Greetings, ladies and gentlemen, and thank you for joining the Northern Oil third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Mike Kelly, Chief Strategy Officer.
Good morning. Thank you for joining us for our discussion of Northern Oil and Gas' 3rd quarter 2021 earnings release. This morning, before the market opened, we released our financial results. You could access this release on our website. Our Form 10-Q will be filed with the SEC within the next few days. We also posted a new investor deck on the website as well this morning. I'm joined here with Northern Oil and Gas CEO Nick O'Grady, our COO Adam Dirlam, CFO Adam Dirlam , and Chief Engineer Jim Evans. Our agenda for today's call is as follows: Nick will give us, will start us off with his comments regarding Q3 and our overall strategy. After Nick, Adam will give you an overview of operations. Chad will review NOG's Q3 financials and our updated 2021 guidance. Finally, our executive team will be available to answer any questions.
Before we go any further, though, 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 EBITDA and free cash flow.
Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued this morning. With that taken care of, I'll now hand the call over to Northern CEO Nick O'Grady.
Good morning, everyone. Thanks for joining us. We continue to fire on all cylinders here at NOG. Let's get down to it with five key points. Number one, execution has been strong. Our business model is shining. Q3 is a testament to the work we've put in year to date. NOG has signed three amazing transactions so far in 2021. These transactions have allowed us to take the company to the next level, which is evident in our financial results for the quarter. We are continuing to be very disciplined in our capital spending strategy and focused only on high-return opportunities. Looking at Q3 specifics, our production was higher than our internal forecasts. Unit costs and realizations have improved, which has allowed us to exceed our cash flow forecasts. Consistent with last quarter, we once again achieved record adjusted EBITDA and free cash flow.
Two, we're not done. The fourth quarter is setting up to be materially stronger than Q3. We'll experience the full power of our Permian acquisition in Q4 and a partial contribution from the pending Williston acquisition. Our completion count in both the Williston and the Permian will be up substantially in the fourth quarter, and we look for new record cash flow and even higher free cash flow as we close out the best year in the company's history. three, despite the incredible pipeline of M&A we have evaluated this year, the list is only growing larger, with active prospects still totaling north of $1 billion. The window of opportunity for M&A opens and closes over the years, and we will not squander the opportunity for our investors while the window is open.
I would add that with oil and gas prices up substantially, risk management pertaining to any M&A transaction is more important than ever. This translates into higher discount rates applied to our evaluations, along with a thorough hedge strategy aimed at locking in a sizable portion of the economics of any deal, but also leaving room for considerable upside over time. We continue to be thoughtful in how we evaluate future acquisition opportunities with the expectation that the acquisitions must meet the number 1 criterion, that they are highly accretive to our stockholders. As Adam Dirlam will discuss further, we're also expanding our reach on the ground with more avenues and creative structures to aid operating partners in development. Number fourm, the positive trajectory of our cash flow and balance sheet is mnoteworthy.
Even after our pending Williston acquisition, we still expect to end the year with a run rate leverage ratio of less than 1.5 times and to fall below 1 time in the second half of 2022. We are also far exceeding our free cash flow outlook for 2021, with over $140 million cumulative year to date versus prior estimates of $160 million for the full year. We are increasing our estimate to north of $175 million for the year, our third straight increase. The fourth quarter of 2021 is set up to be the strongest quarter for cash flow and preliminary indications for 2022 point to even further upward momentum. Number five, dividends and returns to our shareholders are also increasing.
We will recommend to our board of directors a further increase in our quarterly dividend to $0.06 per share for the fourth quarter upon closing of the Williston acquisition. If you're keeping score at home, this would increase our quarterly dividend 100% since first declaring one only two quarters ago. As I stated on our first quarter call that it was just the beginning, and I meant it. It's important to note that this is our base dividend only, and while it has been growing rapidly, our excess cash flow has continued to outpace the growth of the dividend, which currently represents less than 10% of our 2021 expected free cash flow.
For those seeking more clarity, we will answer in the same consistent fashion that we have previously. We believe that the dividend will be able to grow more substantially as our leverage targets are achieved. Capital allocation is force-ranked here at Northern, whether for acquisitions, drilling capital, acreage replenishment, or stock buybacks and dividends. We are dedicated to providing our investors with a competitive dividend yield, and we expect strong and steady dividend growth in the coming quarters and years. I will reiterate my past comments that future dividend increases will be augmented and accelerated by smart M&A and continued leverage ratio reduction. That's it for me this quarter. Thanks for listening. We are and always will be a company run by investors for our investors, and I truly want to thank each and every one of you for joining us today. With that, let me turn it over to Adam.
