Greetings, and welcome to the Northern Oil third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce to you Host, Erik Romslo, Chief Legal Officer. Thank you, Erik. Please go ahead.
Good morning, and welcome to our third quarter 2022 earnings conference call. Yesterday, after the market closed, we released our financial results for the third quarter. You can access our earnings release on our investor relations website, and our Form 10-Q will be filed with the SEC in the next few days. We also posted a new investor deck on our website last night. I'm joined here this morning by NOG's Chief Executive Officer, Nick O'Grady, our President, Adam Dirlam, our Chief Financial Officer, Chad Allen, and our EVP and Chief Engineer, Jim Evans. Our agenda for today's call is as follows. First, Nick will provide his remarks on the quarter and our recent accomplishments. Then Adam will give you an overview of operations. Last, Chad will review our third quarter financials and updates to 2022 guidance.
After the conclusion of our prepared remarks, the 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 our forward-looking statements. Those risks include, among others, matters that we have described in our earnings release, as well as in our filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.
During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, and free cash flow. Reconciliations of these measures to the closest GAAP measures can be found in our earnings release. With that, I will turn the call over to Nick.
Thank you, Erik, and thanks again to everyone joining us on today's call. I'll get right down to it with five key points. Number one, business is humming. We generated a company record $292 million of adjusted EBITDA this quarter and well over $100 million in free cash flow, the highest and third highest in company history, respectively. We produced over 79,000 BOE per day in the quarter, and we have already generated a cumulative $370 million of free cash flow in the first nine months of 2022. Leverage at the end of the quarter based on LQA adjusted EBITDA dropped below 1x even with the closing of our Williston acquisition in August.
The increases to cash flow and decreases to leverage ratios quarter-over-quarter are even more impressive when you consider that oil prices were down substantially from the prior quarter. Number two, growth. As evidenced by the increase to our production in CapEx guidance, we are driving value creation through investment. It is translating into more profits, but more importantly, the increase in capital for the year isn't being driven by inflation, which is something we had already built into our expectations. Instead, the increase in capital is truly incremental investment in additional activity that will in turn drive cash flows higher in the coming quarters. With over $370 million in free cash flow generated so far this year, we are able to increase our investments in high return projects and are thrilled with the organic and ground game opportunities that we continue to see.
We expect our balanced total returns-based approach will continue to drive superior total returns for our shareholders, and we still expect to generate approximately $500 million of free cash flow for the year. We are extremely proud of this achievement given the decreases in oil prices and acceleration of near-term capital spending. Number three, outperformance. Despite high prices and inflation, we're seeing notable outperformance in all three basins. Our Williston wells have thus far exceeded past years, even in an environment where we would typically expect step out wells. Our Marcellus assets continue to surprise as EQT's new pads materially outperform and PDP declines have been shallower than expected. In the Permian, costs, realizations, and well performance have all exceeded internal estimates. As I said earlier, business is humming. Number four, acquisition success.
As you've seen from our flurry of deal announcements over the last few months, we have been very busy on the M&A front. Make no mistake about it, our discipline remains, and we continue to underwrite acquisitions with the same rigor. Our success is a testament to our role as the preferred partner, a company with a reputation of execution and consistency, with the capital availability and the ability to negotiate and close in an honest, straightforward manner. This often trumps price. I wanna stress that we are buying assets that are not just accretive to financial metrics, but accretive to asset quality and future growth prospects. This means resilient assets that have the ability to outperform our underwriting. In short, we're confident that our recent M&A success will deliver both near-term results and long-term value for our shareholders. Number five, shareholder returns.
Our goal is to provide our shareholders the highest possible total return over the long term. We have implemented a multipronged approach, including equity buybacks, repurchasing high-cost debt, and increasing the cash dividends for our common shareholders. A, during the third quarter and October, we repurchased and retired another $10 million of our 8 1/8 notes at less than 95% of par. This lowers fixed charges, which boosts free cash flow permanently and retiring the notes at a discount to face value is accretive to enterprise value. We are prepared to continue to take advantage of opportunities to repurchase these senior notes. B, on the equity side, we've retired $109 million year to date, including $51.5 million of common stock, the remainder being preferred stock. As a reminder, we have $98.5 million remaining on our common stock buyback authorization.
Last week, we announced a 20% increase to our quarterly common stock dividend to $0.30 per share for the fourth quarter, with the goal of providing an attractive yield for our investors. We strongly believe that the consistency of a stable and growing quarterly dividend is more valuable to investors and our equity value over time than special dividend structures, which can introduce unpredictability and volatility. We announced yesterday that we have executed a mandatory conversion of our preferred stock into common stock. This will have no effect on the diluted share count because the preferred was already included on an as converted basis. The conversion will reduce annual cash dividend payments and also avoid future dilution through cash dividend adjustments made to the preferred stock each quarter.
The preferred stock was created with our bondholders in 2019 to accelerate essential deleveraging of the company, and we are thrilled with the successful outcome for our common and preferred investors. This conversion milestone will simplify our balance sheet and continue to underscore the strength of our company. In closing, I'll remind you, as I always do, that we are a company run by investors for investors, and I wanna thank each and every one of you for taking the time to listen to us today. With that, I'll turn it over to Adam.
