Northern Oil and Gas Inc (NOG) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Northern Oil and Gas, Inc. Second Quarter 2018 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Northern's Chief Executive Officer, Brandon Elliott. You may begin, sir.

Thanks, Mitrish. Good morning, everyone. We are happy to welcome you to Northern's Second Quarter 2018 Earnings Call. Before we get to the results, 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 these 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 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 earlier this morning.

All right. Here's our plan for the day. I will quickly update everyone on our strategy and what we have accomplished so far this year. Then I will turn the call over to Nick O’Grady, our CFO, to walk through the financials. Then we will turn the call over to Mike Reger, our Founder and President, to talk about acquisitions. Then Bahram Akradi, our Chairman of the Board, will talk about our vision for the next few years. And then finally, we will take your questions.

Our strategy is honestly very simple. We are laser-focused on being the best allocator of capital of any oil and gas company in the Williston Basin. We have 3 capital allocation buckets that we consider in order to earn the highest return for our shareholders. First, we utilized our substantial database of well information built from our participation in over 3,500 gross wells to best deploy our cash to the highest rate of return, organic drilling opportunities that we receive on Northern's existing acreage base. This is a daily review and processing of inbound well proposals. We evaluate every individual well proposal and make a decision on whether or not to participate on a well-by-well basis. Organic activity also includes what we call the acquisition ground game which are land acquisitions we make, again utilizing our extensive database to add additional acreage or interest in wells that are being permitted or spud. The individual interest we pick up may be small, but this part of the strategy is definitely not inconsequential. This is the day-to-day ground game that helped build Northern and continues to fuel the Northern engine today.

The second bucket is deploying capital into the M&A and A&D market. This should supplement our production growth and cash flow growth. It also grows our inventory of future core drilling locations. Year-to-date, we have been incredibly successful in this area with the announcement of $500 million plus of accretive deals. Mike will talk more about these acquisitions later in the call.

The third bucket is shareholder returns. This will come after we have been able to refinance all or a portion of our current debt with more traditional, less expensive debt. The goal is to have a capital structure with very low debt metrics that can thrive and survive in all commodity cycles. Once we have achieved that capital structure, we can then look to return some of the excess cash flow Northern will be generating to shareholders.

Obviously we have had some capital allocation successes so far this year. Activity is higher, represented by the increase we are seeing in organic net well additions. We increased our net well additions guidance by 2 net wells. The wells we expect to add this year generate some of the highest return on invested capital we see. This increase has come not only from inbound well proposals but the ground game I referenced earlier. This organic growth has not only resulted in the production and EBITDA growth we have experienced year-to-date but has also built a backlog of wells in process that are some of the best wells Northern has ever participated in and are clearly some of the best wells being drilled in the basin. When they are closed, the capital we have deployed to acquisitions will set the stage for a 40-plus percent sequential production growth rate from the third to fourth quarter this year, a step function change in our cash flow generation and is helping to create decades of high rate of return future drilling locations.

Let me sum up my remarks by saying we are very excited about the rest of 2018 and the continuation of the momentum we have built. Northern has come a long way from a year ago. We are extremely proud of all the team has accomplished this year. We will continue to methodically and judiciously pursue additional avenues to drive growth, only when those opportunities are accretive to our shareholders.

With that, we would like to welcome Nick O’Grady, Northern's Chief Financial Officer, to his first earnings call here at Northern. He will cover the financial and balance sheet highlights. Nick?

Thanks, Brandon. As everyone can see, it's been a busy start for me here in Northern. Let me start off by saying this clearly to our investors: we have stated our goal to be the consolidator in our basin and to do so in a disciplined and responsible manner for our shareholders and our creditors alike. I can say definitively we have achieved this in recent months.

We are a different kind of oil company. I want to reemphasize what Brandon said earlier. Our asset is strong, and that asset will produce capital that we can judiciously deploy in 3 buckets: organic growth, high-return bolt-on acquisitions; and over time, shareholder returns through dividends and share repurchases. It's a simple model, and we will not waver from it.

