Northern Oil and Gas Q3 2023 Earnings Report

Northern Oil and Gas EPS Results

• Actual EPS: $1.73
• Consensus EPS: $1.76
• Beat/Miss: Missed by -$0.03
• One Year Ago EPS: $1.80

Northern Oil and Gas Revenue Results

• Actual Revenue: $313.97 million
• Expected Revenue: $503.98 million
• Beat/Miss: Missed by -$190.01 million
• YoY Revenue Growth: N/A

Northern Oil and Gas Announcement Details

• Quarter: Q3 2023
• Date: 11/2/2023
• Time: After Market Closes
• Conference Call Date: Thursday, November 2, 2023
• Conference Call Time: 8:00AM ET

Northern Oil and Gas (NYSE:NOG) is a publicly traded independent energy company focused on the acquisition, exploration and development of oil and natural gas resources in the United States. The company’s primary operations are concentrated in the Williston Basin, where it secures acreage positions and partners with drilling operators to advance upstream projects. Through strategic leasehold acquisitions and joint ventures, Northern Oil and Gas seeks to expand its footprint in both conventional and unconventional reservoirs.

Northern Oil and Gas employs horizontal drilling and hydraulic fracturing technologies to develop unconventional resource plays, particularly in the Bakken, Three Forks and Red River formations of North Dakota and Montana. The company’s asset base includes working and royalty interests in producing wells, as well as undeveloped acreage across multiple drilling units. By leveraging technical expertise and capital partnerships, it aims to enhance drilling economics and generate sustainable production growth.

Headquartered in Denver, Colorado, Northern Oil and Gas completed its initial public offering in 2012 and is listed on the New York Stock Exchange under the ticker NOG. Since its founding, the company has pursued a growth-oriented strategy, balancing capital discipline with focused exploration. Leadership is headed by Chief Executive Officer Stephen Bowden, under whose guidance Northern Oil and Gas maintains a disciplined approach to portfolio management and operational execution.

With a focus on the Williston Basin, Northern Oil and Gas positions itself as a partner of choice for operators and investors seeking exposure to one of North America’s most active hydrocarbon regions. The company continues to evaluate opportunities for acreage expansion, joint venture partnerships and cost-efficient development to support long-term value creation.

Northern Oil and Gas Q3 2023 Earnings Call Transcript

Key Takeaways

• Production hit a record ~100,000 BOE/day in Q3, landing near the upper band of guidance, with a higher oil cut, lower operating costs and an 11th consecutive dividend increase.
• Free cash flow surged to $127.8 million in Q3—2.7× year-ago levels—and is on track for a potential record in Q4, providing capital for both shareholder returns and future growth.
• Non-operated M&A (“ground game”) remains strong, closing 31 deals YTD, adding ~25 net wells, tripling Permian acreage and targeting >30% ROCE on 2023 ground game investments.
• Northern raised $290 million of equity at just a 4.75 bp discount, aiming to de-risk capital allocation and maintain flexibility for opportunistic acquisitions while adhering to leverage goals.

Presentation

[Operator]

Greetings, and welcome to the NOG third quarter 2023 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require the operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Evelyn Infurna, Vice President, Investor Relations. Thank you. You might begin.

[Evelyn Infurna, Vice President of Investor Relations at Northern Oil and Gas]

Good morning. Welcome to NOG's third quarter 2023 earnings conference call. Yesterday, after the market closed, we released our financial results for the third quarter. You can access our press release and presentation on our investor relations website. 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, and 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 our operations and business development activities, and Chad will review our third quarter financials and walk through updates to our 2023 guidance. After our prepared remarks, the executive team will be available to answer any questions.

[Evelyn Infurna, Vice President of Investor Relations at Northern Oil and Gas]

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 we have 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. Reconciliations of these measures to the closest GAAP measures can be found in our earnings release.

[Evelyn Infurna, Vice President of Investor Relations at Northern Oil and Gas]

With that, I'll turn the call over to Nick.

[Nick O'Grady, CEO at Northern Oil and Gas]

Thank you, Evelyn. Welcome and good morning, everyone, and thank you for your interest in our company. All right, I'll get right down to the five key points. Number 1, all is well. Operationally, things are going swimmingly. Last quarter's activity slowdown became this quarter's acceleration, and our Mascot project well performance continues to impress. Production was near the upper band of our guidance. The oil cut was up significantly, and our operating unit costs were lower. Additionally, we're pleased to have raised our dividend again for the 11th straight quarter. Our ROCE ticked up 160 basis points this quarter to 24.5%, even as we capitalized a large transaction and continue to invest heavily in our future. It's a testament to the rigor of our investment process and the scale we've built.

[Nick O'Grady, CEO at Northern Oil and Gas]

Number two, we have entered harvest mode, but we're pursuing a dual path. We generated significant free cash flow from our assets this quarter, about 2.7 times the amount in the prior period, and we head into Q4 looking towards a potential record quarterly figure. Free cash flow has not empirically proven to be a driver or valuation marker for stock performance, but it is definitively a provider of shareholder returns. And more importantly, it is a powerful convexity tool, which provides optionality for dynamic capital allocation, something we believe we've proven to be adept at doing. When you have free cash flow, you effectively can choose your destiny. Our choice has been, and will continue to be, to serve both masters, deliver solid, dependable, and growing cash returns, while also driving total return by investing to grow our longer-term profits. Number three, opportunity and dominance.

[Nick O'Grady, CEO at Northern Oil and Gas]

We continue to see compelling investment opportunities, big and small. We had elevated ground game success in Q3, and larger and smaller packages are spooling in the Permian and Appalachia. NOG's capital allocation has benefited from the domination of our niche. We find ourselves involved in nearly every operated and non-operated M&A process, which is providing us an incredible range of opportunities. So even as we're larger, we're finding that options in front of us allow for increased returns and more flexibility. Shorter term, this has driven capital spending higher, but spending today provides the returns for tomorrow. Adam will give more details. Number 4, bigger and stronger. When we started this journey back in 2018, our board chair was clear in his belief that scale would drive powerful outcomes for NOG.

