Northern Oil and Gas Inc (NOG) 2016 Q3 法說會逐字稿

Good day, everyone and welcome to Northern Oil and Gas, Incorporated's third-quarter 2016 earnings results conference call. This call is being recorded. With us today from the Company is Tom Stoelk and Brandon Elliott. At this time, I will turn the call over to Brandon. Please go ahead, sir.

Thanks, Shannon. Good morning, everyone. This is Brandon Elliott. We are happy to welcome you to Northern's third-quarter 2016 earnings call. I will read our Safe Harbor language and then turn the call over to Tom Stoelk for his opening comments and discussion of the financial results for the quarter.

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 these forward-looking statements. Those risks, including 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 this conference call, we will also make references to certain non-GAAP financial measures, including adjusted net income and adjusted EBITDA. Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued last night.

With the disclosures out of the way, I will turn the call over to Tom.

Thanks, Brandon. Good morning and thank you for joining the call today. I'd like to begin the call with a few operational and financial comments to provide some color as you review our earnings statement and then get to your questions.

Production averaged 13,442 BOEs per day in the third quarter despite the fact that, during the quarter, we had some of our best producing wells shut in to frac protect them while completion activities occurred on adjacent locations. The loss from these shut-ins was actually offset by the improvements in well productivity we are seeing on many of our newer locations. The good news is is that these shut-in wells, a number of them and a number of the newly adjacent wells for the most part were placed into production in October, which will help our fourth-quarter production. We estimate the shut-in production lowered our third-quarter production by approximately 600 BOE per day. Despite the impact of the shut-ins, we are maintaining our 5 million BOE total production forecast for 2016.

Drilling activity in the basin remains moderate with North Dakota rig count at 34. Our current inventory of wells in process at the end of the quarter was approximately 9.4 net wells. We elected to a majority of the well proposals we received in the third quarter. The higher consent rate is representative of the fact that most drilling activity is occurring in the core of the play. In addition, strong improvements in well productivity combined with lower development cost per well are increasing internal rates of return at existing commodity prices.

In our most recent investor presentation that's available on our website, the slide titled Focusing on the Core does a nice job of presenting our core focus area. As this slide denotes, we believe we have over a ten-year inventory of drilling locations within the focus area that will generate strong returns in the current commodity price environment. We believe we are well-positioned to grow via completions and new drilling activity as commodity prices improve due to our high-quality acreage and drilling inventory in the core of the play.

I mentioned earlier the improvements of well productivity that we are seeing. Those improvements are largely due to the widespread adoption of enhanced completion techniques by the operators of our wells. Our mix of higher-intensity completion as a percentage of total number of completions has ranged between 80% to 90% during each quarter of 2016. Our enhanced completion wells drilled and placed into production during 2015 are tracking at 800,000 BOE EUR type curve and the early results for the enhanced completion wells drilled and completed in 2016 are tracking a 900,000 BOE EUR type curve. So obviously, we are really pleased with those results. We believe it is representative of the quality of our acreage over a broad area and the performance of wells using enhanced completion techniques.

Let me turn to capital spending where we have been living within our cash flow. Our third-quarter CapEx came in at $15.8 million, which brings year-to-date capital spending to $50.4 million or a 52% year-over-year reduction. Our improved well performance is being complemented by a decrease in the average AFE cost per well, which has declined to an average of $7.1 million per net well for our 2016 year-to-date elections. Our continued focus on a return-based capital allocation process allows us significant flexibility as it relates to our capital expenditures. This non-operated capital allocation advantage has allowed us to adapt quickly to changing conditions so we can protect our balance sheet and maintain adequate liquidity. We believe this advantage will benefit our shareholders through this and future commodity cycles as we continue to consent only to those wells that we expect to generate an appropriate rate of return in the current commodity price environment.

Since the beginning of the year, our discretionary cash flow has exceeded CapEx spending and allowed us to reduce the amount of borrowings outstanding under our revolving credit facility to $120 million as of September 30, 2016. As noted in our earnings release, we recently completed our semiannual borrowing base redetermination for this credit facility and with over $200 million of borrowing base availability, we remain confident that we have sufficient liquidity to execute on our development plans and pursue accretive acquisition opportunities.

