Welcome to the Northern Oil and Gas Second Quarter 2020 Earnings Conference 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 the 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, Executive Vice President of Finance. Thank you. You may begin.
Thank you, Diego. Good morning, everybody. We're happy to welcome you to Northern's second quarter 2020 earnings call. I'm joined here this morning with Northern's CEO, Nick O'Grady; our COO, Adam Dirlam; CFO, Chad Allen; Senior Vice President of Engineering, Jim Evans; as well as Northern's Chairman, Bahram Akradi. Our agenda for today is as follows: Bahram's going to kick things off, and then he'll turn it over to Nick and team to provide their state-of-the-union comments and recap for second quarter. After that, we will get into the Q&A session.
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 risk and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward-looking statements. Those risks include, among others, matters that we have described in our earnings release as well as in our filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q.
We disclaim any obligation to update these forward-looking statements. During this conference call, we may discuss certain non-GAAP financial measures, including adjusted net income and adjusted EBITDA. Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued this morning. With that taken care of, I will now hand the call over to Northern's Chairman, Mr. Bahram Akradi.
Thank you, Mike. Good morning. I wanted to lead off today's call to deliver a very clear message on Northern's vision and what shareholders can expect from the company moving forward. In order to properly frame this, first, I would like to reflect on the progress that Northern has made over the last two years. Our net debt to EBITDA was nearly seven times at the start of 2018. It's now only slightly above two times. Our production growth has increased more than two and a half times over the same period, while we have posted the very highest corporate returns in E&P space.
When you review Northern's second quarter, the company generated meaningful cash flow, and we continue to reduce debt despite unprecedented industry challenges. We believe our approach to the oil and gas business is unique in both its strategy and its success, and this was evident again this past quarter. As we look ahead, our Board and management team are committed to making it abundantly clear that Northern's financial health is strong and our business model is sustainable in the long run.
Our goal is to build a multi-billion dollar E&P company, a company that will have a [fortress-like] balance sheet with leverage that is 1x EBITDA or less. You may ask, how do we intend to do this? Our playbook consists of two major pillars. One, we will grow our cash flow by investing in high-return assets. Two, we will continue to strengthen our balance sheet by reducing debt. In terms of the specific actions you can expect us to take, it will be continuation of what we have done in the last two years, where every move we made not only grew the company but strengthened the company by paying down debt and taking advantage of opportunistic debt-for-equity exchanges.
Going forward, you can expect us to adhere to those same principles. Furthermore, given the struggles that highly leveraged companies are experiencing in E&P space, we believe the time to accelerate our business model is now. The opportunity set is impressive, actionable, lucrative, and accretive. I believe the company is well-positioned for major success in the second half of 2020 and beyond. One final comment.
As it pertains to the proposed reverse split stock, I am pleased to announce that we have received significantly more votes than needed in support of this split. Over the next couple of weeks, we will determine the exact split ratios, but our desire is for a high single-digit stock price immediately after the split. The benefits to shareholders of the reverse split are undeniable. It will enable institutional investors who have wanted to invest in our company but simply couldn't due to internal restrictions placed on the stock trading for less than $5 a share to own the stock in Northern.
Two, it will lower our trading cost. Three, it will open the company up for inclusion in additional equity indices. I will now like to turn the call to Nick, but before that, I want to thank Nick and the rest of the management team and the members of the Board of Directors who have been working incredibly hard, during these months. I am forever grateful for what they've done. Nick, to you.
Thanks, Bahram. All right. Let's get down to it in five points. Number one, the second quarter was one of the most volatile in decades, but it should mark the bottom. Production, differentials, and commodity prices have already dramatically improved compared to Q2. Production curtailments and deferred completions disrupted production by an average of about 40% of potential production in Q2 and peaked in June at nearly 57% of our volumes expected in a normal environment. These issues are beginning to slowly ease, and we project a steady return of our volumes to sales throughout the second half of 2020.
With crude prices up sharply in the past quarter, we are supportive of these moves by our operators. As we have discussed in the past two quarters, we have appreciated the rational behavior of our partners, and the moves taken in the second quarter to curtail volumes allowed us to capture hedge gains and now earn much higher margins on those same barrels. These gains add up to tens of millions of dollars at the current strip that could have been squandered.
We expect, assuming supportive pricing, to see curtailments, shut-ins, and completed wells not turned to sales slowly but steadily come online throughout the remainder of the year. Ultimately, we expect completion activity to resume at a more robust pace. Number two, we expect logic and common sense to prevail as it pertains to the Dakota Access Pipeline, but if that doesn't come to fruition, the Bakken is still set to thrive. In regards to the pipeline, we believe cooler heads will prevail. The legal case against it is and always was weak, but in politically charged times, it is always difficult to predict the outcomes in such cases.
Whatever your political beliefs, the solution without DAPL will be a higher-cost one for American consumers and producers alike, by rail. Despite what the detractors seem to want, the oil will not be stopped at all but instead travel on a more expensive and dangerous method over bridges in the very same areas of dispute. We are prepared if it faces long-term issues as we underwrite acquisitions and deploy capital with this mindset, but by no means do we think it is a killer to our business. However, it will add modest amounts of cost to our differentials, and until such resolution takes place, it will slow the pace of activity.
