Northern Oil and Gas, Inc. (NYSE:NOG) Q1 2023 Earnings Call Transcript

Northern Oil and Gas, Inc. (NYSE:NOG) Q1 2023 Earnings Call Transcript May 5, 2023

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

Evelyn Infurna: Thank you, Operator. Good morning and welcome to our first quarter 2023 earnings conference call. Yesterday, after the market closed, we released our financial results for the first quarter. You can access our earnings release and presentation on our Investor Relations website. Our Form 10-Q will be filed with the SEC with the next few days. I’m joined this morning by NOG’s Chief Executive Officer, Nick O’Grady; our President, Adam Dirlam; our Chief Financial Officer, Chad Allen; and our EVP and Chief Engineer, Jim Evans. Our agenda for today’s call is as follows: Nick will provide his remarks on the quarter and on our recent accomplishments, then Adam will discuss an overview of operations and last, Chad will review our first quarter financials.

After our prepared remarks, the executive team will be available to answer any questions. Before we go any further, let me cover our Safe Harbor language. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by our forward-looking statements. Those risks include, among others, matters that we have discussed in our earnings release, as well as in our filings with the SEC, including our Annual Report on Form 10-K and our quarterly reports on Form 10-Q.

We disclaim any obligation to update these forward-looking statements. During today’s call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income and free cash flow. Reconciliations of these measures to the closest GAAP measures can be found in our earnings release. With that, I will turn the call over to Nick.

Nick O’Grady: Thank you, Evelyn. Welcome, and good morning, everyone, and thank you for your interest in our company. Given the strong consistent results and lack of big changes this quarter, I’ll be more brief than usual. I’ll get right down to it with only three key points. Number one, stellar execution. In our first quarter of the year, NOG’s national diversified model delivered once again with better than expected production and cash flows. We continue to fire on all cylinders. Our Mascot acquisition was closed on time and our assets are on track to deliver growth throughout 2023. Generated record adjusted EBITDA in the quarter and record oil and total volumes, despite significantly lower commodity prices. Even with the closing of our Mascot acquisition this quarter, our LQA leverage ratio was down sequentially.

Our capital spending is right on track at about 28% at the midpoint of our guidance and in line with our anticipated 60% first half waiting. In a year of notably weak gas pricing, our oil properties have picked up the slack with our oil cut rising materially in the past few quarters. Number two, growth. In the middle of year for commodity pricing, we are seeing tremendous opportunities on all fronts, from our organic properties, from our ground game, and from an ever expanding variety of growth prospects. Given our size, scale and diversity is the largest national non-op franchise, we are unique in having access to the best of the best properties across both commodities and multiple basins. Additionally, we’ve expanded our bolt-on opportunity set beyond our traditional fractional non-op asset acquisitions.

We are pursuing other growth avenues, including partnerships directly with the operating groups, as seen with MPDC, co-bidding and M&A as a partner to operators with similar economic discipline, and other unique structured solutions to deliver solid returns for our investors and drive the compounding of returns over time. Adam will talk about it further. But we continue to make traction with our operating partners as the superior capital provider for the co-development of oil and gas assets. We have the scale and the capital to provide solutions for these operators in ways other can’t, and we pride ourselves on being a straightforward and reliable counterparty with a track record of execution. Number three, capital allocation. Our goal is to provide our shareholders with the highest possible total return over the long-term.

Photo by Jason Blackeye on Unsplash

We have implemented a multi pronged approach including a share repurchase program, repurchasing debt securities at discounts, and increasing the cash dividends for our common stockholders. We recently announced a 9% increase to our common stock dividend for the second quarter of 2023, our ninth straight increase. Additionally, we tactically repurchased common shares during periods of volatility. Since we initiated our dividend program and share buyback in mid-2021, we’ve returned well north of $200 million to investors. And our view at NOG is that our scale should help us build a shareholder return program that can grow over time. As always, we’ll be mindful of risk and leverage, but the power of what we built should continue to deliver an attractive risk adjusted total return as the company under our management has consistently done over the past five and a half years.

