Northern Oil and Gas, Inc. (NOG) 2026 Q3 法說會逐字稿

(technical difficulty) It is now my pleasure to introduce your host, Evelyn Infurna, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to NOG's third quarter 2026 earnings conference call. Yesterday, after the market closed, we released our financial results. You can access our earnings release and presentation in the investor relations section of our website at noginc.com. We will be filing our September 30, 2026 10-Q with the SEC within the next few days. I am 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 will be as follows. Chad will provide an overview of our financial performance, followed by Adam, who will share an overview of NOG's operations and business development activities, and Nick will close with remarks about NOG's positioning and value proposition. After our prepared remarks, the team will be available to answer any questions.

Before we begin, let me remind you of our safe harbor language. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by our forward-looking statements.

Those risks include, among others, matters that we have described in our earnings release as well as in our filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During today's call, we may discuss certain non-GAAP financial measures, including Adjusted EBITDA, adjusted net income, and free cash flow. Reconciliations of these measures to the closest GAAP measures can be found in our earnings release or earnings presentation on our website.

With that, I will turn the call over to Chad.

Thanks, Evelyn. The power of the NOG platform was evident in the third quarter, as the company set new quarterly records for both Adjusted EBITDA and production. Adjusted EBITDA was up 11% from the second quarter and 15% from a year ago. Total production was up 7% sequentially and 19% year-over-year. Oil volumes were up 10% from the second quarter, and natural gas set another record, up 39% from a year ago. Production expenses ran a bit higher in the quarter, above our full year guidance range. That largely reflects elevated processing costs, primarily in the Williston Basin, which run higher with stronger NGL prices. Year-to-date, we're at $9.77 per BOE, and our updated guidance range of $9.75 to $9.85 implies a fourth quarter in line with the third.

Higher production expenses didn't hold back our results. Cash margin and Adjusted EBITDA both improved in the quarter. Contributing to the improvement in margins were tighter oil differentials, which came in under $3 per barrel, while gas realizations improved significantly to 98% of Henry Hub, up from 90% from the second quarter. The improvement was led by the Permian, where gas realizations recovered to 85% of Henry Hub, compared to 39% in the second quarter, as Waha pressure eased. The improvement in realizations added about $12 million in the quarter, or about $0.85 per BOE, more than twice the increase in our production expense rate. Cash margin per BOE improved sequentially to $30.74. Budgeted capital expenditures were $247.3 million, including $190.7 million on organic D&C and $56.5 million on ground game activity.

The increase from the second quarter reflects the pickup in activity we discussed last quarter. Free cash flow was up 25% from the third quarter of last year, even while funding that higher level of activity. On an LTM basis, we have generated $381 million of free cash flow, up from $351 million at the end of the second quarter. Just as an aside, the third quarter of 2026 marks the 27th consecutive quarter of positive free cash flow for NOG, exceeding $2.3 billion over the same time period. Moving on to the balance sheet, we ended September with over $1.6 billion of total liquidity. In August, we issued $500 million of 7.5% senior notes due 2034 and used the proceeds to pay down our revolver, which ended the quarter at $223 million.

Total debt came down by just over $100 million, and net debt to LQA Adjusted EBITDA was sub 1.5x, within our stated range, one quarter ahead of our year end goal. On shareholder returns, we purchased about 668,000 shares in the quarter at an average price of $23.96, leaving about $227 million on our authorization. Our Board declared a $0.45 per share dividend for the quarter, or about $48 million, paid on October 30th. Our dividend remains well covered, with third quarter free cash flow exceeding the payout by more than 3x. Turning to our guidance, with three quarters behind us, we are updating our full year 2026 outlook. Given the record third quarter volumes and strong well performance, we are raising our annual production guidance to 147,000-150,000 BOE per day.

We are also updating our cost guidance, including production expenses, cash G&A, and production taxes. Stronger realizations year to date allowed us to tighten our oil differential guidance and raise gas realizations. Our capital budget remains $850 million to $900 million, and given higher activity and continued ground game success, we expect to land toward the high end of that range. You can find additional details on the guidance page of our earnings presentation.