A non-operated model at times receives praise and occasionally derision from the investment community, yet I will remind investors of one powerful notion: Northern has signed agreements for over $500 million in acquisitions this year, yet we will not have added one additional employee for these transactions, no additional teams in field offices, rig managers or engineers. We simply work with our strong internal departments to manage these assets as they are rolled into our machine.

It is my role here as Northern CFO to find the best routes for us to execute upon our stated goals: to build and maintain trust with the investment community, and with that, reward our investors with a company that can grow organically through acquisitions, and as we go through the final steps of our balance sheet transformation in the next 2 years, provide forms of shareholder returns given our strong cash flow generation.

Here's a quick overview by the numbers. We generated $70.5 million of adjusted EBITDA in the second quarter, 129% increase over the second quarter of 2017 that was driven by a significant increase in production and improved commodity pricing. Our second quarter production increased 53% year-over-year and 17% sequentially to average 21,046 barrels of oil equivalent per day. I'd note Salt Creek closed in June and only had a minimal impact on the quarter. The 8.1 net organic well additions in the second quarter, coupled with strong continued well performance that has exceeded our expectations, has set up nicely for the remainder of 2018. Based on the improved results we have seen with initial production rates and EURs, we are very optimistic about activity levels in the basin remaining strong, bringing forward activity, and thus, net present value to the company and its shareholders.

Despite the substantial increase in production, our drilling and development capital expenditures were approximately $52.3 million for the second quarter or a $1 million decrease sequentially. In addition, we spent approximately $59.8 million on acquisitions, including Salt Creek. We now expect to add 25 to 27 organic net wells to production during 2018, using an updated D&C capital expenditure budget of $215 million to $230 million, which includes ground game acquisitions and workovers but excludes capitalized expenses and material acquisitions, closed or pending.

With the increased quantity and quality of wells as well as closed and pending acquisitions, we're also increasing our guidance on 2018 annual production, which we now expect to increase approximately 60% to 64% over 2017 levels. Our fourth quarter guidance that we laid out in the release should give investors a clear picture of what Northern will look like post close on the pending transactions. This now includes our Salt Creek acquisition and includes our other pending acquisitions for the fourth quarter.

Our realized price for the second quarter, including the effects of our settled derivatives, was 25% higher than the same period a year ago. The increase was driven by higher commodity prices and a lower oil differential. Our oil price differential during the second quarter averaged $5.77 per barrel, which was 16% lower than the second quarter of 2017. As we mentioned on our first quarter call, we did see some widening in our differential as the price of oil has moved higher and production continues to increase in the basin. However, in recent periods, this has begun to moderate. In time, we are upping our guidance modestly for our oil price differential for 2018 to between $4.75 and $5.75 per barrel.

Lease operating expenses continue to impress. In the second quarter, they came in at $7.60 per BOE compared to $9.67 per BOE in the same period a year ago. The continued decreases seen year-to-date are a product of our growing production and the lower per unit cost associated with newer wells. We expect a stabilization in these costs given the high level of activities we are enjoying at this time.

For 2019, we expect the assets from our pending acquisitions to have a cost structure similar to or lower than our current corporate average. We are lowering full year 2018 lease operating expense per BOE to a range between $7.50 and $8.50 per barrel, and our production tax as a percentage of our oil and gas sales remain at approximately 9.2%.

General and administrative expenses were $3.3 million in the second quarter of 2018 compared to $4.3 million in the second quarter of 2017. As we close on recent acquisitions, we expect our G&A per BOE to continue to decline. We are lowering expectations for full year 2018 total G&A expense per BOE to a range between $1.50 and $2, a $0.50 or 22% reduction at the midpoint despite only 1 quarter of full contribution from our pending acquisitions. We believe cash G&A is a more relevant metric to the investment community. And here and going forward, we will break out our cash costs separately. All in, even inclusive of higher differentials, we expect our cost structure should decline approximately $0.50 per BOE for 2018 versus prior guidance.

