Northern Oil and Gas - Earnings Call - Q1 2021
May 7, 2021
Transcript
Speaker 0
Greetings, and welcome to the Northern Oil First Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Mike Kelly, Chief Strategy Officer.
Thank you. You may begin.
Speaker 1
Thanks, Diego. Good morning, and thank you for joining us for a discussion of Northland's first quarter twenty twenty one earnings release this morning. Before the market opened, we released our financial results for the first 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 the website this morning, if that's more of your speed.
I am joined here this morning with Northern CEO, Nick O'Grady our COO, Adam Durlim our CFO, Chad Allen and our Chief Engineer, Jim Evans. Our agenda for the day is as follows: I will hand the mic over to Nick here for his comments regarding Q1. We'll do that in a minute or two. After Nick, Adam will give you an overview of our operations, and then Chad will review NOG's Q1 financials and 2021 guidance. After that, the executive team will be available to answer any questions.
Before we go any further, 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 the risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward looking statements. Those risks, among others, matters that we have described in our earnings release as well as our filings with the SEC include our annual report, our Form 10 ks and our quarterly reports on Form 10 Q. We disclaim any obligation to update these forward looking statements.
During this conference call, we may discuss certain non GAAP financial measures, including adjusted EBITDA and free cash flow. Reconciliations of these measures to the closest GAAP measure 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 CEO, Nick O'Grady.
Speaker 2
Thanks, Mike. And I would like to thank everyone for joining us this morning. It's hard to believe it's been over a year since the beginning of the pandemic. This past year, we've seen the price of oil go from less than 0 back to $65 a barrel. We're very fortunate that we've been able to thrive during this year in part because of our hedging strategies and also because of the support of our shareholders and lenders.
I'm very proud of the Northern team and how we've responded to the challenges. As usual, I'll get down to it with four points. Number one, the quarter. Our results for the first quarter beat our internal forecasts as a result of improving well performance in conjunction with robust pricing for gas and solid oil differentials. These improvements more than offset the work overspending associated with the costs we incurred for getting our production back online that we highlighted in our fourth quarter release.
This is the third quarter in a row since the pandemic took hold that our production has risen. The increased workover costs are largely transitory and thus we should see unit costs continue to trend down throughout 2021. Our Bakken assets continue to see strong oil output and increased gas capture and combined with robust NGL pricing resulted in Northern exceeding our internal revenue estimates. Our capital spending was less than expected, which translated into free cash flow of $41,700,000 for the quarter. In summation, as we enter midyear, we are well ahead of our 2021 plan as it stands today.
Number two, the balance sheet. As we've outlined in previous earnings calls, one of our primary objectives is continual improvement of our balance sheet and to decrease our operating leverage. Our free cash flow enabled us to pay off an additional $24,000,000 of debt and fund the $17,500,000 deposit for our Marcellus acquisition. Based on the current outlook, we expect to end the year with less absolute debt and a leverage ratio of less than two times, and we plan to further reduce the leverage ratio to the mid-1s level by mid-twenty twenty two. Based on our internal forecasts, we expect to end the year with over $400,000,000 of available liquidity, not including any potential increase to the revolver capacity.
And at the current strip, the revolver is projected to be undrawn with significant cash on hand by maturity at the end of twenty twenty four. These forecasts take into account a cash dividend with growth over time, which we'll get more into later. I'd like to thank Bank of America for their increased commitment to our facility and the flaws execution advising us in the Marcellus transaction and along with Wells Fargo leading our Q1 financings. RBC, Truist, Citizens, Fifth Third, U. S.
Bank and other members of our bank syndicate have been truly great partners as we collectively and successfully navigated through the worst of the pandemic. And I'm particularly thankful that we've had such an incredibly supportive lending syndicate that never wavered in their sponsorship of the company. Number three, acquisition pipeline. We continue to enjoy a robust backlog of acquisition opportunities from acreage to ground game development and growing quantities of larger asset packages. Our team has never been busier and we prosecute each opportunity with the same rigor and we remain optimistic that from small to large, we can create value for our stakeholders going forward.
We are currently evaluating 15 different package opportunities, 12 of which are not formally being marketed. The bulk of these prospects are focused on the Williston, Permian as well as the Eagle Ford. As I've mentioned previously, the deep bench of opportunities out there is non operated properties is by our estimates over $10,000,000,000 We believe strongly in creating win win scenarios for us and potential sellers, but our own stakeholders come first. We are the natural consolidator of non operated interests, now on a national level with an advantaged cost of capital and unmatched size and scale. Number four, dividends and returns to our shareholders.
