Okay, we're gonna get started with Northern Oil and Gas. We're just gonna have kind of a fireside chat as opposed to a traditional kinda going through slides. On behalf of Northern Oil and Gas, we have the CEO, Nick O'Grady here. And Nick, maybe just for those that aren't familiar, 'cause y'all do have a unique business model, maybe just go over kind of the background on the company, kind of the business model, et c, just to get people who aren't familiar.
Sure. Good morning, everybody. So NOG is about a $5.5 billion market or enterprise value. We are the largest publicly traded exclusive non-operator. What that means is we're a passive owner of working interests in upstream space. We're in three major basins: the Permian, the Williston, and Appalachia. We're in about 10,000 wells. We have about 100 different operating partners. That's about 1,000 net wells. We produce kind of upwards of 110,000 barrels a day. And today we are, you know, as you look at the overall mosaic, that's about 300,000 net acres across those three different basins.
Over the last six years, we've done about $4 billion in acquisitions, and so we've made ourselves a leader in our space in terms of an acquirer. And recently, we've changed the mosaic as well in the sense that we haven't just bought up disparate passive ownerships, but we've also been acquiring in the forms of joint ventures with our operating partners. So if you think about it, and you could use this as a juxtaposed against real estate, you can buy up and create a passive interest in almost anything. So as opposed to just buying existing passive interest, we've actually carved out working interest and bought passive interest with our operators in joint ventures and bought.
Last year, we bought two co-purchases with, both now, Vital Energy and with now Permian Resources, in two large transactions last year. So, those are relatively avant-garde transactions. And we head in, you know, we're, this year, it's a relatively flat budget. We'll grow about 20%. You know, we've been amongst the best performing upstream companies over the last 5 years. I think we've, if I, if I may say so, I think in over our 10 years, since 2018, we, we kinda reformulated the business in 2018. I think we've outperformed the XOP, which is the S&P Oil and Gas Index, by about 90%. We've also grown the dividend, pretty substantially. We started from zero. We grew at about 11 straight quarters. Dividend's about, you know, 4.5% today.
And we try to do it in a dynamic fashion, so we don't necessarily, we don't have a formulaic or, you know, a variable dividend strategy. It is a fixed dividend strategy, but we also have looked at buybacks from time to time, and so from there, we... Our goal, though, over time, is to grow that strategy. So I'll pause there and get going.
You know, you've talked about, you know, you think over the next five years, based on the opportunity set you've got, you could double the company again. I assume a lot of that will be more of these kinda big, large-scale JV co-development type projects. So as you think about kinda balancing the opportunity set with obviously the, these bigger co-development projects, the bigger capital outlays, lumpier sort of capital production profiles, just how do you, how do you balance that with the historical just kind of ground game kinda deals that y'all used to exclusively do?
Yeah, I mean, I think it's an all-of-the-above strategy. I think, you know, we actually had our best year of ground game ever. Last year, we did about $300 million of just ground game. That was about, you know, 2,500 acres, rough and tumble, and about 30 net locations we picked up across last year. And those will be developed, both some last year and then kind of into the future. And that's what-- Our ground game is really micro acquisitions, so, little, small, disparate interests that we pick up one little unit at a time. And we pick those up all the way from our operators to small mom and pops, to just literally brokerage, what we would call ourselves the Dustbuster, literally, or remora fish. We use any coyotes, any term you wanna use.
And so that really is our bread and butter, and we'll stay true to our roots as a small company in that respect. And there are still hundreds of millions, if not billions, of disparate non-operated properties that still need to be consolidated, as capital has become more scarce in the upstream space. We still see ourselves as the de facto consolidator, and I think over time, that will still create a lot of natural growth for the business. But to John's point, with that capital, you know, being needed, we see an increasing inbound need for us and our ability to structure and provide creative solutions from operated partners to generate JV, buy down, and other structures, which we can structure for our investors to create a solid return, which can provide significant growth for us.
