Northern Oil and Gas, Inc. (NYSE:NOG) Q4 2022 Earnings Call Transcript

Northern Oil and Gas, Inc. (NYSE:NOG) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Greetings and welcome to the Northern Oil Fourth Quarter and Year End 2022 Earnings Conference Call. . 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, Evelyn. Please go ahead.

Evelyn Infurna: Thank you, Paul. Good morning and welcome to our fourth quarter 2022 earnings conference call. Yesterday after the market closed, we released our financial results for the fourth quarter and fiscal 2022. You can access our earnings release and presentation on our Investor Relations website and our Form 10-K will be filed with the SEC within a few days. I’m joined here this morning by NOG’s Chief Executive Officer, Nick O’Grady; our President, Adam Dirlam; and 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 Chad will review our fourth quarter financials and walk through our 2023 guidance. 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. I’d like to take a few moments to welcome Evelyn to the NOG team. Evelyn comes to NOG with tremendous amounts of capital markets and investor relations experience, and we’re excited to have her on board. All right, I’ll get down to it with five key points. Number one, business fundamentals are strong. We delivered strong results in the fourth quarter and the full year. Despite lower commodity prices and severe weather, we generated approximately $90 million of cash in the fourth quarter, and still we’re within annual production guidance. As we entered Q1, the business is back online and building momentum driven by strong turn-in line activity in December. Number two, growth. The fourth quarter was incredibly busy for the company.

We closed on three Permian acquisitions and in the first week of January, we closed on our Midland Petro transaction. In total, these represented over 750 million of closings and over 900 million in acquisitions announced in 2022, which should translate into more than 20% growth in our year-over-year production on a reduced diluted share account. This is following roughly 40% growth in 2022, all the more impressive given we are in a low growth era for most public energy companies. As the largest, best capitalized non-operator with superior data insight and an unmatched track record, we are proud to be the preferred partner to the public and private upstream community. NOGs differentiated positioning sets the stage for significant relative and absolute outperformance in 2023.

We have transformed the company by diversifying and growing our footprint, enhancing the quality of our portfolio and meaningfully improving the strength of our balance sheet. Despite inflationary pressures, and lower current commodity strips, we expect to generate significant cash flow and production growth in 2023. Our disciplined and efficient transaction underwriting prudent and sophisticated capital formation and superior data insights have driven and we expect will continue to drive consistent multi-year equity outperformance. Number three, the 2023 outlook. Our 2023 guidance, which Chad will delve into later reflects capital efficient growth, conservative cost inflation assumptions, and as I just mentioned significant and differentiated volume and cashflow growth throughout the year.

At our new elevated level of baseline production, we expect to generate significant levels of free cash flow in 2023, as the Midland Petro project reaches completion, it sets the stage for a substantial increase in free cash flow in the coming years, enabling us to further accelerate the company’s growth and enhance shareholder returns. Number four competitive advantage. We believe our competitive advantage has expanded in 2022. Over the last four years, we’ve not only rebuilt our infrastructure, augmented the financial strength and improved the asset positions of the company but have also invested in data science to continuously improve our technical analysis. With the launch of our purpose-built, AI powered system in January, we expect to further enhance the power of our proprietary data, and the accuracy and efficiency of our decision-making.

More specifically, we believe our enhanced analytics will enable us to efficiently find differentiated value in properties further enhance our risk management tools. Our team does not rest on its laurels and we believe we are unmatched in the non-operated sphere given our scale, data analytics and underwriting advantages. We believe that few can compete with us for the high-quality properties that we target daily and our scale allows us to play in a field largely on our own. As the breadth of opportunities as expanded for us, both from a Basin and structural basis, our competitive advantage has only widened. Number five shareholder returns. Our goal is to provide our shareholders with the highest possible total return over the long-term. We have implemented a multi-pronged approach, including share repurchase programs, repurchasing high-cost debt, and increasing the cash dividends for common shareholders.