We provided our current hedge book in our earnings release. It's worth noting that for the first time in the company's history, we've entered into approximately 4,500 barrels per day of basis hedges for 2019 to lock in lower differentials. We will continue to work on adding to this over time as market conditions allow.

Debt reduction has been a primarily goal for the company. In May, we completed our senior notes exchange, which included a $145 million equity raise to bolster cash and make acquisitions. In addition, in the second quarter and more recently into the third quarter, we've continued to attack the remaining unsecured bonds, equitizing over $77 million of them in a series of transactions, most with investor-protective lockup structures. This has eliminated nearly 38% of the issues still remaining and annually saves the company over $6 million in interest expense.

Finally, I'd like to talk about our liquidity. Investors have hopefully taken notice that when we said we would be the national consolidator in our basin, we would do it and do it accretively. The investors who helped fund this, both in our recent exchange offering as well as our common stock offering, have been richly rewarded with how we have deployed that capital. Northern, on a pro forma basis, will have more than doubled its annualized EBITDA from the end of 2017, yet its leverage multiples upon closing of these deals this fall will have fallen by 2/3 since the fourth quarter last year. In addition, as pro forma for the closing of the most recent acquisitions, we believe Northern will now produce significant amount of free cash flow in excess of our spending and will have a significant amount of cash and ample liquidity at the end of 2018. In addition, we believe there is a substantial boost to free cash flow over the coming years when our refinancing window opens and it becomes economic for the company to call its current secured debt structure.

With that, I'll turn the call over to Mike Reger, Northern's Founder and President, to talk about acquisitions.

Thanks, Nick. Northern is the largest non-operator in the Williston Basin. We were early to the play in 2006, and we know the basin as well as anyone.

In 2018, we have reestablished the company as the dominant and natural consolidator of non-operated Bakken and Three Forks assets. Over the past few months, we have signed agreements to acquire nearly $500 million of new assets, all of which were acquired using both cash and stock. To recap the size and impact of each deal, I will walk through our recently announced transactions.

The first large deal we announced was the acquisition of Salt Creek Oil and Gas, which we announced in April and closed in June. This asset consisted of 1,380 barrels of oil equivalent per day and 8 net wells of million plus-type curve drilling inventories. We paid $40 million in cash plus 6 million shares of Northern common stock for this highly accretive acquisition.

Next, in mid-July, we announced that we had entered into an acquisition agreement with Pivotal Petroleum, and we expect to close that deal near the end of the third quarter. This asset, primarily producing wells, is currently producing about 4,100 barrels of oil equivalent per day. We agreed to pay approximately $150 million comprised of 45% cash and 55% stock. Northern shareholders will benefit from this highly accretive acquisition with the cash flow and production base this asset brings to us.

Most recently, we announced that we've signed an acquisition with W Energy Partners, which we also expect to close near the end of the third quarter. This deal will contribute 6,750 barrels of oil equivalent per day at closing and comes with over 10,000 acres of some of the best core drilling inventory in the basin. We paid approximately $100 million in cash and 56.3 million shares of stock, which is 1/3 cash, 2/3 stock in another very highly accretive transaction.

Going forward, we expect to have a significant consolidation advantage in the Williston Basin. We have the largest database of information in the basin and an unparalleled knowledge of the basin. We have participated in approximately 25% of all of the Bakken and Three Forks wells drilled in the basin since 2006. In addition, we will have one of the strongest balance sheets of our public peers in the basin. And we are prepared to use our public currency to acquire additional accretive assets as evidenced by our most recent accretive acquisitions.

Finally, stay tuned for more acquisitions. We have the best land and technical team in the basin, and we continue to evaluate every opportunity, both large and small, to strategically consolidate additional accretive non-operated assets.

With that, I'm going to turn the call over to Northern's Chairman, Bahram Akradi, to talk about our vision and goals for the next few years.