Since we last spoke, we've spent a great deal of time with our Board of Directors researching the sector in regard to returning capital to our shareholders. We are pleased to announce our first ever quarterly dividend of zero three dollars per share about five months early from our initial plans. While it will be very modest start for this program, this is just the beginning. Future increases will be tied directly to our reduction in overall leverage. And I'm pleased to tell you that our analysis of where we are and where we are heading has provided a bright outlook.
This means we can create a dividend that can grow faster than that of our overall company. So for longer term investors, what will at first be a starter dividend should consistently grow into something more meaningful over the next several years. Additionally, we might be able to increase our dividend even faster if we are successful on the acquisition front in a leverage accretive fashion. And to the extent that oil prices continue to be strong or rise even further, we might be able to accelerate this strategy or consider alternate forms of returns. As I wrote in our release, this is the culmination of over three years of work by our Board and my executive team to get to this point, and I'm very proud of their work and thankful to our stakeholders and bankers who helped us get here.
In conclusion, the outlook is bright. Our opportunity set continues to grow with each passing day. And as I will remind you each and every quarter here on out, we are a company run by investors for investors. And I truly thank each and every one of you for your interest. With that, let me turn it over to Adam Derlin.
Speaker 3
Thanks, Nick. Operationally, Northern was firing on all cylinders in the first quarter. On the production front, we continue to see curtailments decline to the tune of 2,000 barrels a day. And even more encouraging was the fact that well productivity outperformed internal estimates. This is driven by certain operators and areas where we have higher concentration levels, and we will continue to monitor these improvements.
On the spending side, CapEx came in at $38,100,000 for the quarter. Well cost realizations for certain operators came in under AFE as renegotiated costs during the downturn were realized. Approximately 40 new well proposals were received during the first quarter, and we elected about half of them with an average well cost at around $7,000,000 Moving forward, we expect average well cost to range between 7,000,000 and $7,500,000 depending on the mix of operators and completion methodologies. The lower number of consented wells was largely driven by one operator stepping out into areas where we have seen some meaningful decreases in productivity over the last eighteen months. Actively managing our portfolio, we were able to reallocate the capital from the non consented wells to much higher rate of return ground game acquisitions.
We executed on six transactions during the quarter and continue to take a barbell approach, picking up exposure to additional drilling opportunities in both the Bakken and the Permian. With Shale three point zero in full swing, the number of ground game deals available to us remain at elevated levels. And as operators focus on some of their best inventory, the economics are certainly compelling. As Nick alluded to in his comments, our business development team is busier than ever as we review several compelling asset packages across the Lower 48. In April, we closed our Marcellus transaction and related financing, generating several reverse inquiries.
Our approach to any acquisition will remain disciplined with a strict focus on hurdle rates at an asset level while checking the appropriate boxes at a corporate level. Executing on any one of these will need to meet our specific criteria as we sensibly scale the business and continue to consolidate. Now I'll turn it over to our CFO, Chad Allen.
Speaker 4
Thanks, Adam. I have a few highlights to go over this quarter, starting with a quick summary on Northern's financial performance. Our production averaged 38,417 barrels of oil equivalent per day, an 8% increase over the fourth quarter, which was a strong start to this year. Curtailments and shut in production began to ease as we exited the quarter, but we estimate it still reduced our first quarter production volumes by approximately 2,000 BOE per day. Our adjusted EBITDA for the quarter was $98,800,000 and our free cash flow was $41,700,000 up 543% respectively over the fourth quarter due in large part to increased production levels and better realized commodity prices.
Oil differentials were $6.56 during the quarter, which was an improvement of approximately 5% over the fourth quarter and 38% over the pandemic lows. As expected, gas realizations saw significant improvement over the fourth quarter due in large part to strong natural gas and NGL pricing. Lease operating expenses for the first quarter came in at $34,300,000 or $9.92 per BOE, which was slightly higher than our full year guidance range. However, as I mentioned on our last earnings call, we expected our lease operating costs to be higher earlier in the year as we incurred costs from higher workover activity. Cash G and A, excluding onetime acquisition costs related to the Marcellus transaction, came in at $1.01 per BOE this quarter, about 12% better than the midpoint of our Q1 guide.