Thanks, Nick. We closed the third quarter accelerating our investment program across the board, including our organic activity, ground game acquisitions, and corporate M&A. Overall, we picked up the pace as we entered the second half of the year, turning in line 16.2 net wells, a 60% quarter-over-quarter increase. Permian completions were the primary driver, contributing over 70% of the additions at nearly a 100% increase over the prior quarter. Our operators in the Permian are driving efficiencies in order to keep well costs on budget. As a result, we continue to see shorter spud-to-sales times, down roughly 25% from our well spud in 2021. Accelerated drilling activity and larger average working interests across most of our active basins has increased our overall wells in process to 61.5 net wells, an increase of 10% from the second quarter.
Driving that increase, we elected to 190 well proposals during the quarter, which was up 65% from Q2 and accounting for 40% of our consented net wells on the year. Our operators are drilling longer laterals to drive efficiencies in this environment. In connection with that, we saw the average AFE rise to $8.6 million, but only up 5% from the prior quarter based on normalized lateral lengths. Our weighted average well proposal remains well within our per well estimates that were already included in our CapEx guidance. Most importantly, the drilling opportunity set in front of us is expected to generate an average rate of return far north of 100%, further supporting our top-tier corporate level return on capital employed of 34% during the quarter.
With our ground game, we closed on two net wells and 965 net acres in Q3, and the acquisitions to date are expected to generate a full cycle return on capital of 49% next year. Strict emphasis is put on targeting the right operators in order to maintain capital efficiency in this environment. This stringent process, both from a planning perspective and the execution within the business development function, has enabled us to largely avoid inflation woes affecting some of our peers, as well as grow the investment opportunity set. As competitors' budgets have been exhausted in the back half of the year, we have continued to raise our full cycle hurdle rates. This ground game success has played a meaningful part in our elective investments. Regarding corporate M&A, we've been extremely busy.
We have executed and signed up some of the highest quality asset packages we have seen to date, tacking on meaningful production and even more impactful inventory across the Delaware and Midland basins. On the heels of our Laredo transaction, we have recently announced three more premier acquisitions. Looking back from the billion of dollars in M&A opportunity we've canvassed this year, these three all ranked at the very top in terms of quality, operating partners, and inventory depth. The two Delaware acquisitions we announced, pairs with Novo Oil & Gas, one of the most active and cost-efficient operators, and located in the core of New Mexico.
As we close these in December, Northern will directly benefit from their best-in-class operating team and capital efficiency. Our recently announced Midland-Petro Joint Development Agreement highlights the expanding suite of opportunities available to Northern as we reap the benefits of reaching a new scale in the non-op space. These JDAs add another arrow to the quiver, as well as modification protections. This Midland-Petro acquisition is structurally similar to, and an ideal follow-on from our highly successful Southern Midland Joint Development Program signed in Q4 of 2021. In fact, we are establishing momentum with this structure. Conversations with other operators have begun in earnest, and we are actively screening and co-bidding operated assets, as well as discussing buydowns of operated interests using this model.
The expansion of the JDA structure establishes a new set of opportunities that will be unique to a scaled Northern, and we will continue to drive value with a disciplined approach that is focused on returns. With that, I'll turn it over to Chad.
Thanks, Adam. I'll start by reviewing some of our key third quarter results, which was again one of the strongest quarters in company history. Our Q3 average daily production increased 9% sequentially over Q2 to 79,000 BOE per day. A 37% increase compared to Q3 of 2021. Oil volumes were up 8% sequentially over Q2 and have normalized after the spring storms in the Williston Basin, which is where we have our highest oil cut assets. Our adjusted EBITDA was $292.4 million, which exceeded consensus expectations and was a record for NOG. Our free cash flow was robust at $110.6 million, despite increased CapEx spend driven by growing activity.
We have generated approximately $370 million of free cash flow year to date, almost 2x more than the entirety of 2021, despite the additional spending and lower oil prices. Our adjusted EPS was $1.80 per share in Q3, above consensus estimates. Oil differentials were again better than expected in Q3, and came in at $0.84 per barrel due to continued strong Bakken pricing and having more barrels weighted towards the Permian, which are at a premium to WTI. As a result, we're updating our oil differential guidance to a range of $3-$4 per barrel. Additionally, we're tightening our gas realization guidance as well by taking the low end of our expected range up to 105%.
On the CapEx front, we invested $154.5 million during the quarter, roughly evenly split between the Williston and Permian basins. Activity has been robust. As Adam mentioned, Q3 turning lines were up roughly 60%, and spuds were up over 15% from the second quarter, while days under development has been reduced roughly 25% from our 2021 levels. This has resulted in a record DNC list of 61.5 net wells, and has contributed to the pull forward in our capital spending, along with our continued success on our high return ground game investments. While these accelerated investments have led to an increase in our 2022 CapEx guidance, they are also expected to boost our 2022 production exit rate and reduce our 2023 maintenance capital requirements.
