Northern Oil and Gas Inc (NOG) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Northern Oil and Gas Inc. Second Quarter 2017 Earnings Results Conference Call. This call is being recorded. With us today from the company is Northern interim Chief Executive Officer and Chief Financial Officer, Tom Stoelk; and Executive Vice President, Brandon Elliott. At this time, I would like to turn the call over to Brandon. Please go ahead.

Thank you. Good morning, everyone. This is Brandon Elliott. We are happy to welcome you to Northern's second quarter 2017 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 may discuss certain non-GAAP financial measures, including adjusted net income and adjusted EBITDA. Reconciliations of these measures to the closest GAAP measure 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 release and then get to your questions.

Production for the second quarter exceeded our expectations due to a couple of key factors. We had more net well additions than anticipated during the quarter and also have continued to see improvements in well efficiency. For the quarter, production averaged 13,794 BOE per day that was a sequential increase of approximately 4% over the first quarter. What's got us excited about the growth we're seeing is it's being driven through a combination of both improved performance from enhanced completions as well as our bread-and-butter ground game of acquiring additional well interests. During this quarter, we certainly saw the impact of improved completions from a number of our operators. One example is in Burlington's Corral Creek unit where 14 gross wells have been completed so far in 2017, with those wells tracking a 900 Mboe type curve which is a significant improvement over past wells. The improved results from Burlington and other operators were complemented by our acquisition activity, for example our acquisition of additional well interests in Oasis' Forland unit located in McKenzie County added 11 gross wells, which contributed to our production growth during this quarter.

Drilling activity in the basin has increased with approximately 58 active rigs running today. The higher activity level led to a corresponding increase in a number of well proposals or AFEs that we processed during the quarter. We participated in just over 90% of the well proposals we received during the quarter with almost all of these wells being designated for enhanced completions. Our well elections continue to be focused on the core of the play and of very high quality. We estimate that the wells we elected to participate in during the quarter had a weighted average EUR of 850 Mboe. Based on the improved results we're seeing in initial production rates and EURs, we remain optimistic about the 16.1 net wells and our in-process inventory at quarter-end. During the quarter, we added 4.5 new net wells to our in-process inventory and reduced that inventory by 4.3 net wells that were added to production. As we previously mentioned, over half of our wells in process are operated by Continental Resources, who has indicated their intent to begin completing those wells during the second half of 2017 and first quarter of 2018.

Clearly, the pace at which our backlog of in-process wells are completed will affect our spending and production levels in the second half of 2017. Should some of our operators accelerate additions to the second half, we could see a higher net well addition number which will result in a bit higher capital expenditure budget, but at present we're still guiding to 12 completed net wells with annual production flat to slightly above 2016 levels.

Capital expenditures totaled $30.7 million for the second quarter, bringing year-to-date spending to approximately 57% of the 2017 capital expenditure budget. This spending is associated with both the 6.3 net wells added to production during the first half of 2017 and the 2.7 net well growth in our inventory of in-process wells since year-end 2016.

We continue to focus on a return-based capital allocation process, which allows us to flex our capital spending based on the best investment opportunities. This nonoperated capital allocation advantage has allowed us to adapt quickly to changing and volatile conditions, while at the same time remaining disciplined in our balance sheet and liquidity management.

We continue to manage our commodity risk and protect our future cash flows from downside risk to lower prices. We now have approximately 2/3 of our 2017 forecasted oil production hedged and have approximately 2.2 million barrels hedged in 2018, with a combination of swaps and costless collars.

Crude oil differentials during the second quarter of 2017 were $6.86 per barrel below the average NYMEX price and came in slightly better than our expectations. With the Dakota Access Pipeline operational, the overall increase in basin takeaway has lowered differentials and we believe that differentials in the second half of the year will range between $6.50 to $8.50 per barrel. Lease operating expense for the second quarter came in at $9.67 per BOE compared to $8.74 for the same period a year ago. The increase this quarter was largely due to higher workover and maintenance spend on wells that were previously operated by financially stressed companies. In an effort to increase production, the new operators are reworking these wells. Recently work over and maintenance cost spending has declined with [the unit's] lease operating expense coming in at $9.26 per BOE. We expect our second half LOE to range between $9.25 and $9.50 per BOE.