During our tenure, NOG’s total return outperformance versus the upstream sector has been significant. Driven by a capital allocation strategy included in dynamism. The flexibility inherent in our strategy, as well as our business model has allowed us to adjust our capital allocation to where the greatest opportunities exist at any point in time, all the while providing a solid and growing cash return via the dividend. We continue to see this as superior to more dogmatic return programs, and the results in the marketplace speak for themselves. In closing, 2023 is off to a strong start for the NOG team, and we remain confident that we can continue to deliver growth opportunities in the coming years. I will remind you, as I always do, that we are a company run by investors, for investors.

With that, I will turn it over to Adam.

Adam Dirlam: Thanks, Nick. The first quarter was seasonally strong as we kicked off 2023’s operations. Turning lines for the quarter were as expected, adding approximately 13.1 net wells to production organically, which was up over 20% versus Q1 of last year despite multiple periods of inclement weather. The Williston made up approximately three quarters of the organic activity driven by larger working interests with several of our top operators. The closing of our Mascot joint development project in January added another 16.4 net wells of current production and we continue to be encouraged with the project’s overall productivity. So far, on average, actual production results have outperformed our internal estimates by 10% in the Mascot project.

The productivity and outperformance across each basin are testaments to our capital allocation process where we target areas and operators that we believe will deliver a superior return on capital. The drilling and completing list finished the first quarter with 59.3 net wells, up from 55.4 net wells where we started the year. During the quarter, we added 14.1 net wells across the Williston and the Permian via organic and ground game activity with an additional 9.2 net wells added from our Mascot project as drilling continues. First wave of Mascot completions since we joined the project is slated to turn in line over the next couple of months with the second batch set to start completions in the fourth quarter. Our D&C list grew during the quarter and our near-term backlog of well proposals has also been consistent.

During the quarter, we received over 200 well proposals are highest on record, albeit with varying working interests. Well cost inflation has been consistent with our recent AFEs. We are seeing leading indicators of deceleration and we expect to realize that towards the back half of the year as operators continue to reset terms of service providers. The quality of the proposed wells also remained high as we had over a 95% consent rate during the quarter. The M&A landscape continued to evolve during the first three months of the year. Large asset packages were a bit slow coming out of the gate and the quality of what came to market was not particularly enticing. As such, we passed on a number of potential transactions while continuing to search for opportunities that are better aligned with our strategic positioning and return profile.

We are being patient and are beginning to vet in more compelling and higher quality opportunities. NOG’s total addressable market has expanded given our size and scale, and we have been invited to COVID on a number of operated prospects, as well as explore sell downs from operators looking to partially monetize and remain as operator. These opportunities are not necessarily available to smaller non-ops as size and scale are required to participate in these large asset packages. This puts NOG in a unique position where we can have a seat at the table with our operating partners, determine a long dated development schedule, and underwrite accordingly. Looking at the entire landscape, there are currently 14 opportunities we are reviewing across our basins of interest, totaling over $6 billion across large asset packages and joint development structures.

Volatility in commodity pricing was also a headwind during the quarter and there were several M&A processes that were put on hold. While the Bid/Ask spread was alive and well, we pivoted to our ground game to target drill ready opportunities in situations where most sellers needed to transact to manage budgets and capital outlay. Taking advantage of that backdrop, we reviewed over 140 opportunities and closed on 10 transactions during the quarter, picking up 2.6 net wells and 369 net acres. We’ve maintained that momentum moving into the second quarter for the backlog of attractive deals under negotiation. Our Midland Petro transaction last year has shown the art-of-the-possible and while we’re exploring large joint development agreements, we’ve also been able to bring this concept to our ground game, putting together one-off operated units and bringing in operators to develop.

While our total addressable market for non-operated properties is as large as ever, we remain steadfast in our discipline. We will never be focused on growth just for growth sake. Our strict underwriting remains focused on returns. With that, I’ll turn it over to Chad.