Touching briefly on acquisition opportunities, I would mention that we recently closed an $8.9 million property acquisition in late October that is expected to add approximately 350 to 380 BOE of daily production subsequent to its closing. The acquisition was comprised mainly of producing properties and also included approximately 1,650 net acres located principally in McKenzie and Williams counties. We continue to see accretive transactions that provide enhancement opportunities for our operating base.

On the hedging front, we continue to protect our future cash flows from downside risk due to lower oil prices. We have certainly seen the impact that hedges can make in protecting cash flows both in 2015 as well as the first nine months of 2016. We currently have a total of 450,000 barrels hedged with swaps at an average price of $65 in the fourth quarter of 2016; 900,000 barrels hedged with swaps at an average price of $50.78 per barrel in the first half of 2017; and 900,000 barrels hedged with swaps at an average price of $53.04 in the second half of 2017. So we've increased our hedging levels by approximately 1.1 million barrels since the second-quarter earnings release. We will continue to look for opportunities to layer in hedges for 2017 and may begin to layer in hedges for 2018 as well.

Settled derivatives for the third quarter of 2016 increased our realized price by $7.30 per BOE for the quarter. Crude differentials were $7.68 per barrel below the average NYMEX price for the third quarter and $8.47 per barrel below the average NYMEX price for the first nine months of 2016. So, generally, they were consistent with our guidance.

With significant pipeline capacity additions planned for late this year and early next year, we continue to believe that Bakken differentials will remain in the $8 to $10 range for the rest of the year with the potential for further improvements in 2017.

LOE for the third quarter came in at $8.83 per BOE, which was essentially flat with last quarter and on a year-to-date basis is $9.09 per BOE. During this quarter, we saw a more normalized level of workover activity. We believe our LOE per BOE will remain within the range of $8.75 to $9.25 per BOE.

General and administrative expense was $2.1 million for the third quarter of 2016 and that compares to $4.6 million for the third quarter of 2015. The reduction of general and administrative expenses for the third quarter of 2016 was driven by a $2.2 million reduction in compensation expense due in large part to the reversal of $1.8 million of non-cash compensation in connection with the termination of employment of the Company's former Chief Executive Officer in the third quarter of 2016.

Cash, general and administrative expense in the third quarter of 2016 amounted to $2.8 million, which decreased 19% as compared to the same period last year, and on a year-to-date basis, cash G&A in 2016 is down 13% compared to the first nine months of 2015. We currently believe our fourth-quarter 2016 total general and administrative expenses will range between $3.50 and $4 per BOE.

On the strategic front, we announced in August that we are evaluating alternatives and while we won't comment on that in much detail, I did want to discuss one area where we spent a fair amount of time evaluating our options, which is our balance sheet and debt levels. In the right scenario, we would be interested in reducing debt and interest expense and so we've had discussions with some of the larger holders of our senior notes and we've evaluated structures similar to what you've seen in the market where we might swap some of our existing unsecured senior notes, ideally at a discount, for a combination of new secured notes and equity and in that way reduce our total debt and interest expense. We certainly won't rule anything out, but given where things are right now, I think it's unlikely that we will do a significant exchange like this in the very near term.

There are a few reasons for that. For one, our existing senior notes have been trading at relatively high levels, generally in the high 70s, so there isn't much discount to capture in terms of debt reduction and couple that with the fact that we don't have any near-term debt maturities, the fact that we've been drilling within cash flow and actually reduced our credit facility balance by $30 million this year, that's left us with really good availability on our borrowing base and all in together puts us in a pretty envious position to be able to stay the course and not have our hand forced on anything. So I'm certainly not ruling that out, or any other moves to strengthen our balance sheet, but we still feel good about where we are today.

In concluding my comments, I would like to point out that our asset base is substantially held by production and as a non-operator, Northern has extensive control over its capital spending because we have the ability to elect to participate on a well-by-well basis. We continue to protect the value of our assets and potential long-term growth of this Company by analyzing day in and day out the allocation of our capital.

We continue to see a steady flow of inbound investment opportunities and, with higher oil prices, may begin to see incremental increases in activity. Most importantly, the development activity we are seeing is dominated by wells located in the core of the play that are being complemented by enhanced completions. The increases we are seeing in well productivity and EURs give us confidence that we will end the year on a strong note. By maintaining capital discipline and protecting our liquidity, we are navigating this low-price environment and at the same time preparing ourselves for future opportunities and value creation.