Thanks, Mike. First, I want to thank the Northern Oil and Gas management team for their exceptional performance and exemplary execution of our strategy over the past several months. As Brandon mentioned earlier, we have executed faster than we have originally hoped. So now I want to raise the bar and lay out a new set of aspirational targets for the next few years.

To do this, I would like to map out a 2-year plan for Northern Oil and Gas. Our goal is that by the second quarter of 2020, Northern Oil and Gas has become a mid-cap-sized company with a debt-to-EBITDA ratio of an investment-grade entity, 1.5x or less. This will put us in a position to replace the first lien and the second lien with a normal revolving credit facility. This alone will provide approximately $30 million plus of additional cash flow for our company, which will be a function of lower interest rates based on our credit at that time.

When we recapitalized the company this spring with the completion of the bond exchange and the equity raise, our goal was to get Northern to $300 million of run rate EBITDA by the end of 2018 and $400 million of run rate EBITDA by the end of 2019. As it is evidenced to you, Northern's management has executed in such a manner that the closing of Pivotal Petroleum and W Energy in 60 days, our fourth quarter 2018 annualized EBITDA, based on our current consensus, will be already in excess of $400 million and cash flow positive. Therefore, I'm resetting the bar higher and setting new goals of approximately $600 million of fourth quarter 2019 annualized EBITDA, along with the investment-grade debt metrics of 1.5x or less.

We are clearly on our way to achieve the objectives of making Northern Oil and Gas a company that can create positive cash flow regardless of commodity prices. We are committed to be a responsible fast-growing company, and I'm thrilled with the progress Northern has made already.

With every passing quarter, we will update you and lay out additional goals and objectives, as I hope we continue to achieve our goals ahead of schedule and set new ones as we drive to increase shareholder value. With that, I will turn the call back to Brandon.

Thanks, Bahram. All right. With that, I'll turn the call over to the operator for Q&A. Mitrish, if you could please give the instructions for the Q&A portion of the call.

(Operator Instructions) And our first question comes from Neal Dingmann with SunTrust.

Mike, it's nice to see you back in the seat and nice to see Nick onboard. Mike, my question for you, first on acquisitions, just looking at some of your older slides. Could you talk, number one, about how you thought -- obviously, the last couple of acquisitions have been a little bit different as far as going out and bringing in essentially a private acquisition that way versus doing some of these bolt-on and smaller asset deals. Could you talk about -- are you seeing both of these going forward and that's going to continue to be the strategy? Or how do you see sort of see that going forward?

Yes. I think it's 2-pronged. We -- our ground game every day where we're waving in new acreage and AFEs, that book of business has never been better than it is right now. As far as the larger deals, as you know, at Northern, we proactively source our own deals, both large and small. And if they're accretive, we're going to act on them. There are a handful of deals that were available in the first and second quarter that we looked at. Several of them, as you know, we've transacted on. And with the opportunities that we see, primarily the off-market privately sourced deals that we do here, we continue to see more and more deals that we uncover. And if they're accretive, we're going to act on them. So everything's hitting on all cylinders here, Neal.

Okay. And then one just follow-up on acreage. Interested to hear your opinion, I haven't for some while. Before, you had sort of an opinion of kind of where you would -- where you sort of deem the sort of Tier 1 Tier 2. Now the way things have continued to improve in the Bakken. If I look at -- again, let's just look at maybe where Williams, Mountrail, McKenzie, Dunn all kind of come together there, could you talk about are there certain areas there that you're targeting? Again obviously, you don't want to give away your game plan, but I'm just really wondering how you sort of view it today versus maybe a year or 2 ago given the improvements and efficiencies we've seen in the play with some of these just monster wells in the Bakken.