The Williston is full of opportunity, and we are seeing the best new sets of wells we have ever had in process, period. The Williston survived prior to 2017 without DAPL, and it will survive and thrive without it now, but we hope it will not come to that. Number three- we remain committed to paying down debt. We have continued a dual path of growing our business where there are attractive returns and continuing to de-risk the balance sheet. We have been doing this consistently since the rebuilding of this company two years ago.
Through recently announced deals, both on the debt and acquisition front, we continue to strengthen the company. We have several other ground-game deals in process, and if completed, we will update you accordingly. When completed, our tally year-to-date will have cut our senior notes by over $124 million and cut our revolver by an additional $12 million. As we reduce debt through next year, we can also focus on moves to extend maturities, increase liquidity further, and simplify the balance sheet, but all in good time.
There is a fine line between doing things when you can and when you should, and we will continue to reduce risk. We also continue to bolt on core net inventory at the ground level, well bore by well bore and acre by acre, which brings me to my next point. Number four, we're confident for the remainder of 2020, and we're set up well for 2021. We currently forecast our capital spending, which was down dramatically in the second quarter, to be well within our stated guidance, even though our ground-game has been active and continues to add to our wells-in-process inventory.
We have been encouraged by our operators' recent public commentary in regards to their shut-ins returning to sales, and t his could mean a path faster than we are modeling. With only 3.6 net turn-in-line wells expected in our guidance for the remainder of the year, it would mean spending toward the lower end of our current capital guidance. If both the return of production and turn-in-line accelerates faster than we anticipate, it could mean more production and more new wells online, which would bring us to the higher end of spending as well as significantly more production.
With potentially 30 or more net wells ready to be turned to sales by year-end, what this also means is that even as we've reduced debt dramatically by year-end and spent substantially less capital, we can still see a path in early 2021 to production levels within striking distance of where we began the year, nearing 40,000 BOE per day. What does this mean in aggregate at today's strip? It means that EBITDA could actually be higher year-over-year and free cash flow higher as well- this despite an 80% reduction in the Williston rig count year-to-date.
Importantly, much of the capital in those 30 or so wells that we can exit the year with have been completely or partially paid for. This means the capital call in 2021 should remain very efficient, and we should be able to roughly sustain those levels with the capital spending provided in our release. The capital is similar to 2020, and the 2021 range we've provided is driven at the high end by how much additional activity develops throughout next year.
If oil prices are supportive and we see more activity, this would mean spending at the higher end and likely more cash flow and production in the back half of 2021 and into 2022, depending on the timing. The credit for this goes in part to our operators, who have not wasted those producing volumes in a low-price environment, and to our engineering and land team, who have continued day in, day out to find the best economic drilling opportunities for us to recycle our capital.
Number five, we remind investors that the durability and flexibility of the working interest business model is second to none. We get asked constantly by investors if we would take our strategy out of basin. We have responded that we are data and economically driven, and our advantages in the Williston give us underwriting confidence that is not easily replicated. In my two-plus years here, we have looked at over 50 opportunities in other basins in the past. If one good thing has happened in 2020, it's that the downturn has brought more realistic expectations to other basins closer to our economic hurdles as the flippers fade away.
Importantly, with capital scarce brought in many parties from other areas seeking to partner with us. We are cautious and conservative by nature and believe in walking before we run. We focus on top-tier operators and the best of the best areas. This is a must from a risk management perspective for anywhere we look. As we build our data and experience, we expect we can find opportunities in other basins, assuming they compete for capital. As demonstrated by recent announcements, we also continue to see ample opportunities within the Williston. There is no shift in priorities or basins, merely potentially an extension of our strategy.
We are focused on making money, not on being bigger, although we have clearly benefited from our cost structure as we've built scale. If we can replicate our data advantage and use the same methodical processes in other basins, we would be able to benefit from an expanded opportunity set. I'll conclude by saying that while things are undoubtedly better than when I last spoke to you, our focus on risk remains in place. Our hedges are deeply in the money through next year and, in fact, netted us over $77 million in realized gains last quarter alone.
The gas hedges we just put on in April have already begun to pay out, netting us approximately $1 million since inception. We've also added our first hedges in 2022 for 1,000 barrels a day at about $50. Hedges have served their main purpose and given us the ability to continue to build for the company's future during a very trying time. If all of you have learned one thing in this business, it's that risk management is critical on the front end to create long-term value in the commodity space.
As we seek acquisitions and find economic drilling opportunities on our acreage, we won't change our stripes, which have allowed us to weather these times. We'll continue to hedge away risk and continue to whittle away at the debt on our balance sheet. The equity-infused moves we've used in recent times directly benefit the company and its investors over the long term and have been done on an accretive basis to the enterprise.
Despite where activity in the U.S. is, we literally, as a team, have never been busier. We have analyzed over 25 separate major transactions in the past three months and continue to look for ways to add value to Northern. It's not some hollow catchphrase. This is a company run by investors, for investors, and we believe, as we prosecute on our plan, Northern will come out on the other end stronger than ever. Thanks for your time, and let me pass it on to Adam Dirlam, our COO.