General and administrative expense in the second quarter of 2017 was $4.4 million, driven primarily by a decrease in compensation expense, offset by an increase in legal and professional expenses. Second half of 2017 general and administrative expense is expected to range between $3.25 and $3.50 per BOE.

Based on our borrowing base of $325 million, we had available $174 million at quarter-end, comprised of approximately $4 million of cash on hand and $170 million of revolving credit facility availability. We remain well within our covenants and strongly positioned from a liquidity perspective. In conclusion, we'll continue to use our flexible capital allocation process to protect the value of our assets and seek the highest returns available to us. The increases we're seeing in well productivity and EUR has given us confidence for 2017 and beyond.

As we continue to evaluate avenues to strengthen our balance sheet, our focus and discipline should position us well to take advantage of future opportunities for value creation as the industry environment improves.

All right. At this time, we will turn the call over to the operator for Q&A. Operator, if you could please give the instructions for the Q&A portion of the call.

(Operator Instructions) Our first question comes from the line of Neal Dingmann of SunTrust.

Just a question on a lot of that cadence that's coming up. Is the working interest there, is that going to be kind of normal what you've seen on -- for the first half or any color you can give us on that?

I think that average working it's going to range probably between 5% and 6%, somewhere there is where I'd peg that Neal.

Yes. And, yes the -- the D&C list is about 5.5% working interest for that 16.1.

Okay. And then on, obviously, Continental, we've seen a few guys now boost type curves really talk about really 2 things. One, obviously, the improvement in the differentials but then more importantly, I saw Continental last night nicely boosted their type curve. You talk about returns in here I'm just wondering is that sort of based on -- maybe Tom just walk through what that's sort of that based on in, is there upside into that return potential based on kind of what we're hearing on the improved economics of these wells?

Yes. Neal, I think there is upside. In fact as -- we look pretty optimistic. I mean, we've got over 16 wells in. In my commentary in the script today, I mentioned over half of that was Continental. Most of those wells or a large majority of them are probably a type curve in the high 800s, probably 900. I think, yesterday I saw something they put out in connection with our call today and they bumped them over to about 1.1. So we're pretty excited about that and I think it does provide upside not only in our EUR, but as well as rate of returns.

(Operator Instructions) Our next question comes from the line of [Nate Streechter] of [Entrust].

A quick question. We've been seeing some pretty good prints and the Whiting in North Dakota recently, specifically near where you guys produce. I'm curious how you guys think of asset sales going forward?

I think, we think more about inbound assets coming to us, kind of our ground game is to pick it up. I think that we've seen a couple of larger packages out there, a couple of months ago, larger meaning greater than $100 million, I think at the time, it was one of timing with respect to that where those packages got pulled. You saw the [prompt] in the 45 range and wasn't much lift from the curve kind of on the back end. It's not something I think that we're actively considering at this point. It's obviously an option we have, but the bigger packages clearly weren't bringing it and we used that opportunity basically to acquire just what we call our small ball, kind of the singles and doubles to acquire very attractive rates of return. When you take a look at the rates of return for us and there's a slide presentation, I hope everybody has a chance to take a look at on our website today. You take a look at the AFEs that we've elected to over the last 4 quarters. They average maybe a low of 32% over that period of time. So if you think of us, you need to think about we're capital allocators. EURs are certainly important, the enhanced completions are really driving that today. But on the sales side, we are just not really looking at that real hard. It's something that's an option but based on kind of where we're headed and what we're trying to do, it's not a priority.

Our next question comes from the line of Scott Hanold of RBC Capital Markets.

A couple of questions. And you all talked about obviously, Continental ramping things up a little bit. And this quarter it looks like you elected to do a few more wells and made some selective acquisitions. How do you balance between that increased activity level where your cash flows are? It does look like you're probably going to continue to outspend at least in the visible future here. How do you think about that? Is there some goal at some point to kind of bridge that gap a little bit? Maybe if you can five your view on how you look at leverage and capital spending?