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

Thanks, Chad. Our third quarter results demonstrate our ability to allocate capital across the portfolio, driving record total and natural gas volumes, and with oil production up nearly 10% from the second quarter. The Uinta again beat our internal expectations on oil, and Permian volumes rebounded as Waha takeaway constraints eased. In Appalachia, our 2025 joint development program culminated with strong performance and expected returns well above our underwriting, while our jointly owned Ohio assets with Infinity are gaining momentum. Our recently closed Duvernay position is also running ahead of initial expectations, with well productivity, D&C costs, and operating expenses all outperforming. Activity picked up modestly relative to our expectations. We turned online 23.9 net wells during the quarter, nearly double that of the second quarter, and almost all within our oil-weighted basins. We also added 18.1 net wells to our D&C list, and well costs remain in check.

Recent normalized AFE costs are down 3% quarter-over-quarter and more than 5% below our 2025 average, as drilling efficiencies are realized and lateral lengths continue to increase. Turning to business development and our ground game, NOG's execution has been exceptional as we continue to expand our opportunity set and allocate capital to compelling investments. During the quarter, we closed on 19 transactions, bringing our year-to-date ground game to 15.4 net wells and over 8,500 net acres.

Large M&A opportunities have also accelerated, and the team has been evaluating roughly 14 asset packages across seven different regions, with an estimated total value of over $15 billion. This expansive opportunity set gives us the ability to be discerning. We will only focus on the opportunities that command a compelling risk-adjusted return net to NOG. Whether through acquisitions, divestitures, or trades, our focus will always be to enhance NOG's overall portfolio, take a returns-first approach, and allocate capital that will drive long-term value.

With that, I'll turn it over to Nick.

Thanks, Adam, and thanks everyone for joining us this morning and for your continued interest in our company. I will cover four pillars that reinforce the strength of our business and build on Chad's and Adam's comments. Number one, record results. Our third quarter results speak for themselves. We delivered record total production and record adjusted EBITDA, a testament to the depth and quality of our portfolio we have assembled over the past several years.

We generated approximately $150 million of free cash flow, and we did so even as capital spending rose, which tells you something important. Our assets are funding their own growth while still generating substantial excess cash. Margins expanded as well, driven by improved pricing differentials and record gas production. Rising volumes combined with better realizations is exactly the operating leverage our model is built to capture. Number two, a strong balance sheet.

We have used our balance sheet to acquire high-quality assets over the past several years, and we know debt levels have been a focus for investors. We are delivering on our commitment to improving our leverage metrics. Total debt fell by more than $100 million in the quarter, and our net debt to EBITDA ratio is now below 1.5 times.

Aided by our recent notes offering, total liquidity stands at approximately $1.6 billion, giving us the flexibility to act when opportunities arise, whether that's in the form of acquisitions or share repurchases. We enter the final quarter of the year with a strengthened balance sheet and significant firepower. Number three, games are won on the ground. The headline transactions get the attention, but a great deal of our value is created at the ground game level, one acre, one well, and one trade at a time.

We continue to optimize our assets region by region, adding, trading, or executing small asset purchases that enhance our overall holdings. For instance, in Canada, we see line of sight to significantly growing our existing footprint. In the Uinta and Appalachia, our teams delivered significant ground game success, expanding our position in two basins we believe have long, price-resilient runways ahead. These are capital-efficient additions that rarely make headlines, but they compound into meaningful inventory and value over time.

Importantly, our team is hitting the proverbial Q4 ground running, with this period often the most seasonally productive time of the year in what's already been a very strong year for our BD efforts. Number four, portfolio optimization on multiple fronts. Guidance is increasing for the year while capital efficiency shines. Activity across our portfolio is stable to increasing, and every one of our regions is performing well.

This is momentum we expect to carry into next year. At the same time, we remain relentlessly focused on optimizing our portfolio, which could include a myriad of strategies, including divestitures that bring value forward. Additionally, we maintain an unyielding focus on the ground to add value to our existing asset base, while also evaluating longer-term strategic acquisitions that improve our portfolio and add financial benefit to investors.

We also continue to invest in our own shares, repurchasing additional shares of stock in the third quarter at prices below $24 per share. We continue to view our shares as one of the most compelling investments available to us today. Like many upstream companies, our shares traded at deep discount to the underlying after-tax marketable value of our assets. We do not see that as a setback. We see that as an opportunity, and one we intend to seize.