[Nick O'Grady, CEO at Northern Oil and Gas]

Scale was the key to grow the company beyond the overlevered balance sheet we inherited, and scale would provide more stability and diversity to our asset base. It would lower our long-term cost of capital and provide access to a larger investor pool. Over time, scale would lead to higher return opportunities with more influence for us. Scale would grant access to capital to purchase assets that our competitors could not because of size or concentration.... Scale has never been more important, and our thesis has borne itself out over the past several years. The perpetual challenge of this strategy was, and always has been, to maintain our high asset level return standards and to keep focus on core assets.

[Nick O'Grady, CEO at Northern Oil and Gas]

We could have simply bought lower quality assets to temporarily create scale, but the harder path was to actually improve our asset quality and return profile while simultaneously growing the business. We have achieved this and then some. With interest rates and the overall cost of capital, the highest in over a decade, never has size been more important. What we're finding is that scale begets scale. Now that we're bigger, the opportunity set has grown in lockstep. The theme of bigger and stronger ties into my final point. Number 5: optionality leads to potentiality. We recently raised $290 million of equity capital in a bought deal, and many of you, rightfully so, might be asking why. After all, I just described how we're generating significant free cash flow and that our leverage levels are in good shape and set to improve further.

[Nick O'Grady, CEO at Northern Oil and Gas]

So why did we raise capital? As we discussed our future with the board, we highlighted to them that the investment opportunities, big and small, are coming to us. We also discussed how the economic and geopolitical situation in the world, candidly, is as complicated as it's been since the financial crisis 15 years ago. And so knowing what's in front of us and also knowing the conflicting signals in the capital markets, we collectively decided to simply de-risk the path to delivering growth to you in the future. We now have the flexibility to act no matter what happens in the macro environment. The options in front of us now carry less risk. To the extent we see a market meltdown, we can aggressively purchase securities or assets for sale.

[Nick O'Grady, CEO at Northern Oil and Gas]

To the extent things stay the same or better, we can continue to do what we've been doing while staying within our self-imposed leverage constraints. Our capital raise was not a call on our stock price, and certainly not because the capital was needed at this very moment, as you can see from the results today. Rather, we have shrewdly, astutely, and carefully found growth opportunities that have driven this business and our profits higher over time. With the extra capital that you provided, trust that when the time is right, we will allocate it to benefit all stakeholders. Doing this is why our corporate returns have been driven ever higher as risk has declined, and it's how we've delivered superior total return. As I have said in the past, we are a company run by investors with a goal of growing value for our investors.

[Nick O'Grady, CEO at Northern Oil and Gas]

It's our fiduciary duty, and it's how we are incentivized. In the short term, we may make difficult decisions that aren't always popular, but those decisions are focused on driving long-term value. What is most exciting is that I am confident that we can continue on a similar path for the foreseeable future to drive growth for our investors. We will keep our focus on delivering strong results over time. We thank you for taking the time to listen to us today and your continued trust in us and interest in our company. With that, I'll turn it over to Adam.

[Adam Dirlam, President at Northern Oil and Gas]

Thanks, Nick. In the third quarter, we saw an acceleration of activity on all fronts, setting up for a solid 2024 campaign. I'll start by reviewing this quarter's operations and then turn to the M&A landscape and our business development efforts. During the third quarter, turn-in-lines rebounded to a company record of 22.6 net wells, a 64% increase quarter-over-quarter. Our organic assets did the heavy lifting with 18.9 net well additions, while our ground game turned in line 3.7 net wells, the majority of which came online towards the end of the quarter. Activity had a healthy balance between the Williston and the Permian, and as we enter the fourth quarter, we expect to see elevated turn-in-lines before seasonal easing during the winter period. Well, performance has been encouraging as our Mascot prospect continues to outperform expectations.

[Adam Dirlam, President at Northern Oil and Gas]

While it is early, our new operating partners in Vital, Earthstone, and soon to be Permian Resources, have all been making improvements to our recently acquired co-developed assets. Continuing with the theme of acceleration, our wells in process again grew to an all-time high as we ended the quarter at 74.2 net wells, a nearly 10% increase quarter-over-quarter. Driving activity levels, our organic acreage added 14.6 net wells and accounted for one-third of our Permian activity, as our acquired acreage over the last two years continues to show its value. We added another 9.3 net wells from the closing of our Novo transaction, and the ground game accounted for an additional 5.5 net wells.

[Adam Dirlam, President at Northern Oil and Gas]

In total, the Williston and Permian combined to account for nearly 80% of our wells in process, while the Permian has grown to 60% of our oil-weighted wells on the D&C list. As we have taken market share, we've also seen our average working interest grow to 13% from under 10%. This is a 34% increase relative to our producing wells, which will enable us to do more with less rig activity if we so choose. Inbound well proposals also saw an acceleration as we reviewed 194 AFEs, up from 140 proposals in the second quarter. This was driven by the Permian, where activity levels more than doubled from Q2 to Q3, and also accounted for the highest number of net wells evaluated during the year.

[Adam Dirlam, President at Northern Oil and Gas]

Our Williston activity has remained stable and consistent, as we have seen over 100 well proposals in every quarter this year. While activity levels have increased across the board, the quality of wells continues to be strong, with the expected rates of return far exceeding our hurdle rate, even as we sensitize our evaluations for a lower commodity price environment. This translated to a greater than 95% consent rate during the quarter as we partner with our top tier op, making up a much greater proportion of the total activity. Normalizing for lateral length and basin, estimated well costs were relatively flat quarter-over-quarter. Given the volatility in commodity markets, we remain conservative in our views on costs as we plan for 2024.