Yes. I think there is a balance. I mean that's a great question. This year we're -- right now we're holding our guidance kind of at 12. You saw Continental reduce the number of completion rates from about 7 to 4. They make up about half of our in-process list. And you are correct. This year I think we'll outspend. We've got a CapEx budget of approximately $102 million. I think our outspend will probably be about $30 million in connection with that. We're watching it pretty close. We still have plenty of liquidity with over $174 million at the end of the quarter. But it's kind of a balance. I think you'll see a little bit of growth from us this year, but we'll be mindful of it, probably try to stay at or near cash flow. I think post '17, we've got a pretty heavy wells in-process list right now. We'll see how that plays out. In my earlier comments, I talked about how optimistic we were with respect to the weighting to Continental and kind of the results we're seeing. I think we have limited completion results from them during the first half, but I think on the ones that we did see they were over 1 million Mboe with respect to that. So keep a close eye on it at or near probably post '18, '17, probably, a modest outspend of about $30 million is kind of how I'd frame it.

Okay, great. And along -- maybe along the lines of some of these more intense completions, it certainly seems like EURs and initial productivity look pretty strong. You talked about the weighted average AFE in your -- I guess, consented being up to $7.8 million from $7.1 million. Where do you see that going like over the, say the next 6 months?

In this quarter, one of the things that really drove that weighting up is we elected to some very -- some higher working interest wells that we're spaced on 1920s. So that really drove it up. If you eliminated the CapEx in connection with those 3-mile laterals, you kind of got back to like $7.1 million. We took a look at our July AFEs inbound, they were a little under $7 million. I sort of think it's going to be $7.2 million to $7.4 million kind of average. You see a weighted average cost right now, I think, in our inventory of about $7.4 million. I don't really have any reason to think it's going to be much different than that, hearing a lot of operators talk about 5% to 10% increases, but it really dries. I mean, we're capital allocators. We allocate based on rate of return. So depending on the mix of wells that come in, you'll see it bounce around quite a bit. I mean, it was $6.6 million Q1, $7.8 million this quarter, kind of average is $7.1 million, kind of average in our wells in-process about $7.4 million but $7.2 million to $7.4 million is short answer.

Yes. How do those -- it was a 3-mile lateral. How do those look? I mean, do they -- are those pretty good wells?

They just spud in July. So I don't have a lot of information yet. It's the torpedo wells on Slawson is the ones we're referring to.

Our next question comes from the line of Jason Wangler of Imperial Capital.

I was just curious, you mentioned that you consented on 9%. Can you just talk to that 10% that you were seeing, I know that you guys obviously looked at the economics of these, but were they nonenhanced completions or were they out of kind of the core focus of the area? Just curious, what you're seeing that's still getting out there that you guys are saying "no thanks" to?

Really a bit of both. Some of them were nonenhanced completions, but I think some of them were just really step outs that we were really unwilling to kind of look in our crystal ball and figure out they were going to be better. We'll watch them, obviously. We don't lose our interest in those units because they're held by production. But we'll take a wait and see because, in a prior question, which is watching capital, that's one of the things we do is make decisions like that. But a little bit of step out and the ones that fell below -- I don't think we're unusually weighted to nonenhanced completions, I think it's more driven by kind of the area that they were proposing.

And our next question comes from the line of Sean Sneeden of Guggenheim.

Tom, can you maybe talk a little bit about your kind of ongoing discussions on the revolver. I think clearly it becomes current in a couple of months here and how would you characterize your conversation with the banking group at this point? And how do you kind of envision this going forward?

Yes, we're having discussions with banks now. And our focus really over this last quarter has been extending the term of that credit facility from September 2018 to something kind of further out with respect to it. Our first choice would be to get a -- would be to go to a revolver. It's -- with the maturity extension. It's obviously the lowest cost of capital for us to do that. Haven't had any discussions with respect to the borrowing base yet. It's a little early on their price tag, but our midyear reserves have shown a lot of nice improvement. SEC reserves from year-end were up about 26%. So not so much concerned on the borrowing base. The focus has really been to talk about an extension. So I've had a number of conversations really with respect to that.

