Northern Oil and Gas - Earnings Call - Q2 2021
August 5, 2021
Transcript
Speaker 0
Greetings, and welcome to the Second Quarter twenty twenty January 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.
You may begin.
Speaker 1
Good morning, and thank you for joining us for our discussion of Northern's second quarter twenty twenty one earnings release. This morning before the market opened, we released our financial results for the second quarter. You can access our earnings release on our Investor Relations website and our Form 10 Q will be filed within the next few days with the SEC. We also posted a new investor deck on the website this morning as well. I'm joined here this morning with Northern CEO, Nick O'Grady our COO, Adam Durlam CFO, Chad Allen and our Chief Engineer, Jim Evans.
Our agenda for today's call is as follows. Nick will start us off with his comments regarding Q2 and our overall strategy. After Nick, Adam will give you an overview of operations, and then Chad will review NOG's Q2 financials and our updated 2021 guidance. Finally, our executive team will be available to answer any questions. Before we go
Speaker 2
any further though, let me
Speaker 1
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 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 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's CEO, Nick O'Grady.
Speaker 3
Good morning. I would like to thank everyone for joining us this morning. We've had a very productive 2021, expanding significantly into two new basins, and we've continued to improve our balance sheet. Our disciplined investment approach has been paying off handsomely as our results show today. I would like to focus on four key points.
Number one, we had a monster quarter and one that truly highlights the flexibility and benefit of our differentiated and actively managed business model. In a quarter where the overall Williston Basin volumes decreased, Northern's oil volumes increased by 14%. Because of our ground game playbook and ownership of core rock in the Bakken, augmented by an increasing Permian presence, Northern's outlook is never tied solely to basin wide activity levels. Strong well performance and accelerated pace of completions and robust realized pricing for both oil and gas resulted in us being able to exceed both internal and external forecasts. All of our key financial metrics, including production, EBITDA, cash flow, free cash flow and earnings per share were above forecast across the board, and in most cases, new records for the company.
Our capital expenditures were less than forecast. Our production costs fell on a unit basis as we integrated our low cost Marcellus assets and as workover expenses in the Bakken began to tail off. Number two, our free cash flow outlook and our balance sheet projections continue to improve. Debt decreased this quarter, and we expect to meaningfully exceed our initial and recently updated free cash flow estimates for 2021. We now expect to end the year with a run rate leverage ratio of less than 1.5 times and to fall below one times by the end of the second quarter in 2022.
During our conference call in June related to the Permian acquisition, we highlighted that we expected to produce more than $150,000,000 of free cash in 2021 and cumulatively more than 800,000,000 through 2025. We now estimate over $160,000,000 of free cash flow in 2021 and cumulatively more than $900,000,000 through 2025. I would also like to point out that if the current pricing strip holds, we expect to be able to retire all of our bank debt by late twenty twenty two, leaving only $550,000,000 of 2028 notes as our sole piece of debt. Number three, Northern's M and A pipeline continues to grow. The M and A landscape continues to remain strong.
Even as we work down last quarter's M and A backlog, having selected the best prospects with our recent Permian transactions, new opportunities continue to arise across many basins of interest in The United States. To be clear, we could have transacted on many more deals than we have year to date, but we will not just do Wall Street accretive deals because we value transactions as any cash buyer would, which is on return on capital employed and rate of return. It's money in, money out. We wanna buy assets with discipline, not because we can. Number four, dividends and returns to our shareholders.
Our Board of Directors has declared a 50% increase to our next quarterly common stock dividend for a total dividend of $0.45 per share. As I mentioned last quarter, successful M and A could accelerate our dividend strategy. And with the Permian acquisitions and the associated financing, we expect to continue to increase dividends over the coming years. In conclusion, the outlook continues to improve as we have steadily exceeded our targets. We are ahead of our free cash flow forecast and production outlook.
We continue to grow our shareholder returns all the while improving our balance sheet. We have lowered our unit costs through scale and high quality property acquisitions. The quality of assets testing the market is impressive and the possibilities for value creation continue to excite us. We are a company run by investors, for investors, and I truly want to thank each and every one of you for joining us today. With that, let me turn
Speaker 4
it over to Adam Derwent.
Speaker 5
Thanks, Nick. Our operational plans for the year remain on track and continue to play expected. In the Bakken, activity levels have started to pick up as we brought online 10.5 net wells during the quarter, a 55 increase quarter over quarter. Drilling activity continues to pick up steam too. Operators have been steadily working down their drilled but uncompleted well inventory, and they've started to reload their pipeline of new drills.