During the fourth quarter, we continued to tactically repurchase our common stock and senior notes as market opportunities allow, we will continue opportunistic common buybacks and debt repurchases throughout 2023 and beyond. A few weeks ago, we announced a 13% increase in our quarterly common stock dividend to $0.34 per share for the first quarter and introduced a plan to accelerate the dividend further to our target of $0.37 per share about two quarters ahead of schedule. We continue to have the goal of providing an attractive yield for our investors. We strongly believe that the consistency of a stable and growing quarterly dividend is more valuable to our shareholders and our equity value over the long-term. Our Goldilocks strategy should give us the ability to both pay healthy, growing current income to our shareholders and also allow for our significant excess retain cash flow to provide for value added bolt-on acquisitions and growth opportunities.

Going forward, we remain focused on driving the highest total return to shareholders, focusing on optimal yield tax and capital efficiency and management of our overall leverage levels. The good news is with the business positioned for strength, we anticipate being able to deliver continued growth to our returns, while still leaving room for flexibility and the ability to scale the business responsibly over time. 2022 was another evolutionary leap forward for NOG and I want to recognize the NOG team from top to bottom for their hard work and dedication they always accomplished. In closing, I’ll remind you as I always do, that we are a company run by investors for investors. And I want to thank you all for taking the time to listen to us today.

With that, I’ll turn the call over to Adam.

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Adam Dirlam: Thanks, Nick. On both the operational and business development fronts, we finished off another transformational year and look to continue our growth trajectory into ’23. In the fourth quarter turn-in lines beat our internal forecasts as we added nearly 20 net wells and completions return to a relatively balanced mix as the Williston and Permian accounted for a 60:40 split. While initial production results were outperforming internal estimates, winter weather in December impacted production by approximately 10,000 barrels a day. As normal operations return, we expect to receive much of the benefit of our fourth quarter adds moving into the first quarter. Looking further ahead, we anticipate a typical turn-in line schedule, with spuds front-end loaded and completions weighted toward the back half of the year.

Given the pull forward in well completions during the back half of ’22, our wells in process finished the year totaling 55.4 net wells, with the Williston accounting for roughly 80% of our WIPs, excluding our Marcellus ducts. That said, we added 6.8 net wells in process with the closing of our mascot project in January. And accordingly, we now expect new drilling activity levels to be equally weighted across the Permian and Williston for 2023. In the Marcellus, we have deferred most activity to 2024 as we focus on higher margin oil properties, but continue to look for ways through acreage trades, and other means to potentially add exposure in the back half of the year. Q4 well proposals on our organic acreage remained healthy as we received over 125 AFEs during the quarter, which accounted for roughly 10 net wells.

The combination of our operators staying disciplined, and our acquisitions focused on the core of our respective basins led to a consent rate of approximately 95%. Economics also continued to improve as we saw estimated IRRs increased by over 25% relative to our Q3 well proposals. As we think about well costs going forward, it has been encouraging to see a deceleration in inflation, which broadly aligns with the conversations that we’ve had with our operators. We do expect and have seen some creep from some of our lowest cost operators in the Williston as long dated service contracts roll off. This has been an offset by a steadier state in the Permian, which has kept our overall AFE inflation modest. We anticipate those minimal increases from leading edge indicators at year-end to carry over into 2023, which results in an estimated 7.5% inflationary increase at the midpoint.

As Nick alluded to earlier, the fourth quarter was extremely busy for the business development team as we work to close some of the most impactful acquisitions in company history. The 750 million of M&A completed in Q4 and Q1 has deepened our exposure to top-tier inventory, with the addition of approximately 8000 net acres in the Permian. Overall, our 2022 closed acquisitions and ground game activity added approximately 125 high quality, low breakeven net future locations to our inventory, and 15% to our proven reserves, which increased to an estimated net 330 million barrels of oil equivalent. Note that our year end reserves exclude the impact of the recently closed Midland Petro acquisition. Midland Petro represents an important evolution in our M&A strategy.

The transaction showcased northern scale and ability to provide creative capital solutions for our operating partners while generating best-in-class returns. On the heels of our announced joint development agreement, we have been approached by multiple operators trying to find solutions for existing assets and desired development plans, as well as partnership opportunities to co-bid and acquire operated assets. Not only are we one of the few non-operators with scale, and a balance sheet to help move the needle pursuing large scale acquisitions. We also have the data insights to underwrite with conviction and participate alongside our operators as a low maintenance partner. These competitive advantages have established NOG as a partner of choice in pursuing operated assets, and at the same time brought in the opportunity set available to us.