Thanks, Nick. From an operational standpoint, activity levels have certainly fallen to historic lows in the Williston Basin. In an environment like this, Northern's competitive advantage is most apparent. Through our active management during the second and third quarters, we have been able to high-grade our wells-in-process and inventory, which is continuously being prosecuted through ground-game acquisitions, the non-consent process, well-bore and acreage trades, as well as other initiatives. As we've recently announced, the opportunities available to us have never been better at the ground-game level. Operators have retreated to the core in order to develop some of their best inventory in a depressed price environment.
While basin-wide activity has slowed to just 10 rigs, it is through our ground-game acquisitions that we're able to increase our exposure to the best areas and best operators where the wells are still economic, inclusive of all costs. By doing this on a real-time basis, we have been able to adapt to the changing environment and increase Northern's net activity to set up one of the strongest lists of wells-in-process in our history. As noted by one of our acquisitions announced last week, even in these unsure times, we can adapt, if necessary, adjusting for potential Dakota Access disruption in our economic analysis.
Through the second quarter and first part of the third, we have signed up or closed on over 850 net acres, 0.7 net producing wells, and 4.1 net wells-in-process, all while staying within our stated budget for the year. As our guidance suggests regarding curtailments and well completions, we expect curtailments to ratably ease through the end of the year. During the second quarter, most of our operators heavily curtailed their volumes, and as we moved into the third quarter, we are starting to see meaningful volumes come back online.
While many other basins have already seen the bulk of their volumes come online, given our strong hedge position, we are pleased that our operating partners have been rational and patient. This, in turn, will lead to both a stronger base of production and a stronger reserve report as we enter the fall. The result is more production at a time of higher prices than having been wasted in the low-priced environment of the second quarter. Put simply, we'll get to earn on these barrels twice.
While we've used our ground-game acquisitions to step into more drilling opportunities that have met or exceeded our hurdle rates, we have also non-consented a number of wells and traded out of others that no longer penciled in this price environment. In the second quarter, total well proposals fell to about half of what we would typically see in any three-month period. Of the well proposals that we did see, we elected to participate in about two-thirds of them for a total of 2.3 net wells.
Our ability to react quickly to a volatile market enabled us to elect out-of-wells with operators that might have worked in a normalized price environment but not the current one. We ended the quarter with 26.7 net wells-in-process, and we expect a significant majority of the completions will be deferred until the latter end of the year and into 2021. Costs remain relatively consistent with the first quarter, as our average AFE came in at around $7.7 million. However, July has been encouraging as the average well was balloted for approximately $7 million.
Northern will continue to stay nimble in a volatile market, high-grading our asset base and taking advantage of the distress and lack of capital availability in the market. I cannot stress enough that we will remain disciplined, only electing to invest in projects that will continue to reinforce our best-in-class return on capital employed. As we look to 2021, we see production bolstered by the rational curtailments from 2020, participating in only the best wells-in-process that will drive a strong cash flow and production profile while continually augmenting the asset from our active management throughout this year. With that, I'll turn it over to our CFO, Chad Allen, to discuss the financials.
Thanks, Adam. I have a few highlights to go over this quarter, starting with a quick summary on Northern's financial performance. Our production decreased 32% year-over-year to an average of 23,804 barrels of oil equivalent per day. Production was significantly impacted by curtailments, shut-in production, and delayed development plans by our operating partners. We estimate that our second quarter production was reduced by approximately 16,800 BOE per day as a result. We've given production guidance based on the ramp we expect from curtailments.
We recognize, particularly in the third quarter, these estimates are below Wall Street estimates, which are challenged by the fact that we did not give prior guidance. It's worth noting that even versus consensus production estimates, due to our strong hedge position, this would have little impact on our cash flow estimates. We estimate the delta would be less than $4 million at the current strip. Oil differentials were $10.60 during the quarter, which was due in part to poor in-basin pricing and storage constraints as we moved through the quarter.
In the current environment, we would expect oil differentials to narrow substantially for the remainder of 2020, and we are seeing that as we speak today. Gas realizations were significantly impacted during the quarter, much like we saw in the oil markets. Natural gas and NGL prices were affected by physical storage constraints and higher processing costs, which created negative pricing for NGL products as demand collapsed due primarily to the COVID-19 pandemic.
Lease operating expenses for the quarter came in at $26.6 million, down 29% sequentially, driven by a 46% reduction in production volumes, partially offset by increased processing and saltwater disposal costs. We've already experienced further reduction early in the third quarter and expect to continue to see basin-wide cost savings during the remainder of the quarter. Cash G&A came in at $1.61 per BOE this quarter and continues to be one of the lowest in the industry, even though production volumes decreased over 46% compared to the first quarter.
In the third quarter, we expect to see a slight increase in cash G&A costs in the form of acquisition costs for both deals we've executed on and deals we have not. As a result of the significant effort we've put forth analyzing numerous acquisition targets in recent months, the additional acquisition costs could range from $200,000-$400,000. As Nick mentioned, we've significantly improved our leverage profile since the end of the year. Our focus continues to be on debt reduction in these challenging times.
We have reduced our net debt by $132 million, or 12%, since the end of the year. This has reduced our run-rate interest expense by approximately $11 million. We finalized our spring borrowing base redetermination shortly after the quarter, with our borrowing base set at $660 million, which is less than a 20% reduction while many of our peers experienced well over 40% reductions. This is a testament to our hedging strategy, high-quality PDP asset base, and our healthy leverage metrics. Even at this reduced level, we expect to have ample liquidity, and we'll expand our liquidity profile through our free cash flow generation.
