Northern Oil and Gas, Inc. (NYSE:NOG) Q4 2023 Earnings Call Transcript
Northern Oil and Gas, Inc. (NYSE:NOG) Q4 2023 Earnings Call Transcript February 23, 2024
Northern Oil and Gas, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the NOG's Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time all participants are in listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] 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 may begin.
Evelyn Infurna : Good morning. Welcome to NOG's fourth quarter and year end 2023 earnings conference call. Yesterday after the close, we released our financial results for the fourth quarter and full year. You can access our earnings release and presentation on our Investor Relations website at noginc.com. Our Form 10-K will be filed with the SEC within the next several days. I'm joined this morning by our Chief Executive Officer, Nick O'Grady; our President, Adam Dirlam, our Chief Financial Officer Chad Allen and our Chief Technical Officer, Jim Evans. Our agenda for today's call is as follows. Nick will provide his remarks on the quarter and our recent accomplishments, then Adam will give you an overview of operations and business development activities, and Chad will review our financial results and walk through our 2024 guidance.
After our prepared remarks, the team will be available to answer any questions. But before we begin, let me go over 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've described in our earnings release as well as 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 that 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. I'll get right to it with four key points to start the year. Number one, scoreboard, execution delivering growth and profits. On our second quarter call, I spoke about the importance of delivering growth in profitability year-over-year. I'd like to use that framework today to put the results from the fourth quarter into context. Our fourth quarter adjusted EBITDA was up 52% year-over-year, and our quarterly cash flow from operations excluding working capital was up 55% year-over-year. Over the same period, our weighted average fully diluted share count was up about 17% significantly less reflecting the impact from our October offering, but not the impact of our fourth quarter bolt-on deals.
We achieved outsized growth in profits despite a more challenging commodity backdrop than the prior year. Oil prices were down over 5% and natural gas prices were down 52% versus the prior period a year ago. Even more impressive is the fact that our LQA debt ratio was 1.1 times this quarter down about 17% versus the prior year. So in summary, our leverage was down, our per share profits up markedly even as commodity prices were down. The point I continue to make is that our company is focused on the same simple philosophy, finding ways to grow profits per share through cycle and overtime for our investors. We believe that is the path to driving sustainable share price outperformance. While oil and gas prices go through down periods that can and will affect our profits.
Again, it is our job to find ways to grow the business through such times. The scoreboard we share with you is something that keeps us honest, being a cyclical business does not afford us a perfectly linear path and we will have our ups and downs. But we are actively investing hedging and looking to drive consistent long-term growth to profits and cash returns. This has and will drive dividend growth and share performance. I'm pleased to say as Chad will highlight in a bit that our guidance for 2024 reflects 20% production growth on a budget that is very similar to last year's look across the upstream sector and you'll find very few companies offering that. Once again, we stand out and I believe we have a lot more levers to pull, which brings me to my next point.
Number two, be greedy when others are fearful. The fourth quarter was ground game one on one, highlighted by what happens when people run out of money. We saw operators pull forward activity even as budgets were exhausted. We chose to turn the ship directly into the storm and take on some of the best returning small scale acquisitions we've seen in some time. And these should help capital efficiency as we head into 2024 and beyond. We are diligently chipping away one opportunity at a time, and Adam and his team continue to innovate with creative structures of every kind to solve for our operators' needs. This does mean we will spend money counter-cyclically at times. But spending money is what provides longer term growth opportunities for our investors, growth isn't free.
And as a non-operator, sometimes our capital commitments will accelerate and come sooner. And the timing of our projects can vary somewhat, as we saw in the fourth quarter, but it doesn't change the soundness of these investment decisions. As we track well performance through our loopback analysis and review our return parameters internally, we continue to see excellent results across the board. Number three shareholder returns. I typically leave this category for last, but I'm going to address it sooner this quarter, particularly as I've observed weaker relative and absolute performance for our equity out of the gate for the start of this year. We talked a lot of energy about dynamic capital allocation, and we get asked about share repurchases and where they rank in the stacks.