We have the assets, the balance sheet, and the team to close that gap, and we will take deliberate steps to do so. The records we set this quarter are not a ceiling. We believe the best is still ahead for us, and there's a great deal more potential yet to be unlocked.

We have catalysts and options in front of us to further unlock value over the coming months and years, and we will focus on the results that drive the highest long-term returns for the business. That is what a company run by investors for investors does. Before we open the call to questions, I'd like to note that NOG is planning its first Investor Day in the coming months. Specific details on exact time and location will be shared soon, but we're looking forward to using this event as an opportunity to connect with the investment community and share a deep dive on our business and our long-term strategy.

With that, we can turn the call over for questions.

(Operator Instructions) Neal Dingmann, William Blair.

Good morning, Evelyn and the rest of the team. Nick, my first question is for you or Adam. Just wondering, specifically, how often would you say Northern these days goes non-consent versus the historical average? I guess what I'm trying to figure out is twofold. First, are there areas you own that you believe still don't compete for capital and you'd rather not have the operators drill? And secondly, do you believe that there's some well costs that are too high even in today's environment, and you'd rather not have the operator drill those?

Our non-consent rate is around 3%, Neal. It is largely focused to what I would describe as some of the weaker operators in areas in the Williston. On a net basis, it is relatively low. We spend a lot of time on the front end buying properties that we know will be competitive. What I would say, though, is if you think about the stack of returns, we obviously benchmark everything on a risk-adjusted basis versus our own cost of capital or our own return thresholds. But there are some that are lower in that stack than others, and so oftentimes, there is the ability to potentially trade some of the ones that are in the lower quartile of that stack for those that are in the higher.

Neal, I think the only thing that I would add there is, a lot of these wells that are non-consented, I think it is less than a handful, frankly, were delineation-type wells, more kind of science experiments. We are taking a look at the AFEs that are coming across mine and Jim's desk on a daily basis and comparing that way and that against the ground game. If we are able to source significantly better returns on the ground, then that is a trade we are going to make all day.

That is what I was thinking, Adam. You have a much bigger portfolio, so I figure you could be a little bit fussier these days. My second question, Nick, is for you or Chad on capital allocation. Specifically, has the capital allocation strategy changed now that you have reduced debt certainly to more than a manageable level? The dividend yield obviously continues to be over 8%. Would love to hear your thoughts on the allocation.

Yeah, I mean, open window opens on Monday, Neal. As I mentioned in my prepared comments, our equity is as compelling as it has ever been. Look, the markets are what they are at any given point in time. I have been watching the last few days of what has been going on, and I have to remind myself that oil is still 90 and when I look at what has happened with the equities.

At the same time, what I tell you is, look, we want to take leverage down further, and we will do that. So it is all about, like everything in life, doing it in moderation. But I think the equity is a very We have increased our buyback authorization on purpose, which is really to give us the flexibility to take advantage of periods like this.

Look, I mean, you mentioned the yield, the cost of the equity and where it is today. Our dividend represents, and it has, if you go back over the last three years, roughly a third of the cash that we've been generating, and it doesn't really foot with where the yield is today, and ultimately, that creates a big advantage for us.

Perfect. Thank you.

Neal, just to quote our Chairman, he would tell you, high stock price, happy face. Low stock price, happy face, because it creates an opportunity.

Scott Hanold, RBC Capital Markets.

Yeah, appreciate it. Thanks. Nick, I think some of the turbulence in NOG stock, especially this week, is related to the Uinta and what the operator said about its outlook there and performance. Can you just give us a sense of how that impacts Northern and how you go about putting things like that in your guidance? I guess that wouldn't only apply to the Uinta, but all your assets, just to give us some comfort in your outlook.

I mean, number one, Scott, the Uinta represents about 8% of our total production. Number two, if you've watched carefully, we've done about $150 million of additional acquisitions in the Uinta since we acquired those properties outside of our partner.

Our numbers aren't necessarily directly tied to theirs. Three, each company risks their potential performance accordingly, and I just say that we take great pains as a non-op to try to risk that. I don't think this is, quite frankly, from our perspective, our Uinta performance in the third quarter, and as we headed into the fourth, is right on track with where we thought it.

The final thing I'd just say, and I've had the time now, I've been traveling, but to read through those comments, this is a transitory issue. There's massive expansion going on there.