On slide seven of our earnings presentation on our website, we provided a walk from the prior midpoint to the current midpoint of guidance. The balance sheet's in great shape. Closed on a convertible notes offering shortly after quarter end that largely cleared out our revolving credit facility borrowings to fund our closed and pending acquisitions. The convertible notes offering had tremendous demand, and the terms associated with it ultimately provide low risk, unsecured term debt with an all-in cost of borrowings below that of our current revolver, and have further extended our maturity schedule at the same time. Additionally, due to the features we selected, there will be minimal to potentially zero dilution to our existing holders. To the extent that there is, the company has options to manage this over time.
We expect leverage will tick up slightly over the next couple quarters with the closing of our pending acquisitions, but the ratio should be back below 1x by the end of 2023. Year to date, we retired $23.4 million of our 2028 notes and continue to monitor the interest rate environment as well as our bond levels. We continue to look for ways to efficiently reduce leverage if the market opportunity arises. With respect to hedging, since our last report, we opportunistically added hedges in the form of attractive costless collars that allow us downside protection with the opportunity to participate in upside if prices rally. We continue to hedge our volumes from each closed and pending acquisition based on our stated hedging strategy. Finally, a few comments on our updated guidance, which we laid out on slide six of our earnings presentation.
We increased the midpoint of our full year 2022 production guidance by 1,250 BOE per day, and now expect to exit December at over 83,000 BOE per day, which includes our Midland transaction that closed in October, a full month from our two acquisitions that are expected to close in December, but does not include our pending MPDC transaction, which we expect to close in January. We bumped the midpoint of our full year CapEx guidance by $42 million as a result of the factors I mentioned earlier. Cost guidance has remained largely unchanged from prior guidance, with a slight increase in LOE from increased field level costs. All in all, we expect to generate approximately $500 million in free cash flow for the year, and from a value creation perspective, the exit rate cash flow and production volumes are substantially higher.
With respect to 2023 guidance, we're hard at work in having board level discussions over the coming weeks and expect to be able to provide our plan by early next year.
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 anyone would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 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. One moment, please, while we call for questions. We have a first question from the line of Neal Dingmann with Truist Securities. Please go ahead.
Morning, Nick and team. My first question is on 2023. Specifically, you all highlighted on the press release and Nick, in your prepared remarks, all the continued attractive opportunities driving the boost this year, not necessarily inflation. I'm just wondering, are you able to give. I know you don't have specific 2023, I don't wanna press you too much on that, but I'm just hoping you can maybe give a little color on the latest increase on how that could shape 2023 production, and maybe more importantly, what type of CapEx increase you all might entertain next year.
Morning, Neal. I think what we'll tell you is this, and it won't be as simple as sort of well cost times the number of wells. You know, I think to grow to and sustain, call it 100,000 barrels a day, we'd need to drill about 80 wells a year. For 90,000, around 65. The building and maintaining of the DNC list and the associated CapEx accrual means the nuanced timing and total amount is far more complicated than just that simple math. It'll depend also on what region we allocate capital to, and what role the ground game plays into it, if any. This should be a helpful start for some bookends.
I think the bigger questions for us are, as the windfall develops from the Mascot project, you know, do we have competitive reinvestment opportunities for that, or would we rather harvest the cash windfall for our investors? I think we'll spend a lot of time at the board level debating these topics in the coming weeks and months.
Okay. I mean, you know, just on sort of that production or CapEx guide, I mean, are you able to say just what you're able to let that, you know, maybe broad comments on what that might go up?
Are you just talking about inflation?
Yeah.
Sorry.
Yes. Driving that. Are you know, that would probably be the more, you know, specific question.
Yeah. I mean, I think it, as it pertains to inflation, I think most of the reporting operators have been guiding to a kind of 10% inflation rate. You know, I think that's a deceleration, you know, certainly year-over-year. I think we look forward to coming back to you soon with our overall investment plan and kind of our own views on the accuracy of that. I think current, I don't think we've we really have a differing opinion. So what I would tell you is that, you know, there's definitely leading edge inflation. I would agree that it is somewhat decelerating and operators are enterprising folks, and they're figuring out ways to offset some. I don't know, Adam, you wanna add to that?
I think once we get through Q4, kinda understand what their overall mix is basin by basin, operator by operator, we'll be able to nail that down a little bit better. That's kind of how we're couching it at this point.
Okay. Nick, something you just said, you know, on the growth versus shareholder return. I don't think these days Brahm's on the call anymore, but I'm just wondering, Nick, as you mentioned, you're having the conversation going forward with the board when addressing 2023 production growth versus shareholder return. I'm just wondering kinda how those conversations go. I know for a long time, you know, a lot of times the board favored maybe more shareholder return, but, you know, you mentioned that the goal is to provide the highest total shareholder return, total return over long term. I'm just wondering kind of how those conversations might go.
Yeah. I mean, I think it's the age-old question, Neal, of getting a dollar today versus making that dollar worth more tomorrow. It's a challenging debate with our board, with investors, and it's the crux of our capital allocation process. The biggest challenge, you know, as I read sell-side notes as an example, is that at this point in the year, much of the capital we're putting to work will translate into volumes and cash flows in next year, not necessarily right away. I think also factor in that we're pretty conservative, by nature, and so we certainly could give you a scenario that would give you immediate gratification, but we wanna make sure we achieve those things, you know, before just promising the moon and the stars. I think trust is a big driver.