All right. At this time, we will turn the call over to the operator for Q&A. Shannon, if you could please give the instructions for the question-and-answer period.

Thank you. (Operator Instructions). Neal Dingmann, SunTrust.

Good morning guys. Maybe just an overall operating question. You've got a lot of good slides out today; I'm particularly looking at slides 6 and 7. We've heard a lot of the Bakken operators talk about the improved efficiency and cost improvement that you spoke of. Given those things that we've seen, I know you don't have a full 2017 plan out, but based on now the improvement that we are certainly seeing, especially in the Bakken, will that change your thought about maybe going more on the offensive, or is it still about protecting the balance sheet, staying within cash flow? I'm just wondering again how these efficiencies and costs will play into that.

The Board actually meets in December, so we will finalize our CapEx at that time. So we don't have any guidance for CapEx going forward. But, to your point, it's going to be awfully price-sensitive. If prices get into the low to mid-$50s, you will probably see us get maybe a little bit more aggressive on the number of well completions. If they stay sub-$50, I think you are going to see us stay the course and basically drill within cash flow trying to maintain a fairly flattish production profile.

And then just lastly, Tom, are you being approached continually still by a lot of the operators as far as trying to partner with them? Obviously, you all have still a great reputation with a lot of the operators, the private like Slawson, all the way to the larger public operators. Is that just continuing every day or --?

Actually, you state it very well. It really hasn't changed effectively. We've been more aggressive I think in the last couple of quarters looking at the other non-operated interests in the wells that we are in and have solicited them for the ability to buy their interests. And some of them are interested. We've done that over time and we're getting a lot of callbacks, so I think, to your point, it still continues on and we are trying to use the advantage of being in so many wells across the basin to try to take advantage of that as we allocate capital.

Lastly, Tom, are you able to -- I don't hear too much about when you all and others speak about minerals -- are they just not available in the Bakken because that acreage has been around so long, are you able to pick up any minerals along with the leases?

Most of them are held by production, but what we are doing is being opportunistic within that core focus area. And I commented on that within the script and we continually try to mine those opportunities there. They are generally very, very small acreage acquisitions, but they represent really good opportunities. So not a tremendous amount of capital because there's not a tremendous amount of opportunities, but the opportunities that we believe are there and continue to be there are these smaller acreage, which is kind of in the middle of our fairway.

Great details. Thanks, Tom.

(Operator Instructions). Owen Douglas, Baird.

Good morning, guys. Thanks for taking the question here. Just wanted to get a little bit more granularity if I could. So when you talk about this development plan and pacing, I guess I don't really know what the near-term target is. Are you guys thinking more in the mode of trying to hold production flat, or is there some sort of a growth objective in the near term?

Yes, I think in a low-price environment, you will likely see us stay the course where we are at, which is approximately about 10 wells per year. With an uptick in prices, you might see us get a little more moderately aggressive with it, but we are going to be mindful of our liquidity. Where we are at now, we try to maintain more of a flattish production profile. If you remember year-over-year, we will be down about 15%, but drilling at about a 12-well level of activity we believe we can keep that flattish to maybe softly slightly up.

Okay. That's helpful. And that's relative to 2016 levels when you talk about the flattish to modestly up?

Correct. Yes, compared to where we expect to end this year.

Okay. That's very helpful there. And then also just wanted to get a little insight into the borrowing base redetermination process. Can you give a sense for whether or not your lenders were looking at your existing acreage position and wells and giving you guys credit for some of the development improvements?

No, I would say that most of it was just PDP-focused, a little bit PDNP. Very little if any credit and some banks honestly just didn't give us any credit for the PUD locations. So mostly PDP.

Okay. I see. And as far as thinking about your undeveloped acreage there, do you guys have any plans on -- or have you guys given any thought to strategies to accelerate the monetization of some of that?

As a non-operator, we really don't have the ability to direct the drilling and things like that, so we just continue to mine the opportunities. We are about 83% held by production, so we really don't have a lot of expiration risk with respect to our acreage and we will just continue to mine the opportunities that come in. Again, I would emphasize it's really return-based. As a non-operator, we obviously have a lot of flexibility over the capital that we can allocate.