Yes. Thanks. I think the new completion design has changed the game completely. I think over the last 2 years, one, drilling costs have come down from -- say, from 2014 to today, drilling costs have come down $2 million or $3 million, and EURs have increased anywhere from 50% to 100%. I think that's just the function of the new completion designs with 45 to 60 stages, 10-million-plus pounds of sand. And I think almost every one of our operators has adopted the new completion design. And I guess to sum it up, when we used to look at the core, say, 3 -- 2, 3, 4 years ago, anything that was in that 700,000 EUR range, we considered core. Now the core is as big as Tier 1 and Tier 2, and it's all million-barrel-plus country. So it's -- the new completion design really unlocked this rock, and we're lucky to have a really nice bite of this play.

And our next question comes from Jeff Grampp with Northland Capital.

Curious just kind of going off the comments on the 2020 goals here, kind of maybe some of the background behind those goals. The $600 million, is that just kind of where you guys think you need to be to get that investment-grade type of rating? Or is it maybe also based on kind of some of the organic and inorganic opportunities that you see in front of you guys? Obviously with all the acquisitions that you did, it seemed like you had some good insight to get to those earlier targets that you put out. So just maybe help expand on those comments a little bit more.

Yes. This is Bahram. Myself and Nick will take this on and try to give you the best answer. First, as I had stated initially, when I got involved with this company, the goal is to create a company that is able to create positive cash flow earnings for our shareholders in any reasonable commodity prices. I didn't really want to be a large investor in a company that could only make money if oil is $65 or $70. And we have the ability, and now we are already there. I think it's just a matter of now executing what we have been doing. The -- there are plenty of opportunities in our sights right now that could get us to the $600-plus million of EBITDA. We would only be doing these when we can use our shares accretively to our metrics, to our returns and also for our shareholders, but the opportunity is there to do so. We're going to do the debt to EBITDA so that we have a large entity that is investment-grade credit. So you guys all understand, with this business, there's plenty of demand for the cash as you have to reinvest in the additional opportunities for new wells. And the key is to be in control of our own destiny. The -- I want to make sure that not only we have grown to that size, we also have the ability to easily and naturally retire the 1 and 2 well. I want to thank enormously TPG and our bondholders who were so great to allow this deal come together and recapitalize and make Northern Oil and Gas a company that can do all the things we have done. However, as we all know, it's a very expensive debt. We were totally fine with doing that structure because it allowed us to get to where we are today, but it has its course. And we will definitely do everything we can to position the company so we can have normal RBL-type financing available for us to do this exactly on the day we can pay those things off reasonably. And that's May 15, 2020, is when we can pay those off with the right kind of economic return and change things. And I want to turn it over to Nick to add to that.

Yes. Jeff, in terms of our balance sheet from a credit metric perspective, in our opinion, we're there. Obviously, I think the structure of our debt, as Bahram just mentioned, will have to change over time. But I think the way to think about this is Bahram is creating an aspirational goal for us. There are -- as Brandon talked about on the call, there are the 3 kind of avenues that we're going to go towards that, organic and inorganic. But let it be clear to our investors and to everyone that this is a management team that we are compensated in our shares and we set targets, not just for growth, but for also for ourselves. And so therefore, everything we do is designed to grow value and to theoretically create value per share. So this is a truly a corporate finance exercise of sorts, and we will not -- the goals here are we have an opportunity within our basin to both do things that are accretive without risking our balance sheet in any regard.

Does that answer your question?

That's perfect. I really appreciate it. And just for a follow-up more on the operational side. I noticed that the well costs that you guys quoted for wells in process like $8 million or so, I think that was maybe up a little bit from where you guys have recently talked about costs. And was just kind of curious if you guys are seeing any service cost inflation. What's driving that? Or maybe it's just more kind of where those wells and process are kind of concentrated throughout the basin.

Yes. Jeff, I think -- we did see that average number came up a little bit. I think we had a little bit of mix of -- and I'm looking at Adam Dirlam in Atlanta. I think we had a little bit of mix of some higher longer laterals in 2Q, so that had that average come up a little bit. When we look at the wells that have -- that we've seen come through in July, the numbers are down from that 8 number. So I'd probably model something in the 7.75 to 8 range and obviously increased completion designs and more fluid usage is also increasing that average cost a little bit as well.