We've seen a ratable increase in new well proposals, and more notably, we've seen an outsized percentage of those well proposals across our acreage footprint. During the quarter, we elected to 50 AFEs, up more than double from Q1. As encouraging, if not more, we have yet to see any sort of material inflation to overall well costs. During the quarter, new proposals averaged less than $6,500,000 and were actually down 7% versus our Q1 average. We benefited in Q2 from having higher activity levels with some of our most efficient operators.
And as it stands right now, we continue to remain conservative with our internal assumptions, modeling well costs at an average of 7,000,000 to $8,000,000 a copy, depending on the operator and completion methodology, which should buffer any potential for cost inflation. In the Marcellus, completions on our initial well pad commenced in early July and production to date has been right in line with our expectations. Cost savings with EQT have been a focus and we've been pleasantly surprised with the efficiencies we've seen and been able to generate. Turning to the Permian. Our outlook for NOG's future in the basin gets stronger by the day.
In less than one year since entering the play, we have now closed on over a $100,000,000 worth of deals, and we have responsibly built out a scaled position across more than 3,000 net acres. Our playbook in the Permian is really the same successful playbook we've historically used in the Bakken, build out a top tier position partnering with the best operators in the basin. Activity levels remain elevated in the play, which continues to present compelling opportunities for Northern. As it pertains to overall deal flow for NOG, we are extremely busy both at a ground game and package level. On the ground game front, we closed on 11 transactions in the quarter, almost double from what we signed up in the first quarter.
High grading the opportunity set between the Bakken and the Permian, the number of transactions were evenly split between the two basins. In total, we picked up 2.8 net wells and over 600 net acres. This barbell approach has enabled us to diversify across operators and regions while adhering to our hurdle rates even as we run sensitivities for lower commodity prices. If the bid ask spread starts to widen out in various areas, the ability to pivot will certainly be a competitive advantage for us. Given where we are in the calendar, it's worth noting that typically we see smaller competitors exhaust their budgets mid year, and we expect we'll see even more opportunities as the year progresses.
As it pertains to potential for larger M and A, during the quarter we looked at over 10 new packages focusing on high quality assets that will see activity levels regardless of the price environment. With the high volume of prospects available, the opportunities are force ranked and our discipline means only a select few meet our return criteria. Consolidation has been a theme that is alive and well, and we will continue to evaluate multiple opportunities in the current market. Now I'll turn it over to our CFO, Chad Allen.
Speaker 2
Thanks, Adam. I have a few highlights to go over for this quarter, starting with a quick summary on Northern's financial performance. Our Q2 production averaged 54,623 barrels of oil equivalent per day and 33,346 barrels of oil per day, up 4214% sequentially over Q1. Our adjusted EBITDA for the quarter was $132,800,000 and our free cash flow was $46,200,000 up 3511%, respectively, over Q1, significantly ahead of Wall Street and internal expectations. Oil differentials were 5.46 during the quarter, which was an improvement of approximately 17% over Q1.
Operating costs also continued to trend down in the second quarter. Lease operating expenses decreased 13% over the first quarter on a per unit basis. Cash G and A, excluding onetime acquisition related costs to the Marcellus and Permian transactions, came in at $0.77 per BOE this quarter, about 9% better than the midpoint of our previous guidance. Capital spending for the second quarter was also below Wall Street and internal estimates at $68,400,000 excluding the Reliance acquisition. We continue to improve our balance sheet and liquidity profile since the end of last year through debt and equity offerings and free cash flow.
In the first June of twenty twenty one, we produced $87,900,000 of free cash flow, more than in the entirety of 2020. This has allowed us to fully equitize the Marcellus and Permian transactions and extend our maturity wall by retiring the remaining $65,000,000 of our VEN Bakken note and our second lien notes. As of June 30, pro form a for the closing of the Permian transaction earlier this week, we had approximately $350,000,000 outstanding on our revolving credit facility, leaving around $315,000,000 of available liquidity, including cash on hand. Moving on now to our updated full year 2021 guidance that was included in our earnings release. We have increased our production guidance for the year, primarily driven by the integration of our Permian properties and the acceleration of some planned Q3 development into Q2.
That will likely translate into a somewhat flat production profile in Q3 before increasing again in Q4. Additionally, we expect to shift some of our planned natural gas development into 2022. Some of that CapEx will be reallocated to our oil properties as noted in our increased oil percentage guidance of 63% to 64% for 2021. That should be cash flow and free cash flow enhancing for 2021 at current pricing levels. Oil differential guidance has been lowered by over a dollar on the high end, a function of strong pricing in the Williston and Permian Basins.