Investors should know and trust that these dollars are being, you know, put to good work and let's put it into perspective, too. You know, we're still gonna generate a half a billion dollars in cash this year, even with the extra elective investments. This isn't a reckless decision. I can tell you empirically that those companies that have focused exclusively on free cash flow have lagged over the short and the long term. Those that have gone for broke and kinda spent and have outperformed certainly in the short term. Admittedly, that's a strategy that's way too risky for us, and it's been bolstered by strong pricing. You know, over the long term, I'm not sure that that's the right strategy either.
You know, we constantly repeat ourselves, but we're focused on balance, finding a way to generate growth and additional recycling of returns, but also never getting over our skis and delivering solid shareholder returns. I think in the next several quarters, the logic of both the acceleration we just announced today, as well as the robust cash on the back end will play out for our investors.
Great answer. Thanks, Nick.
Thank you. We have next question from the line of Scott Hanold with RBC Capital Markets. Please go ahead.
Yeah. Hey, thanks, guys. You know, Nick, maybe Adam, can you give us a sense of, you know, this, I guess, joint venture acquisition you all did? I mean, how big do you think that opportunity set is going forward, say, relative to, well, I'd say more of the traditional kinda deals that NOG has done over the last, several years?
Yeah. I mean, I think it's early days. It's certainly been encouraging in terms of, you know, the reverse inquiries that we've gotten after announcing the Midland-Petro deal. That's on the heels of, you know, call it the Drillco LITE, that we signed up late last year that we're finishing up here, and that's frankly been a home run for both the operator as well as Northern. I think it's unique to us because you need to be able to move the needle for some of these operators. You can frame it up in a couple of different ways. You can co-bid assets, operated assets that are on the market. Maybe there's an independent that doesn't wanna issue equity or doesn't wanna or can't wear it on their balance sheet, and so you can carve out a non-operated interest out of anything.
You know, we can come in, underwrite it with our technical team, and effectively take down a minority interest in that, and then subsequent or in parallel with that, you can put together the joint development agreement and kinda plan the business around it. I think there's other operators that are out there that have run some failed processes over the past year, whether it's drilling obligations or whatever it might be, in terms of getting kind of the right bid from other operators where they've got to socialize that with the rest of their inventory. I think there's an opportunity to kinda come in and buy down, again, an undivided interest, minority interest and put together a joint development program. We've got, you know, at least two or three that are live right now.
I don't know if they'll necessarily meet our return thresholds, and we've had significant kinda reverse inquiries kinda after the fact. It's certainly encouraging, but we'll just have to see how that shakes out relative to some of the other, you know, typical non-op packages that we continue to screen.
Yeah. 'Cause, you know, I know this recent one you all did had a pretty high working interest. Do they typically come with high working interest, and how do you think of that in terms of like a risk profile?
Yeah, I mean, sorry, Adam, I didn't mean to interrupt you, but I think, Scott, you have to think about there's concentration risk, and then there's control and timing risk, right? Each set of assets have similar, you know, right? If you buy a traditional non-op asset, you certainly don't have the same concentration risk in most cases, but we have to really spend a lot of time on the art and the science of the timing of that development to ensure that we're earning our IRRs. The neat part about it is as we get larger, more concentrated interests don't really rock the boat, and so that timing factor can make up for a lot of those things.
That's why you'll notice we're spending a lot of time on super high quality areas, right? You're talking about the guts, probably some of the best pieces of land in North America, which is why you can and are able to take those risks, but also a project that's, you know, over 30% complete, so you have well control and an understanding of how that area is performing already. That can give a lot of confidence to the underwriting. I would tell you, we're not known for being optimistic here, and so I think that that's critical to that beginning phase. I think it's gonna be an all of the above approach.
You know, we recognize that these projects are a bit different, especially when you're thinking about it not as a 10-year asset, but as an asset you're gonna go and mow down. I will tell you, as it pertains to the Midland-Petro project, that is the highest underwritten return we've ever done. I think, you know, while it might seem, you know, weird and different, I think over time it'll prove its fruits to our investors.
When you look at, you know, obviously a lot of discussion this past quarter on well performance, you know, for various operators. You know, look, I know you guys do your diligence to take a look at, you know, different types of permitting that, you know, your partners are gonna do. You know, how do you get comfort in sort of that, you know, kind of more mid to longer term perspective, you know, view on the quality of inventory that your operators have? You know, how do you get, you know, kinda comfortable with that assessment? Maybe I'll leave it with that.
Yeah. You referring to that project in itself or in general?
Just in general. Not any specific project, just in general in terms of, you know, your partner's depth of their well inventory.
Yeah.
The quality of it.
Yeah. Yeah. I mean, I think, look, we do our own work, right? You know, every piece of leasehold that we own, we draw our own sticks. We have our own EURs. We have, I mean, nearly 400 type curves in the Williston alone. We certainly, you know, with no offense to any particular operator, but we're not listening to their views on what they think those wells can do or what that inventory will do. We do our own work. You know, every acquisition we do is bottoms up engineered by our own team. I don't know, Jim, if you wanna add to that.