[Adam Dirlam, President at Northern Oil and Gas]

We continue to have conversations with our operating partners, and we've seen some of our larger operators, along with some of our more adept operators, drive costs down while seeing others get squeezed as contracts roll off. Moving on to our business development efforts and the M&A landscape, we continue to adapt to the ebbs and flows of the market. As I alluded to on our second quarter call, there was a bit of a lull in quality, large-scale assets in the market over the past few months. During that time, we were able to pivot early in the quarter and capitalize on the dislocation we observed with lower commodity prices and stayed busy with our ground game. We closed on 8 transactions, adding an estimated 5.7 net wells in process and 514 net acres weighted towards the Permian.

[Adam Dirlam, President at Northern Oil and Gas]

This brings our year-to-date activity to 31 transactions for an estimated 24.9 current or future net wells and approximately 1,800 net acres. Since the beginning of the year, we have reviewed over 400 ground game deals and continued to leverage our proprietary technology and data to run these evaluations. This has afforded us the ability to focus on only the high-quality transactions, which has translated to an expected ROCE north of 30% on our 2023 ground game. As I mentioned earlier, we closed our Novo transaction in the middle of the quarter and are excited to get to work with our new operating partner, Permian Resources. We know the Permian Resources team well, and having greater exposure to PR will provide incremental benefits from their increased scale and cost synergies.

[Adam Dirlam, President at Northern Oil and Gas]

Governance through our joint operating agreement and our area of mutual interest with Earthstone remain intact, and we expect nearly a decade of self-funding, continuous development within our Tier One inventory. Through leveraging partnerships with our operators, we've been able to aggregate in high-quality areas while gaining line of sight to development. We continue to reap the benefits of more opportunities to deploy capital to accretive transactions as we scale the business with resilient assets. In the past 12 months, we have added over 25,000 net acres in the Permian, more than tripling our position. Looking ahead, there are a number of high-quality prospects that we are reviewing, ranging from traditional non-op packages to minority interest sell downs from operators to joint development programs. Put simply, we estimate that the universe of on and off-market opportunities that are available to us has never been broader.

[Adam Dirlam, President at Northern Oil and Gas]

However, we will remain consistent in our underwriting, focusing only on potential transactions that will benefit the business for the long term and that generate superior returns that our investors expect. With that, I'll turn it over to Chad.

[Chad Allen, CFO at Northern Oil and Gas]

Thanks, Adam. I'll start by reviewing our third quarter results and provide additional color on the operating update we released on October 25th. Our Q3 average daily production topped 100,000 BOE per day for the first time in company history, a 13% increase compared to last quarter. Oil volumes were up 16% over Q2 as we rolled in our Forge and Novo acquisitions and benefited from the reversal of most of the prior deferments in the back half of the quarter. But the real story is the addition of record levels of turn-in-line wells and the continued strong well performance across all of our basins.

[Chad Allen, CFO at Northern Oil and Gas]

Our adjusted EBITDA was $385.5 million in Q3, up 32% over the same period last year, and our third quarter Free Cash Flow was $127.8 million, despite continued elevated levels of organic and inorganic investment, commodity price volatility, and to a lesser extent, TIL deferrals. Adjusted EPS was $1.73 per diluted share. Oil realizations were better than internally expected due to continued strong in-basin pricing and a higher percentage of barrels coming from the Permian, which is typically priced tighter than the Williston.... Natural gas realizations were 82% of benchmark prices for the third quarter, below our year-to-date run rate, with realized actuals in the Marcellus down over 30% from last quarter as basis spreads widened for the shoulder season.

[Chad Allen, CFO at Northern Oil and Gas]

The biggest driver is the NGL to natural gas ratio, which moved back to more normalized levels in the quarter as NGL prices were relatively flat quarter over quarter and natural gas prices were higher. LOE came in at $8.76 per BOE, below our annual guidance range, driven primarily by increased Permian volumes, which have a lower cost structure than the Williston. On the CapEx front, we invested $216.6 million in drilling, development, and ground game capital in the third quarter, with roughly two-thirds allocated to the Permian and one-third to the Williston. We had previously expected our CapEx cadence for the second half of the year would be equally weighted between Q3 and Q4.

[Chad Allen, CFO at Northern Oil and Gas]

However, as a result of having access to high-quality opportunities, success on the ground game, along with the pull forward of organic activity on higher commodity prices, we shifted more investment into the third quarter. This shift in spend led us to adjust our full-year CapEx guidance, which I'll discuss shortly. After quarter end, we took the opportunity to further enhance our balance sheet. In early October, we completed a $290 million equity offering, priced down just 475 basis points from the closing price, highlighting our access to capital. More importantly, it was done in a manner that had minimal effect on our existing investors and provides us with capital to pursue significant M&A opportunities within the confines of our stated leverage goals.

[Chad Allen, CFO at Northern Oil and Gas]

Our expectation is that the near-term dilution from the offering can be more than offset over time through value-enhancing acquisitions. In the meantime, we have accelerated a path towards our stated leverage target. Now turning to annual guidance. We have made a few adjustments, which are highlighted on page 16 of our earnings presentation. We are tightening our annual production guidance to 97,000-99,000 BOE per day. The main drivers for Q4 will be the timing of completions, giving our record number of net wells in process and seasonal factors, particularly in the Williston, where well timing can be highly sensitive to weather. We now expect net well spuds for the year in the range of 76-79 net wells, which, along with our TIL guidance, should assist in modeling.

[Chad Allen, CFO at Northern Oil and Gas]

The higher level of net wells explain the bulk of the move in the CapEx, which is ultimately just growing 2024 activity stacked onto this year's capital. Our annual CapEx guidance has been revised to a range of $790 million-$820 million, reflecting year-to-date investment activity ahead of our prior forecast, and as I just mentioned, the increased spud count. Our full-year gas realization guidance has been improved to a range of 95%-105% of Henry Hub to reflect year-to-date realizations, which implies more typical levels for the remainder of the year. And lastly, we've also tightened the expectations for oil differentials to a range of $3-$3.75 for the year.