Thanks, Nick. Northern continues its march forward operationally with disciplined capital spending, stable and growing production, and solid improvement in operating costs. Our production was up quarter-over-quarter despite a quiet period for completions. We turned in line approximately 6.5 net wells in the quarter and expect activity to keep ramping into the fourth quarter, notably driven by our Permian assets. Drilling activity continued to pick up steam, too. Operators have dramatically drawn down their drilled but uncompleted well inventory, and new drill activity is picking up markedly as we head into 2022. During the third quarter, we elected to over 80 AFEs, an increase of 44% from Q2, and we have already received over 40 AFEs in October. The increase in well proposals is more a function of NOG's managed acreage footprint rather than an overarching trend in rig activity.
We've also been encouraged with our operators' discipline to remain in the core of our respective plays as the weighted average rate of return for our Q3 elections at Strip is estimated to be well north of 100%. The potential for cost inflation has also been a hot topic. During the quarter, new proposals averaged around $6.9 million, an increase of approximately 5% compared to our Q2 average. This increase was primarily driven by the operator mix and completion methodologies during the quarter. We do expect with casing and other items rising in cost to see moderate inflation as we head into 2022. However, we continue to remain conservative with our internal assumptions, modeling well costs at an average of $7 million-$8 million a copy, which should buffer cost inflation in regards to our spending plan.
Most operators we speak with are reluctant to significantly accelerate drilling given tight labor and materials markets and the effect that would have on drilling costs, which means costs may rise, but we'll likely avoid the huge spikes we've seen in past high oil price environments. In the Marcellus, completions on our initial EQT well pad commenced in early July, and production to date has been right in line with our expectations. This asset is obviously enjoying much higher cash flows at today's commodity strip than we anticipated when we purchased the property. The Marcellus properties valued using an October 1 strip have a total unhedged PV10 value of $468 million compared to our purchase price for the properties of approximately $140 million. Turning to the Permian, our outlook for NOG's future in the basin gets stronger and stronger.
We are screening multiple deals on a daily basis and continue to regularly pick up core interests in the Delaware. We're excited to announce that our Permian expansion continues as we've recently signed a deal to drill over seven net wells in the Midland Basin starting in the fourth quarter and moving into the first half of 2022. Our M&A strategy continues to expand, not only with our ability to buy acreage and assets with near-term development, but to also formulate direct drilling partnerships with operators in need of drilling capital and with better aligned structures to the DrillCos of old with financial counterparties. We also continue to work with our operators to develop some of our operable acreage, something that gives us unique insight into the timing of development and strong economics.
We continue to build out a top-tier position partnering with the best operators in the basin and have line of sight for the Permian to reach roughly 10% of our total production volumes as we exit the year. As it pertains to overall deal flow for NOG, we are extremely busy both at the ground game level and with larger M&A opportunities, and there is no rest for the weary. We continue to work through the backlog with the same methodology and discipline we've always utilized. On the ground game front, we closed on 6 transactions in Q3, roughly in line with what we completed in the second quarter. In total, we picked up 2.2 net wells and over 1,000 net acres.
We had transactions in both the Bakken and the Permian, and we as we've moved into the fourth quarter, our Permian ground game has begun to grow market share as a function of high levels of activity. As we mentioned in Q3 of last year, we've seen a pickup in deal flow in the latter part of the year at a time when we often see our competitors and operators exhaust their budgets. As it pertains to the potential for larger M&A, we are currently evaluating three new substantial opportunities focusing on high-quality assets with robust low-cost inventory in the top plays of the U.S. We have passed on a number of acquisitions in the past three months as we want the opportunities to focus on our core areas.
The recent Williston transaction is a testament to this, where we purchased assets that had direct overlap with existing operations. The overall integration is truly plug-and-play. As I mentioned last quarter, being the largest non-operator, we see consolidation as an important theme. This has to be combined with our need to deliver strong asset returns to our investors. Thanks for your time. I'll turn it over to our CFO, Chad Allen.
Thanks, Adam. I'll give a quick summary on Northern's financial performance.