As I've said before, and I'll say again, we try to seize on opportunities and allocate capital accordingly. Our valuation has compressed in recent months. So in 2024, our stock may well be front and center in our capital allocation stacks. We don't buy back stock with reckless abandon only one flush with cash and when times are good, and when our valuation is high. Instead, stock repurchases legitimately compete as a use of capital to maximize the long term returns on the capital we employ, which by nature means focusing on the point of entry and being discerning on when we do so. You've seen us be aggressive and repurchasing equity during times of value compression, like in early 2022. We tried to allocate capital efficiently and seize on the opportunity when the time is right.
From this vantage point, it certainly seems as though this is the moment when the macro outlook has been more influx, and commodities have been more range bound and volatile, and our own value has compressed. If the market gives us lemons for the first time in a while, we're more than happy to make some lemonade. Number four, I have not yet begun to fight. Sailor John Paul Jones immortalized that defined phrase during the American Revolutionary War, when asked to surrender by the British and the naval battle. My use of it here is meant to convey that while our team has grown our business tremendously over the past six years, you'd be mistaken if you think our growth story is over. Far from it. We've worked hard to claim the mantle of the non-operating partner of choice.
Given the opportunities and landscape in front of us, I believe we can with thoughtful execution, double the size of our company again, if not more over the next five years. And this time, I believe we can do it more creatively. It's an enormous goal, and will pose a tremendous challenge. But I believe the opportunity is there for the taking. We will stay humble to our roots as a small company. But we had great ambition to grow the business to the benefit of our stakeholders. And our board has incentivized this and aligned us with our investors to do so for the long term and to do it the right way. And done right it will add tremendous per share value row dividend significantly and drive market outperformance all while continuing to lower the business risk.
It would be stating the obvious to point out that it's been an active time in the M&A sphere in oil and gas of late as we've seen many mega merger transactions, as well as many private to public transactions in 2023. The fallout from these mega transactions is likely to create even more opportunity for our company overtime, providing both improved cost efficiencies on our properties, and a broad variety of potential acquisitions as combined portfolios are rationalized. We're already seeing signs of significant cost benefits on our properties from some of these mergers. While I just spoke about our dedication and focus on shareholder returns. I also want to highlight that NOG's path to grow through acquisition also remains very, very strong.
We are involved in as many if not more conversations today than at any point in my history of the company. And the quality of these counterparties is very different, as are the nature of these discussions. That is largely because our company today has become de facto the only viable entity for complex solutions for our partners that is truly upscale and commercial. We believe we built a reputation as creative problem solvers. Our balance sheet is locked and loaded with capacity for deals in 2024. While we remain selective, I have no doubt there will be a myriad of opportunities in front of us this year. But it should go without saying that our main goal is to grow our business the right way. One of the first questions we always ask ourselves when we look at an opportunity is will this make our company not just bigger, but will it make it better?
We pass on a lot of things that would certainly make us a lot bigger, but we question whether they'll make us a better company. Asset quality governance, if needed value, operatorship, inventory and commodity price resilience are all factors that go into driving these transactions. These questions have driven us to where we are today and will continue to drive us as we move forward. Adam will fill you in further on the deal front but expect an active 2024. I'll close out as I always do by thanking the NOG engineering, land, BD finance and planning teams and everyone else on board our investors and covering analysts for listening our operators and contractors for all the hard work they do in the field that actually creates what you see in NOG's results quarter-after-quarter.
We entered 2024 formatively positioned with our strongest balance sheet, the highest level of liquidity and largest size and scale since our formation. And as always, our team is ready to pounce on the opportunities to drive the best possible outcome for our investors, whether that's growth through our ground game, through our organic assets, through M&A or through share repurchases in our quest to deliver the optimal total return. That's because we're a company run by investors for investors. With that, I'll turn it over to Adam.
Adam Dirlam : Thanks, Nick. As usual, I'll kick things off with a review of operational highlights, and then turn to our business development efforts and the current M&A landscape. During the fourth quarter, we saw production increase to over 114,000 BOE per day, driven by the closing of Novo in the middle of Q3, as well as an acceleration of wells turned in line during the quarter. We turned in line 27.6 net wells evenly split between the Williston and Permian, which included roughly half the net wells in process acquired through our ground game in Q4. While well performance has been in line with expectations, we have been encouraged by the outperformance of our Mascot assets. The new wells completed since closing forge in the New Mexico results from our Novo assets.