[Chad Allen, CFO at Northern Oil and Gas]

As we exit driving season and oil prices have increased, we began to see seasonally wider oil differentials starting at the end of the third quarter and expect that trend to continue through the winter. As we finish out 2023, we are extremely well positioned for another year of strong growth in 2024, given our recent acquisitions and record wells in process. We are still working through our 2024 budget and look forward to providing guidance details on our year-end call. With that, I'll turn it back over to the operator for Q&A.

[Operator]

Thank you. At this time, we will conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it might be necessary to pick up the headset before pressing the star key. One moment, please, while we are pulling for questions. Our first question came from Scott Hanold, RBC Capital Markets. Please, sir, go ahead.

[Scott Hanold, Managing Director, Senior Energy Analyst at RBC Capital Markets]

Yeah, thanks. Good morning, all. You know, hey, you know, Nick, I, I can't help but kind of think back a few years ago when you and I chatted with Bahram, you know, about, like, you know, just growing scale, what's important, you know, for the long term, you know, for Northern. And certainly, you guys have, you know, moved quite a bit from that, I think, up, like, somewhere around threefold. When you kind of think about the future and the opportunity sets you see in front of you and just in general, the maturation of certain parts of the U.S., like, is there an optimal level you think, you know, for-- that there is for Northern?

[Scott Hanold, Managing Director, Senior Energy Analyst at RBC Capital Markets]

If you could also kind of parlay into this answer, you know, how does, you know, the higher interest rates kind of impact your ability to kind of, you know, you know, do M&A transactions or see just things out there?

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah, I mean, I think I'll answer the latter part first, Scott. You know, when the cost of capital goes up, you know, so too do the discount rates. And so we've observed that, you know, clearing discount rates have risen. From a strategic perspective, it's definitely benefited us as our cost of capital has probably been more static than that of our private peers, and, you know, we just require bank capital or things like that. So it's definitely helped us. But you see it particularly, you know, you saw a kind of a wave in the last couple of years of people using asset-backed securitizations to finance PDP-heavy acquisitions. And that game, you know, gets really tough when base rates are over 5%.

[Nick O'Grady, CEO at Northern Oil and Gas]

You know, you know, to the other point, I think I got asked this question recently by one of our investors, and I think my answer would be: Our fiduciary responsibility as a company is not to decide what size is the right size. It's really our, our job is to earn high returns and grow the business and make more money for our stockholders, and I think that that's our path going forward. And I think while shale overall is maturing, from a non-operated perspective, I think it's wide open for us. The opportunity set in, in front of us is as big relative to the sizes of our company as it was three or four years ago. And so I feel very confident that our team can continue the path that we have.

[Nick O'Grady, CEO at Northern Oil and Gas]

You know, from a law of large numbers, maybe that percentage doesn't move quite at the same pace, but from an opportunity set, frankly, we're as busy as we've ever been. I don't know, Adam, if you want to add to that.

[Adam Dirlam, President at Northern Oil and Gas]

I think it touched the majority of it. Scale begets opportunity, right? And, you know, I've touched on it in my prepared remarks in terms of kind of the different structures that are now available to us, and I think that gives us the optionality to deploy capital, you know, where we see fit. If you rewind, you know, five years ago, it was really just the ground game and the non-op, you know, packages that we're beholden to. And now we're looking at co-bidding exercises, minority interest buydowns, joint development agreements, and all of that is at scale, right? And so I think we're a much larger and better capital provider and partner to a lot of our other operating partners, that gives us, you know, significantly more opportunity.

[Scott Hanold, Managing Director, Senior Energy Analyst at RBC Capital Markets]

Thank you. Appreciate that. As my follow-up, I know it's going to be a little bit early for 2024 thoughts, but you know, I was kind of curious, and especially with respect to the Mascot, which was, you know, your first JV. You know, you talked about the well looking good. Can you talk about the pace of that going, you know, the pace of completions for that and production going into next year? And you know, just your kind of thoughts on how that sets you up for 2024.

[Nick O'Grady, CEO at Northern Oil and Gas]

Well, I'll cover just a little bit, which is obviously we shifted some of the development into 2024, and so it really would've been peaking, I think, both in terms of volumes and in terms of capital in the fourth quarter, and some of that shifts out. I mean, I think the, the next batch of wells is really, you know, it's obviously been performing extremely well. We'd expect, you know, that the next major batch of wells comes on sort of early in the second quarter. Adam, anything?

[Adam Dirlam, President at Northern Oil and Gas]

Yeah, performance is kind of at 13%, better overall versus kind of our forecast, Scott. And as far as kind of the modified schedule goes that we discussed last quarter, we'd expect production to decline a little bit in the fourth and the first quarter, and then begin ramping materially in late March. So, you know, to Nick's point, that's when the larger batch of wells, you know, come online.

[Scott Hanold, Managing Director, Senior Energy Analyst at RBC Capital Markets]

Okay. So then from an overall cadence perspective, I mean, you guys should be starting, you know, next year in a pretty good spot overall.

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah.

[Adam Dirlam, President at Northern Oil and Gas]

Yeah. I think Q2 and Q3 is really where we see kind of the bulk of the TIL coming on the Mascot project.

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah. And, you know, we typically see a seasonal slowdown in the first quarter, particularly in the Williston, just around kind of the winter weather piece, but that's been the pattern for almost every year I've been here.

[Scott Hanold, Managing Director, Senior Energy Analyst at RBC Capital Markets]

Right. Okay. Thank you.

[Nick O'Grady, CEO at Northern Oil and Gas]

Mm-hmm.

[Operator]

Our next question came from Neil Dingmann, Truist Securities.

[Neal Dingmann, Managing Director, Energy Research at Truist Securities]

Porter, Nick, my first question is on M&A. Specifically, sounds to me like you all have more than... I mean, continue to have now more than ample M&A opportunities ahead, having the, you know, what I call the non-op market cornered. I'm just wondering, can you speak now when you look at your deal criteria, how these requirements have changed, maybe, you know, different standards today versus when you were looking at maybe a year or two ago? Because, again, it just seems like, you know, just how creative the deals are today. So I'm just wondering, like, when you and Adam chat are looking at some of these deals, how the requirements have shifted.