You know, we did raise some ad hoc capital towards the end of the year, last year, to provide us a ton of buying power this year. I think we have about $1 billion of on-balance sheet firepower this year to make acquisitions, and that's been about our pace. We've done about $1 billion a year over the last several years, and so we're really locked and loaded for this year. And I think... Look, I think the opportunity is there. It's easier said than done, you know, to find the right assets with the right risk profile and obviously willing sellers, and to do it on our terms and conditions. It's not easy, and it's also to be clear, when you're doing this with other partners, you have to agree, right?
So, you have to both win a transaction. You have to... Our engineering teams and our partners' engineering teams have to agree. And then, really, to understand how these work is when we've done these with partners. There's a whole layer of governance because... Non-operated assets tend to be, the benefits of those are very obvious, which is that we have, if you think about yourselves as portfolio managers, we have small, low working interests, so a diversified portfolio of small interests that provide low risk, right? And so, if you have a portfolio of 100 stocks, no one interest makes up a huge difference to your portfolio, and that's how we like to think about it, Modern Portfolio Theory. When we do these larger joint ventures, they have higher concentration, which provides higher returns generally, but with more risk.
And so, the way we've solved for that is creating governance and rules and regulations that we create these contracts with the operators that provide us surety of return and rules around the development that can protect us for those risks. And obviously, we have to come to agreements with them and that can be around the timing of the development, what to do if commodity prices changes, and things like that. So those are obviously, you know, challenging things to negotiate around. So there's a lot of things that have to go into getting that done, but I am confident for the right opportunities and the right things that we can find those and get them done.
And obviously, one of the huge benefits of being a non-op is you can run extremely lean. I think, you know, y'all generate more revenue per employee than any other energy company in the world. As you've done all these deals, you really haven't had to address the headcount much. I mean, do you feel like the personnel you have, like you could, if you were, theoretically, you double the company again in another-
Yeah
... five years, from a headcount perspective, like, what, what would need to be done, if anything?
Yeah. So funny, I annoyed Evelyn on this on Saturday morning. I had an epiphany at 7 A.M., and we put a new slide in our deck. We wound up going with production per employee, but we went back to 2017. It's in our slide deck for this if you want to see it, but that was just what we went with just because we had the data readily available. But we've got, I think, 38 employees today, right, Evelyn? And so if you look at it on a production per employee, it's roughly tripled since 2017. And so if you think about an operator, and it's not to knock the operator business, it's obviously a great business, upstream business. They are our partners, and I'm not here to knock it.
But there are natural dis-synergies as you get bigger, which is that if you are an operator in the Permian Basin, and you buy an asset in the Williston Basin, you have to add field offices and real estate and a whole other team of geologists and rig personnel and all, a whole set of engineering staff to do that. We are one team, right? So the same engineers, now, granted, they have different specialties and things like that, but the same underwriting team is the capital, it's one funnel of capital allocation. Excuse me, so this doesn't set that off. It's one capital allocation, so we don't have two teams fighting and lying to each other, competing for capital. We don't have embedded personnel that have to be fed capital every year.
It's really just financial decisions, no different than when you're swapping one stock for another. It's very, very efficient. And so what that's created is a very lean, a lean structure that can really just be financially motivated and nothing more. And so as we've grown, ultimately, really the biggest growth in our organization has really just been technical. So, when I started, there were three engineers, now it's 14, and that's been really the only part, and that's really just as we've gone from a single basin to a multi-basin operator. And as we grow from here, I think really it'll be geology and technical staff that's only there. And I think we're quickly reaching terminal velocity, and the reason is because we've spent the bulk of our capital in the last few years has been on technology.
And so we hired a group called Palantir Technologies, which I'm sure you know, and they built out a massive data lake to really take that, and as opposed to throwing bodies at it, we've thrown money at technology to really automate a lot of that away. And so we're 38 people, I think, candidly, at around 45; the goal is to keep it under 50. So I think even if we doubled or tripled the business from there, I think that's really where it would probably top out. We still don't even have a full-time HR person, as an example. We don't need it. We use a contract person when we need somebody to be hired and things like that. But I think that is the benefit of it.