Our Q3 production was up 7% sequentially over Q2 and up 98% compared to Q3 of 2020. Our adjusted EBITDA and our free cash flow were up 2% and 22% respectively over Q2, ahead of Wall Street analysts and internal expectations. Our adjusted EPS was $0.84 per share and on a comparative basis to Wall Street analysts, which typically exclude the tax effect of adjustments, our adjusted EPS would have been even higher at $1.11 per share. Oil and natural gas differentials were stronger during the quarter, which increased our cash flow. Operating expenses also continued to trend down in the third quarter. Lease operating expenses decreased 5% compared to Q2 on a per unit basis. Cash G&A was about flat on a per unit basis, excluding acquisition-related costs.
Capital spending for the third quarter was also below Wall Street and internal estimates at $63.2 million, excluding the non-budgeted corporate acquisitions. As Nick mentioned, in the first nine months of 2021, we produced over $140 million of free cash flow, near our estimate for the entire year and roughly doubled of what we generated in 2020. We discussed in August on our Q2 call that the pro forma for the Permian deals, our revolver balance was approximately $350 million, yet we were able to pay down over another $30 million by quarter end. On the hedging front, we've added modest volumes since our last report, mostly in connection with the pending Comstock acquisition to de-risk the high returns of our PDP cash flow stream, but our net exposed barrels to the stockholder have increased, providing additional upside.
2021 guidance has been updated. We have increased the midpoint of our production guidance for the year, partly as a result of the pending Comstock acquisition and the rest from continued outperformance. That points to a fairly significant ramp in our production profile in Q4, where we expect significantly more well completions. Cost guidance, including CapEx ranges, have all been lowered, and our differential guidance substantially improved, reflecting what we've experienced year to date. With respect to 2022 guidance, we are hard at work looking towards 2022 and are currently formulating our financial plan and forecast for board approval. I will provide some goalposts. Management currently sees no scenario where capital expenditures would be greater than $350 million in 2022, assuming no material M&A.
This outlook should generate, at current strip prices, well in excess of $250 million of free cash flow and would result in modestly increased production volumes and consistent growth in our common stock dividend. With that, I'll turn the call over to the operator for Q&A.
Thank you. At this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star one on your telephone keypad. Our first question comes from Scott Hanold with RBC Capital Markets. Please state your question.
Hey, good morning, guys. Adam, you had mentioned something about, I think, you all will be participating in some Midland Basin wells. Is that a new, I guess, initiative? I know, you know, before you were a little bit more focused in the Delaware. Could you give us a little bit of color on, you know, where that might be specifically in the Midland?
Yeah, Scott. With the CA in place with our operator and the fact that we're working on a couple other, you know, things that are in process right now, I can't necessarily get into the details in terms of kind of area and the structure. What I'd say is net to the cost, our overall rate of return materially exceeds kind of our typical ground game transaction. You know, from a structural standpoint, it also gives us a lot more transparency and control over well design, lateral lengths, timing of development, cost controls and other various kind of off-ramps. You know, from an operator's perspective, it's certainly a superior structure, you know, relative to the reversionary DrillCos structure of old.
It gives us the ability to, you know, flex our ground game strategy with higher returns, and also, you know, gives us the ability to do larger quantities in kind of one fell swoop.
Yeah. Scott, to your question about the Midland, I would say we've been looking actively in the Midland as much as we have in the Delaware. I think we've generally struck out a lot more in terms of finding high-quality opportunities. This one came to us directly from the operator.
That's right. Yeah. I mean, the Delaware and the Midland have both been a focus. I think the Delaware has just been more, you know, not coincidence, but focused on quality operators and opportunities there.
Got it. Are you all seeing, you know, more interest coming inbound from operators looking to, you know, either reduce, you know, sort of working interest or probably more important to them, it's getting rid of non-op? I mean, there was a prominent-sized Delaware operator that kind of mentioned that on their call that they're working with, you know, someone to do that. Are you seeing more of those inbounds come in, Neal?
Yes, both. I think as we've gotten bigger, and our financial wherewithal is greater, it's something that is picking up notably, I would say in the last three or four months, we've had more phone calls and bankers looking to do introductions on this type of stuff than we've ever seen before.