One thing to highlight is that we still expect to incur approximately 2,500,000.0 to $3,500,000 of additional nonrecurring acquisition costs related to the closing of the Marcellus transaction in the second quarter. I'd also like to highlight cash G and A costs pro form a for the Marcellus transaction and our growing oil volumes are projected to be approximately zero eight five dollars per BOE, by far one of the lowest in the industry. Capital spending for the first quarter was $38,100,000 or a 22% reduction compared to the fourth quarter, which consisted of $33,100,000 of organic D and C capital and $4,400,000 in total discretionary acquisition capital, inclusive of acquisition D and C capital. In terms of cadence, as it stands today, we expect the second and third quarters to have the highest levels of CapEx for 2021, particularly for the Marcellus assets where the majority of development is projected to take place midyear. We strengthened our balance sheet and liquidity profile since the end of last year through debt and equity offerings with gross proceeds of approximately 690,000,000.
These transactions allow us to fully equitize the Marcellus transactions, which closed on April 1 and extend our maturity wall by retiring the remaining 65,000,000 of our VEN Bakken note and 95% of our second lien notes, of which the remaining 15,700,000.0 will be called on May 15 year. Remainder The of the proceeds were used to pay down the revolving credit facility. As of March 31, pro form a for the closing of the Marcellus transaction, we had approximately 366,000,000 outstanding on our on our revolving credit facility, leaving almost $300,000,000 of available liquidity, including cash on hand. We started the year ahead of our internal forecast and have a lot of confidence in our 2021 program, both on a capital spending front as well as the pace of our production volumes. We remain conservative on our outlook, and we will look to reflect any upward adjustments on our second quarter call as warranted.
With that, I'll turn the call back over to Mike Kelly.
Speaker 1
Thanks, Chad. All right, Diego, let's assemble the queue for Q and A. Thanks.
Speaker 0
Thank you. And at this time, we will open the call for a question and answer session. Our first question comes from John Freeman with Raymond James. Please state your question.
Speaker 5
Good afternoon, guys.
Speaker 3
John, how's it going? John?
Speaker 5
Good, thanks. Congrats on establishing the dividend. That's great accomplishment. How do you all I just want to sort of piggyback off of some of your comments, Nick. And I realize, as you said, that acquisitions can certainly impact the pace of dividend growth.
But sort of ex acquisitions, just sort of maybe wanted to how you all think about managing the growth of that dividend going forward in terms of do you think about establishing like, a percentage of your free cash flow that goes toward the balance sheet and then another percent that's kind of earmarked for dividend growth? Just any additional color on how that that long term dividend strategy would be helpful.
Speaker 2
Yeah. Not not being trite in any way, we had called it sort of a one third doctrine a few years back when we were first contemplating this. And I think that that's about the right place to end up, where about a third of your distributable cash flow is going back to your stockholders. That's still the goal that hasn't changed. When we've done this analysis, the average upstream E and P is paying out less than 15% of their distributable cash flow right now.
Obviously, our starter dividend is a smaller portion of that. And I think as my prepared comments said that as we hit our own internal leverage targets, I think we can share more of that with our stockholders as we derisk the business. And so as we kind of hit that 1.5 times milestone, I think we can see a substantial step up in that. And as we get closer to one, which is really where our forecast looks like over the next couple of years, I think we can really get to that one third area.
Speaker 5
That's great. And then shifting gears, the AFEs were down nicely again from the fourth quarter to a new low, just below $7,000,000 And going forward, you all indicated sort of expect kinda 7 to 7 and a half million is what you all are are planning for. And since, you know, the budget was based on 7 and a half million on the AFE side, does that mean there's a sort of a downward bias to the full year budget?
Speaker 2
Potentially. I think we need to be mindful just as the rig count picks up overall. And I think the Williston rig count, in particular, is going to pick up some that we want to leave some buffer. But certainly, if it goes at the pace now, there would be some downward pressure, which would be great. We'll leave it as is for the time being.
Speaker 5
Sounds good. Excellent quarter, guys. Congrats.
Speaker 6
Thanks, John. Our
Speaker 0
next question comes from Scott Hanold with RBC Capital Markets. Please state your question.
Speaker 7
Thanks, and congrats to all of you. You all accomplished a lot in a very short period of time. And I think that dividend is certainly, at this point, the cherry on top, so congrats. Where I want to go is kind of continuing down the path of the dividend and just shareholder returns. Obviously, Nick, you'd indicated you'd like to get to that onethree payout ratio.