As we move into 2023 the M&A backlog is spooling and we are reviewing more than $5 billion in non-operated packages, operated packages and joint development opportunities. While there are more prospects than ever available to us, our colors have not changed. We remain laser focused on our consistent approach to capital allocation and our ground game. In the fourth quarter, we closed on 1.2 net wells, and 127 net acres finishing, our 2022 ground game efforts acquiring 8.7 net wells, and over 1400 net acres across 24 transactions. As we look ahead to 2023, we are seeing a variety of compelling opportunities across our respective basins. And we will actively manage the portfolio in order to build on an already high graded drilling program and maintain our superior return on capital employed.

With that, I’ll turn it over to Chad.

Chad Allen: Thanks, Adam. I’ll start by reviewing key fourth quarter results, which were solid across the board despite the impact of the recent winter storms. Our Q4 average daily production was 78,854 BOE per day, a 23% increase compared to Q4 of 2021. Well volumes were up 4% sequentially over Q3 and have normalized after the winter storms. Our adjusted EBITDA was 264.8 million in Q4, and top 1 billion for the year, a record for our company. Our fourth quarter free cash flow was robust at 87 million despite growing activity. And we generated almost 460 million of free cash flow in 2022, which has more than doubled the prior year. Our adjusted EPS was $1.43 per share in Q4, up roughly 35% year-over-year. Oil differentials were again better than internally expected in Q4 and came in at $2.42 per barrel, due to continued strong in basin pricing and have more barrels weighted towards the Permian, which are typically priced tighter.

For the year, our differentials were $2.73 off WTI, a record low for the company, driven by improvements in North Dakota and the diversification of our business over the last several years. Natural gas differentials were 92% of benchmark prices for the fourth quarter, lower sequentially but better than our internal expectations. Lower natural gas and NGL prices drove the reduction a function of lower gathering cost absorption and lower NGL uplift, for the yearly average 113% of NYMEX. On the CapEx front, we invested 142.9 million during the quarter evenly split between the Williston and Permian basins. Activity has been robust. As Adam mentioned, before turn lines were up dramatically from the third quarter and provide strong momentum as we enter 2023.

This has resulted in a D&C List of 62.2 net wells inclusive of the mascot project and has contributed to the pull forward of our capital spending along with the continued success of our high return ground game investments. The balance sheet remains strong. We closed the $500 million convertible notes offering in the fourth quarter to fund in part, our recent acquisitions. As you may recall, due to the features we selected, there will be minimal to potentially zero dilution to our existing holders. And to the extent there is, the company has options to manage that this over time. In addition to the convertible notes offering, we’re able to expand the capacity of our revolving credit facility to $1 billion from 850 million, reflecting the growth on our borrowing base to 1.6 billion from 1.3 billion.

As a result of our M&A activity, we flexed our balance sheet for the announced transactions in the fourth quarter. And our leverage will be modestly higher over the next couple quarters but well within our comfort zone. Our net leverage ratio should return to normal levels by the end of 2023, as our acquisitions contribute to our operations, and we’re able to organically delever. Liquidity remains strong. We still have over $1 billion of dry powder in the form of unused revolver and borrowing based capacity. In 2022, we retired 25.8 million of our 2028 notes, and we will continue to look for ways to efficiently reduce leverage if market opportunity arises. With respect to hedging since our last report, we opportunistically added volumes in the form of attractive costs collars that provide downside protection with the optionality of participating in the upside of prices rally.

We continue to add volumes from each closed and pending acquisition based on our conservative hedging strategy of 55% to 65% of expected production on a rolling 18-month basis. As it pertains to our 2023 guidance, with a run rate CapEx from 2020 to of approximately 500 million largely carrying over. Capital plans from our 2022 acquisitions of approximately 220 million layered in and 25 million to 50 million of service cost inflation. This translates to a range of 737 million to 778 million total CapEx guidance for 2023 from perspective, we expect approximately 60% overhead annual spend will occur in the first half of the year. We want to point out that only approximately 25 million to 60 million that is specifically associated with the build out of our mascot project is expected to reoccur in 2024.