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah, I mean, I think discount rates have definitively gone up. That doesn't always show up in the multiple, Neil. The multiple is going to be a function of the longer-term growth and value of the undeveloped piece, right? So the short-term multiple to the investors might not seem obvious, but we've seen in the last three or four years, probably even on the ground, probably a 1,000 basis point increase in our own clearing price, and that's a function of the cost of capital. It's also a function of where we're targeting, and we've really changed some of our focus to where we feel like we can get a much, you know, we become much more critical to that part, and that's generally through concentration or scale and size.

[Nick O'Grady, CEO at Northern Oil and Gas]

I don't know if you want to answer the other part.

[Adam Dirlam, President at Northern Oil and Gas]

Yeah, I mean, as far as the criteria, qualitatively, you know, I think we're relatively agnostic in terms of overall structure. It's really going to boil down to the overall rate of return and asset level returns there. So, we're never gonna change our stripes in that regard, big deal, small deal, all take the same amount of time. And so, you know, I think where that probably comes into play a little bit more is on the ground game side, right? Is a 1% working interest really going to move the needle for us? And frankly, you know, when you get into the larger ground game deals, the higher concentration, the competition is relatively limited, right? When you think about your competition and what their capital pool is and how they want to diversify kind of their capital allocation.

[Adam Dirlam, President at Northern Oil and Gas]

So, you know, we've definitely stepped up in that regard. But as far as, you know, overall structure or quality, those types of things, I think we're going to continue to just stay the course with what we've done in the past. And as far as where those opportunities are located, I'd say, you know, primarily that's going to be in the basins where we're at. Permian, obviously, with the rig level activities there in the Delaware, to be a bit more specific, is generally where we're seeing those opportunities. But you know, we've been surprised about some of the things that have come to market, and we've been approached on in the Appalachia as well as the Bakken.

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah.

[Adam Dirlam, President at Northern Oil and Gas]

Not to mention, you know, the Haynesville. Does that work in this particular price environment? Maybe, maybe not. Then you've got, you know, the Eagle Ford, that's been, you know, an area of interest. But given the maturity, and the way things are blocked up there, we just haven't found the right asset. DJ, Great Western or Grey Rock, you know, got to obviously take into consideration the political environment there. And so I think, you know, a lot of these other places, you know, I probably forgot the Utica. That's been interesting. Obviously, you got to be under the right operators there. And so, you know, kind of those four areas are areas where, you know, we're obviously keeping our ear to the ground, but are going to have a much higher bar to get things done in.

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah, and, you know, I mean, I think the one thing you have to take into account is the commodity environment we're in. I mean, commodity prices are relatively high, and so we generally stick to our knitting. We want resilient assets, right? You really want to focus on lower breakeven co-assets, especially in an environment like this, because whatever the discount rate is, the sensitivity on the discount rate is going to be very different depending on if you see a pullback in prices as well, activity. So, you know, not all returns are... You know, they might be underwritten alike, but the resiliency of them are different. And that's why you've generally seen us focus on higher quality assets in areas that are always active.

[Neal Dingmann, Managing Director, Energy Research at Truist Securities]

Yeah, that makes total sense. And then, Nick, just secondly, maybe I'm trying to get an idea of how do you—you know, you gave some good ground game update, as well as your dividend growth. You know, you recently just talked about that, and I'm just wondering, you know, kind of going forward, how do you sort of balance the production and shareholder return growth?

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah, I mean, I think you know that is the special sauce, and I think that in general you know we want to be... We're conservative by nature, Neil. And so I think that you know in terms of you know raising the dividend early, it's about $2 million additional capital this year than we've you know previously planned. I think the board was very confident that we were there. And we've obviously done a ton of you know hedging and de-risking of the assets we bought you know over the past quarter. But I think over time I think we view there's upside to dividends.

[Nick O'Grady, CEO at Northern Oil and Gas]

I mean, I think you can easily look at the environment we're in today and say: Well, why aren't you paying out, you know, a lot more capital? And I think it's because we're not just thinking about the environment we're in, we're thinking about the environment that could be. Because I think, you know, there's a fine balance in our business about giving everybody what they want right away versus, you know, being a good steward of capital and thinking about the potentiality of outcomes. And so I think we want to be purposeful. I think there's, is there upside to our current dividend plan? Of course, there is. And we'll take that in stride as we achieve goals and as we get there. But I think we want to be careful.

[Nick O'Grady, CEO at Northern Oil and Gas]

I also think, and you've heard me say this quarter after quarter, but we really do think about capital allocation and total return, which is that, I, you know, personally, I love dividends. I love every time we pay a dividend. I'm a significant stockholder. But at the same time, we want to see, we want the flexibility to dynamically allocate that capital so that we can create more dividends for the future, not just as much as we can get today. And so it's a fine balance. I think we've done empirical studies with our investors, and I think that, the view is that, one, you know, a dependable regular dividend is the way to go. I think that's been proven out over the last year.

[Nick O'Grady, CEO at Northern Oil and Gas]

That wasn't very popular when I said that a few years ago, but I think people have come around to that. And I think the second thing is that you want something that's sustainable and has a path to grow, and they want to see us grow our profits, because I think ultimately, that's been the driver of why our stock has performed better than peers. Not just because we're paying a dividend, but because we're providing a dividend and providing some growth. And as a non-operator, we don't really run the same risk, we don't have the same inventory concerns that some operators may have, and we don't affect overall supply.

[Neal Dingmann, Managing Director, Energy Research at Truist Securities]

Perfect. Thanks, guys.

[Adam Dirlam, President at Northern Oil and Gas]

Our next question comes from John Abbott, Bank of America. Please, sir, go ahead.