When as you progress to that point, like how do you think about doing that through a base dividend versus some of the other mechanisms, such as a variable dividend? Do see there's value in a structure to make it very predictable and have a variable bent to it just to mitigate commodity price volatility impact?
Speaker 2
Yeah. I mean, I think someone on Twitter said I had the worst IR game on the street because I was sort of downplaying the concept of special dividends and the volatility they ensue. So I'll try to do better this time. I think special dividends have a role. I think that we've been watching that carefully.
You've seen from the Devon's and the Pioneers of the world a formulaic structure. Kind of I believe the Pioneer one is kind of once a year kind of backward looking. I think that makes sense to some degree. And so I think you have to think about the balance. We don't want to go down a path of where upstream MLPs were, where you have high fixed dividends and then you wind up cutting them, which is worse.
And so the special dividend definitely gives you the ability to navigate through the volatility of commodity prices. And so I think it does have a role. I think our first plan is really to build a small and solid base dividend and continue to ratchet it up over time as we hit our targets. And I think the special will play in to the extent that things are going the way they are now, which is that we continue to exceed our own internal targets. It gives room to move quicker.
And so I don't want to make false promises or hopes, but I do think it has a possibility, particularly when we're in robust periods as we are today.
Speaker 7
I think that's pretty clear. And as my follow-up question, you cited that you see over $10,000,000,000 of opportunities out there right now. Just to clarify, is that specifically non op opportunities, or is that, you know, everything you see out there? And and secondarily, of those, you know, half dozen or, I'm sorry, dozen or so opportunities you're looking at, can can you describe just the size and scale of of some of those individually?
Speaker 3
Yeah. It's a 100% non op within kind of that population would be operated. And so I'd say it's primarily weighted towards the Permian and the Bakken. A number of different Permian deals we've seen kind of off market as of late and continue to kind of see as well as some other formal processes that are being run. And I'd say, you know, we're looking at stuff that's anywhere from, you know, ten to fifteen million north of 500 at at this point and kinda anywhere in between.
I'd say kind of the sweet spot's been kind of, you know, 100 to 200 kinda give or take.
Speaker 8
Yeah. And I mean, think
Speaker 2
the way to think about it, Skye, is that 0 to $100,000,000 can be more competitive just because obviously it's a smaller quantum of capital. As you get north of $150,000,000 companies with the wherewithal to make those transactions in the non operated space start to shrink. It doesn't mean the sellers always enjoy that fact, but it tends to make those processes less competitive. But obviously, the larger it goes, capital becomes an issue and you want to make sure that you're not stretching your balance sheet or anything like that. But I do think that what we're referring to is really just a function of the amount of capital sunk into non op over the last ten years.
Probably a third of it is looking for a home now and the other third to two thirds have to be monetized over the next three to four years. And that's where we kind of come up with about that 10,000,000,000
Speaker 7
Got it. Got it. And and and I guess part of my question was too is, like, you know, how big of a deal, like, can you guys do, like, just operationally and financially? Like, what do you think that limit is for you guys?
Speaker 2
Boy, I mean, I think the answer is, I think the business could support and the capital markets could certainly support a $05,000,000,000 transaction. I don't think that's necessarily where we'd want to start. I think that we find somewhere in between in the more moderate where it's generally our sweet spot. But certainly, the company is at a size and scale in which you can do meaningful transactions. Don't know, Adam, you have
Speaker 3
No, that's right. I mean, other thing I was going to add is we're looking at a bunch of different non operated properties, but we've also had a number of different reverse inquiries from operators that are looking to take down particular operated packages. And we've got the ability to carve out a non operated working interest kind of within that potentially put together kind of joint development agreement and and right size the transaction, for everybody. And so that's, you know, another lever that we can pull in terms of kind of, you know, taking down certain acquisitions. So
Speaker 2
Yes. And I guess I'll just put a bow on that, Scott, and just say that as you saw with the Reliance transaction, granted we started that transaction when the sector was really on its lows and capital was fairly scarce. But we brought in a financial partner on that transaction. And certainly, for some of the really big and chunky stuff, that's always on the table. And I can just tell you that we are inundated from everyone from private equity groups to large family offices looking to partner with us every day.
So
Speaker 7
Thank you.
Speaker 0
Our next question comes from Brian Downey with Citigroup. Please state your question.
Speaker 9
Good morning and thanks for taking the questions. The first, solid production performance to start the year. You mentioned rig count earlier, but I'm curious on the DUC front. Has your sense of operator DUC completion cadence changed at all in the
Speaker 0
Williston as commodity prices have risen?