Yeah. It's across all our basins. I mean, I think we probably are getting three or four, kinda onesie-twosie opportunities on a daily basis. We're having more, you know, fulsome conversations with operators, about packages, you know, as they kind of continue to pick up, you know, operated packages or merge, you know, there's always non-op that comes with that. You know, for them to be able to kinda clean up some of that stuff, it's not small packages. It's, it's everywhere from kind of the AFE to AFE unit by unit stuff as well as kind of the larger packages. That seems to be picking up steam.
Yeah. One thing about that, Scott, is that, you know, for a lot of operators, they're trying to keep their leverage in check. They're trying to keep their spending in check, but they still have lands they need to develop, whether it be expiry risk or other things. They're looking for partnership structures. I think from our perspective, you know, similar to our Marcellus assets, if you can have a higher degree of control and you can share in those risks and have good alignment, it's a superior structure, and I think you'll see more of it from us.
Got it. Nick, if I could squeeze in one more on shareholder returns. I mean, you've got obviously some goals out there on, you know, increasing that dividend because, you know, have your thoughts changed on buybacks variable, you know, special dividends? Like, what has your thoughts changed on that in, you know, where does NOG go from here?
Yeah. I mean, I think on the special dividend part, I just wanna couch it by saying, you know, we have a regularly scheduled board meeting in December. I think this is gonna be a hot topic about how, you know, as we ramp the dividend, how the terminal structure is. I don't wanna speak on it until we really have that whole conversation. You know, as it pertains to buybacks, I think where our company is today and where it's headed, I think we still think dividends make the most sense. Deals like Comstock prove to us that we can create, you know, more value through growing the cash flows of the business than, you know, the potential per share or trading benefit to the shares of a buyback.
That's where we are today, where we're still relatively small. Over time, I think it will be something we will inevitably look to do. I think for now, we can continue to add assets and grow the dividend substantially. And as I've said before, buybacks carry significantly more cyclical risk to our investors and much less discipline than a dedicated dividend strategy. For the time being, dividends are the way to go. My observation is that investors like them because they're tax efficient and because at least in the short term, they can make the stock go up. They're also a lot riskier than dividends from a timing standpoint. I mean, how many announcing buybacks today were doing so in 2020 when our stocks were actually low?
I also think that it's a lot more fickle, 'cause companies can easily abandon them versus the consistency of dividends. I would add that while they might not have the same instantaneous impact on a share price that a buyback would, they do help provide stability and floors, and they do disincentivize short selling. I think that's where we are now. I think this is a fluid, conversation. I think we have to achieve those leverage targets. As we do, I think that'll be a high-class problem to have.
Thanks.
Thank you. Our next question comes from John Freeman with Raymond James. Please state your question.
Good morning, guys.
Morning.
Morning.
Morning, John.
Firstly, I wanted to touch on, Chad, you sort of touched on kind of the upper bounds of what CapEx could be in 2022, and just wanted to maybe get a little additional color on sort of the assumptions that go into that, let's just say the upper bound of y'all's expectations in 2022 in terms of if I was to compare it to, let's say, the 38, 40 wells that y'all are expecting to add to production this year versus what maybe the upper bounds of that CapEx would assume next year? What sort of like oil service inflation is sort of built into that number as well?
I'll answer the last part, which is on the inflation front. You know, we never really cut our well estimates, so we've been cutting CapEx all year as we've actually, you know, enjoyed lower costs. We never really on a forward basis have ever really changed that. It's really more on an as incurred basis. You know, while we've been enjoying $6 million-$6.5 million well costs on average, we never really stopped from budgeting at $7 million-$8 million. I think we'll be relatively well insulated from a, you know, inflation perspective. In terms of the, you know, let's call it $350 million upward bound, I think the answer is that, and I think Chad alluded to this, is that our view is based on our.
You know, we don't have a formal board approval. I would say that that would be the upward bound, which would include a fairly decent chunk of some growth capital. I think, you know, we certainly could grow modestly and spend somewhat less. We just sort of want to set the upward bound so that people don't, you know, fear that we're somehow going to have some massive blowout as we get to next year. Chad, I don't know.
No. You know, you said it right.
Yeah.
That's exactly our thoughts.
I mean, I think Does that answer your question, John?