Owen, I think one of the opportunities that we continue and have been -- it's the ground game of Northern -- is looking for additional working interest in units and wells that we are already in. So that's one version I guess of accelerating drilling is the ability to pick up additional working interest in wells and acreage that obviously have AFEs in motion. So I guess that's the non-op version of increased activity levels.

Yes, when we see an opportunity on a wellbore, we are always asking about picking up the incremental acreage with respect to it and you do see those opportunities when you have an operator maybe AFE 16-well pad, or a number of non-operators that's too big of a bite for them. They are looking to lay off a portion of their interest; don't want to get out of the well totally. But it's those type of opportunities that we try to capitalize on.

Okay. Helpful there. And if I could, I'm not sure if I missed this earlier, but can you guys share some of the color -- I know in the past has been shared about the number of AFEs that have come your way versus consents. Any sort of color as to what sort of opportunities you guys are seeing from your development partners.

We are about 66% consent rate year-to-date. That's fairly consistent with what we saw in the quarter. I think the activity level this quarter with the elections compared to prior quarters, fairly consistent on election rate and number. So fairly steady in October, much higher consent rate there. Almost everything in the door because it was all really core McKenzie, Mountrail-focused for us. So fairly consistent.

Okay. And I've got to ask this one, but as far as thinking about getting your interest down, I think you guys are about $60 million give or take running at for a year. What sort of a cut do you think you need in order to have this balance sheet in the shape that you think is required?

Well, I'm not going to give you a total answer on that, but we are aware of our debt levels and really keenly focused on it. One of the opportunities for us is -- I don't think there's one solution for us. It's going to be some debt reduction, but there might be other solutions out there with respect of incremental acquisition of properties and things like that that create cash flow and generate additional EBITDA. So I can't really give you a number of a dollar amount of debt reduction, but I can tell you, as part of our process, we are keenly aware of it. We are focused on it and I guess with the lack of no near-term maturities and the hedging levels that we are at, the liquidity that we are at, we clearly have time to address it without a situation where our hand is being forced. And I guess that would be my comment to you.

Owen, I know you know it, but just to reemphasize it, obviously, debt covenant changes that we got, the prior redetermination, we think gives us very good room on those issues as well. I know you know that.

Right. I guess it was less of a balance sheet question per se than thinking about, well, you are paying $1 a share of EPS just in terms of interest there, so what kind of level do you think you need to try to have this Company better capitalized?

Well, certainly, I would like to see the debt levels reduced and it depends on a number of factors. It's going to depend on commodity prices as well. It's going to depend on differentials in that. It wouldn't hurt us to have a couple hundred million dollars of lower indebtedness clearly, but outside of that, that's about all I'm willing to comment on.

Okay. Well, appreciate the time.

Peter Kissel, Howard Weil.

Thanks for taking my questions. Quick question for you. I know you've mentioned acquiring additional working interest in wells and you made the recent acquisition here as well, but what about going the other way and using some of your production as a source of funds? In the whole context of strategic alternatives, is that something you are viewing as well to ultimately reduce debt?

Everything is basically on the table with respect to alternatives and it's something that, Peter, we are taking a look at. We made some small divestitures incrementally where I think we've divested just under about two net wells, 1.8 net wells and they are usually specific opportunities with an operator looking to acquire additional interest. We might not have the same view on what the upside is with respect to it and choose to sell something, but it's traditionally lower and probably doesn't move the needle a whole lot.

We are looking at some opportunities in some of our non-core areas and are constantly getting inbound calls with interest, which actually this quarter has picked up I think. The inbound on are you interested in selling wellbore. So it is something we focus on. I think the point I would tell you is that when you look at our focus area and the value there with over 10-year inventory there, that's an area that I think would be very difficult for us to really get rid of because that's the core of our asset base. It's where most of our, at least in this price environment, opportunities exist. We've got about, I think, 154 or so properties that are economic at existing strip prices, so we are going to hang onto those and continue to look around. But to your point, it's certainly an alternative. It's certainly something that we continue to evaluate.

And obviously, Pete, you mentioned the acquisition. With that kind of acquisition potential, a small deal, yes, but I think if you look at what we paid, either on a BOE per day or even with zero on the acreage or even lower BOE per day when you put some acreage value on it, that's a great little ground game Northern acquisition and I think the patience that we've displayed through the downturn I think is going to bode well for us on some of these little deals on a go-forward basis.