Our updated guidance on gas realizations reflects a strong pricing year to date. This guidance implies high 70% realizations for the remainder of the year, inclusive of our Marcellus properties. On to cost guidance. It's fairly universal reductions across the board with reductions to G and A cost and LOE that is much lower than we experienced in Q1. While our LOE guidance is $8.6 to $8.9 per BOE, the run rate should be around the low end of this forecast for the remainder of the year because this guidance includes Q1, which was $9.92 per BOE.
Do note that the benefit of higher NGL prices will have a modest impact to our LOE numbers as POP contracts are increasing some processing charges in our LOE. However, these will be more than offset by the additional revenue from higher gas and liquids prices and will be a net benefit to overall margins. We've also simplified our production tax guidance to account for being a three basin company at 9% to 10% of oil and gas sales. Finally, we reduced the high end of our capital expenditure forecast to $260,000,000 a $10,000,000 reduction. While prices are higher and could certainly warrant higher spending, we're maintaining a disciplined approach and not chasing lower quality prospects as we focus on full cycle stress tested returns.
And with that, I'll turn it over to the operator for Q and A.
Speaker 0
And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 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 And our first question is from Alex Rabel with Bank of America.
Please proceed with your question.
Speaker 6
Hey, guys. Thanks for having
Speaker 7
me on the call.
Speaker 4
Morning. Hey,
Speaker 6
Alex. Hey. So my my first question is really just kind of on the breakdown between the Marcellus and the Bakken. I mean, clearly, saw some pretty impressive gas realizations. I mean, you guys elected to report things as consolidated.
So just trying to get any color there that you could offer as far as the split and then on production as well.
Speaker 2
Yeah. As far as the split between the Bakken and Permian, I mean, we certainly saw very solid pricing in the in the in the Bakken north of, call it, a 120 to a 130% realizations there. And then that was offset by the by our Marcellus production that was in and around I think it's around 70% ish 60 to 70% realizations there.
Speaker 6
Okay.
Speaker 8
Yeah. Alex, in terms of production, we were about 80% in in the Bakken, 20 in the Marcellus.
Speaker 6
Got it. That's helpful. And then the other question I wanted to ask was just on hedging. It looks like you guys have layered in some more hedges for 2022. Obviously, you're not at your leverage target yet, but have an anticipation of getting there midyear.
So just kind of curious, are you happy with your hedge position right now? And then beyond, when you're looking at getting to that target, should we expect any change in strategy?
Speaker 4
Yes. I mean, I think my first comment is that there's no question that as our balance sheet improves, our hedging needs to protect credit are reduced. As we noted in our earnings presentation, due to the balance sheet improvements, our target percentage is down about 1,000 to 1,500 basis points on a rolling eighteen month basis to about 60% to 65 from previous periods where we were typically at about three quarters. I would anticipate like our dividend as our leverage continues to tick down, so too will our internal hedging requirements. But let's also get real here.
Oil is near $70 not because the world is out of oil or that demand is through the roof, but because the largest cartel in the world is holding back about 5% of the world's supply artificially. The cartel is beginning to ease those restrictions. You also have the Delta variant, massive government action trying to kill demand for our products. So the concept of being wildly bullish and riding the upside because of a feeling doesn't exactly feel like prudent financial management to me. I was inundated with investors at the beginning of this year telling me we should be hedging everything at $45 because oil was going to be dead forever.
The strip's never been an accurate predictor nor has short term investor sentiment. Our view of hedges in general is that the long term value of a hedge is zero, meaning you're going to win some, you're going to lose some, but importantly, you live to fight another day. And our hedging counterparties tell me consistently that 90% of their E and P clients only start hedging when in panic mode and oil is breaking down. We would much rather have discipline and be consistent. We talk all the time to our investors about the asymmetry of hedging.
This quarter as an example, we had more net completions in nearly 2,000 barrels a day of oil production more than we expected because oil prices are high. And we throttle our development and our operators naturally accelerate their plans to capture that. Compare that to a quarter a year ago, where we wound up more than 100% hedged because activity was deferred and curtailed. In this environment with higher pricing, we will see more well proposals and more production, less downtime, and so naturally we become less hedged. In the 2020, we made $77,000,000 on realized hedge gains.