As we navigate the rest of the winter, we expect to see a typical seasonal deferral on IPs from the Williston in the first quarter with the reacceleration in completion activity, as we move into the spring and summer. Overall, we expect a relatively balanced completion cadence in 2024, as activity is more heavily weighted towards the Permian, which accounts for about two thirds of the estimated tails. Our drilling program has remained consistent over the last three quarters as we spun an additional 20.8 net wells in Q4, with our organic acreage seeing continued focus from our operating partners. Our Permian position pulled roughly 60% of the organic net well additions, and if we include the contribution from our ground game, we saw three quarters of our activity come from the Delaware in Midland basins.
Our acquisitions over the past few years are driving growth in the Permian, as locations are converted, and we head into 2024. At the end of the year, the Permian wells in process were sitting at all time highs of 35.7 net wells, and now account for more than 50% of our total wells in process and over two thirds of our oil weighted wells in process. We expect this trend to continue as the Permian accounts for the majority of expected new drills in 2024. As our drilling program has remained consistent, so have our inbound well proposals. During the quarter we evaluated over 180 AFEs with our Williston footprint contributing over 100 proposals in every quarter of 2023. Our net well consent rate remained at over 95% in Q4. However, we continue to actively manage the portfolio by comparing what's in the market at a ground game level and what is being proposed.
For example, given the commodity market volatility, we non-consented approximately 16% of gross AFEs, which collectively accounted for just half a net well in the Williston during the quarter. As certain operators have stepped out, we have redeployed that capital into our ground game at higher expected returns. This highlights our flexibility with capital allocation and our ability to quickly react to changing environments, in contrast to operators that have to stick with their drill schedules. With that said, our acreage footprint continues to produce some of the highest quality opportunities available as our 2023, well proposals have expected rates of return north of 50% based on the current strip. Looking ahead, we have seen cost reductions come through with our operating partners, yet we remain conservative with our budgeting process for 2024.
Through 2023, well, costs were relatively flat. However, as of late, we have seen some of our larger operators coming in below their cost estimates from original well proposals. Notably, we have seen evidence from our planning sessions and recent AFEs have a potential 5% to 10% reduction in well costs related to our Mascot Novo and Forge properties. As gas prices remain under pressure, some drilling and completing resources may also be reallocated to our oily basins, where we could then expect some additional tailwinds. Shifting gears to business development and the M&A landscape, the fourth quarter kept up another banner year for NOG, both on our grounding and in larger M&A. As Nick alluded to earlier, we were able to take advantage of the dislocations we were seeing during the fourth quarter, executing on a number of short cycle grounded in acquisitions.
While competitors' budgets were running dry, we were able to step in and deploy meaningful capital consistent with our return requirements. During the quarter, roughly half of the locations we closed on were also turned in line, which will contribute to our 2024 plans and growth profile. Our small ball focus was almost entirely in the Permian during the fourth quarter in caps off a record year for our ground game, where we picked up roughly 30 net wells, and 2,500 net acres. While, we buy non-op interest day in and day out. We've also used our co-buying structures, joint development programs, and have acquired operated positions with our ground game to generate these results. During the quarter, we expanded our footprint as we signed and closed our Utica transaction.
Similar to our approach in building scale in the Permian, we've elected to walk before we run, deploying a modest amount of capital in the core of a new play under some of the top operators. Since the Utica announcement, we've been inundated with additional opportunities, and we will methodically review each of those, as we think about our footprint in Ohio and Appalachian in general. In January, we closed our previously announced non-operated package in the Delaware, where we have significant overlap with our current position and grossed up many of our working interests in New Mexico. With Newburn [ph] as the operator on 80% of the position, we've aligned ourselves with one of the most cost efficient and active private operators in the basin, which drive future growth for NOG.