Chad Allen: Thanks, Adam. I’ll start by reviewing key first quarter results, which outperformed our expectations despite a volatile commodity pricing backdrop. Our Q1 average daily production top the high end of our expectations of 87,385 Boe per day, an 11% increase over Q4 of 2022. Oil volumes were up 12% sequentially over Q4 as we experienced better well performance across all basins and the addition of our MPDC acquisition which closed in early January. Our adjusted EBITDA was $325.5 in Q1, a record for our company. Our first quarter free cash flow was robust at $84 million despite growing activity and commodity price volatility. Oil realizations continue to be better than internally expected as Q1 differentials came in at $2.57 per barrel due to continued strong in basin pricing and having more barrels weighted towards the Permian, which are typically priced tighter.

Natural gas realizations were 142% of benchmark prices for the first quarter, substantially higher than our stated guidance due to the stabilization of NGL prices and some of our Permian gas tied to West Coast deliveries versus Waha. Balance sheet remained strong. Leverage is trending in the right direction and is down sequentially on an LQA basis versus year-end even with the closing of our MPDC acquisition, which added approximately $320 million to the balance sheet. Our net leverage ratio should return to our target level by the end of 2023 as our acquisitions contribute to our operations and we are able to organically delever. We still have over $1 billion of liquidity in the form of unused revolver and borrowing base capacity. Since year-end, we have retired $19.1 million of our 2028 notes at attractive prices and have reduced our outstanding revolver balance by approximately $50 million post closing of the MPDC acquisition.

Mindful of our net leverage target, we will continue to look for ways to efficiently reduce leverage if market opportunity arises. We are reaffirming our CapEx guidance and reiterating the amount and cadence of our CapEx spend. As a refresher, the range is $737 million to $778 million for 2023. Our Q1 CapEx investment was $212 million, represented approximately 28% of our CapEx guidance at the midpoint, keeping with our expectation of realizing 60% of our annual spend in the first half of the year. With respect to cost inflation, year to-date, we are within our internal expectations, but as Adam mentioned, we are beginning to see early indications of stabilization and with the continuation of weak natural gas prices, we anticipate the potential for a reduction in rig count and subsequent cost savings over the next six to nine months at current trends stay in place.

We are not adjusting our 2023 production guidance and continue to expect a range of between 91,000 and 96,000 Boe per day for the full year, barring unexpected disruptions. With respect to our production case for the year based on our current TIL schedules, we still expect fairly ratable increases each quarter. With slightly more modest volume growth in Q2 and an acceleration into Q3 as the next wave of Mascot wells come online. We have made minor adjustments to our guidance on gas realizations and LOE. On differentials, we are upping our gas realizations to 80% to 90% given stronger than expected NGLs thus far, but keeping our oil differentials the same for the time being as in basin pricing in the Permian and Williston remains volatile. LOE was adjusted for higher NGL prices realized year to-date.

We’ll update you in the coming quarters if we anticipate material changes. With that, I’ll turn the call back over to the operator for Q&A.

See also 10 Best Brewery and Distillery Stocks To Buy Now and 12 Best Performing Dividend ETFs in 2023.

Q&A Session

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

Scott Hanold : Yes. Thanks. Hey, Nick and team. Just a question on the shareholder returns, obviously, you all were able to hit your dividend target much sooner than anticipated. And you’ve flexed several different aspects of shareholder returns. How do you see that progressing like through 2024 — into and through 2024? Are you looking to target maybe another dividend that is driven by rate? Or do you continue to look at buybacks as an option that increasingly becomes more important?

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

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

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

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

Nick O’Grady: I think they’re just different. I’d say, in general, the short answer would be yes. But it’s a combination — Adam used the term risk adjusted. I mean, you have to think about you have concentration, both benefit and risk, you have line of sight and development timing risk. And when you combine all those things together, that’s really what, from an underwriting perspective, what really will drive the decision making in. So what I mean by that is that you could buy a non-operated fractional business with 2% working interest across those things, across the board. And you kind of underwrite it to a very high discount rate. But ultimately, it takes a lot of activity to be impactful on those assets if you buy something with a 20% or 30% working interest that has different sets of risks.