So as opposed to, if we went from, we're in three basins today, if we went to six, I mean, I don't imagine that happening, but if we did, you don't have the same type of issues where you have to add those, and you don't get the same lack of efficiency from having to then allocate money automatically from one to the other. Frankly, for us, if one basin is not economic at any point in time, we have no problem just allocating zero capital. For an example, last year, in a weak gas environment, we simply didn't allocate any money to our Marcellus properties 'cause it didn't really make any sense. And so that's the difference. We don't have, you know, a field personnel that you simply have to keep money going into that period of time 'cause it's just money to us.
You mentioned how, you know, like you're in three basins now. Originally, you got started in the Bakken, pretty quickly grew the Permian to an even bigger position than the Bakken. You're in Appalachia. Like, what would you need to see, whether it's scale or otherwise, to add, you know, jump into another basin?
Yeah. I mean, we tend to walk before we run. You know, we've obviously added to our Appalachia position through the Utica in a very small way recently. Obviously, we have Utica exposure in our existing Marcellus assets. It does have some Utica penetrations, and so we had had some technical knowledge of it. We had the opportunity to add on to some Ohio properties recently, and we chose to buy a portion of them as opposed to the whole thing, in order to test it out. It's gone very well so far, and we have options to look at the rest of the properties over time, and we'll evaluate them one piece at a time. And as you'd imagine, as a public company, one of the advantages you have is you sort of plant the flag publicly and then-...
Lo and behold, you get about 50 inbounds as soon as you make that announcement, and that's one of the benefits we have. So, you know, as you can imagine, we, we made that announcement in November and, you know, we are just inundated with people calling us now, telling us about all their Utica opportunities they'd like us to participate in, both private and public. And so I think realistically, though, from a scale perspective, there is a balance between the fact that we wanna make sure when we go and do something, that we have the technical knowledge and understanding before we do it. At the same time, you wanna make sure if you're gonna do something, that it's gonna be meaningful to the organization. And so there are basins, I'll use an example, like the DJ Basin in Colorado.
It's an area that we have looked at in the past, and it has great geologic properties, right? But it has major political risks, right? And so we've never been able to get comfortable around those issues. There are ways you could solve for that if you had the right operator and all those sort of things, but we've never been able to find the right property to solve around those types of things. And so if you went into it in a major way, that could pose real risks, right, to the organization because you would effectively be going in in a big way and then creating potentially more problems than you'd be solving.
If you went in in a small way, in a sort of surgical manner on a specific asset, you might be able to do it in a different way. I mean, that's just a small example. On the flip side, you have assets like the Eagle Ford, which we've also looked at a ton over time, and same thing, we just haven't found the right particular Eagle Ford asset at the right price, or we haven't been competitive and things like that. So I think where I'm going with it is that I think, if you're going to do something, you wanna make sure you have the technical knowledge in advance to make sure you do it. You wanna make sure it's gonna be meaningful to the organization and meaningful to our investors, that it's not a distraction.
But if you're gonna do it small, you wanna make sure it's gonna be something that you can build upon over time, and that it's gonna be something that is... You know, in the case of the Utica, I do think that I don't think it'll become, you know, a company changer over time, but I do think that our technical knowledge and the opportunity in the basin is real enough that we should be able to build some scale to it over time, even though I don't think it'll become like the Permian has for us.
Just given how acquisitive y'all have been, obviously, hedging's been a pretty vital part of y'all's, your, your strategy, sort of locking in returns when you do deals. Maybe just talk about, you know, you've obviously been a lot more you are more active hedging than most of my traditional E&Ps.
Yeah.
Just maybe talk about that.
Yeah, I mean, I think, you know, I believe in a reasonable rate of return. You know, I think that, you know... I think there, there's a great Wall Street Journal article a couple of years ago. I've, I've cited it a few times publicly, but it did, it did a great empirical study going back, and it basically showed that people that never hedged or that always hedged came out about the same, and the companies that hedged and then stopped hedging and then, you know, basically lost money consistently, right?