Speaker 3
Yes. I mean, we certainly saw the DUC count get worked on in the first quarter. And I think we're seeing the same thing kind of going into April. We're looking at 40 AFEs that came in, in the first quarter. I'm looking at April activity, and we had 30 come in.
So as the operators kind of work down those DUCs, I think you're going to kind of see potential rigs and new well proposals kind of following through that. And so we're monitoring that as we move through kind of the second quarter and what that means. And then obviously, we're looking at our hurdle rates and seeing what makes sense. The thing that you got to be careful about when you get into this kind of commodity price range is certain operators like start stepping out in the tier two and tier three stuff. So we're running sensitivities at every particular oil price range to kind of understand what that means should we see any sort of pullback.
So depending on kind of how operators act in that regard, we'll be using that lever and then obviously using kind of our ground game to backfill anything. But I think from a net well standpoint, even in April, we've seen kind of double the net wells that we saw in Q1 alone. So all signs are certainly pointing to a general uptick in overall activity in the Williston.
Speaker 9
Great. And then as a follow-up on acquisition front, in areas, you know, particularly the Permian, we've seen private operator rig count rebound more so versus public operators being a little more disciplined. Has that private operator dynamic changed how you're thinking about A and D opportunities at all or created any any interesting opportunities?
Speaker 2
Yes. I mean, I think there are a handful of private operators, high quality ones in the Permian in particular that we have targeted a lot of our acquisitions around. So names that might not be household names to public investors, but ones that are well renowned. We're not talking about the small sponsor backed company with one rig, we're talking about big, large, private legacy Permian companies. And so they've definitely been the most active.
And a lot of the acreage that we're targeting, which is really for near term development, has been targeted around those guys.
Speaker 0
Great. Appreciate the comments. Our next question comes from Neal Dingmann with Truist Securities. Please state your question.
Speaker 10
Good morning, Nick, I just want to say you and the team are still top of my book despite that IR ranking.
Speaker 2
Neil.
Speaker 10
My first question really my first question, Nick, you or Adam, I'm just wondering, again, given the sort of rise in price and everything that's going on, changed has your requirement, what I would call sort of return requirement now when you're looking at, I don't know, either one offs or even larger sort of pads that you can do, whether that's in Bakken, Perm, gas, any of those? Can you talk about that a little bit?
Speaker 2
Yes. I mean, think this is my second time since I've been here where we've seen a big spike in oil. The last was in the fall of twenty eighteen. And what I tell you is people get their tolerance for risk actually goes up the more price goes up, and we kind of work the opposite here. So as prices go up, we tend to become more selective, not the other way around, not just, hey, this works now, let's do it.
And we've seen, in the Permian in particular, people bidding more aggressively, on certain properties, as prices have gone up with lower discount rates, which is we're happy to miss on that stuff because you want to buy properties that are going to work at $40 oil as well as $65 So if you're going to miss, you're going to miss small. Buying marginal properties or in Tier two areas is a recipe for setting yourself up for poor returns if anything was to change. Don't know Adam, you want No,
Speaker 3
that's right. I think our batting average as of late has certainly gone down, but I guess that would be offset by the overall number of opportunities that we're seeing. Net net, you're probably about same similar in that regard. Then from a ground game standpoint or or even packages, I mean, we're running different sensitivities at at, you know, different commodity prices and then taking a look at higher discount rates to see, you know, what that means in in terms of how we can get things done. And, fortunately, what we've seen with the stuff that we've been able to get in the boat, we've been able to capitalize at much higher discount rates.
Speaker 10
Okay. And then just a follow-up, don't know if Bahram is on, but I guess my question, Nick, be kind of when you talked about the third and what you think about dealing with the excess, it's nice to now be able to ask that question about what to do going forward with the excess shareholder return. I mean is that, I guess, the decision more just what you think for the business? Is it more driven by what Brahm and the Board's saying you and the rest of the Board are saying? I'm just wondering how that's again, I like the answer prior.
I think that makes a lot of sense. I'm just kind of curious to know if anything else behind that.
Speaker 2
Yes. I mean, look, we've made tremendous progress. We still have wood to chop on our balance sheet. I still we still want lower overall leverage. It looks we're on a glide path at this point.