[John Abbott, VP, E&P Research at Bank of America]

Hey, good morning, and thank you for taking our questions on a very busy morning. Yeah, so in the opening remarks, there was some commentary related to, you know, seeing some contracts, you know, potential costs going lower due to contract, you know, moving lower, as well as some operators potentially being squeezed as contracts sort of roll off. So how do you think about what are your thoughts as you sort of look at the Permian and the Bakken and maybe the Marcellus, as far as how you think costs play out next year for operators?

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah. I mean, I think that operators are always finding ways to be more efficient, drill faster, and find ways to get more bang for their buck. And I think that's productivity improvement, you know, never really stops, and so there's always some benefit to that. I think that you have to take the practical reality, which is that you've had the rig count come down. You know, the completion piece, the fracking piece is the most, you know, it's 70% of the well cost, right? So rig rates are down. You know, ancillary costs from tubulars to sand are down, water handling, down.

[Nick O'Grady, CEO at Northern Oil and Gas]

But at the end of the day, those really don't move the needle all that much unless the cost of completions go down, and that's really gonna be dictated by the number of wells being drilled, and the rig count, and the number of wells being drilled don't always foot with one another. Certainly, there's a lot of static costs in between there. And so you have to think about the commodity environment that we're in, right? We've seen commodity prices drop this year and then come back up, and so if overall levels are stable and you do have inflation to labor and other costs over time, I think we view that costs are going to be relatively static unless something materially changes.

[Nick O'Grady, CEO at Northern Oil and Gas]

If gas prices, for example, were to stay weak for another year and you see a gas activity falling off, those completion crews may have to move and compete for services, and you could see some further costs, but I don't think we necessarily wanna count on that. And so I think that, you know, where we are now, I think things are stable. You know, our costs were up quarter-over-quarter, but that's a bit of a misnomer because it's really a function of the Permian making up a higher proportion. Permian wells cost more, and secondarily, the lateral length on our wells were much longer. So on a kind of per lateral foot basis and agnostic basis, they were relatively flat. I don't know, you wanna add to that?

[Adam Dirlam, President at Northern Oil and Gas]

No, that's the reason why we, you know, focus on partnering with the larger operators. The conversations that we're having right now, and you've seen the rig levels fall, a lot of those guys are going back to the service providers, laying down rigs, you know, in an effort to kind of keep costs low. And if you're running, you know, 17-20 rigs or whatever it might be, it, you can still keep and maintain, you know, your operations plan, but still be able to kind of flex your muscle. And, you know, we've got to manage the volatility. I think Nick mentioned it, you know, last quarter on the call. You know, if commodity prices go higher, then we'll expect to see well costs, you know, do the same. And likewise, we'll see a gap down, then something's got to give there.

[Adam Dirlam, President at Northern Oil and Gas]

I think as we manage all of this volatility, we're gonna stay conservative, especially as we're going into 2024 planning.

[John Abbott, VP, E&P Research at Bank of America]

Appreciate it. Then for our follow-up question, I think this is for you there, Chad, is just, you know, with the acquisition, with the deals that you've done, how do you see the trajectory of cash taxes over a multi-year basis at this period of time for Northern?

[Chad Allen, CFO at Northern Oil and Gas]

Yeah, I talked a little bit about it on the last call, addressed it on my prepared remarks. I mean, it hasn't really moved. We contemplated Novo in that, in that last year. We kinda knew what we had. So, you know, I think it's still a 2024 item. It's gonna be to a lesser extent in 2024, and then obviously it's gonna be a bit more fully loaded in 2025 and beyond.

[John Abbott, VP, E&P Research at Bank of America]

All right. Very, very helpful. Thank you.

[Adam Dirlam, President at Northern Oil and Gas]

Thanks, John.

[Operator]

Ladies and gentlemen, I apologize for the technical difficulty. We will move on to our next question, which comes from the line of Paul Diamond with Citi. Please proceed with your question.

[Paul Diamond, VP, Equity Research Analyst at Citi]

Good morning, all. Thanks for taking my call. Just a quick one from me. Talk a little bit about the shifting CapEx. I just wanted to get your kind of your idea on how that goes, how that goes forward into 2024. Should we think about this as more of a just a quickening of cadence over the course of the year, or is it something that's more there was, you know, that one-time opportunity, it's kind of brought that block forward?

[Nick O'Grady, CEO at Northern Oil and Gas]

It's a little bit of both, Paul. So, I mean, I think we saw some kind of 2024 pull forward and obviously some ad hoc capital. I think so in a sort of, in a vacuum, it's in many ways a pull forward of 2024 activity. I think we still look at 2024, and our target CapEx is sort of what we wanna target. And I think, you know, look, I think we can address 2024 without, you know, explicitly endorsing. We have not guided or anything like that. But, you know, we've looked at the 2024 ranges of consensus from sell-side analysts.

[Nick O'Grady, CEO at Northern Oil and Gas]

You know, I think it's around 111-117 thousand barrels a day equivalent, and, you know, call it around $840 million in CapEx. And I said, you know, I would say based on, you know, current pricing, et cetera, I think those are very plausible. I think the reason that we wait, you know, until the reporting year ends before we share guidance is, you know, first, I think, and foremost, and this is important to your question, is that we're return driven, not, you know, growth or production driven. So we want the time to take a look at all of the drilling proposals and projects in front of us, you know, and then look at the timing of those and everything from completions to overall costs to provide the optimal plan.

[Nick O'Grady, CEO at Northern Oil and Gas]

I do think those, those numbers are achievable, though. You know, to the extent that, you know, we produce less and spend less, obviously, we generate more cash. To the extent we spend more, we'd likely produce more, but generate less near-term cash. So, you know, we'll make allocation judgments, you know, for optimal total return, you know, whether we feel, you know, we have those projects that meet our hurdles. But I will say, you know, given the opportunities we're seeing every day, you know, it's always a balance of meeting what we say we're going to do and juxtaposing that with our fiduciary duties to grow and deliver profits.

[Nick O'Grady, CEO at Northern Oil and Gas]

So, you know, I also just as a side note, you know, one of the things that, that I always am concerned about is that, you know, we, we'll report our year-end in February, and a lot can change in the commodity market between now and then. And so I don't think we want to be in a position where we, we have to do this twice. And given how volatile it's been and given how wacky the macro has been, it's never been, you know, more important to, to, to do this once and to do it right.