We ended the quarter with $568 million outstanding on our revolving credit facility, and on the working capital front, we continue to work down our operating current liabilities, which are down 41% since the beginning of the year. We expect it'll take through the third quarter to work down our working capital deficit because, as a non-operator, we tend to see cash capital spending costs lag compared to that of our operating partners, so it'll depend on the timing of those costs.
Nevertheless, we expect to reduce our revolving credit balance significantly by the end of the year from its current levels. Capital spending for the second quarter was $34.5 million, down 60% when compared to the first quarter, which consisted of $32.7 million of organic D&C capital and $1.8 million of total discretionary acquisition capital, inclusive of acquisition D&C capital. As you saw in our earnings release this morning, Northern has reiterated its 2020 capital spending guidance to a range between $175 million and $200 million, a reduction of over 50% compared to our actual capital development expenditures in 2019.
On the hedging front, our hedge book is a testament to our commitment to protect our invested capital, cash flow stream, and our balance sheet. We have approximately 26,500 barrels per day hedged at an average price of $58.26 for the remainder of 2020 and approximately 21,400 barrels per day hedged at an average price of $54.66 for 2021. We've also added natural gas hedges and begun to hedge oil for 2022. At the end of the second quarter, the fair value of our hedge book was 188.4, so we expect to generate a significant amount of cash flow from our hedge book. With that, I'll turn the call back over to Mike Kelly.
Thanks, Chad. Diego, if you wouldn't mind queuing up the Q&A, we'd appreciate it.
Thank you. At this time, we will be conducting a your question and answer session. If you would like to ask a question, please press the star key followed by the one key 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 two key 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. Our first question comes from Derrick Whitfield with Stifel. Please state your question.
Thanks. Good morning, all.
Good morning.
Good morning.
Hey, Derrick.
Hey. Perhaps for Nick or Adam. Regarding your comments on the ground game heating up, could you offer some additional color on the degree of deal flow you're seeing and current seller expectations?
It, yeah- I mean, the deal flow that we're seeing has been relatively consistent with what we've seen in, call it, the past 12 to 18 months. I think even with the activity levels dropping, you've got a handful of both non-operators and operators, that either don't have the ability or they've got a mandate, in certain circumstances where they're unable to invest in OBO or non-operated, working interest opportunities. What we're seeing is a lot of the operators with the 10, 11 rigs that are going right now, you know, retreating to the double bullseye of the basin, but you've got, you know, eight, 10 AFEs maybe being balloted at any given time given the development that's going on, and no one wants to participate in those.
That creates the opportunity for us to, you know, quickly evaluate these with the engineering, you know, type curves that we have, ability to move quickly and close these out. The only other thing I'd add is, in times like this, certainty to close is, of even utmost importance relative to valuation. With Northern's balance sheet, and track record, we can offer that to both our non-operating and operating partners.
The only thing I'd add, Derrick, is that we have continued to up our own internal hurdle rates and- by dramatically. In times like these and certainly early in the second quarter, we've been able to execute on these at higher returns than we've ever done before with all the optionality, of upside, to commodity prices. In the deals that Adam has prosecuted in the last few months, what we underwrote is already, you know, significantly high or should I say the returns are likely to be significantly higher than what we underwrote just because we had the convexity on oil prices.
That's right. That's great color, guys. Then shifting over to DAPL and your potential exposure, if we were to receive an adverse ruling in the coming months, could you speak to the degree of exposure you have- in a ballpark's more than fine and then offer some commentary on the current dynamics of available rail takeaway and how much is immediately available for dispatch?
Let's start with the last part first. There's 700,000 barrels a day plus of idle rail capacity in the basin, there's plenty of takeaway. The thing with rail is pretty simple, which is that there's term rail, there's spot rail. Spot rail is very expensive. Term rail is sometimes about half of what that is. Let's just be clear here. The Dakota Access Pipeline is not a cheap form of transportation. With Gulf Coast, oil price is where they are today. It does not compete with in-basin pricing. It is among our more expensive forms of transportation.
The differential on DAPL today is a high $4.01 net, that's net before you include the gathering cost of getting the oil to market. Relative to rail, DAPL was a very cheap alternative in 2017 when Gulf Coast spreads were $7 versus WTI. MEH was less than $1 yesterday. In terms of its overall impact, it's going to be relatively muted in terms of our own production volumes. I would say it's relatively low to the overall period. It does shift from time to time, I would wager to say it's less than 20% of our aggregate volumes on a normalized basis. Our largest operator doesn't transport anything to DAPL.
The only thing I would tell you is that the biggest purchaser of oil in the basin, very few operators have firm transportation on pipelines in general. Marketers are the purchasers of many of those barrels, where they ultimately end up, they go to the terminal, they're resold. Some of those oil barrels may be resold, it's a difficult question to answer. However, what I would tell you is I think based on current Gulf Coast spreads, what DAPL barrels ultimately receive, rail barrels can actually get a slightly better price. I wouldn't anticipate it having a huge impact to differentials over time.