Yeah, it absolutely does. Thanks, Nick. Just a follow-up, and maybe some of Adam's prepared remarks kind of alluded to this as well. You know, just looking at, you know, each of the last several quarters now, y'all, you've been able to do some pretty sizable transactions, you know, acquisitions on the bigger side. You know, I look at the ground gameSpend, and obviously it was, you know, this quarter, third quarter is about half what it was in 2Q. I'm curious just how much of it that dynamic is A, maybe some of what you've alluded to in the past, Nick, that it's like in this commodity environment, the smaller deals are still quite competitive versus when you're looking at the bigger deals.
There's just not that many people out there that can, you know, write that size check. Is it just sort of a shift of y'all's attention maybe on the bigger deals, maybe more so than has been in the past? Just any additional color on that?
Yeah. I mean, I think that the deals that we closed, you know, this quarter, some of that is a function of timing. I mean, if I'm looking at October, you know, we've already closed seven transactions, I think five of which were in the Delaware, and I think we've got maybe commercial terms lined up on another five. I think it's really just finding the deals and going through them. We're probably batting, you know, 200-300 as these deals come in, you know, given the hurdle rates and the operators in the areas and everything else. In this price environment, you're gonna get a lot of variability in terms of quality. When we start running sensitivities, a lot of that stuff gets set to the side kind of at step one.
You know, in midyear, a lot of times, you know, we'll see people start chasing things, that's where, you know, we'll kinda sit back, you know, that's where we're able to kinda make hay in the fourth quarter, similar to what I alluded to. You're not wrong, though, in terms of the overall competitive nature. I mean, there's, you know, the smaller stuff, there's certainly more folks chasing kinda the onesie-twosie stuff. You start getting north of $50 million-$100 million and that buyer universe starts to shrink markedly. It's really just taking a look and screening, you know, everything in our focus area that we can and force ranking it amongst each other.
Yeah. I mean, I think as it pertains to the strategy shift, I think we remain the dust buster. I think we still focus on, you know, opportunities large and small. It really comes down to economics. To Adam's point, I do think capital still is relatively scarce in our business, except on the small scale. You know, I would say in the kinda June, July timeframe, which is that midyear when you really first saw the big surge, you know, of oil kinda start to come through, and we definitely saw some pretty aggressive behavior. Even as we head into the fourth quarter, it's like clockwork every year where that stuff starts to pass by and it gets more to real dollars.
I would say this, that from big to small, the opportunity set is somewhat overwhelming. I'm trying to make sure Adam doesn't wanna kill me on a daily basis.
Well, okay. Thanks, guys, and congrats on another really nice quarter.
Thanks, John.
Thanks, John.
Our next question comes from Neal Dingmann with Truist Securities. Please go ahead.
Morning, all. Nick, I just wanna make sure and clarify what you were kinda saying on shareholder return. Obviously, phenomenal job. It looks like prior numbers, you're closing in on that 1 times, which, you know, going back a year or two, it's just obviously a fantastic job of getting down there. I'm just wondering, once you do get down under sort of that 1 times leverage, do you think. You were talking about kind of on different shareholder, you even meeting with the board, different shareholder options, as well as sort of growth options with Adam's group. I'm just wondering, once you sort of hit that 1 times, does that change how you think about things? Maybe just give us conceptually, you know, how you're thinking about it from that point forward.
Yeah. I mean, I think every target always is moving, right? I think, you know, at the rate we're deleveraging, and, you know, with M&A kind of always out there as a possible catalyst to accelerate that path, or, you know, asset, you know, some of the assets that we're looking at that the cash yields, and the IRRs are simply incredible. You know, you never have any surety, but if you can get them on your terms, you know, we can really accelerate that. You know, we've talked about that one-third doctrine as sort of a base plan.
You know, could we potentially get to a point where, you know, you're not gonna take your leverage to zero, but could you get to a point that at a mid-cycle price, your leverage is so low that you need to start to think about what to do with that capital? Absolutely. You know, we have debt securities outstanding, we have preferred securities outstanding, we have common stock securities outstanding. I think the thing that I would just plead is patience, which is that we can grow the dividend substantially. I think the overall terminal structure of it, whether it includes, you know, some sort of special mechanism or we really feel comfortable enough to do it all through a base dividend, I think that's a conversation at the board that we really haven't solved for yet.
I think that the main plan has been grow the base dividend, you know, as fast as we feel we can comfortably. I do think that, you know, I see what, you know I'm keenly aware of what a lot of the large companies are doing. Now, granted, you know, we're not a 30 or $100 billion business yet, but obviously they're paying out really large sums of their cash flow. Is that a possibility down the road? Of course.