[Operator]

Thank you. We'll move on to our next question, which is coming from the line of Charles Meade with Johnson Rice. Please proceed with your question.

[Charles Meade, Research Analyst, Large Cap E&P at Johnson Rice]

Good morning, Nick, Adam, and Chad, and the rest of the NOG team there. Nick, I want to go back. I'm not sure it was comments that you made or that Adam made, either in prepared comments or earlier in the Q&A. But you referenced about how, you know, interest rates are higher, and that moves the, you know, the hurdle rate up across the board. I'm curious. I've talked to some other companies who are active in the A&D market, and they have mentioned that there's a little bit of an issue between...

[Charles Meade, Research Analyst, Large Cap E&P at Johnson Rice]

or what, what they were saying, a little bit of issue in the bid-ask spread, in that, in that the ask, the ask side hasn't really or had not really adjusted for this higher interest rate environment, and, and, you know, consequently, you need to use a higher discount rate on the PDPs. And so I'm curious if you are seeing that, and, and if so, if there's any kind of movement to a resolution or any other, anything other, any other dynamics that may be surprising given the, the, the move in the risk-free rate?

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah, I mean, I don't think I've ever met anyone who didn't think their children were more beautiful than everybody else. You know, so is that a surprise to me? That the social issues around A&D are the most important and most difficult to come over, which is that, you know, we feel like we generally have a pretty good pulse of where things are going to trade for and what they're worth. But you can lead a horse to water, you can't make a drink, and we spend a lot of time banging our heads against the wall with people who have wildly unrealistic expectations.

[Nick O'Grady, CEO at Northern Oil and Gas]

You know, you've seen a flurry of M&A this year at the operated and non-operated side, but there have actually been a number of failed processes that we've seen go dormant just because people had completely ridiculous assumptions of what their assets were worth. And so that is the thing we have to navigate. And honestly, a lot of times on the front end, we'll decide or not decide to participate in something because of the counterparty and whether we think they're a realistic seller. I mean, look, really good assets are going to still sell for, you know, good prices, and weaker assets are going to get weaker prices. But I think, I don't know, that's the art of the deal.

[Adam Dirlam, President at Northern Oil and Gas]

Different day, same stuff, right?

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah.

[Adam Dirlam, President at Northern Oil and Gas]

I mean, I think we try to be as transparent as we can in order to, you know, educate, you know, our counterparties as to where we're coming from. You know, maybe that's a way that you can help bridge some of that bid-ask spread in terms of kind of the overall expectations that Nick alluded to. But, yeah, that works.

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah, I mean, yeah.

[Adam Dirlam, President at Northern Oil and Gas]

30%, 10% of the time.

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah, I mean, I 60% of the time, every time. Yeah. I'd be remiss if I didn't do a movie quote or something. So, you know, I'm always reminded of the movie Trading Places, and he's trying to pawn his watch, and he says, "Well, in Philadelphia, it's worth $50." And so we deal with that every day.

[Operator]

Thank you. Our next question is coming from the line of Donovan Schafer with Northland Capital Markets. Please proceed with your question.

[Donovan Schafer, Managing Director, Senior Analyst at Northland Capital Markets]

Hey, guys. Thanks for taking the questions. I want to start off with the ground game. So, you know, it seems like you see, you know, simultaneously a lot of opportunity there, while also not a lot of competition. So it sets, you know, kind of the economics and opportunities up really attractively, while at the same time, like what you've talked about with, you know, larger, you know, kind of more of a lull in larger package deals, and, you know, some of those bid-ask spread stuff on larger probably M&A. So I'm curious, like... So my understanding is, maybe what's going on with the ground game is it's like, you know, people get an AFE, and they've got to make a decision quickly.

[Donovan Schafer, Managing Director, Senior Analyst at Northland Capital Markets]

And if it's an operator or someone with a lot of kind of different irons in the fire and a limited, you know, budget they planned for this year, if there's an acceleration in activity, then they're not ready to pull the trigger on all those AFEs or consent to them. And so it kind of becomes almost like a scramble. And so maybe there's more of this scramble that's relevant to, like, the ground game, kind of AFE market, and then people dealing with limited budgets. You know, maybe some of that runs up against ESG stuff, where less capital flow, you know, is maybe not as quick to respond to better commodity prices and all that.

[Donovan Schafer, Managing Director, Senior Analyst at Northland Capital Markets]

So that's kind of my understanding of what. So just can you confirm, like, is that what you're seeing, and that's kind of what is happening with the ground game? Or are there other dynamics that are making it so particularly strong right now?

[Adam Dirlam, President at Northern Oil and Gas]

I think directionally, you've got one of the themes there, right? You've got operators that have shareholder return requirements, dividends, buybacks. They want to drill their own wells, whatever it might be... And then, you know, they've got their own set budget, and different operators handle their non-op, you know, in different ways. And some of those folks are packaging it up and selling it. Some of them are, you know, selling them the well proposals as they get them. And then you've got other operators in order to manage everything, you know, what I kind of alluded to on the second quarter call, where they've got maybe two obligation wells, but it makes more sense to do cube development, and they wanna drill six. Well, how do you manage your capital there?

[Adam Dirlam, President at Northern Oil and Gas]

You go find a non-op partner, sell down your interest, you know, get a carrier or whatever, a promoter, whatever it might be, and you drill, you know, additional wells in that regard. And so I think that's definitely a theme that we've seen. I don't know that it's necessarily changed in the short term. We've seen that, you know, forever. I'd also add, on the competition side of things, there's definitely competition. It's just what level of competition are you dealing with, at what size, you know, of transactions? And that goes back to the comments that we made earlier on the concentration, number of wells, you know, average working interests, all of that good stuff. And so, you've got a handful of different dynamics that are, you know, playing.