Yeah, obviously, we're looking at the inventory that we think the operators have left. You know, we can go out there. We've got everything mapped across the entire basin, so we can look at units, have an idea of how many years of inventory we think a specific operator has left, how they might target that. That's part of our, you know, proactive management, where we can go in, target specific DSUs that we know that the operator's gonna have to move to, within the next couple of years to get developed. We use that to help augment. Then on all the acquisitions that we do
Again, we're using that to augment our inventory. All the acquisitions we've done over the past couple of years have been to improve the remaining inventory that we've got left in our portfolio.
Got it. Thanks for that.
Thank you. We have next question from the line of Charles Meade with Johnson Rice. Please go ahead.
Yes, good morning, Nick, to you and the whole crew there. I wanted to go back and ask something about what you're seeing in the ground game, and if you know, there was a little bit of an uptick there we saw in 3Q. I guess I'm really interested how much of an uptick. Obviously, you've given a guide for 4Q, but how much of that of your 4Q guide are you expecting to see an uptick in more opportunities to elect into wells or participate where other people are not present?
Yeah.
I think you mentioned this in your press release, but I wanna get an idea of the magnitude.
Yeah. I mean, I think a lot of the raise in CapEx is ground game that's already been really in process. There's I would say, beyond the normal course of business. I wouldn't say that there's an anticipation of a material increase from here going through the end of the year. Charles, I would say this, and I'll let Adam or Jim, you know, chime in at any point, which is that we have found a big return disparity as well as competitive disparity in what I would call chunkier ground game opportunities. There are a lot of people chasing a tenth of a wellbore or five or 10 acres here or there.
What we're seeing are just attuned to what we were talking about with Scott before in larger ground game interests, materially higher underwritten returns for us and a lot more, you know, success rate. That's a good thing, but it also means that when you have that success, it's obviously gonna be actually more impactful to our capital over time, which is one of the reasons that we've, you know, sat down with our board and really had to make some tough decisions in terms of how much money we wanted to spend in the last few months.
Yeah, that's right. I mean, it's the competitive universe when you get into these larger, more concentrated deals where subscale non-ops frankly don't have the wherewithal to spend the money or don't have the risk tolerance because they don't have that base. We've continued to raise our discount rate as we've moved through the end of the year, as people have exhausted their budgets and have been successful in that regard.
That is helpful color. Then, Nick, going back to your convertible bond offering, can you give us kinda a narrative of your evaluation and your selection to go with that kind of financing route rather than you know either some mix of straight equity or and/or straight debt? Whether this was something that you decided was a solution you wanted and you went looking for it, or whether it was the other way around that maybe you know the market came to you and said, "We've got favorable terms.
Yeah. I mean, I think let's take a step back for, like, 30,000 ft. Chad and I have been looking at it for four or five years. It is a very bespoke instrument. You know, I had a board member once tell me that it sounded like witchcraft to him, which I appreciate. The complexity is interesting. Look, the reality is that you can make a convertible bond whatever you want, and obviously the embedded optionality in it provides a lower cost, which, you know, is particularly sensitive in an interest rate, you know, rising environment like we're in today.
Ultimately, if you look at the instruments that we chose for this bond, and Chad mentioned this in his prepared comments, effectively, we've been able to boost it to a $52+ conversion rate. Even at that conversion rate, there is no dilution. Effectively, we pay back the bond in cash. Therefore, if you and Charles, I think I provided you with some of the kinda Excel metrics on how this works. Ultimately, it provides all the good things of a convertible bond, which is a lower coupon, with really minimal dilution on the back end.
Because we used a capped call where we can control it, we can always, over time, move and manage that capped call to prevent any dilution if we so desire, with a minimal impact to the overall cost of capital. We've really threaded the needle here. I will tell you, the convertible bond market is heavy in tech and biotech, and so they're not used to profitable corporations being part of it, so the demand was off the charts. We recognize when you do and price this and just the mechanics of the derivative, it is gonna hurt your stock for a day. I think as you saw, it was really a one and done type scenario, and it goes through there.
I mean, when you compare it to common equity, you know, we don't really feel like this wasn't really a function that we felt like we needed to manage our leverage ratios. In fact, you know, they'll flex up for a quarter or two, but we didn't really need an equity injection. I think that, you know, we feel like the high-yield bond market is too expensive, simply. This instrument provided all the good with really none of the bad, and I think it was a fairly obvious choice, admittedly a more complicated one.
Thank you, Nick.
Thank you. Again, to ask a question, participants may press star one on the touchtone phone now. We have next question from the line of Derrick Whitfield with Stifel. Please go ahead.
Thanks. Good morning, all.
Morning.
Throughout earnings, I think Scott touched on this earlier, but co-development has been a subject of focus, particularly in the Midland, based on industry commentary.
Regarding your Mascot project, could you speak to the co-development strategy there?
Are you just talking about in terms of structure, Derrick, or in terms of communication and all those sort of things?
More associated with how you're gonna develop the suite of intervals.
Oh, yeah. You know, we began negotiations and discussions with MPDC back in June. They laid out their view of development and optimal development, and we spent a lot of time with our advisor and our technical team reviewing that. You know, candidly, it's changed like anything else over time. Ultimately, we memorialized it when we built a joint operating agreement, which, you know, both gives us, you know, obviously, you know, ripcord features and protections along the way, but also, you know, a strong level of confidence in how it's developed.