I think the real question is that we just want to achieve these targets. Then I think it really, like I said, earlier, it's a high-class problem to have. What I can promise you is we'll try to put something very formulaic and very transparent so that people can really understand what they're gonna get. We just wanna make sure we do it in a thoughtful way. I don't wanna be keeping up with the Joneses, and because one company did something, we do it that way. I think we wanna be a little more thoughtful than that. I think that's where, you know, our meeting with the Board in December, we're gonna prepare a lot of different scenarios and see what sticks.
No, like the optionality. Secondly, just maybe a question for Adam. I know you don't have the full, you know, sort of activity or quarterly guide out there, but you mentioned just the limited completions just this last quarter. I'm kinda surprised, I guess, given some of the private activity, both by some key guys, obviously in the Bakken, and sounds like what we're seeing in the, you know, Permian. Would you assume, you know, a little bit of step up activity? If so, is that more coming from kind of just all around or more some of your privates? If you could talk a little bit about that.
Yeah, I mean, I think it was a combination of two things. I think we had a pull forward in Q2 where some of the planned completions in Q3 were pulled forward. You know, to your point, I think, you know, Q4 is gonna be pretty robust in terms of completions. I got a quick look at what October looks like and, you know, I think we're gonna see a step up there. I think just from activity levels based on kind of our average position and exposure to the various operators, both in the Delaware as well as the Williston. You know, I mentioned we've got 40 AFEs in the month of October. I would expect things to continue to keep cooking.
Very good. Thanks, guys.
Our next question comes from Charles Mead with Johnson Rice. Please state your question.
Good morning, Nick, and to the whole NOG crew there. I wanna go back to a comment you made, Nick, in your prepared comments when you said, you know, the M&A window opens and closes, and right now it's open. What does that look like to you? You know, how would you characterize the window being open? What would be some of the signals that it's closing?
Well, you know, the old adage is that, you know, bear markets and bull markets end when, you know, there are neither of any of them left. In a bear market, you know, if you wanna use a bear market that oil and gas were in by the middle of 2020, I couldn't find anyone that was bullish. You know, lo and behold, here we are today. Bull markets end when everyone's bullish and convinced, and that would be probably around 2014.
I would say that I think that in general I would say there is a window over the next 3 years I would say where a lot of capital that's been deployed in the space for the last 10 years in what I would call temporary hands, you know, kind of finally consolidates and transfers through. I think we're in probably the third or maybe the fourth inning of that in which, you know, there's a lot of money sitting in private equity hands, family offices that never really intended to own it long term.
I also think that there are a lot of businesses just in general that need to either be consolidated or are subscale or, you know, you're not gonna be able to take a new company public anytime soon in the space. I think people have to kind of really weigh those strategic alternatives and what they need to do. You know, I think that, you know, as it pertains to the market today, you know, I think it's as robust as we've seen in the last several years. You know, our competitiveness, you know, ebbs and flows. You know, I think in general, you know, our focus remains in kind of our core areas.
You know, we have looked at assets in other basins, nothing that really got us too excited so far. Where I would end it is just say, look, you know, we don't want to squander opportunities where we can make meaningful, you know, across the board, whether it be, you know, total return on capital, every per share statistic. That's what's out there right now because like any other market, if this lasts long enough, you know, people will copycat and see that it is a, you know, it is a profitable business and they'll wanna join in. Ultimately, those arbitrage windows close. I don't think we're anywhere close to that point.
I think that the overall macro pressures on the, you know, the energy space in general will keep a lid on that for some time. I think it's pretty Goldilocks for us, frankly. The hardest part about this job, for our entire team is keeping focus and keeping discipline, and that's something that we just won't change our stripes. It, you know, it's sort of our way or the highway. We're very mechanical in how we do this.
You know, one of the best comments I got from one of our bankers recently was like, "You're very different than most of our clients because you're totally willing to walk away." We are, because we know there's a lot out there to do, and if we can't get it on our terms, we'd rather not get it at all. There have been plenty of transactions that we've looked at this year that if we just sweetened it by a few million dollars, even on large transactions, it could have been ours, but we're not willing to do that. That's the discipline it takes to be able to be consistent as a roll-up strategy, which is what we are.