[Adam Dirlam, President at Northern Oil and Gas]

You've also got, you know, what funds are coming into the year. You know, gangbusters generally were not nearly as successful on the ground game on, you know, front end of the year, where everybody's kind of flush with you know, cash, and they've got their budget set, and they want to deploy it. And then by the end of the year, everybody's kind of shot their bullets. But the AFEs and the drilling rigs don't come, and you've seen, you know, some of that, you know, in our Q3 reporting here. So it ebbs and flows, right? And it's gonna be the same thing with, you know, commodity pricing. I think it's almost comical when we see oil rip north of $90-$95 a barrel.

[Adam Dirlam, President at Northern Oil and Gas]

Our competition, we're getting outbid 2-3 times, and then as soon as everything pulls back, you know, everybody starts running for the hills. But it's just a function of the market. Some things can be explained, some things can't.

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah. I mean, I think the, the third quarter success on the ground, Donovan, is really predicated on the second quarter weakness in oil prices. So the bulk of those transactions were being worked on in the second quarter and, and likely closed in early third quarter. And you really see the whites of the eyes of people when crude is $60 or, you know, in the 60s or low 70s, in today's cost environment, and that's when we tend to be the most successful. And then conversely, to Adam's point, you know, a month ago, with, you know, crude in the 90s, we're, we're shaking our heads at, at where we see things transact, and, and that's just the way it goes.

[Operator]

Thank you. Our next question is coming from the line of Charles Meade with Johnson Rice. Please proceed with your question.

[Charles Meade, Research Analyst, Large Cap E&P at Johnson Rice]

Nick, apparently, I had a copyright infringement by quoting Trading Places, and the operator cut me off, so sorry for that. Hey, the follow-up question I wanted to ask was, you... I think Adam mentioned in you talking about the A&D opportunities. I think you said that some things surprised you of what you're seeing coming out of Appalachia, and especially in light of you guys have been really active in the Permian in the last, call it, 12 or 18 months. But what is surprising about what you're seeing in Appalachia now? And is that kind of maybe moving back into focus for you guys?

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah, I mean, I don't think it ever went out of focus. I think last year, you know, we bought the asset, and gas basically ripped from day one, which made it more challenging, and, you know, when, especially gas, which is even, you know, frankly, more volatile than oil, more cyclical. You know, buying. You know, we looked at a handful of things last year and just could never get comfortable that buying stuff in a $6 environment was a good idea. But, like, the fact is, it's been bad for the bulk of this year, and suddenly, dollars start to become a lot more precious to those counterparties, and it's shaken loose some activity. And there are a lot of exciting things out there.

[Nick O'Grady, CEO at Northern Oil and Gas]

There are also a lot of sort of special situations there where, you know, some of the more creative structures that we've done in recent times can be very appealing to groups that may, you know, may not wanna sell themselves entirely and things like that. But I do think we have to be naturally more structured in Appalachia. The land structure of Pennsylvania, in particular, is very different than in, say, New Mexico or North Dakota. So it does, quote, "narrow the field" in terms of how we structure these things.

[Nick O'Grady, CEO at Northern Oil and Gas]

But I think at the end of the day, when it comes to non-operated interests, you know, many operators may want to control all of that, but then when they're bleeding money, suddenly, those interests become a real thorn in their side, and they need a source of capital. So I think we've been reviewing, I think every, you know, everything under the sun in terms of structure there, but I think we're probably a little bit more optimistic, and I think we take it each day, so don't... You know, take it with a grain of salt, but that we can find ways to grow that position over time.

[Adam Dirlam, President at Northern Oil and Gas]

Yeah, I think there was interest last year, but going back to the whole bid-ask spread, right? I mean, volatility is gonna widen that significantly from a seller's viewpoint and a buyer's, and so you've kind of had things settle down a little bit, and so there's maybe a little bit of a backlog. And so now I think we're having, you know, some additional conversations with counterparties, where it really didn't even make sense to have those conversations in the past periods.

[Nick O'Grady, CEO at Northern Oil and Gas]

Yeah. I think we want things that, you know, if gas goes back to $2, $2.50, still work. I mean, it doesn't have to be pretty, but they'll, they'll work. And a lot of assets that tend to come for sale when gas is $6 look great, but, you know, there's the undeveloped has no value in an environment like this. I think that's been honestly the challenge in the Haynesville. It's an amazing play, but, ultimately, you want to be in an environment where you can have some confidence in the outlook. And I think, you know, the strip certainly gives you that confidence, but the, the spot price has not. I mean, obviously, it's been a little bit stronger of late, but I think that should, you know, get you there, if that makes sense.

[Charles Meade, Research Analyst, Large Cap E&P at Johnson Rice]

Got it. I appreciate the added detail. Thanks, guys.

[Adam Dirlam, President at Northern Oil and Gas]

Yeah.

[Operator]

Thank you. Ladies and gentlemen, that concludes our question and answer session. I would like to pass the floor back over to Nick O'Grady for concluding remarks.

[Nick O'Grady, CEO at Northern Oil and Gas]

Thank you again for joining us today. We appreciate your continued support and look forward to touching base with you in the coming days and weeks. This is the way.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. If you would like to access the digital replay for today's call, please dial 877-660-6853 or 201-612-7415 and enter access ID 13741092. Once again, this concludes today's teleconference. We thank you for your participation, and you may disconnect at this time.

Participants

Executives

• Adam Dirlam, President
• Chad Allen, CFO
• Evelyn Infurna, Vice President of Investor Relations
• Nick O'Grady, CEO

Analysts

• Charles Meade, Research Analyst, Large Cap E&P at Johnson Rice
• Donovan Schafer, Managing Director, Senior Analyst at Northland Capital Markets
• John Abbott, VP, E&P Research at Bank of America
• Neal Dingmann, Managing Director, Energy Research at Truist Securities
• Paul Diamond, VP, Equity Research Analyst at Citi
• Scott Hanold, Managing Director, Senior Energy Analyst at RBC Capital Markets