Our strongest marketing partners that we work with would suggest maybe a $2 differential increase. The only thing that will take some time, I think one of the reasons why curtailments have been slower in the Bakken in general, is that to sign those long-term rail agreements, you only wanna do so if you know that you have to. There will be some time for those barrels to spool up over time and for the rail cars to be delivered and then for those systems to go active.
My final comment on that is just that the Mobridge crossing, which goes over Lake Oahe, is directly across from the Standing Rock Reservation. Ultimately, the same barrels that they don't wanna go thousands of feet underground are going right over that rail bridge on a more dangerous method. Our view, both ethically and I would just say legally, is that longer term these issues will be resolved, but it may go on. We are not talking about people necessarily who are thinking rationally. Ultimately, we want the oil to be transported in the safest method possible.
The only other thing I'd add to that just from an underwriting standpoint, I mean, that's the way we're viewing this. This isn't a worst-case scenario. We alluded to it in our prepared comments a little bit, but the acquisitions as well as the inbound kind of organic AFEs that we're looking at, we're looking at it through that lens. Should this get resolved, In a beneficial way, we'll see an uptick in terms of rate of return.
Final, just to Adam's point, is that these numbers I'm discussing are assuming that the pipeline is shut down and nothing else ever happens. My guess is the industry is dynamic, and with an arbitrage that would be opened up, you will see modifications, expansions, and other things that will go in over time to add additional capacity in other ways that is competitive on a cost basis.
That's great, guys. I certainly agree with your views, and thanks for your time and response.
Our next question comes from Dan McIntosh with Johnson Rice & Company. Please state your question.
Morning, Nick.
Morning.
I had a quick question on the guidance for kind of Q3 and Q4. Pretty wide ranges there. Just wondering, you know, what are some of the levers that y'all would pull or, I guess, maybe hurdles you'd have to get over that would kind of push you towards the upper or lower end of those ranges?
If you look at our stated guidance on, we're only assuming about 3.6 net turning lines through the remainder of next year. The vast majority of the volumes returning are it's just the pace of curtailments coming back on. That's as a non-operator, that's the hardest thing for us to predict, I would say, based on public comments we've seen from the operators and early results in the third quarter, we're very encouraged. It's early to tell, and especially given how tenuous the recovery in oil prices are, we are gonna be as conservative as we possibly can.
Given that we have 26-plus wells, in process today prior to some of the closings of these ground game deals, there's also the potential that, more wells turn in line, especially if prices remain relatively robust. That can have a dramatic impact on those numbers. We've really just taken with what we know. We are, as you guys all know, we live and die by our engineering analyses. We have to take the most cautious approach, but the range is purposely wide because the number of outcomes is equally wide. We will update you guys accordingly as we know more.
All right. Thanks. Kind of along the same lines, just, you know, going forward a little bit into 2021, you know, the 40,000 a day looks really good relative to consensus and even the lower end as well. My question's more on the CapEx side and how it sets you up longer term for 2022- n ot necessarily looking for numbers, but how you're thinking about the spend. I'd imagine there's gonna be a lot more on the ground game based on your comments this morning, just kinda how the spend next year sets you up for 2022 and really the longer term strategy of Northern Oil and Gas.
Yeah. I mean, I'll let Jim set that up. I would just say from obviously, as you've had, lower activity levels, our maintenance capital call, is declining from where it was. I think, going forward from there on out. You know, using that sort of range, we could expect to spend a very similar amount of money and sustain those volumes. I think it'll depend obviously on the opportunity set and the quality of those wells and the timing.
What I would say is we gave that sort of early look at 2021, it's important to understand that the timing of that spend is as important as ever. As I mentioned in my prepared comments, if you spent towards the higher end of the range, it would mean likely that there's more organic activity that develops throughout 2021. What that would mean would be more volumes and more cash flow and more production towards the back half of that year given the timing of spuds. That ultimately will then, you know, somewhat reduce the capital call in the following year. I'll let Jim talk about it a little bit 'cause he's done some good analysis on this.
Yeah. As we've kinda mentioned, we expect to exit the year with about 30 net wells in process. With the curtailments coming back off towards the end of the year with 30 net wells in process, we think that's enough wells that could hold production flat at roughly 40,000 barrels a day next year. A significant portion of that capital is already spent on those wells. If we were just shooting for a one-year goal to hit 40,000 next year, we'd be at the lower end of that capital spending.
Obviously, we're looking more at kind of a three, four-year outlook. In order to maintain those barrels in future years, we need to spend a little bit more in the back half of 2021 to set up 2022 and 2023 and beyond that. In that scenario where we're trying to hold production flat at 40,000 a day over the next couple of years, we'd be at the higher end of that guidance range on CapEx.
[Oh...]
Can I say from a sustaining capital perspective, again, subject to timing of when the money's spent, you're talking somewhere between $200 million-$240 million as a consistent maintenance number for the years beyond that, maybe less. It just depends on the how flush the production is at any one given point in time.
All right. Thank y'all.
Our next question comes from Jeff Grampp with Northland Capital Markets. Please state your question.
Morning, guys. Was curious how you're visiting or thinking about potentially revisiting the dividend conversation- I know obviously, the markets have kinda flipped everything around, but is there, you know, a leverage goal, you know, commodity stability level that, you guys might wanna see before revisiting that, or just any high-level thoughts would be great.