And our next question comes from Derrick Whitfield with Stifel Financial.

Perhaps for Mike, with the increase in completion activity you're expecting to see in the second half, can you comment on the ground game games that you'd expect to see in the second half versus the first half?

Yes. I think what we saw, if you remember our original guidance where we started the year, I think we're estimating I think to make it wide, I think we were around 18 to 22 net wells we thought we could bring on. Just organically on our existing asset base, we're looking at now 25 to 27 net wells that we're going to bring on this year. And again, this is exclusive of any of the acquisitions. So it's really -- really, what we're seeing is operators are continuing to drill more, drill faster. I think we've come up over the course of the year from about 50 rigs to about 65 rigs. As you know, these rigs are all drilling big pads. Northern has a significant working interest in the Continental pad that just came on, for example, which is 24 pads in the Burr Federal well -- or 24 wells in that Burr Federal pad. I think what we're seeing is more and more wells are being proposed. Northern has kind of an unusual high percentage in a lot of this activity in the core. So as we go, we expect to see that if the rig count stays where it is, we continue to see that number creep up continually. There's more and more activity in it. What our ground game does, as you know, Derrick, better than anybody, is if more wells are proposed, it creates more opportunity for us to consolidate the smaller working interest. Again, if we have about 10% working interest in a well that gets proposed, within a week of all of the working interest owners receiving their AFEs in the mail, we'll probably -- we could probably consolidate another 5% to 10% in each one of these wells. So I think what happens is more activity breeds more activity, and it just -- it builds on itself. So we're excited about the momentum in the field. We just happen to have a really disproportionately high bite at the action right now.

Very helpful, Mike. And then perhaps for Nick. With regard to your decision to increase the oil differential for 2018, shouldn't I think about the recent widening in the Brent-TI spread actually is helping your second half differentials? And with that logic -- go ahead.

The answer is yes. We've definitely seen it moderate in July and into August. We're just being conservative.

Very helpful. And Nick, I'm glad to see that Mike and team are keeping you gainfully employed. Keep up the good work, guys.

Thanks, Derrick.

Thank you.

And our next question comes from Jason Wangler with Imperial Capital

Was curious with the acquisitions you guys have announced and closed. I mean, as you think about the operator mix and just kind of who we should be kind of thinking about is your big focus, is that changing at all? Or is it still pretty much similar to what we saw in the past?

This is Mike. I think what we've seen over the last several quarters are dominant operators are Continental, Whiting, Conoco or Burlington and Oasis and Hess. I think we've seen a lot of activity from all those. Some of the big drivers over last quarter primarily have been some of these monster Continental wells and these big pads they've been bringing on. We've got significant working interest in some of these great pads, and Continental continues to be our #1 operator.

And are those -- Mike, are those similar traits with some of the acquisitions as we think about like the fourth quarter and beyond? Or are there any differences really?

No. I think it's really similar. One thing I'll notice around -- I'll note that in the Pivotal acquisition and the W acquisition, they almost have a very similar look at the operator mix that we have organically, again primarily Continental, Whiting, Hess. And as we see -- as we go forward, we continue to expect Continental to be a primary driver. One thing I always like to note is that Slawson Exploration, who's a private operator, they very lightly drilled their Van Hook fields in southern Mountrail County, where we have significant working interest and approximately 20% working interest in roughly 65 units that Slawson has there. And Slawson, who is a company with no debt, has always drilled within cash flow, has very lightly drilled that core of core field in southern Mountrail. And that presents us with a very unique concentration of core of core drilling inventory. So Slawson is starting to get after it as well. Slawson is utilizing the new completion design as well as of late. We brought on a couple of really big wells this quarter with Slawson. We continue to see more action from them. But generally speaking, your mix is going to be, going forward, primarily Continental, Whiting, Burlington, Conoco, Hess, Slawson. So the typical mix of A-plus operators.