I think it's really important, too, in these units to really develop them all at once, to maximize the EURs and the ultimate IRRs on those wells, and that was something that we very much agreed to, both experientially and just in terms of how the Midland Basin and communication between those units, or between those wellbores, works. It's very important. I'm sorry. Go ahead, Adam.
No, that's all right. I mean, the short answer is that's exactly what's gonna happen. I mean, what they've done, and you can see it on the gun barrel in the presentation, is they've drilled the deep rights to HBP acreage, then the offsets in order to, you know, mitigate any sort of frack communication with offset operators, and then they're effectively just moving east to west across the board.
Yeah. You can see this is a four unit development. One of the units is already fully developed across the entire suite of zones. We can see, you know, the impact of the parent wells versus the child wells. Going forward as a co-develop, we can model that out with our expectations. Obviously we're, you know, as Nick mentioned earlier, we're always a little bit conservative. I think here in this area as well, we're being conservative with our assumptions here, and there's probably some upside to what we think the actual results will be.
That's great. Maybe just a build on where you ended there. In light of how active you guys have been in A&D, I wanted to ask if you've had a chance to perform look-backs on your 2021 acquisitions to see how close your projections were. I'm sure, as you guys admitted, you've been quite conservative in your assessments.
Yeah. I mean, I can tell you universally, I think we've destroyed every single forecast that we put forth. I mean, I think we mentioned it in my prepared comments about the Marcellus and just the overall performance. Remember, we underwrote that as if Chevron still operated it. I think both performance and cadence of development on our Veritas, which is our largest one, has materially exceeded our estimates.
I mean, I think literally if you go deal by deal over the last year and a half, and frankly, I think almost every transaction we've done since 2018, you know, I think you know, we don't talk about it a ton, but the Flywheel transaction we did last back in 2018, which is heavily leveraged to Ovintiv, has turned out to be a home run, and they've been one of our marquee operators in the Williston over the last year or two.
Terrific. It's very helpful. Thanks for your time.
Thanks, Derrick.
Thank you. We have next question from the line of John Freeman with Raymond James. Please go ahead.
Hey, good morning, guys.
Good morning, John. John, what's happening?
Hey. The first thing I wanted to touch on, obviously y'all done a remarkable job, you know, growing the base dividend over the past year plus. I just, you know, a year ago, roughly, like last December, y'all had a presentation y'all put out that sort of gave sort of a more detailed kinda look around the base dividend kinda growth plan and kinda how y'all thought about the structure. I just sort of wanted to revisit that kind of initial concept. You know, initially that was based on, you know, $50 oil, $3 gas, and you basically said at that price deck you'd be able to grow kinda 20% on average kinda quarter to quarter growth rate through 2023.
That would sort of equate in 2023 to, like, one-third of your free cash flow after maintenance CapEx at that price deck. Excuse me.
Yep.
I'm just trying to get a sense for. Obviously, y'all are almost a year ahead of schedule, you know, combination of, you know, mainly, M&A's obviously been much more than y'all were assuming in that plan, which didn't assume any M&A. When I think about, like, going forward, obviously you've made it clear kinda what your view is on the special dividends. Should we think that, like, on a go-forward basis, the base dividend, it's always gonna kinda run at kind of that rough, you know, idea of a price deck at $53, a third of free cash flow post-maintenance CapEx? Or have y'all thought at all about longer term, you know, like maybe what the large caps do with having this kind of fixed plus variable component?
Just assume the base dividend kind of is what it is, and as you do acquisitions, maybe that kinda goes up with it. You keep the conservative price deck, and then you sort of layer on from time to time, you know, the buybacks like y'all have. I'm just trying to get some more color.
Yeah.
Around how you think about long term, 'cause y'all have obviously been way ahead of what y'all originally projected.
Yeah. I mean, I think we noted in our quarterly presentation. I think this quarter's dividend is about 43% higher than what we promised last December when we launched the plan. I think it's a little more complicated, John, in the sense that, you know, we wanna provide a solid and growing dividend. I think the rules that you're discussing are healthy and consistent and true. Also, you know, we think about it too in terms of, you know, what is the yield you're providing to investors. Too much yield is not a good thing for the business long term, and too little yield is not a good thing.
I mean, I think this sounds, you know, sort of boilerplate, but we really are focused on delivering the best risk-adjusted total return value proposition for the stockholders. This means, you know, consistent, well underwritten base dividend, you know, premium cash flow growth. It is one of the highest base dividends, you know, in the space, and that's partly because I think we have higher ROCE than average. I think it's a disciplined approach, you know, from acquisitions over the last two years as well. You know, I think we can continue to drive capital allocation, balancing current income with future cash flow growth, and again, targeting that superior total return. You know, but I think they are out in the public forum.
You know, I think we've targeted, you know, by the end of next year to get to about $0.37 a share per quarter. We've fairly consistently accelerated upon those plans. If and as we achieve those internal goals, I think we hope to keep delivering better returns. We may shift our capital allocation over time, though, because the factors that'll drive that will be the valuation of the stock, the yield of the stock, and the opportunity set in front of us in totality. I'll take dynamism over kind of dogmatic plans any day from a long-term value creation perspective.