This is Bahram. I'm gonna take this one. Obviously, as I've mentioned multiple times, our focus is to make sure the entity is strong and we make every move to make sure the company will remain solid. The question for dividend is that our goal has been to make this company a dividend, paying company, but however, we want that dividend to be sustainable. The rather than picking a exact time that we could say we wanna resume, the condition that at which we wanna resume paying dividend is when we have visibility to the stabilization of the oil prices long enough that we have the ability to put in strong hedges for the following years as well as balancing debt to EBITDA a bit more.
Combination of these dynamic things will allow us to get to a point where we believe we can start the dividend and maintain it in a sustainable fashion through any commodity pricing. That's what this management and the executive members of the board have done so well with this company, as you can see right now. I think it can be soon. It could be, you know, early next year, where we could resume into some form of a dividend. It's really a function of the conditions coming together, allowing us to run an incredibly safe entity and a solid movement to dividend where there's never a chance that we have to pull that dividend back.
Got it. Appreciate that, Bahram. For my follow-up, it sounded like you guys were maybe a little bit more constructive on out-of-basin opportunities than you've been in the past. I was just kinda curious, you know, how you guys would evaluate the framework in terms of, you know, I don't necessarily want you guys to name, you know, what basins are doable versus not, but kinda the framework for, you know, what that would need to look like to get you guys to pull that trigger?
Jeff, it's Nick. What I said in my prepared comments is pretty succinct, I think, which is that, you know, we've told people we get asked constantly, and the reason that we're discussing it now is that we've looked- you know, we've been looking for two years, and we don't even really have to look that the opportunities come to us. We added it all up, and it's over 50 things that have come our way. What I'd tell you is that we're just driven by economics. If we can look at our entry costs, full-cycle return, have full confidence in underwriting, it shouldn't matter what basin you're in.
What I would tell you on the latter part is that that confidence in that data that we have is really hard to match. It's made for a very hard, high bar. I would say in a lot of the active basins in the country, you've had a lot of funny money going around, which has really meant that regardless of how good wells are in any given basin, when you added it all up, it didn't earn a return on capital employed. What I was suggesting is that it may be that we're entering a time now where it really just doesn't make money or not and that the bloom is off the rose.
In that case, these deals may start to compete. We'll have to see how it plays out. Again, I'd say that the concept of us, you know, going somewhere else and testing out some tier 2 area is very low. If we're gonna find something, it's gonna have to check every single box, because our appetite for risk is about zero. I do think there's no reason that this business model can't work everywhere. I think I've been consistent in that, and I think everybody here feels the same way. It's just that it has to be done the right way.
You can't, you know, we've seen plenty of public companies who felt that they needed another arrow in the quiver and spent tons of money to jump into some other basin only to spend way too much money and never earn a return even if that basin itself was okay. We're not gonna do that. What we're gonna do is make sure that every deal we do basically adds value day one, not just to make some symbol. We're about making money here, and I'll leave it at that.
Got it. Appreciate it, Nick. Thanks for the time, guys.
Thank you. Our next question comes from Neal Dingmann with Truist. Please state your question.
Morning, y'all. Nick, my question is y'all have been pretty I guess probably for you're one of the guys there. My do you guys have been very nimble on, you know, looking at, maybe going non-consent and then taking that capital and going elsewhere? I'm just wondering, going forward, will that, you know, are you gonna continue to, you know, sort of use funds that, and do that to really, you know, I guess, use funds most prudently?
I mean, we talk about return on capital employed and rate of return. The answer should be obvious. I'll let Adam talk in a second. I'd say that if we have an organic well that is, you know, wishy-washy in terms of its return, we'll not consent it because we know we have 10 deals behind it that will earn our cost of capital. We're just capital allocators. That's what drives every decision we make. Adam, you wanna?
Yeah, I mean, you've got operators that'll drink their own Kool-Aid even in an environment like this. We look at the ground game, and the organic AFE as kind of a little bit one and the same. We're taking a look at what we're getting on an inbound basis, on a daily basis. We're proactive in sourcing, you know, other opportunities, getting in front of the drill a bit, as well as the inbounds, on a deal flow standpoint.
We kinda put all those together, high-grade everything, that's what we've been able to do. We've been able to pick up, you know, a handful of ground game deals in the third quarter and kinda late Q2. We non-consented a handful of wells, then we've also been able to kinda trade out of other kinda tweeners, in the meantime. That's effectively set up for one of our most impressive kinda wells in process with best operators, best rocks. Certainly encouraged in that regard.
Yeah-
Yeah. Sure. Go ahead, Jeff.
You go on one of my you go on one of my standard rants. You know, one of the things that I think we find the most frustrating is that people view us as some sort of ETF on the Bakken and that, you know, if Continental or Marathon or Conoco or whoever and their rig count and their activity's going one way or another, that dictates what our capital and what our outlook is gonna look like. That's the farthest thing from the truth.
We're no different than any portfolio manager- just because one sector's going down doesn't mean that your portfolio has to if it's structured correctly. What our moves in the last few months should show you is that if the economic returns are there, we're able to add activity that may not correlate with just some passive entity sitting there waiting for those things to happen. That's not what we're doing. It's not what we've ever been doing. Our growth rate could meet or exceed the basin.