It seems easily achievable, but you got to achieve those milestones before you start to get ahead of yourself. We want to stay humble. I think so really, I think this is a Board decision truly. And so I think we had some proof built. Frankly, in the event of this one, you'd be surprised to know that the Board frankly came to us and said, you know, you're well ahead of where you were.
Don't you think this is time? Whereas we had sort of stayed on that path as a management team. And so I would definitively tell you that the Board is very active in these discussions. They're watching, they're using our own metrics and our own targets to help solve for that. So to the extent that we continue to be successful, that we continue to chip away at the leverage, we see those ratios fall, it should be relatively mechanical in fashion of how we get there.
Speaker 10
Nice. Good decision, great operation,
Speaker 2
Thanks, Neil.
Speaker 0
Thank you. Our next question comes from Phillips Johnston with Capital One.
Speaker 1
Hey, guys. Thanks and congrats from me as well. Just one question, it's really a follow-up to Scott's question. It's obviously early to start talking about variable dividends, as you mentioned. And I'm sure you'll be watching to see how the market responds to the structures and policies that a few companies have adopted.
But Nick, once we get to a point where the base dividend is sort of maxed out and you start to evaluate other options, at this point, do you think special or variable dividends would be preferable to share buybacks? Or is it still sort of a TBD type of thing?
Speaker 2
I do. I think, know, the E and P sector has been a horrible buyer of of stock. How many E and P companies were buying stock back last October when their stocks were actually at the lows? They're all turning them back on now. Don't get it.
So I think symbolically, want people to have the cash in their hand as a proof of return, different than a private business. Yes.
Speaker 1
Okay, great. Thank you.
Speaker 0
Our next question comes from John Daniel with Daniel Energy Partners. Thanks
Speaker 11
for letting the dumb OFS guy on the call. I appreciate it.
Speaker 1
Big risk. Don't be down, John.
Speaker 11
I'm gonna I'm gonna really dumb this down. So I got really three questions. The first one is on the comments about workover costs and activity. Was that really a function of just bringing back a bunch of rigs early on in the year? And does that fade as you go through the through the course of this year?
I'm I'm trying to distinguish between workover and drilling rigs because I know you talked about Williston going off on the rig. Yeah.
Speaker 2
I mean, so so the way that curtailments work, and I kinda talked about this last call, but a lot of the the actual physical curtailments were eased. But those wells need to be repressurized, worked over. And so you saw a slew of workover rigs. One of our operators had seven alone in January going on to the acreage and basically flushing out and repairing those wells and doing basic maintenance to get them to produce what they should be producing. So that's why it's really quick turnaround.
So we saw it start in earnest really in December, and all indications look like it was peaking out about March. And so I think sequentially, it should be slowly coming down. It will still be somewhat elevated because operators really want to cut their LOE as fast as they can during the downturn. So when you curtail a well, you just simply stop maintaining it, but that's not a sustainable practice. And so the first thing is really to get the wells back to maximum production.
We're getting we're almost there. And then we should see that expense fade materially.
Speaker 11
Okay. Sounds good. And then on the you noted all of the acquisition opportunities are out that are out there and, you know, gave a pretty wide range. And this is a bit of a follow on to another person's question, but help me understand. I don't know this.
So, again, it's a dumb question. But the managerial time commitment on your part and the team's part when, yeah, $20,000,000 deal versus a $200,000,000, not just the time to look at it, but also once you once you close that deal on a go forward basis, the time allocation. If you could just give me that tutorial, it would be appreciated.
Speaker 8
Yeah. I mean, I think I think you'll take
Speaker 2
some comfort that the company is effectively built to acquire, properties. So, the entire organization is built around this. So it's it's pretty much old hat. So the numbers change, but the workflow really doesn't. So whereas, you know, four or five years ago, this was all built around doing million dollar deals.
Now the same team does it, you know, with a 300 on it. It doesn't really change the overall output and and tax on the organization. But business development per our business model is is the primary function of a good portion of our employees.
Speaker 3
No. That's right. I mean, you know, in the Williston, we've looked at a number of different, you know, transactions where we're already in 60% to 70% of the value associated with those acquisitions. So it's literally just moving your working interest in your NRI, and you're off to the races. And it's actually, not terribly dissimilar to some of the deals that we've seen, in the Delaware, as of, you know, the concentration of of value in some of those packages and stuff that we're already in.
And so, you know, from an engineering standpoint all the way through kind of to the title and the due diligence phase, you can start moving quicker and then rolling those things in.