Okay. Got you. And I am assuming in an ideal world, you could sell some of your non-core acreage that doesn't have any cash flow on it, but that market is probably a little bit tougher, but I'm assuming you are looking at that as well.

Yes. I think that market is an awful lot tougher, but, yes, we are looking at it.

Okay. All right. And then maybe just one clarification on -- I think it was, Brandon, on one of your last answers -- just to reiterate, for your debt covenants, you are comfortable as it stands right now and you don't see any issues in the near future?

Yes, let me step on that one. Yes, we are in compliance and really with our projections are in really good shape. The interest coverage covenant is the only one that really ever gets close and that doesn't spring back until June 30 of 2018 and the current facility matures on September 30 of 2018. So good shape there and don't think we are going to have a covenant issue period.

Great. Much appreciate it. Thank you.

Sean Sneeden, Oppenheimer.

Thanks for taking the questions. Tom, I think maybe for you. You started I think to indicate that some of your 2016 vintage wells had been trending towards a 600,000 BOE type curve and as you are more than aware, some of these larger operators are talking about some pretty impressive large completions with call it 1.5 million type of type curves. Have you guys participated in any of those yet, or are they in any of your inventory at all?

Yes, we have. You've seen some color from Whiting with respect to the role of Federal wells. We are in that. The Carscallen well we were in. Abraxas came out with a release yesterday with a well and the Barangas well we are in. And one thing just to clarify, it was a 900,000, not 600,000 BOE. I'm sure that's what you meant.

Yes, sorry. Yes. I think that's helpful and good to know. I guess, secondly, differentials have obviously continued to come down pretty nicely as we've come along here in 2016. How should we be thinking about that going forward for you guys? Are you seeing market improvement? I know you tend to have that flow through on the OpEx side.

Yes, I think we are fairly conservative with our fourth quarter to be honest with you. 8 to 10 is where we are pegging it for the fourth quarter with additional capacity expansions that are on the board planned that come on late 2016 or more probably into 2017. I think that's going to be helpful with respect to actually reducing it. It's hard to pick a number to be honest with you. I would think it's going to stay the course as to where it's at through the quarter would be my best guess and you may see it step down $1 or $2 in 2017, probably more second half than first half because of the timing of completion of expanded capacity coming online.

Okay. That's helpful. And maybe just lastly on the balance sheet. I know you talked about having some discussions in the past with some bondholders on potential second lien and equity type of exchange, but you seem to mention that current prices aren't very attractive in the mid-to high-$70s. I guess in order of magnitude perspective, what would you need to see to reengage folks again? Are we talking about $60s or do you really need something more like $50s in your mind to make things really interesting?

Yes, I'm not sure we have a particular number in mind with respect to it. I guess our point in the scripted comments was that you've seen those trade up and in the discussions that we've had, I think the holders probably look at it and say, boy, you've got excellent liquidity; you have no near-term maturities. They have different price expectations, like everybody does with respect to it. So I won't speak for them, but my impression is is they are not overly concerned with recoverability with respect to their holdings.

And so I think, one, you would need to see a discount or the ability -- at the same time, you've seen our equity trade down. I think obviously -- I'm biased -- I think it's been way overdone, but I think you are going to need to see a little bit of recovery where your common is a little bit better currency and because you're -- we have a fiduciary responsibility to our common shareholders not to overdo it.

So it isn't attractive enough based on the discussions we've had. We will continue to have those discussions likely and see if we can't get to somewhere -- because, as I mentioned in one of the other answers was we are keenly aware of it and we are focused on it and although we don't work on it day in day out, we work on it week and week out certainly. So we are really focused on it.

Okay. That makes sense. Thanks for the color, guys.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Brandon Elliott for closing remarks.

All right, thanks, everybody, for your participation and your interest in Northern. Shannon will give you the replay information and we look forward to answering any follow-up questions that you guys have or seeing you out on the road. We appreciate everybody's interest. Everybody have a good day.

Ladies and gentlemen, as a reminder, a replay of this call will be available today, November 9, 2016, at 2:00 PM Eastern standard time until 11:59 PM Eastern standard time November 16, 2016. The dial-in numbers are 1-855-859-2056 or 1-404-537-3406 for international callers. The passcode is 4937592. Thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.