That is all really helpful, Nick. Thank you for that. Just one quick discrete follow-up. Adam, you mentioned that you guys, I think you said saw 80, or you elected into 80 AFEs in 3Q and that you've seen that you've seen 40 in October. Can you give us a sense how many AFEs did you opt out of in 3Q? How do you see that same ratio for the 40 you've seen in October?
Of the, you know, call it 80 or whatever, there are about three that we ended up non-consenting. I think it goes kind of back to my comments of being pretty encouraged with our operators' discipline in this particular environment. I think in years past, in prior kind of high oil price environments, you saw a lot of operators step out and start getting after some of the science experiments, and that's where you saw, you know, a lot of our non-consents. I think, you know, based on the position that we've been able to put together and how we continue to keep managing things, it, you know, our average rate of return at the strip, you know, today for the wells that we elect to do is, you know, north of 100%.
That's been the biggest thing that I think we've been encouraged on. It's really kind of you're seeing similar operators that we've been partnering with in the past, your Continentals and Slawson. You know, moving to the Delaware, your EOGs and Mewbourne make up a large majority of that, and they've stuck put to the rocks that we're certainly comfortable with participating in, you know, here and at any sort of level of pullback.
Thanks for that detail.
Thank you.
Our next question comes from Derrick Whitfield with Stifel. Please state your question.
Thanks. Good morning, all, and great update.
Thanks, Derrick.
Good morning.
With my first question, I wanted to focus on your deal flow on the larger side. Over the last few quarters, you've steadily evaluated 10-15 larger A&D deals. Could you comment on the quality, size, and focus of what you're seeing and how that's trending in a higher price environment?
Yeah. You know, it's funny. In 2020, we were hell-bent on buying as many assets as we could, you know, to be a countercyclical investor and see what we could. The funny thing is, it's challenging to buy quality assets in a down market, you know, unless there's some form of significant distress. It kinda cuts both ways. The best quality assets only come to market generally in an environment such as this one. I mean, make no mistake, there's a lot of garbage hitting the market too. The issue you have is that the convexity and the risk changes when oil is $80 versus when it was in the 30s. That convexity is something we're very mindful of.
What that tends to translate, and I think we talked a little bit about this in our prepared comments, is about discount rates, risk management strategies, you know, the fact that, you know, incremental moves in oil at this point probably get less, you know, credence from us than typical. If you look at, you know, the Comstock transaction and the implied discount, ultimately sellers are often focused on the total proceeds. The discount rates may in fact increase substantially as prices go up, a function of that risk that happens in higher price environments and the fact that people are oftentimes solving for total dollar amounts versus their invested capital, right?
If you invested $100 million in something and you can sell it for $200 today, you're probably less focused on the PV discount and the IRR than you are on the fact that you're making money. I think that that's something that's very helpful. But I would say the quality of assets that are coming to market now, especially on the larger side, is better than what we've seen in the last few years. I would say that in terms of a mix, we do see a lot of, you know, garbage, for lack of a better term, as well, when it just goes right in the trash, as Adam would say.
Yeah. I mean, we're certainly seeing the good, the bad, and the ugly. I think, you know, as important as the asset quality is also kind of the social dynamic, right? 'Cause, you know, a lot of the counterparties that we've dealt with have, you know, wanted or needed to pivot towards other things. You know, based on kind of the hurdle rates that we're underwriting to, you know, triangulating that between the asset quality is kind of the recipe for success.
Yeah. We've had plenty of counterparties that, you know, want some sort of participation agreement where they look at our multiple and say, "Well, you know, I'm not selling you that for 2.5 times." You know, we sit there and say, "Well, that's irrelevant. What it's worth, we're buying your assets, not your company, and we wanna know what's the implied return on those assets, and that's what's gonna dictate what we can pay." The multiple or where we trade or any of that stuff is irrelevant. You know, those are those social issues that oftentimes break these things down.
Great. Great color, guys. one of my follow-up, perhaps for Adam, as we understand, there were fairly material production events in the Bakken in Q3, including processing outages and DAPL line fill impacts. Could you comment on your sense and your estimates on your exposure to those?
Yeah. Hey, Derrick, this is Jim. I'll go ahead and answer that one for Adam. Yeah, we did a look back. You know, we heard that, you know, Continental and Marathon had some shut-in production due to some midstream downtime and, you know, wanted to reduce their flaring. We did a look back on what we had estimated for our Q3 production versus where our actuals came in, and we maybe saw about a 10,000 barrel difference in what we expected versus actual. We didn't really have the impact that some of our operators are talking about. It may just be a function of where our wells are located versus where they were seeing the impact.