Speaker 11
Okay. Got it. That was helpful to me. And then a final one, Nick, just you've been doing this a long time, All of you guys have. I'm just curious if you could speak from an industry perspective.
What in the world do you think happens with the E and P spending in 2022 if the strip stays where it is? I mean, I know everyone is, you know, toeing the line with capital discipline in '21, but but what would you envision next year?
Speaker 8
Yes. I mean, I think
Speaker 2
my view broadly at the macro level is a couple of things. One, this reminds me a lot of when I started in the industry at the end of the '90s, And it had been a bruising fifteen year downturn for the sector. And oil went from $10 to $40 and people really didn't respond, you know, except a handful of notorious E and P CEOs, which we all know their And then eventually, after it lasted three or four years, you saw the sector take off and get rewarded for being undisciplined. And so I think that's really going to be predicated on the overall markets. Those that aren't disciplined, if they're rewarded by the markets, that can start to feed itself into other companies.
The one thing I think we're aided by this go round, which was very similar to that kind of 2001 to 2004 period, is that primary reservoir is shrinking in the Lower 48. And so the ability for U. S. Companies to cap on a capital efficient basis really grow at the same rates they have the last few years without drinking their entire milkshake of inventory is getting more challenging. The decline rates may moderate some, but with lower decline rates come higher fixed costs.
And so I do think one governor that will play into all of this is that overall, I think it's going to be harder for people to have the inventory and capital efficiency to drill at the same speeds they have. Even the Permian, we see a lot of maturity in areas that are largely the best stuff has already been drilled. So with that, I guess to sum up your question is that, I think it really depends. I think we like kind of nice oil prices, but not super high because that discipline can start to waver. So if oil prices are $70 I can't promise the S.
Industry won't lose discipline. I would push that back to Wall Street and say, make sure you keep them honest because I think that that's gonna be you know, people are are enterprising. And if they get rewarded for certain behavior, they're gonna do it like a, you know, like a lab rat trying to get his his, water. Right?
Speaker 3
So Yeah.
Speaker 11
Okay. Fair enough. I appreciate your candor, and thanks again for letting me in.
Speaker 6
Yeah. Thanks, John.
Speaker 0
Our next question comes from Charles Meade with Johnson Rice. Please state your question.
Speaker 6
Good morning, Nick. I guess they're letting really really anybody in now. Hey. I I wanted to ask, you know, you you talked about those those 15 those 15 deals. And to me, it was notable that that the Marcellus wasn't one of those areas where where you mentioned deals.
I know it was a newer area for you, but it's also my sense that that each operating area has a little different rhythm and composition to the way A and D comes about from identifying opportunities to closing on them. Can you give a sense of what you think the outlook for ground gain kind of stuff is in the Marcellus?
Speaker 2
So far, we've had a handful of little things show up here and there. It's relatively blocked up compared to other areas. There are two very large high quality non op assets that we know of in the Marcellus that we've kind of looked at, but they're not for sale. But they are really nice properties. Certainly, if they ever went to market, we would take a look.
I mean, Adam, you
Speaker 6
want talk about the ground Yes.
Speaker 3
Mean, we screened a number of them and they just didn't necessarily check the box. So they didn't make it into our 15. So if we would have this call about two weeks earlier, it might have been 17 or 18. But, you know, there's certainly opportunities out there. It's just kind of, you know, check boxes both from a qualitative and a quantitative standpoint, and and and those ones didn't necessarily do that.
Speaker 6
Got it. And then my my follow-up, Adam, this this goes to a comment you made about about reverse inquiries. I I can imagine those taking a few different forms. When you first mentioned it, I thought that it was maybe non op sellers or holders of non op assets coming to you as a new entrant in in an area, but but it sounds like it it's it it could be that, but but it's also more of reverse inquiries from financial partners. So can can you can kinda give a sense as are are both happening?
Do you just mean one? And and what's the a little more detail on what you mean?
Speaker 3
Yes. No, it's certainly all of the above. We've got a number of different financial partners that have reached out and it's broadened our overall opportunity set in that regard. We've got operators reaching out to us in order to kinda right size certain transactions and we've screened, you know, three or four at this point. And then you've got just kind of your your classic, you know, a 100% non operated packages coming from the family offices, the private equity groups that maybe a little bit longer in the tooth, those types of things.
It truly is all of the above at this stage. And so we've got the ability to be picky and we're going to stick to the script of how we underwrite things and focus on the quality assets, the quality of our active and the quality operators.
