dividend yield associated with it. But ultimately, it is a permanent instrument. The ideal path is that, we will continue to create value; we will drive the stock price higher and someday down the road, it will convert out and everybody's happy.

Nicholas Pope, Analyst

Are the options for buyback. I mean, is that a - I'm assuming is a premium associated? Is there something available outside of just the conversion at the -

Nick O'Grady, CEO

No, it's just like stock; I had to go in the market and buy it tomorrow.

Operator, Operator

Our next question comes from Jim Duran. Please go ahead.

Jim Duran, Analyst

Good morning. I just have an overarching question about the derivatives that were - get a mark-to-market on those. Are they - are there expiration dates on some of those derivatives, where you're hedging against the price of energy going down? Just curious about what that was?

Nick O'Grady, CEO

Our mark-to-market on our derivatives is simply the change in the value. For example, if you have a stock portfolio, and you buy a bunch of stocks, at the end of the quarter, they lost value, you take a mark-to-market, but you never really took a loss until you actually go and sell those stocks. It's just a moment in time. Ultimately, all it is, is our hedge portfolio where we lock in our oil prices. As the price of oil has risen, the value of those has gone down. That's just it, but obviously, the actual cash monetize, which is about a $7 million loss represented the actual monetization. It's simply the reflection of value, not a loss necessarily. No different than we took a $350 million gain one year ago and that gain was just simply that the value of that portfolio went way up. Ultimately, whether or not we actually realized all those gains or not, is going to be determined as they mature over time. Our hedge schedule is published both in our filings and in our presentations.

Jim Duran, Analyst

Very good. Thank you.

Operator, Operator

Thank you. There appears to be no further questions at this time. I'll turn it back to management for closing remarks.

Mike Kelly, Chief Strategy Officer

All right. Well that's it. Thanks, everybody for dialing in this morning. Reminder, we got the presentation on the website. Feel free to give us a call if you have any follow-ups. Thanks a lot.

Operator, Operator

Thank you. And just a reminder as well, to access the digital replay, please dial 877-660-6853 or to 201-612-7415 and enter access code, 137-192-53. Thank you for your participation. You may disconnect your lines at this time.