Even with 10 rigs active, we continue to add net wells in process to a near record. I think for anyone who thinks that they can look at other companies' activity as a barometer to how Northern is gonna perform over time, are wrong. If you look at our own growth in the last several years, it's had almost no correlation to those of our other operators. Even our production net to any one operator has not shown any correlation. That's gonna continue, as long as we're here.
Got it. My second question's for Bahram. Bahram, you've been active in recent quarters buying shares back certainly you perceive as undervalued, and I would agree. My question is, first, how strongly do you still believe that these are undervalued? I'm just thinking, secondly, is there something else you could do with that capital within the company besides buying shares such as potentially taking a more active position with a deal or something like that that would actually benefit potentially the company even quicker and more material than maybe just buying the shares?
I think if there was a need to provide cash to the company, me and the rest of the large shareholders would do so. At this point, the company has been able to do that. Obviously, I have been acquiring shares for four years and haven't sold any. I certainly believe that the company is undervalued from the standpoint that, you know, we aren't getting never really have gotten any value for the intellectual knowledge and capabilities, the data of the company, and the performance of the management.
You know, the price is always sort of the, "Hey, what's the SEC value of the wells and reserves?" They're really not giving any credit to this amazing management team and the board. We will do that when necessary. I do, wanna emphasize that I think 2021, can be an incredibly amazing a banner year for NOG in the sense that, you know, while we have been producing, positive cash flow this year and, you know, unfortunate for me being on a any sort of a call, as a CEO or as a Chairman of a company, I hate to see any misses of any kind.
We're very competitive. We wanna make sure everything is a win. You know, I have to look at it in a fair perspective. What's really happening is we have invested a substantial amount of cash, into wells. We have a lot of money invested where it actually not producing right now. 2021, as these guys have tried to, you know, highlight, has the potential to have a significant amount of production. If the oil prices come up to the $55 or $60, any reasonable range, you know, obviously, the operators will open the faucets and start kinda letting the oil come out.
We've invested the money already. We will have massive production. Like Jim said, the money we would spend would be for the future years. I think we can come into a 2021 where the spending is, moderate, but the production, the returns, and the cash flow will be significant. Patience is the virtue here.
Unlike many other companies, we don't have any guns to our head. We're still gonna be in a positive cash flow, situation in this company under any circumstance. We have the staying power to wait and see when that, moment of time turns around. All that oil that is being saved in the ground right now will come up at prices that would be more lucrative for us. I'm very, very, very bullish on this company, probably more than I've ever have been.
Very good. Thanks, Bahram. Thanks, team.
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. Thank you. Just one for me as a follow-up on the topic of dividends for either Bahram or Nick. About seven quarters ago, I asked you guys about the idea of a variable dividend given your business model and just your attractive free cash flow profile. I'm sure you saw a couple days ago that two larger E&P companies laid out a strategy of, you know, returning capital to shareholders through what's essentially a base-plus variable dividend strategy.
My question is, once we get back to an environment that Bahram outlined where you're able to return free cash flow to shareholders, does it make sense for Northern- just from a conceptual point of view, to adopt a base-plus variable dividend strategy? If not, what kind of flaws or drawbacks do you see with that type of payout strategy other just other than the fact that it hasn't really been done before in the E&P space? Thanks.
Yeah. Phillips, you know- they say that, to be intelligent, you have to be willing to change your mind. I think that, I kinda shown some skepticism to that in the past. What I'd say is that I saw what Pioneer announced. I think it's interesting. I think it's something to take especially given that, you know, it's been quite a volatile time over the last several, you know, it feels like forever now, but really since 2014, it's been, you know, constant volatility in the oil and gas sector.
So, I do think that that idea has merit of a small-based dividend and then an ability to go through. I certainly think that I think as Pioneer also alluded to, you know, we get pressure oftentimes to buy back stock. It's proven that companies are really bad at that. Who's to say that we'd be any better? I do think that you always have to have an arrow in your quiver. However, I think that ultimately, the most important thing that we can do is deliver a total return. I think that certainly that adds flexibility.
I think my skepticism on that in the past has been, "Will the market ever credit you for that variable dividend? Will it give you consistent value and things like that when, you know, it's gonna vary from quarter-to-quarter? Could it create more volatility?" I think we need to do some more work on our end on that. I certainly think that we're open-minded to the concept.
I wanna add on. I'm committed, strategically to get this company to a point where we can pay a dividend, you know, as soon as it's practical. I also believe that in an environment where I believe in the future, cost of capital is gonna continue to come down across the board for almost any business. Returns are gonna be challenged for most businesses. It's important to not get yourself in a situation where you would have to borrow expensive money. We're gonna chip away as long as we can at this, it's kind of a 8.5% bond. Hopefully, at some point, I expect to be able to completely eliminate that.
Whenever that's done, I think this company can have a clear path for a sustainable dividend, on an ongoing basis, whether or not, you know, we do a hybrid where a portion of it is fixed and a portion of it is, you know, variable based on the cash flow of the company. Nick and I and the rest of the board will come up with strategies. Know for fact that we are thinking already about when and how we can resume a dividend for our shareholders.
As you'll have some time to see how it works out for these guys in the meantime. Thanks, guys, for the color.