We forewent about $27,000,000 in profits this quarter. And 2Q twenty twenty was an existential moment. It seems like a fair trade to me. For those investors that want to play the upside, my comment would be, if you sort unhedged versus hedged stocks coming into 2021 and you bet on the unhedged ones for performance, you would have lost by a mile. And I personally find it a bit incredulous given in 2019 and 2020, we realized over two twenty million dollars in hedging gains and there were over two fifty bankruptcies in oil and gas in 2020 alone.
No one knows what the future prices for oil are, but I can tell you what we know when we hedge if we are locking in good returns or not and we have been. Our weighted average IRR of elected wells this year at 55 flat is about 50%. The hedges we've added since last quarter are well north of $60 So explain to me why that's it's necessary to gamble. We have a choice here, which is candidly to be a sheep or a wolf. And last time I checked, sheep get slaughtered.
It's the roll the dice mentality and wild optimism that has gotten this industry into so much trouble in the first place. So while our balance sheet will be strong enough to absorb any volatility, I'm going to be unapologetic when I say, when Adam and my team commit capital to projects that earn enormous returns, we wanna make sure we don't throw that away on false assumptions just because it's a rounding error on our balance sheet. That being said, as I alluded to in the beginning, I do think we will naturally leave more room for upside over time.
Speaker 6
Yeah. Appreciate the, the the thorough and very powerful response, Nick. That's all. Thanks.
Speaker 0
Our next question is from Scott Hanold with RBC Capital Markets. Please proceed with your question.
Speaker 9
Thanks. And and, Nick, I'll just tell you this. I I mirror your sentiment on that. You know, agree that I think the industry loses on hedges because they're more reactive and not proactive. So I I appreciate your views.
It's very insightful and fresh to hear. My first question is this, is that, Adam, I think you mentioned that there are some gas development projects that are getting moved into 2022 in that you're then moving some capital to oil properties. Can you just talk about that and give a little more detail that did EQT push out its development plan a little bit? And then for you guys to, I guess, move more capital to oil properties, how does that logistically work with your elections? Do you just take a broader look at your opportunities there?
Or just it was just the nature of seeing more things come in that you could consent to?
Speaker 5
Sure. As far as the Marcellus goes, we had roughly about 2.2 net wells added in kind of early July. And initial plans for kind of the next pad were slated towards later in the year, call it kind of Q4. We've since kind of taken a look at plans there. And really, it's just a function of IRR and pricing realizations.
And so we expect that pad effectively to be pushed kind of into early next year. And so the Marcellus is effectively locked and loaded. We've got annual work plan that we come to the table with every year, make tweaks based on kind of the market, rig availability, price realizations, all those types of things. And so that's effectively the plan for the foreseeable future from a Marcellus standpoint. As far as the activity levels, we've seen significant increase both in the Bakken and the Permian as operators are working down the DUCs.
We've seen the AFEs more than double in the second quarter. I was looking at just the third quarter to date and we've already got north of 40 AFEs in the door. So I think we're going to continue to see kind of that activity flex forward. I think our election rate during the quarter was north of 90% and really focused towards our core operators. We've got Slauson, Continental, Conocoa, Enerplus all adding activity this quarter.
And we received a slug of AFEs from Ovintiv during the quarter as well that were expected to spud and start getting to work there. That was acreage that we picked up from the Flywheel acquisition and certainly encouraged by their well results. I think they actually pointed it out in their earnings release talking about six month payout. Certainly one of our more efficient operators love to see them kind of getting after things. As far as the ground game goes, you know, that's gonna obviously be a a function of of both the overall activity levels in the basin, but it's also gonna be a function of overall, you know, competition in overall returns.
And so we're going to continue to run sensitivities in down commodity cycles and make sure that it's meeting our rate of returns. As Nick alluded to, as we layer in that activity, we'll continue to hedge out those returns.
Speaker 8
Hey, and Scott, this is Mike. Just want to clarify one thing with that Marcellus. While we're pushing out a little bit of the activity, we're also pushing out that CapEx too. So it's going to be additive in terms of free cash flow for this year and then also it's just going to be additive from general economics and rates of return as you're bringing on kind of first production in a period where you had higher basin realizations.
Speaker 4
And Scott, just to the way the simplest way to think about it is that we generally have a fixed amount of money we want to spend in any given period of time. Generally speaking, we have more opportunities than that capital. It's
Speaker 9
just
Speaker 4
a force ranking. With robust oil prices, obviously, the return profile for a lot of those properties are higher, so we just shift some of the capital to that and we move it from time to time.
Speaker 5
That's right. It's a function of managing kind of inbound AFEs and ground game activity, force ranking and deploying the capital as such.