We do expect to see continued inflation in the first half of 2023. But the decline in natural gas prices and subsequently what appears to be the beginnings of a reduction in overall rig count, which is down approximately 25 from the peak in the United States could lead to cost savings in six to nine months if the current trend stays in place. Additionally, we’ve seen debottlenecking and sand tubulars, an added pressure pumping capacity, all green shoots towards stabilization or reduction in costs as the year progresses. Regarding our 2023 production guidance, we expect to start the year at a range of 84,000 to 86,000 BOE per day in Q1, improving each quarter with a target fourth quarter exit rate of 96,000 to 100,000 BOE per day. Overall, the quarterly production should translate to an average range of 91,000 and 96,000 BOE per day for the full year.

With respect to the first quarter, we typically see seasonal organic declines and a quarterly guide conservative given the end of winter in the Williston. However, we do expect strong activity throughout the year to drive that higher exit. Differentials, we’re taking a conservative view, given the recent downtick in natural gas prices and typical volatility of in basin oil pricing. We believe that there’s room for improvement potentially as the year goes on. LOE and G&A should be largely consistent with 2022 adjusted for inflation and operating and public company costs. With that, I’ll turn the call over to the operator for Q&A.

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Q&A Session

Operator: Thank you. . Thank you. Our first question is from Neal Dingmann with Truist Security. Please proceed with your question.

Neal Dingmann: Nick, my first question, for your Chad, this is on capital spend maybe specifically, we’re modeling how should we think about your ’23 CapEx sort of pre and post potential transactions or maybe asked another way, do you all assume there’ll be at least a minimum amount of ground game additions that we should put in the model and just really trying to speak to CapEx versus production expectations this year?

Chad Allen: We always leave room in our CapEx guidance or flex capital. So the ground game is in there. And that’s so we can actively manage the portfolio throughout the year. Whether we use it or not, it depends on the proposals that come in the door, what they’re expected spudder sales times are in, compare that to the ground game opportunities that we’re seeing day in, day out, so meaning we really wait of returns against one another. And so we may have the opportunity to high grade our drilling program and modify it, and we’ll definitely take advantage if we do. I’d say, like any other year, it’ll depend on what we’re able to get done. And if they’re compelling opportunities to flex forward, you know, through the ground game, but again, as I reiterate, we budgeted a pretty hefty amount in our base budget every year for that amount.

Neal Dingmann: Okay, because you haven’t upgraded the add, so I thought you all did, okay. And then just second really on Bakken activity. I’m just basically wondering, maybe for Adam, how stable — more recently have no plans have become and if you all receiving what I’d call more or less proposals, than a year ago, I asked that because obviously, a lot of the gas is getting — gas guys are becoming very volatile. And some other plans are volatile. I’m just wondering if you’re seeing a bit more stability, and maybe Bakken versus Permian and just wondering how the proposals have become more recently. Thank you.

Adam Dirlam: Yes. I think you nailed that. And I think in the fourth quarter out 125 plus AFEs, we received about 100 of those were in the Williston. And so, looking at the end of the year, if we’re looking at our oily basin, kind of makeup, that’s about 80% of kind of the wells that are in process right now. And so we see that kind of humming along. They continue to add rigs and the operator makeup is certainly compelling as well. And we’re partnering with the likes of and Conoco. So we’ve been encouraged by the activity phase.

Nick O’Grady: Yes, I would just say Neal, based on our guidance that we put forth today are, whether or not the Williston Basin grows as a whole or not, I would probably say it probably remains pretty stable. We’re going to have record volumes in the Williston by a big measure this year.

Adam Dirlam: That’s right. And I think it’s a function of the working interests and the concentration with some of our operators, we’ve got significantly larger working interests that we’re stepping into here at the beginning of the year.

Operator: Our next question is from Scott Hanold with RBC Capital Markets.

Scott Hanold: I think, one, maybe underappreciated factors is this new AI system that you all have? And it sounds like they are going to be coming, going more full bore on it now? Can you just give us some context on, what do you think this does to your pace? And maybe if, I don’t know the right way to say, but quality of sort of your ground game and your potential acquisition activity, where do you see upside, like, when you do, back looks at what you did versus what now, with this system. Would have you made a change in strategic advantages to having this in place?