The scale that we've been able to achieve over the past few years has opened doors for us that were previously unavailable. And the creative structures that we've been able to implement have created mutually beneficial outcomes with alignment for both NOG and our operators. Given the ongoing consolidation in the industry, we have been engaging in more frequent and substantial conversations with our operators. To put the landscape in perspective, there are currently $46 billion of assets that we're reviewing, both on and off market. Even more than that, we've been in discussions with some of our large independent and mid cap operators, about how we can be helpful whether they are pursuing assets or digesting recent acquisitions. As consolidation continues, we can provide capital to help rationalized combined portfolios, accelerate high quality, longer dated inventory, or facilitate debt reduction initiatives through sales to NOG.
These off-market transactions can be tailor made for both parties, and with our growth in size and liquidity can be as large or larger than any of our recent transactions. Simply put, the option to deploy capital on top tier assets is in no way slowing down for NOG. Depending on the needs and wants of the operator, the solutions could include simple non-op portfolio cleanups, joint development agreements, co-buying operated properties, minority interests carve outs of operating positions, or any combination thereof. At NOG we pride ourselves on finding win-win solutions through creativity and alignment. Our priority is not to chase growth for growth's sake, but three main returns focused over the long term and doing right by our stakeholders.
With that, I'll turn it over to Chad.
Chad Allen : Thanks, Adam. I'll start by reviewing our fourth quarter results and provide additional color on the operator update we released on February 15. Average daily production the quarter was more than 114,000 BOE per day, up 12% compared to Q3 and up 45% compared to Q4 of 2022 marking another NOG record. Oil production mix of our total volumes was lower in the quarter at 60%, driven primarily by gas outperformance. Adjusted EBITDA in the quarter was $402 million, up 52% over the same period last year, while our full year EBITDA was $1.4 billion, up 32% year-over-year. Free cash flow of approximately $104 million in the quarter was up 90% over the same period last year despite lower oil volumes, CapEx pull forward to fund accretive 2024 investments as well as commodity price volatility and widening oil differentials.
Adjusted EPS was $1.61 per diluted share. Oil realizations were wider as expected in Q4, with the increased production and other seasonal factors in the Williston driving wider overall pricing. For these differentials, particularly on the Delaware were modestly wider. Natural gas realizations were 97% of benchmark prices for the fourth quarter, a bit better than we expected, given better winter NGL prices and in season Appalachian differentials. LOE came in at $9.70 per BOE is driven by a few factors. We had highlighted in the third quarter we expected more normalized workovers in the fourth quarter after a lighter quarter in the prior period. We also incurred approximately $4 million of firm transport expense as a result of refining our accrual process based off historical data.
And with the curtailments in our Mascot project that had the effect of artificially inflated the per BOE numbers. As we reach mid-year 2024, we expect our LOE per BOE to trend down as production ramps. On the CapEx front, the investment of $260 million in drilling, development and ground getting capital the fourth quarter, with roughly two thirds allocated the Permian and one third to Williston As a result of having access to high quality opportunities, success on the ground game along with a pull forward of organic activity has shifted more investment into the fourth quarter from 2024. The pull forwarding activity is most apparent because we are seeing a 5% to 10% decline in expected spot to sales development timelines. And we with over a billion dollars of liquidity comprised of $8.2 million cash on hand, and $1.1 billion available on a revolver.
Our net debt to LQA EBITDA was 1.15 times can we expect that ratio remained relatively flat throughout 2024. I want to point out that we did build our working capital significantly in the fourth quarter and expect that trend to continue through the first quarter of the year, and then begin to ease for the rest of the year as we convert the tremendous amount of capital that is currently in the ground into revenue producing wells. We have remained discipline on the heavy front and has been adding significant oil and natural gas hedges to this year through 2026 given the increased commodity price volatility we've seen over the past several months. The oil portfolio consists of over 40% collars in 2024 maintaining material upside exposure while providing a strong floor near $70 per barrel.
With respect to shareholder returns in 2024, everything's on the table. As we've shared in the past, we adhere to a dynamic approach with the objective of achieving optimal returns for our shareholders. And while Nick alluded to potentially an active year for NOG. Those activities may include share buybacks if there's a dislocation or share price, and if returns are competitive with other alternatives we are evaluating. Turning now to our 2024 guidance, we are guiding to 115,000 to 120,000 BOE per day, with 72,000 to 73,000 barrels of oil per day. You'll see typical seasonal declines in the Williston in the first quarter, exacerbated by some fruit in January, but our production cadence will build throughout the year. We anticipate adding about 90 tills and 70 spuds reflecting the midpoint of our guidance.