I think, I think people love formulas, and I think there are formulas you can set as baselines, but I think flexibility in making the best decision for the business, over the medium and the long term will trump that over time.
No, I appreciate that, Nick. Just my follow-up just touching back on M&A again. You know, I mean, last quarter, you know, in August, you mentioned that there was just a number of sellers out there with unrealistic expectations. You talked about how the you know the bid-ask spread was very real. It's just, I guess, sort of remarkable just in you know from August to you know to now what y'all did with those three pretty meaningful acquisitions during the quarter. I'm just trying to get a sense of like, what do you think sort of changed?
Like, is it, you know, I don't know, private backed entities that just need to monetize or just, you know, just something that caused all of a sudden for a bunch of things to kind of domino for y'all to be as successful as y'all were on the M&A front?
Yeah. I mean, I'll give my pithy commentary and let Adam finish it up. I think my view is a lot of this is timing. You get a lot of bluster and then people, you know, threaten and say, "We're gonna go run a process." And we say, "Sure, go ahead." And then we, you know, we come into the process and we realize whether we have the highest price or not, we're certainly the most viable and likely to close. I would say that, you know, in the recent transactions, when you do one, you know, it's kind of funny. You do one, and it actually seems to exert pressures on the others because they're afraid that then you're going to be out of the market, and suddenly people are willing to negotiate.
I would say that as we've had the success on those few, it has tended to actually bring down the expectations from others, in our opinion. Honestly, well, you guys might be surprised at how many transactions we are able to accomplish. I think we would be just as equally surprised. You know, we go into this with a fairly not I don't wanna call it mean-spirited, but fairly mechanical approach. Sometimes it works. Most of the time it doesn't. When it works in a rapid succession, color us surprised. We certainly don't go looking for this. I don't know, Adam, do you wanna finish out?
Yeah. I think two of the three took effectively six to nine months from kind of start to finish. I think to Nick's point, a bit unexpected. We would've been thrilled to have one of these. You know, the fact that we're able to tuck in all three is a bit, I think, coincidental in terms of, you know, signing them up on top of each other. The third, you know, acquisition was frankly a group that we had done, you know, a prior acquisition with, you know, in prior years, and so that was easy in terms of, you know, prosecuting and negotiating the PSA, effectively just take the same one off the shelf.
You know, as we look forward, I think, or look back in terms of the tracking list of last quarter or this year, these were ranked one, two, and three as called the most desirable in terms of asset quality and balance. You know, as it stands today, there's probably another $2 billion worth of live opportunities that are out there. The quality of the assets, I think, is hard to compare with what we've been able to sign up to date. All that said, if these come in in a linear fashion, to the extent that there's something compelling, we'll certainly be screening them.
Yeah. I mean, to give you a frame, like how much of a crapshoot this can be sometimes. You know, there was a Williston asset for sale this summer, and I think someone outbid us by like close to 50% or 40% for it. It's an asset that, you know, we were in 2/3 of the properties. People have differing views on value. If someone wants to, you know, we're happy for the seller if they can get that value, and we're certainly happy not to have it if it's gonna trade for that value. Like I said, we're pretty mechanical and sometimes we have success and a lot of times we have failure, and it's just the way the cookie crumbles.
Thanks, guys. Well done.
Thanks, John.
Thank you. We have next question from line of Donovan Schafer with Northland Capital Markets. Please go ahead.
Hey, guys. Thanks for taking the questions. In the Q2 call, you guys talked about, I think as an example, you mentioned an AFE that came across your desk for a 2 mi lateral that was like $16 million, and you went non-consent. Seemed sort of like a no-brainer. I've also heard that sometimes operators might inflate their AFEs as a way to, you know, sort of discourage the non-operated interest holder from participating. I guess first, my question is just, is that kinda true, where you might get some inflated AFEs where they're trying to kinda trick you into not participating? And if it is, then, you know, how do you know, you know, the difference in those cases whether you should go non-consent or whether they're just kind of trying to fool you?
I guess also if there's a competitive advantage there, where someone that might get scared away by a padded AFE, but you can look at it and say, "No, no, we know. We can see through this." Just any clarification on that or if that's even a thing.
We certainly see it from time to time. What I would tell you is that's a very slippery slope because these operators are legally obligated to give us their best estimate. If they're caught doing that, they're gonna create a whole host of other problems for themselves. It's a small universe, people talk. We've had it happen. It's been a few years at this point. We approached the operator, they kind of went about face and reissued the AFEs. I think, you know, by and large, there's certainly contingencies within the AFEs, and those are things that our engineers are looking at on a line-by-line basis. But you're generally not seeing that sort of trickery going on in the space because the ramifications are high.
I just say, Donovan.
Okay.
We're in almost 9,000 wells. We have 100 operators, and we generate $1 billion in cash flow a year. I don't think that a high cost AFE is gonna scare us. Because we're in all those wells, if we see something that looks out of school, our data's gonna tell us in advance.
Yeah, that's right. I mean, I would almost even look at it on the flip side. You're gonna have certain operators that have, you know, drinking their own Kool-Aid, you know, from a well cost standpoint. Having that data to really understand which operators have the propensity to overrun is probably even more important.