Speaker 4
Yes. And you can see that in our consent rate this quarter, right, which is that we may have probably non consented a bunch of that stuff because it was unbudgeted. But when there's room in the budget for that and the returns have increased markedly as they have, then it makes it a pretty simple mechanical thing.
Speaker 9
Right, right. And again, though, Nick, to that point, when when you look at the Marcellus, obviously, that's you know, we're we're talking EQT at this point. So, you know, the the election to push into 2022, I'm assuming they made that versus you because because, in fact, I mean, so the question, would you would you not consent this stuff that if EQT did wanna push that forward this this this year?
Speaker 4
I think I think given the fall period for for differentials into the shoulder season, it wouldn't have made sense for either of us. We we had, you know, numerous conversations about it. It made all the sense
Speaker 5
Yeah. I mean, it's a true JV, and so there's a much more collaborative approach. So we're having monthly and quarterly meetings discussing these things and making the decisions collectively.
Speaker 9
Okay. That that's good to
Speaker 2
hear than the heads up participation in
Speaker 5
the Bakken and the Permian.
Speaker 9
Yeah. No. That's exactly what I was looking for. That's that's yeah. Yeah.
Speaker 4
I mean, if there was a a disagreement on on the the I mean, it it was it's been pure economics. Right? So when you're doing something that's NPV and IRR enhancing, it's not a very difficult question. But certainly, given the way that's structured, if we had some major disagreement, we, of course, could have expressed that, but we didn't.
Speaker 9
Got it. No, that's great. I appreciate that. And then if I could ask a second question here. And if I turn to I think it's Page seven, you obviously show a very strong performance of wells so far year to date.
And when you look at the mix of the wells you're consenting to, obviously, you said stepped up pretty nicely. Where would you, this curve, kind of put that mix of wells where you'd expect based on where you're seeing some of those AFEs? Is it pretty consistent with that? Or should we expect just some, you know, minor degradations now that things are being, you know, I guess, level out across the base a little bit more now?
Speaker 10
Yeah. Hey, Scott. This is Jim. I think, you know, with the AFEs that we're seeing, the operators are still primarily focused in the core areas. You know, I think they're taking a a pretty conservative approach here.
We haven't seen, you know, any kind of the smaller operators add rigs to to start drilling in tier two areas yet. So I think going forward, at least for the rest of this year, we would expect that well performance will continue kinda in line with what we've seen so far this year.
Speaker 4
And I don't think you're ever going to see well performance that equates to 2020 in probably any basin in The United States just because so few were actually economic. So the wells that came online in 2020 were the best probably will be in The U. S. History. But they're still well above our five year average and pretty damn close when it comes to 2020.
Speaker 5
Yes. And I mean, I'd just point back to kind of the Oventive comments that I mentioned before. I mean, we would put that in the Oventive in my regard as probably the top one, two operator in the basin. They've got some of the most high well efficiencies that we've seen and you know, that activity will be able to flex, you know, going forward as well.
Speaker 9
Appreciate it. Thanks, guys.
Speaker 0
And our next question is from Jordan Levy with Truist Securities. Please proceed with your question.
Speaker 7
Good morning, guys, and appreciate the commentary. Just wanted to see if you could talk to the dynamics you're seeing in the bid ask spread, both in the Bakken and Permian and maybe the Marcellus as well and how that's kind of evolved as we've seen commodity prices move up?
Speaker 5
Yeah. I mean, guess it's a little bit counterintuitive, but we've certainly seen folks chasing things. And it's a function of activity as well as just opinion on oil pricing. So we've got competitors that are running $70 price decks. That's not something that we're gonna be doing, but we've got quite a few swings at bat.
So really, it's just a function of managing the overall competitive landscape, the variability and economics, and then being able to pivot between the different basins where we've got the exposure to. Obviously, there's a lot more activity and a lot more competition in the Permian. But based on the relationships and the contacts and overall activity levels, there's, you know, probably three or four deals that are walking in the door, you know, on a daily basis. Obviously, the Williston is is a little bit, you know, suppressed in terms of activity levels relative to the Permian, but, you know, you're also having operators pick up rigs and they're staying disciplined in the core of the basin. And it's not nearly as competitive given our foothold there, it's our backyard, our ability to gross up our working interests on well elections, all those types of things.
We just kind of force rank the two of them amongst each other. And so that's kind of why you're seeing the barbell approach that that we've taken.