After a significant build in our D&C list in 2023. The conversion of IP wells in 2024 should materially help our capital efficiency, as the D&C cadence returned to more normalized levels. This will bring some large amounts of working capital that we have drawn back on the balance sheet started in the second quarter. On the CapEx front, the 2023 pull forward lowered our 2024 CapEx from our prior internal estimates. So we are making the assumption that the pull forwards are likely to continue given the acceleration and pace of drilling that we're seeing across our core basins. Or CapEx expectations this year are in the $825 million to $900 million range. This level of CapEx will be driven by ground game success, commodity price driven activity levels throughout the year, and overall wall costs with for the time being, are forecasted to say flat despite recent evidence of savings and AFEs, particularly from our larger JV interests.
We have significant capital in the ground right now and expect our larger ventures specifically Mascot and Novo to run materially in the first half of the year. So the capital will be first half weighted around 58% to 60%. On the LOE side, our guidance is purposely wide, at $9.25 to $10 per BOE. This is due to the inclusion of our firm transport charge on a quarterly basis, as well as the anticipated rent we just discussed. We expect LOE to start on the higher side before trending down throughout the year. I believe there will be room for improvement. We want to be conservative out of the gate. And with the firm transport charges being accrued for a quarterly our LOE expense runway will be less lumpy than in the last several years. On the cash G&A front, we've seen a modest tech done an average cost per BOE driven by increased production volumes year-over-year, offset by some inflation and costs and services.
On the pricing front, given the low overall price of natural gas, we expect lower gas realizations year-over-year, even as NGL prices have thus far been better than we expected to the seasonal demand for propane used for heating in the winter months, would expect higher realizations of 85% to 90% in Q1 benefiting from winter NGL prices and differentials. However, we remain cautious based on the typical pattern for pricing as we enter the spring and summer. If we were to see material curtailments from natural gas producers to benefit the overall NYMEX price and 2024, obviously this could help guidance throughout the year. As a reminder, our Q3 reporting embeds transport costs and pricing instead of a separate GP&T line item, and the fixed costs that are absorbed like realizations go down when the absolute price is so low.
To the extent gas prices rise materially or a flat prices and NGL stick around. There's room to the upside. But for now, this is where we're starting. Thankfully, we're well ahead on the gas front, which offsets much of the weakness in the near term. On the oil front, while regarding wider on differentials to start at $4 to $4.50, we will reevaluate this in the second half of the year. Williston volume growth has widened differentials materially over the past five months versus what we've enjoyed over most of 2023 but we believe the Canadian TMX pipeline may pull away some demand from Canadian crude as it comes online in the coming months. We'll remain conservative until then, but this could lift pricing in the back half of the year. Overall Midland Cushing differentials have been solid, so on the Delaware realized deducts has slightly wider.
I'd like to touch on some other items related to guidance. Our production taxes will be tracking an estimated 50 basis points higher in 2024, given the shift in production volumes towards the Permian production taxes are generally higher than our other basins. And our DD&A rate per BOE will also be higher in 2024, reflecting over $1 billion of both on and ground game acquisitions completed in 2023. This of course does not impact free cash flow as it's a non-cash item, but it does impact EPS, and is provided to help with analysts modeling. Before I turn the call over to the operator for our Q&A session, I'd like to provide an update on cash taxes. Given the volume of acquisitions and organic growth completed in 2023, our oil and natural gas properties balance has grown by $1.9 billion year-over-year, which in turn impacts the magnitude of our tax cost to policemen deductions, which reduces our taxable income.
We're now anticipating becoming a cash taxpayer in 2025, with a potential tax expense of less than $5 million over the following two-three years, which is a significant reduction from our prior forecast. This is a material improvement for our shareholders, with potential of over $150 million of additional free cash flow over the next several years. With over 20% growth in year over year production abroad opportunities that are available in front of us. And a strong balance sheet, NOG is well positioned to execute in 2024 and beyond. With that, I'll turn the call back over to the operator for Q&A.
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