I've observed is a lot of the public companies you guys follow hedged, and then, you know, we went through a big bull market, and they were like: "We're never hedging again." And then, lo and behold, then prices went down, and you've probably seen that with some of the gas companies this year, right? So they decided in their infinite wisdom, after 2022, when gas prices rallied a bunch, they probably shouldn't hedge, and now you're seeing that, you know, come to roost this year. And I think our observation is that we're a growth company. We will carry-- we carry modest leverage, but we'll carry some leverage. And we don't hedge necessarily to protect our cash flows in any given year.
We, we underwrite returns, so it means that when we spend, when we commit capital, that capital is based on earning a return on capital employed, and that capital is in the ground for 6-9 months, and we don't know what the price of oil is gonna be in 6-9 months. We know what it's-- we know what it is when we say yes, but we don't know what it's gonna be when it actually happens. And so, if I... You know, if you were at Best Buy and you said, "I'm gonna sell an Xbox," you bought the Xbox from the manufacturer, and then you put it on the floor with no idea what the price was, you'd say that was crazy.
But in oil and gas, it's like, "Oh, I'm just gonna bet on the upside constantly." I mean, to me, it just doesn't make a ton of sense. And so we've taken the philosophy that when we buy something and we commit capital, whether it is on the capital side or whether we're acquiring properties, we wanna make sure that we earn some return. Now, you have to allot the fact that there are risks. For example, you can't hedge 100% of an acquisition because, frankly, the cost of drilling fluctuates.
So meaning that the acquisitions we made in 2021 and 2022 during a period of rising costs, had we hedged 100% of those, the cost of drilling floats too, and so it goes up, and so we have to allot for those things, which is that the price of drilling a well went up. And so even as oil prices rose, so did those, so those margins can be can tighten. But our philosophy is that we wanna make sure, through thick and thin, that we can underwrite and make those returns. And we internally monitor something we call a capture rate, which is basically looking at what % of the realized price are we capturing over time. And what we found is that over time, it's been very, very consistent.
And so in periods like 2020, when the world went to hell in a handbasket, we, you know, we captured a huge percentage of oil and gas. I mean, it frankly protected the company from when we frankly had too much debt, 'cause it's something we inherited as a management team. I didn't create that problem, but, you know, that was the lot I was given when I came in as an executive. But it kept the company going, and we certainly benefited from that and generated cash and were able to take advantage of that environment. And then obviously, it trimmed the edges in a period like 2022, when prices were really, really high.
But through a cycle, you should come out about the same, and I think that that's our philosophy. But I think when we're when we're spending $500-$600 million at a clip, we wanna make sure that we're gonna earn the returns that we underwrite over that period of time, and I think it's a solid philosophy, especially, you know, I think I saw-- I, I've, I've seen this in every single bull market where people come to a philosophy, they say, "Well, you know I want you to just carry no debt and not hedge. And I heard this cry the loudest, probably in 2022. And I saw, especially some people saying it to gas producers, right?
You know, whether you had no debt or not, how many people here would say they wished that the gas producers, levered or unlevered, had hedged in 2022 based on the environment we're in today? I bet you'd say $5 where the strip was in 2024. In 2022, I think they all wish they had hedged, because ostensibly they were committing capital on wells in 2022 that are producing today, that they were spending the money at those drilling costs that I think they wish they had earned. And so I think, to me, playing for the upside consistently in a space in which you're earning super normal returns, and, you know, the average well we're consenting to is earning an unleveraged return north of 50%.
That is not a normal return in the scheme of overall corporate finance, and so I think we need to make sure that we are earning our investors' return. I mean, our corporate return on capital is about 30%, and it is a depleting business, and we want to make sure we earn that return.
Maybe, maybe talk about, you know, on a leading-edge basis, it looks like costs are maybe declining more than what y'all are, let's just say, able to bake in your guidance-
That's right.
due to the fact that you're accrual versus cash.
That's right.
Maybe just explain-
Yeah
... that to the investors.
Yeah, so you won't see it. So we are an accrual shop, but we've had to talk a little bit too much about this publicly, I think, lately. So what that means is that when we receive from the operator the AFE, which is the, you know, the allowance for expenditure, meaning they'll send us a bill for the well, and let's just say, they say it's $12 million. That is an estimate, and those are often stale, so they'll send it to you based on the most recent estimate.