Okay, that's helpful. I guess, maybe 2 things on that. I guess, one, is how much pushback, if at all, has there been from the group just with the bond maturity in 2020? Presumably you'd want to move the revolver maturity kind of beyond that, how much of an [upending], I guess, are bonds to that? And I guess, number two, would you envision that -- or is the goal kind to keep your current cap structure that you have in place today. So kind of revolver plus unsecured bonds, basically the same or do you envision any of that changing going forward?

Well, optimally, we would keep at the same or we'd still have a revolver just because it's a lower cost of capital on that end. In the event that wasn't possible, there are a number of alternative providers out there that could do it but that's going to be really at a higher cost. One of our goals, obviously, is to reduce our leverage and position ourselves to kind of capitalize on the growth and consolidation opportunities that we kind of expect to see in the basin. We are a natural consolidator kind of given our size and our history, it's kind of what we do. It's what built Northern and it's kind of how we grow. We spent a great deal of time really evaluating our options. I've had discussions and continue to have discussions with some of our note holders about the possibility of exchanges and the market will be the first one to know if we are allowed to kind of complete that, that would help us reduce not only our debt but our interest expense. But that's just one of the options that we have, but my vision, if you will, is to continue to work hard to try to extend the revolver and then probably have some senior notes kind of behind that. And in the event that, that isn't possible, we'll have to look at other alternatives which might include alternative financing.

Okay, that makes sense. Maybe just one last one. You guys mentioned the inventory that you guys have in the queue there with at least your 30% IRRs on the [ducts]. How do you think about allocating capital to that versus bond buybacks at this point with yield on the bonds kind of in that 25% plus context...

Yes, go ahead.

No, go ahead.

Well, I think at present our discretionary cash flow is obviously directed to the development of our wells and believe that the rates of return that we're seeing from the enhanced completions indicate they're really solid opportunities and that's where we ought to be directing it. Obviously, the bonds are trading in the mid-60s right now. So they are certainly attractive so -- although I wouldn't rule that out, I'd say our focus at present is to stay with the development of the wells and we'll be -- continue to be watchful of that.

(Operator Instructions) Our next question comes from the line of John Aschenbeck of Seaport Global.

One of the good ones has already been addressed. I did have a follow up in terms of potential M&A transactions comp, particularly in terms of your comments that you'd rather be a buyer than a seller. I just wanted to kind of get your thoughts on how you'd finance that type of deal because obviously you have plenty of liquidity right now, but it may be a little difficult to justify a significant outspend given the current leverage situation. But I was curious what that type of deal would look like, would you have a PDP component, perhaps an equity component with it or a combination of those two?

Yes, good question. I think it's -- we'd evaluate it very carefully, would be what I'd say, but size would definitely be a factor with respect to it. We have had and continue to have discussions with capital providers that have suggested joint venture type things so you might enter into kind of a sidecar sort of situation with respect to it. If the transactional size were let's say $50 million or below, I think we'll probably look pretty hard at and probably trying to do most of it internally. Possibly going to the equity market with respect to that. Equity has gotten -- suffered recently, obviously, but I think hopefully our improved performance and when people look at the quality of really our assets, the deep inventory of wells that we have, the high average IRRs really demonstrated over the period. The mix of kind of what we're participating in is enhanced completions which are really driving the returns in the EURs participating in a lot of the best wells in the basin. So I think, if it were of a larger size, we probably have to bring a partner in with respect to that.

And John you mentioned, would there be a PDP component. Yes, there probably would be a PDP component. So hopefully it would bring with it -- some EBITDA into that equation as well.

(Operator Instructions) I'm showing no further questions at this time. I'd like to hand the call back over to Brandon Elliott for any closing remarks.

Great, Nicole, I appreciate it. At this time, you can give the instructions for the replay and we certainly look forward to talking to you guys out on the road or again at the next quarter. Thanks.

Ladies and gentlemen, this conference will be available for replay after 1:00 p.m. Eastern time, today through August 16, 2017, 11:59 p.m. Eastern time. You may access the remote replay at any time by dialing (800) 585-8367 or (404) 537-3406 and entering the access code of 61127013. That does conclude our conference today. Thank you for your participation. You may now disconnect. Everyone, have a great day.