Okay, that's helpful. As a follow-up, it looks like you had some good Marcellus production that came in during the quarter. I'm just curious, was that, you know, on acreage that you already had in place at, you know, the end of the second quarter? Or was some of that from, you know, incremental, you know, non-op opportunities, AFEs or things that you?
No.
Were able to sort of pick up during the quarter?
No, Donovan, it's all organic. We have not really had an active ground game in our Marcellus properties. It's a large, right, joint development with EQT.
Okay. If I could just squeeze one more in real quick. The MPDC, you know, the Mascot project, you know, it's, you know, and I may be completely off the mark on this, but my, you know, my intuition or just sort of, you know, Texas is a super friendly jurisdiction, so that's all really positive. Yeah, it did. You could see that you're sort of drilling under the city of Midland there. I'm wondering, you know, are you guys in a better position to kind of underwrite that if there are any, you know?
Is that the type of thing that would discourage other potential bidders? You can look at it and think through it and say, "Well, you know, there's you know." I don't know if there's any kind of risk or concern or maybe other people have a superficial reaction, the same way I'm kind of thinking about it on the face of it.
I'll give you the easy answer to that, which the answer is no. I think that while it's under the city of Midland, the land and surface where it's being drilled from is outside of the city of Midland. Both Pioneer and Devon are buying acreage and are doing the exact same thing. I think what gave us an advantage in this was that the operator did not wanna sell the entire project. They wanted to stay in it. I think that it's just as simple as that, and that ultimately gave us a strategic advantage. Believe me, there were plenty of operators, vultures circling, hoping to take the entire project.
Okay. All right. Great. That's very helpful. Well, thank you, guys, and congratulations on the quarter. I'll take the rest offline.
Thank you. We have our next question from the line of Noel Parks with Tuohy Brothers. Please go ahead.
Hi. Good morning.
Morning, Noel.
Just a couple of things. You know what? As you talked about the process of coming up with what 2023 is gonna look like on the budget side, I'm just curious about your degree of visibility this year. I'm just wondering if you're in a position of waiting for more AFE input into your own calculations, and whether what you're seeing for AFEs are looking relatively stable or in line with your expectations or sort of trending up. I just ask about the AFE timing because operators have been pretty unanimously reluctant to give much of an idea of budgets, with many deferring until early 2023. I was wondering if that was rippling through into sort of your information flow.
I mean, I would say from a visibility perspective, we'll enter 2023 with the highest level of visibility we've ever had as a company, you know, anchored by a bunch of important projects, but also just given the levels of AFE activity we're seeing right now that it's really targeted towards 2023. I think the question that really surrounds our 2023 budgeting goal is very simple, which is what level of activity and production do we wanna target? Like, what do we think is the appropriate way? I think that there are various schools of thought within the business, and I think that's what's driving why we want as much time as we do. I don't know, Adam or Jim, if you wanna add to that.
No. I mean, from an AFE activity standpoint, I think we had double the gross AFEs or close to it, you know, kind of quarter-over-quarter with, you know, a relatively flat average working interest, and a lot of that is driven by the Williston, as operators kinda get ahead of things before, you know, winter weather sets in. All of that's gonna be 2023 activity. Then to Nick's point, I think, you know, we need to be dynamic in terms of the acquisitions that we've, you know, signed up, the joint development agreements that we've got in place. Then, you know, what role does the ground game and the opportunity set look like as we move into 2023?
It's a matter of balancing all of those three prongs, actively managing it all and hydrating for that matter.
Great. Thanks. I just wanted to sort of in a bit of housekeeping turn to the hedges. You mentioned the addition of some really attractive collars. I think with the different deal announcements you've done, you had updated the hedge info accordingly. I'm a little unclear about sort of the as of or the, you know, effective date of the numbers you put out. 'Cause it did seem to me that there was maybe a little bit of shifting in the numbers in the presentation. I don't know if it was a little bit of trimming here and a little bit of adding there, but if any insight on that would be great.
Yeah. I don't know what you're talking about there, Noel, but you know, we did add some pretty attractive collars. You know, maybe it's just the timing of the presentations that we did. But I don't recall. I don't know what you're talking about.
Yeah.
No, the things I saw were just, like, super minor, so may have even just been, you know, rounding error type thing.
We do have one small Brent linked hedge, which could maybe move the dollar figures ever so slightly. That's the only thing I can think of. I mean, I think it's like 1,000 barrels a day or something next year, right?
Yeah.
That's the only thing I can think of, Noel.
Right. I think that was just the one I saw.
Based on the Brent WTI spread. I don't know. We're talking about pennies, so.
Yeah. I mean, I'd tell you to use what's in our release.
Okay, great. Those are all as of 9:30 A.M., right?
Those would be as of today.
Oh, okay.
Just a couple of days ago.
Yep.
Great. Better still. Okay, thanks a lot. That's all for me.
Thank you. Ladies and gentlemen, we have reached the end of the question- and- answer session, and I'd like to turn the call back to Nicholas O'Grady, CEO, for closing remarks. Over to you, sir.
Thanks everyone for joining us this quarter. We'll work extremely hard, and we'll see you on the next one. Thanks.
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