The difference between when if Diamondback, you know, a public company, sends that to you, and they drill that well in three months, and it costs them $10 million in that quarter, when they report to you and it costs them $10 million, they're gonna show you $10 million. For us, in that accrual, oftentimes, we won't receive that final bill from them because they're gonna send and pay all their vendors over. We won't receive that bill for maybe upwards of another three months beyond that. Which is great because actually we get the benefit of the carrying cost of that. So from a working capital perspective, it's actually great because we get what's called a joint interest bill. So it means that they're carrying us for those costs, for some period of time.
However, we accrue on a percentage of completion, so we take that $12 million, and we accrue over the life of that well. And then at some point over that period of time, when we don't receive—you know, we only receive $10 million in billing, that $2 million is credited back on our capital expenditures. And so I think what we've been observing over the last 3-5 months has been, we've started to see material cost savings, and it hasn't really been one item. It's been modest savings on fracture stimulation, mostly in sand costs and some water handling. We've seen tubulars and other costs in drilling and rig rates, and a lot of it's just been that people have been drilling faster. So they're just, by drilling faster, they're using less service costs, and in general.
And so we're seeing, call it 10%-15% reductions in costs, but those costs really, on that accrual basis, you're talking about 90-180 days by the methodology. So as we get towards the end of this year, you should start to see those credits start to roll off from our capital. And so there's an inherent conservatism built into our guidance. Meanwhile, you know, you won't probably... And we've actually been stepping up how we, over the last 6 months, because frankly, we're coming out of an inflationary period. We were stepping up how we were accruing because we were seeing the opposite. So we were actually increasing how much we were accruing for the wells because we were making the assumption that everything was gonna be at the full cost, right?
Whereas you would typically accrue with some, because every AFE also has a contingency in it. So we were making the assumption that the full contingencies were being used, right? And so I do think you're gonna see some benefits as the year goes on. Now, of course, if oil prices go to $85 or $90 in the next couple of months, we may see those cost savings start to invert on themselves if we see activity pick up. So that's the other, that's the other reason why, I always tell people, "If you're looking for optimism, don't come to a non-operator," because we tend to just be a little bit more pessimistic than your average operator because we tend to take everything in stride.
And you, John can tell you this, like in 2021, when you saw well costs be very low, we kept accruing at low costs, and I think we underran every single quarter in that year. You know, I think in this year, you might not see it in the first one or two quarters, but I think there's a good chance as the year goes on, you can see us, you know, start to really see meaningful cost savings.
Over the past few years, y'all have really focused on rapidly growing the dividend.
Yeah.
Now, you've sort of talked about, you know, the dividend, given how rapidly y'all are growing as a company-
Yeah
... kind of shifting a little bit more toward buybacks. Maybe just-
Yeah
... talk about how you make the decisions on, from a shareholder return framework, dividends versus buybacks?
Yeah, I mean, you know, I'm a student of the market, so for all of you who don't know this, I spent 18 years on the financial side of the business. So I was a banker and then a buy-side investor for a long time. So, you know, the risk-free rates, like I looked, the 10-year was 4.1%. Today, our dividend yield is about 4.5%. And so what that tells me is that... And we've done investor outreach and surveys. We had Evercore do a pretty holistic look at our dividend. We've grown it dramatically in the last couple of years, and I'm a big believer in long-term growth of dividend, and that is our plan. So I don't wanna make the case that we're not planning on growing our dividend over time.
We've moved to kind of an annual... I think a healthy way to do it is really to look at it annually, and I think that's how most companies do it. I think we really wanted to get to that point. We don't want to be kind of no different than, like, well watching in oil and gas. We wanted to kinda get it to an annual view after kind of a real quarterly step-up over that period of time.... However, when your yield is above the 10-year, I think it's telling you that your equity is undervalued, right?
I think that that was really. And I think the reason our equity is undervalued isn't because I'm here to complain and say, "Oh, the market doesn't appreciate it." I think it's a function that our company has grown so fast in the last few years. I think the valuation simply just hasn't caught up. But I use this term a lot, and I used it on our call. You know, life gives you lemons, you make lemonade, and we have at period, we're not a serial buyer of our stock, but we have periodically, aggressively bought our stock back. We've had this period once before.