Thank you. Our next question comes from Scott Hanold with RBC. Please state your question.
Thanks. Hey, hey, Nick. I appreciate your commentary on how not to use other Bakken participants as a barometer for Northern. Obviously, you guys have proven that's the case here recently. You know, as you guys look forward and understanding that E&P companies, obviously, are being a little bit more disciplined with capital, or at least that's the intent right now. Obviously, the, you know, potential risk over DAPL and whatnot.
I mean, does that, you know, how does that change your strategy? Does that change your strategy? Does that make your beef up your ground game a little bit more and certainly then, you know, obviously have, you know- and you talked about the appetite or at least evaluating other opportunities outside of the basin that have come to you. How does that turn, you know, change your strategy going forward considering, you know, other operators are being a little bit more, you know, tight with their wallets?
Yeah, Scott. I think that that's actually very prescient in the sense that that's exactly how we think about it, which is that it's not like we sit here with some amount of money that we wanna spend, and then we go out and spend it kinda regardless. Really, we have a hurdle rate we wanna meet. If we can find opportunities under that hurdle rate, whether they be organic or through the ground game, then we'll do them. In times like we've seen recently where there's almost no activity and we have additional monies available to us, and those hurdle rates pop up and we can execute on them.
I do think there is the potential that that becomes a bigger part. It also could be that we start to build up additional inventory in areas that are going to be active. What I would say is that we wanna recycle our capital to the highest return opportunities wherever that might be. You know, if what I would tell you at this is that the rates of return and cost of capital to enter any of these assets tends to be fluid. If DAPL is shut forever and differentials go up modestly, you'll just see that reflected in the cost for every acre you purchase.
The return will wind up being quite the same, no different than if you look at E&P's return on capital in a $50 world versus $100, there's not much different because the cost of entry changes accordingly. What I would say, though, is that we have never had so many, and I would say very varied opportunities in front of us. From a risk to being able to reinvest our capital into return into things that earn our returns, I see as a risk that we're not terribly worried about. I don't know, Adam, you wanna add?
Yeah. I mean, the only other thing I'd add is, you know, the capital discipline push has, you know, limited the number of rigs that are running. What operators are doing now, rather than running around in HBP in acreage in order to most efficiently develop their units, they're developing, a significant majority of them all at once. What that translates into, from a development standpoint is significantly more AFEs validated and that cash call, going significantly higher. That has created an opportunity that we've seen, both in North Dakota as well as elsewhere, creating an opportunity where we potentially have the ability to step into these units that are being developed, in totality.
The optionality in terms of deal structure, gets wider- w hether you're picking it up on a wellbore-only basis, whether you're picking up the acreage, it doesn't necessarily matter as much because you're developing the entire unit, right? You know, between the capital call, the push to development, and then the chunkier interest that we're seeing based on, the actors that are out there that don't have the ability to deploy the capital has all dovetailed very well into our strategy.
Great. Great. Appreciate that answer. Nick, on your view on hedging going forward, I mean, you know - keep leverage at , I think you all stated at 1x, you know, kinda range and, you know, maybe even lower. I mean, that's, you know, certainly a pretty high bar for E&P companies, especially with a lot of your peers.
Would you envision, you know, becoming much more active on the hedge front, you know, maybe even get them as much as, you know, being more 100% hedged as you go in these years to help, you know, protect, you know, that balance sheet and allow you to pay the dividend more sustainably?
I think I certainly think it's possible. I think we gotta get there first, obviously. I think that I think our philosophy is, when we underwrite any dollar we spend, we wanna make sure we earn the return we underwrote. That's really driven our decisions. That's gonna not gonna change. I would say as we get larger, the flexibility you get from, your lenders in terms of how we already have seen a material uptick in the last three years, twice now, of our ability to hedge. thanks to the folks at Wells Fargo, when we redid our credit facility in November, they gave us much more flexibility.
We're directly benefiting from that. We, the moment the credit facility closed, we were able to hedge an additional 10% of our volumes and for much longer duration periods of time, one of the reasons we're so well hedged next year. I think as our debt metrics continue to whittle away I mean, even at the strip today, we see them improving materially over the next two years, just from the cash and that we'll generate and from some of the moves we've made in the last three to six months.
But what I would say is I think at least for as it pertains to my policy, to the extent that, you underwrote something at a at a return that meets your hurdle rates, and you can hedge that, then you should, because, so much capital in this space has been destroyed, by people who spent money based on certain assumptions. Those assumptions tend to change over time. That being said, you never are gonna really be able to hedge 100%. Maybe you can for the first year or so.
At, at a PDP level, there is some risk you're creating for yourself as you go too far out. You also, obviously, from a development perspective, if you're hedging future development, you cannot hedge those costs. Those well costs may change. If oil if you hedge at $60 in 2022 and then oil winds up being $80, and you hedge wells you thought you were gonna be drilling, though the cost of the well might be significantly higher from inflation- so, y ou've gotta be somewhat careful. I do think, our strategy will be continue to add duration and consistency to those hedges, particularly when you're paying fixed obligations.
Appreciate that. Thank you.
Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks.
Great. Thanks, Diego. Thank you, everybody, for dialing in to today's call. Have a great weekend.
Thank you.
Thanks.
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