(Operator Instructions) And our next question comes from Owen Douglas with Baird.

Just have a quick question here. Just trying to understand on a go-forward basis as you guys look to do any acquisitions similar to what has come your way. With the stock price moving up nicely, just wanted to understand the appetite for doing more equity-linked deals versus more debt issued? I know you guys have been talking about trying to get the leverage down to very low levels and -- but wanted to understand the parameters of how you may look to fund future deals going forward.

So let me -- this is Bahram. Let me just, first, make a comment about our -- other things that dovetails to your question. I have been in contact with a number of large shareholders as well as people who have had their -- they basically, they have the lockup, including some of my own shares. And we absolutely love the company. We love the execution at the company, and we see substantial potential in where this company can go. And so I think there is probably a little more concern out there about potential people just dumping shares as soon as the lockup is over, and I think that will take care of itself. It will show The Street how much support there is from the -- this -- the people who got the shares on the exchange. And they like the company. They want to stay there. That's one important factor. We think, just like Nick said, that, first of all, for acquisitions, we want to have the right balance of equity and debt so that it's consistent with the long term, the 2-, 3-year strategy of the company to stay in this kind of investment-grade metric. So as long as our shares are moving up and we can do transactions accretively using our shares accretive to our performance, to our EBITDA numbers, to our share -- earning numbers as well as accretive to the current shareholders, based on share price, we're going to continue to use shares and cash or some versions of that kind of mixed in. But I want to emphasize, we actually, at this point, need to do nothing. We're going to respond to opportunities. But when you look at where the company is at, as we've all repeatedly said, at the conclusion, closing of Pivotal and W, this company will be very, very nicely cash flow positive. We have amazing inventory that we can continue to invest in out of our cash flow proposition. So we will do any of these things only when substantially accretive. We don't have to do anything at this point, and that's the best position to be in. Nick?

Yes. And just I think (inaudible) what I think you were getting to is, look, all of you on the phone can do the math in terms of what our pro forma debt metrics look like, and they're very, very healthy. Obviously, we could be more levered at this point. But I think our view internally is this is a cyclical business. I don't -- the list is long of E&P companies that get themselves into trouble with large amounts of leverage, and therefore, we're going to be very careful. But I think with that being said, as it pertains to equity, we also want to do things to maximize accretion but on a risk-adjusted basis. Meaning that we will look at each deal individually, which, going to Bahram's point, the debt levels may fluctuate modestly up and down. The equity ratios may ratchet up and down, but I think just -- and just going back to Northern's recent history, it is a lot easier to relever than it is to delever. And so I think that ultimately, for us, given that we put ourselves in a strong position now, we want to do everything in a responsible manner and tested the downside.

Okay. I appreciate that. And if I could, one more question. Just in terms of -- for now, you guys are going to be a bigger company, so pro forma for these acquisitions. What should I think of then in terms of the number of net well additions needed each year to sort of keep production flat to kind of slightly up?

Yes. It's probably -- this is Brandon. It's probably -- for '19, probably in that 26 to 28 level of net well additions for '19. And then it probably would step itself down, call it, a couple of wells range, 2-well range every year thereafter to hold it flat. And that's flat at the Q4 average rate we've guided to.

And that's pro forma.

Yes. That's -- yes. It's pro forma for the acquisitions.

Yes. So we're coming off of a significantly larger payout at the end of year.

Yes.

Thank you, ladies and gentlemen. That does conclude our Q&A portion of the conference today. I will now turn the call back over to your host, Mr. Brandon Elliott. You may proceed, sir.

All right. Mitrish, thank you, and thanks, everyone, for their participation in the call and the interest in Northern Oil and Gas. Obviously please take note, we have a busy schedule the next several months at some various conferences around the country, and those details are included in our press release. So we look forward to seeing some of you on our travels, and we'll plan to talk to you again next quarter. Mitrish, you can give the replay information. Thanks, everyone.

Ladies and gentlemen, thank you for attending today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.