In 2022, we did a massive acquisition, our first massive acquisition in the Permian, and we saw a huge contraction in our valuation because, frankly, just the numbers, stock had not caught up to the numbers. And at the time, we had preferred stock, a convertible preferred stock that was basically common stock. It was deep in the money, and so we just started acquiring it in huge droves prior to it fully converting. And lo and behold, then the equity had a huge surge pretty soon after. And so when we look at it today from an allocation of capital perspective, to me, it suggests that the best allocation of capital is likely from rather than increases to the dividend from an incremental capital use, is likely the buyback.
Now, of course, what I also mentioned on our conference call is when we do that and we go to the board and say, "You know, instead of the incremental dividend," I think from a buyback versus dividend, I think they were sold on that concept, but they also look at our capital as precious and say: "Well, okay, that allocation capital question is okay, but we also want to think about that you, you are an allocator of capital, and we wanna view that versus your acquisition strategy and all that stuff." So we have to test that because ultimately, we've also proven to them over time that we've created more value from acquiring assets, and so we have to test that.
So we also have to be mindful they're not mutually exclusive, but that we always wanna make sure that we're leaving room and capitalization ability, that we can acquire assets over time, and that we're not - we're leaving room, that we're not exclusively doing that. Because, again, this isn't always the thing that institutional investors wanna hear, but if you're only exclusively buying back stock, that's telling you that you don't have growth opportunities outside in your business, right? And we are... While the sector overall is mature, as a non-operator, we have incredible growth opportunities for us, and what has driven our stock to outperformance over time has been the fact that we have growth opportunities in the sector that's been relatively low growth. I mean, if you look at us versus the average upstream company, we're not really an E&P company.
We are, really are, something else. I don't know exactly what to describe us as. I have yet to come up with the right term, but we are in that trading sector. But the reason our equity has performed better is because we have created growth for our investors, and I think that that is something that I think we still have that opportunity. So we wanna make sure that we, we-- it is an all-of-the-above strategy, but as we focus on buybacks, that we make sure that we leave the balance sheet in, in shape, that we can also focus on those growth opportunities.
Are there any questions in the audience? Yeah, go ahead.
Sure. When you talk about those negotiations that include.
Yes. Yeah, so the first, like, the first conversation is a well-by-well non-consent provision, and that's, that's usually not a difficult one to do. So, the-- Actually, in the case of our Midland-Petro one, it goes a little bit farther, which is... The, the term I like to call it is what you call, like, the red phone. You know, like how in the White House, they have a red phone, you know, call Russia, which is that we effectively have the right to cease all operations, so if there was something really meaningful. And what we did with Midland-Petro in particular, we own 40% of that project. The other 35% is through another non-operated partner that we-- They're not-- I wouldn't call them an affiliate, but it's another friendly party. And so we are, in constant contact with them.
So between the two of us, we own 75% of the project. So if something was to go awry, the two of us would have the right to stop the project, and so that gives us effective control of it. But yeah, we have a well-by-well non-consent. And to give you guys an understanding, this is an important distinction between, say, royalties and working interests, is that as a royalty owner, you know, I think investors sometimes get mesmerized by royalties 'cause they say: "Well, you're a cost-free interest," but a royalty owner has no rights, right? You have no rights, meaning that if oil goes to $30 and an operator wants to drill on your land and you're in a royalty owner, they can do whatever they want.
And yes, they can, they can also drill on our land, but theoretically, if we non-consent, we don't have to spend the money. So yes, you'd be out that individual well, but you also, through the penalty, you would get your interest back. So if they drill that well at $30 and then oil rallies back, you would theoretically get your interest back on the back end costlessly. As a mineral owner, if you bought that asset at $60 oil, and paid all your money up front, and then they drilled it at $30 oil, you effectively have incinerated your capital, as opposed to you would just lose the acreage value, on that individual well in a non-consent right. So you're only out a fraction of your, your dollars.
Can you all please join me in thanking Nick for presenting?