It's just a testament to, you know, the diversified strategy of our portfolio, right? No one thing ever makes that big of an impact.
Very helpful. Thanks for your time.
Our next question comes from Alex Vrabel with Bank of America. Please state your question.
Hey, guys. Good morning.
How are you, Alex?
Good morning.
Good. I wanted to ask, I mean, I saw you guys added some oil hedges, didn't do that on the gas side, and it looks like you're kinda maintaining that, you know, 18-month forward outlook on hedging. I'm just kinda curious, I mean, like you mentioned in your prepared remarks, I mean, the Marcellus obviously looks like a steadily timed, you know, acquisition. I mean, how are you thinking, you know, on a go forward about gas? I mean, as far as hedging, I mean, we've heard, you know, from other operators and seen actually you could do some pretty attractive collars and whatnot. You know, any kind of color on how you think about gas and then, you know, maybe the mechanics of how you think about hedging on that go forward?
Yeah. We actually did add about, I think, 20 million a day of collars. They're just not in the swap schedule that you probably saw. So I think they're 4 by 775 and 350 by 750, I think is what they are. So agreed. I think the gas market hedging it for next year has been a little bit challenging just because of the steepness of the curve. So you're either kind of forced to take an average year hedge, which is gonna be significantly lower in the front and better in the back, or, you know, you can obviously hedge it month by month.
Given you're going into the winter, which is going to be, you know, really volatile one way or the other, we wanted to, you know, make sure that we were very careful about how we did it. The collars, we have added those collars. Very thoughtful on that side. You know, and on the, on the oil front, we, you know, we're just plodding along very steadily. You know, I don't think we're quite at our 60%-65% target for next year, just yet. You know, I think we'll as we exit the year, we should likely be there. Obviously, the average price will continue to go up. I think it's north of 57 now, and I would expect to see it meaningfully go up between now and then.
Got it. Very helpful. I guess, you know, kind of speaking of average prices going up, I'm curious, right? You know, you guys have generated, looks like, about $140 million of free cash in the first 3 quarters of the year. You're telling us greater than $175, you know, for a full year. I mean, you know, CapEx looks pretty ratable. Prices are higher in four Q. Why is it not a lot higher than that? I guess, you know, a very simple, maybe dumb question.
Our internal term for that here is NOGonomics, which is that we try to underpromise and overdeliver.
Very clear. Thanks, guys.
Thank you. Just a reminder, to ask a question, press star one. Our next question comes from Phillips Johnston with Capital One. Please state your question.
Hey, guys. Thanks. Just to follow up on John's prior question on 22, I'm curious what the geographic mix might look like, whether it's, you know, net wells or absolute CapEx dollars. If we're assuming, you know, 75%-80% or so of net well count is in the Bakken with the balance pretty evenly split between Permian and Appalachia, would that sound like it's in the right ballpark?
Yeah. I mean, the plans are obviously kinda still in flux. I mean, as it stands today, you know, notwithstanding kinda the Marcellus wells that are in process, you know, we've got about a quarter between kinda the Bakken and the Delaware. We've got about a quarter of the wells, you know, allocated towards the Delaware. You know, you take the Midland program that'll get underway. I think we received our AFEs, kinda first slug here, and those will all be coming online kinda between, you know, Q1 and Q3. Then, you know, you've got, you know, call it 20 net wells, give or take, in the Bakken. Still in flux. We're still kinda finalizing all that, but that's kinda how it stands today.
Okay, thanks. Obviously there's been a few acquisitions, so I'm just kinda looking for, I guess, an updated net well count that could sort of keep your, I guess, your pro forma production flat going forward.
Yeah. We're still kind of modeling somewhere in that 40-45 net wells to kind of hold production flat. Obviously, with the Comstock acquisition, you know, the decline rate on that is fairly low, lower than kind of our corporate decline rate, which is in the low 30s. Adding that kind of volume, we only need an additional 1-2 net wells to hold that production flat. As Chad mentioned, kind of the $300 million-$350 million CapEx range is what we had modeled for maintenance CapEx to slight growth.
Yeah. Okay. Perfect. Thanks, guys.
Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks.
Thanks, everyone, for joining us this quarter. We'll see you on the next one.
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