Even if it slows the basin down for a quarter or two, by the first quarter, we're going to be, frankly, we're increasing our rig activity. If you can look beyond 90 days, we're going to be seeing significant growth in that basin, something we never underwrote when we acquired it.

Okay, that's good to hear. You obviously talked about the analyst day coming up, and within that, I guess, we'll hear more about the opportunities to at least look at your portfolio and what makes sense to optimize. You mentioned divestitures and potentially other ways of optimizing the portfolio beyond divestitures. Are there other ways that you could evaluate optimizing that, just at a high level?

Yeah, I mean, I think I will reserve some comment on this in the sense that we have a number of private things we are going through today that aren't ready for prime time, but there are numerous ways, everything from how we source our capital to how we partner to how we trade, and divestitures are certainly part of that. But we also, we are an analytically driven place, right? And so when we do these evaluations, we don't do it lightly.

What I would tell you is that many companies, when they feel they are undervalued, will sell a high-value asset, and they will show accretion to Wall Street. But ultimately, they might have just sold their best asset or sold something in which they have given away a lot of future upside that they are not being paid for, even in that scenario. The key thing about all this stuff is to do the research, to do it right, and to do it in a way that ultimately creates the most long-term value.

Okay, appreciate that. It sounds like there is that next evolution of the NOG business model then.

Yeah, look, we have built tremendous scale, and I don't think it's fully appreciated. As a non-operator, we benefit from diversity. I think it's harder for an operator to efficiently allocate capital in multiple places, but for us, it creates a huge flywheel effect. The statistic I would give you that we gave to our board in mid-year is that on the small and large asset transactions, because we are as broad as we are, our footprint was up 48% and 58% in those two categories respectively year-over-year.

And so, where I'm going with this is that the best way to be able to efficiently allocate capital over time is to have more shots on goal, and that is exactly what's happened as we have expanded the footprint. Look, we want to make the business better.

We want to grow our profits per share, but there are a lot of ways to do that. That can be through reducing share count, that can be through acquisitions, it can be through the drill bit. At the end of the day, what we're really looking at, whether it's divestitures, acquisitions, or anything else, is making the business better and more capital efficient as we grow those profits per share.

Charles Meade, Johnson Rice.

Yeah, Scott, good morning, Nick, to you and your whole team there. Adam, you made some comments, or you offered some details in your prepared remarks about AFEs being down. Nick, I think you mentioned that activity in most of your basins is stable to up. I wonder if you guys could talk about what you're seeing, what you expect to see for 2027 across all your different operating areas and operators.

Particularly, Nick, maybe you can wrap in, there's been a lot of shocking things in the market, but one of them is that the 2027 gas strip is $2.90 now. I would think that'd have to bias activity lower in some gas basins. I wonder if you could just give us what 2027 looks like to you right now.

Yeah, I think as we've prosecuted 2026, we've seen a shift, expectedly so, from maybe some of the gas-weighted activity more towards the oil-weighted activity. Looking at the AFEs that we consented just here in the third quarter, the Williston was leading the way. I think some of that is a function of concentrated working interests.

When you think about AFE costs, the Williston has been one of the leaders in terms of kind of reduction on a normalized cost per foot. So I would expect the Permian will continue to be as active as it ever has been. Williston, Uinta, will continue to be steady as it goes in the Duvernay. While it's early days, the conversations that we've been having there has been accelerating ahead of kind of expectations.

I think we continue to see that, obviously notwithstanding any sort of material change in commodity prices. I do not think you are necessarily going to see a massive acceleration from any of our operators, at least from the conversations that we have had. Maybe some of the privates lean in a little bit more than the publics, but that is effectively what we are seeing on the ground right now, and expect that to continue.

Yeah, and I would just say seasonally, Charles, as you head towards the end of the year, things tend to slow down a little bit, and that is just because people are getting close to exhausting their budgets. If, to the extent that they are ahead, they will move that activity into next year. So it is not totally linear, right?

You are also going to go into like a seasonal period in the Bakken where it is always slower in terms of completions. But where I am going with that is that, if you actually look at the rig count in our basins, quarter- to- quarter, month to month, it can vary, but the overall activities continue to rise. As Adam mentioned, our Uinta Canadian operations are poised for growth. I think our Permian and Williston are steady as they go.