Speaker 2
Yes. I mean, I think to keep it simple to Adam's point, you can create a non operated interest out of anything, right? I mean, it's not like these are distinct asset classes that there's operated and non operated. To Adam's point, we've been approached by multiple operators that are trying to buy properties and are happy to have us carve out a working interest in those properties alongside them. And to the extent that properties meet our investment criteria, we're happy to do so.
And in some ways, that's what our Reliance transaction was tied to a really high quality operator. So we talk about $10,000,000,000 but frankly, really the limit is really the greater Lower 48 in terms of all of operated properties because these ultimately can be synthetically created. And to Adam's point, they're not just one set of non operated properties that happen to be so.
Speaker 6
Right. Thanks for that insight, Nick.
Speaker 0
Our next question comes from Nicholas Pope with Seaport Global. I
Speaker 12
was hoping you could talk a little bit I know you guys have spent a couple years kinda hammering away at the at the various debt instruments that you had and kind of are in a good place right now. You still have the preferred the convertible preferreds out there. I was kinda curious what your thoughts are about that instrument today and going forward and maybe kind of what do you think an optimal capital structure looks like for this model and what you're kind of trying to achieve longer term on that aspect?
Speaker 2
Well, one thing I would like to clarify in regards to the preferred because this is really important and I think that as equity analyst, and I was a former equity analyst, I understand it. The concept of the treatment of that preferred, most preferred stock has a term on it. And so it might be called preferred stock, but it's really debt. It has a term, it has a coupon. You cannot pay that coupon, it's not an event of default, But ultimately, it has to be paid back at some point in time.
So theoretically, is worth the liquidation preference. Our preferred stock is perpetual in nature. That means it is perpetual like our equity. It is true equity. It does have a dividend yield associated with it.
But ultimately, it is a permanent instrument. And so the ideal path is that we will continue to create value. We will drive the stock price higher and someday down the road, it will convert out and everybody's happy. I kind of talked about that I'm not a big fan of stock buybacks, but that preferred does have a coupon. So if we're ever in the position in which we really feel like our leverage is there and we're just driving a lot of cash driving so much cash flow that we don't know what to do with it.
Certainly, it can be bought back and terminated in that regard, especially as our own cost of capital falls. And if it winds up being on the higher end of that, it is not today. But if it if it does, that is a form of buyback and and certainly one that has some tangible benefits.
Speaker 12
And is are the options for buyback? I mean, that there's a I'm assuming there's a premium associated. Is is there something available outside of just the conversion at the It's
Speaker 2
it's it it Nick, it's just like stock. I could go in the market and buy it tomorrow.
Speaker 6
Got it. Alright. That's all I wanted to talk about.
Speaker 1
Thanks, Nick.
Speaker 11
Alright. Thanks, Nick.
Speaker 6
Nick.
Speaker 0
Our next question comes from Jim Buran. Please go ahead.
Speaker 5
Good morning. I just have an overarching question about the derivatives that were marked you did a mark to market on those. Are they can are there expiration dates on some of those derivatives? Were you hedging against the price of energy going down? I'm just curious about what that was.
Speaker 2
Our mark to market on our derivatives is simply the change in the value. So for example, if you have a stock portfolio and you buy a bunch of stocks, and then at the end of the quarter, they lost value, you take a mark to market, But you never really took a loss until you actually go and sell those stocks. So it's just a moment in time. So ultimately, all it is, is our hedge portfolio where we lock in our oil prices. And as the price of oil has risen, the value of those has gone down.
And that's just it. But obviously, the actual cash monetized, which is about a $7,000,000 loss, represented the actual monetization. So it's just simply the reflection of value, not a loss necessarily. No different than we took a $350,000,000 gain one year ago and that gain was just simply that the value of that portfolio went way up. But ultimately, whether or not we actually realized all those gains or not is really going to be determined as they mature over time.
And our hedge schedule is published both in our filings as well as in our presentations.
Speaker 5
Very good. Thank you.
Speaker 0
Thank you. There appears to be no further questions at this time. I'll turn it back to management for closing remarks.
Speaker 1
All right. Well, that's it. Thanks, everybody, for dialing in this morning. Reminder, we got the presentation on the website. And feel free to give us a call if you have any follow ups.
Thanks a lot.
Speaker 0
Thank you. And just a reminder as well, to access the digital replay, please dial (877) 660-6853 or (201) 612-7415, and enter access code 13719253. Thank you for your participation. You may disconnect your lines at this time.