As for Appalachia and gas, I think the one thing you have to take in mind, it may mean that you do not see tremendous growth, but keep in mind that in Appalachia, our cost, one of the reasons we acquired those properties is that our cost basis, meaning that our break-even levels are some of the lowest in the industry. So they will be very resilient, and so you are not necessarily going to see a huge variability in activity like you might in the Haynesville or some of the higher-cost plays.

Got it. That is helpful elaboration. Nick, I want to go back to a point I think you have already addressed a little bit, but I want to see if I am understanding you correctly. I think this is about acquisitions and how you would fund acquisitions, and maybe the right way of thinking about it is relative priority. I think what I am hearing is that, you want debt levels to move lower, mostly, maybe on an absolute or a metric basis.

You kind of view your equity as an expensive currency in the sense that, you do not want to use your equity. So that kind of, to me at least, leads me to think that any future acquisitions would have to, some of the funding would have to be from some kind of asset sale. Is that the right I don't want to say, I'm not trying to get you committed to anything, but is that kind of the right read on your posture now?

I would give that a maybe. I think, look, our focus this year, we've spent roughly $150 million on the ground in an environment, in a price environment like we're in right now. I talked about this yesterday. I was speaking at a Hart event, and what I tell you is that it's a tale of two cities. When prices are low, we and everyone else would like to buy oily properties.

We tried very hard last year, but what tends to happen is, in low-price environments, the quality of the opportunities available to you tends to be lower. We spent a lot more money on raw land and leasehold. Bringing it forward to today, there are a lot of high-quality prospects out there. The backlog is big, if not bigger than it's ever been. But the risk-reward is not great for the acquirer, right?

It doesn't mean you can't hedge all that stuff, but you take activity risk and other things alongside that. Our desire to do large-scale M&A, and when you put it into context of, yes, our equity is precious as it's always been, can you still do things accretively? Of course.

But is it the level of accretion that our board deems to be fair? The answer is no. I think, look, we have plenty of liquidity available to us. I mean, we've got $1.6 billion, our revolver is barely drawn, and so we certainly have the firepower to do so, but I don't think we're interested at this point in doing a levering transaction.

That should point you to the fact that most of our acquisitions will be on the ground in the regular course budget, and/or on a small scale in which it's not going to make a material dent into leverage. I'd say this, that we think we can do all of these things. It doesn't mean, though, the answer is yes, would an asset sale potentially provide those proceeds in order to do that? Yes, of course, that's true. But we'll see if But getting those two stars to align at the same time also isn't something that is necessarily a given.

Right. That's helpful, Nick. Thank you.

(Operator Instructions) Paul Diamond, Citi.

Thank you. Good morning, all. Thanks for taking the call. I just want to touch on the structure of your capital expenses. You're trending towards the high end of the range in the year end. I guess, do you see that carrying into Is the same trend carrying into 2027, or is it too early to tell?

I think as it pertains to 2027, it's just too early to tell. We're working on a number of initiatives, some which could drive significant growth, some which would be more in a maintenance model. I think between the volatility in prices and ensuring that these projects get signed up or don't, I think is going to really make a big difference in that outlook. I think we're going to have to wait.

What I'd say is that I don't see an outcome that's a bad one. So either we can maintain the status quo and everything's great, and our capital efficiency should be similar. Look, I think in general, well costs are rising, but I'd say to Adam's point, on a per-foot basis, our lateral length continues to increase. So on a normalized per-foot basis, I'm not sure we're going to see anything that meaningful.

Got it. Can you talk about inflationary pressures, outside of steel and diesel, are you seeing any meaningful movements or meaningful tailwinds into the end of the year and following the next?

I think the two places I would point to is some fracs and just drilling time. I think that is probably where our operators are most focused in terms of trying to mitigate any sort of inflationary pressures that we are seeing. Then obviously lateral lengths being the biggest of the three.

Got it. Understood. Appreciate the clarity. I will leave it there.

There are no more questions at this time. I will now turn the call back to Nick O'Grady, CEO, for closing remarks.

Thanks, everyone, for joining us today. We're really thrilled with the Q3 results, and we look forward to delivering more. Please reach out to Evelyn with any questions.

This concludes today's call. Thank you for attending. You may now disconnect.