Speaker 7
Thanks. That's great color. And and kind of along similar lines, just wanted to get your thoughts on what the pipeline looks like as it relates to deals where you can boost your interest in existing positions and and also how you weight those when you're evaluating transactions versus new new areas you're looking at.
Speaker 4
Yeah. I mean,
Speaker 3
I think we're pretty picky. There's a
Speaker 8
there are a lot
Speaker 4
of assets testing the market. Some of them, are appropriate, some are not. I'd say from a volume perspective, I thought our engineering team was gonna die during the first half of the year, and it has not let up. It's probably even more intense. And frankly, what that's meant is that, for assets that are probably threshold, that maybe there's a good value, but they may not fit the bill.
They're just getting passed on. But there are as good prospects out there now than there were in the first half and we continue to work through each one. And I think it's a fine line between the assets that make strategic sense and the things that you want, and also solving for relatively rigorous return thresholds, right? The one thing that we've highlighted last quarter and I would highlight again is that there are pockets of competition and there are pockets where it becomes less competitive. And so, as we continue to build size and scale, there are areas where we think we can get both high quality assets and add good values.
That generally comes where the size of those prospects others can't be competitive on. And so I think we've mentioned, as you get kind of towards that $100,000,000 mark, there are a few with the wherewithal to write those kinds of checks today. And so I think that that's where we see our ability to create a lot of value. There are a lot of assets out to the market that we'd love to have and it really just comes down to solving for price, because at the end of the day, we don't want to follow the path that many public companies have, which is that they have higher multiples and so they pay those multiples to the sellers. At the end of the day, we want to buy them just like they would buy them in the market on a cash on cash basis.
Speaker 7
Great. Thanks for that, and thanks for taking my questions.
Speaker 0
Our next question is from Nick Popwick, who is a private investor. Please proceed with your question.
Speaker 10
Morning, everyone.
Speaker 4
Nicholas, how are you?
Speaker 11
Great. Hey. I was I was hoping you could talk a little bit about, I guess, where things are from a from a working interest standpoint in in the Williston specifically? And just, I guess I guess, what the comfort level is on creeping up working interest and versus where you where you guys operate now? Or if you even think about a little
Speaker 12
I bit on where you're
Speaker 4
mean, I think like anything else, it's a risk adjusted factor, right? Being in four out of every 10 wells that were drilled means that we have a large database. And so there are periods where we can get comfortable with higher than normal working interests and there are places where we would not be. So we have units in which we have upwards of 50% working interest and we're very comfortable in that because these are core of core areas with core of core operators. And then there are parts where we would not take that risk, smaller operators that may have midstream issues or development risks or their own balance sheet risks.
And you want to make but I do think that alignment is important. If you're taking a disproportionate amount of the risk, ultimately depending on that operator to do to be motivated to do best job becomes a little bit riskier. And so we have many units. Some of our units that came online towards the end of the second quarter are ones that we have worked with operators where we have upwards of 30% working I think it really just depends. But I think that that's a risk that goes into the underwriting factor because the larger the working interest, the larger the single well risk, the larger the development risk is.
Adam, you want add?
Speaker 5
No, that's right. I think our corporate average is around 7% or 8%. I think year to date, our wells added to production is around 9% in total and the Williston maybe a little bit higher than the Delaware. To Nick's point, all we're doing is running sensitivities at different price decks. The other thing that plays into it where we want to flex up activity is the whole shale three point zero kind of paradigm and reinvestment rates.
And obviously a lot of these operators have chunky non op working interests. For a lot of our competitors, having that type of exposure in one particular unit regardless of the overall well quality is something that they're not necessarily willing to take. And it could be a circumstance where it's more of a drop in the bucket based on our overall asset base. So it provides an opportunity for us to pick up things at more competitive prices as well. So really just running sensitivities and deploying capital as such.
Speaker 9
Got it. I I mean,
Speaker 11
I think that would that really kind of answers my my question there. I mean, I was it seems like a higher working interest. I wasn't sure what what kind of a participation level was for you guys here recently, and it definitely sounds like it's crept up. So that's helpful. Thank you.
Speaker 9
Got it.
Speaker 0
And as a quick reminder, if you have any questions, you may press star one on your telephone keypad to join the queue. Our next question is from Jim Musil with McMP Partners. Please proceed with your question.
Speaker 13
Yeah. You know, I I found it curious that you're not seeing any material inflation increase just because I've been on a lot of calls, and there seems to be a little bit of a creep, you know, with your your competitors in various basins. Is that is that a function of productivity that you're seeing, or is that just that you have a lot of competition for oil services and it's keeping the price low?
Speaker 4
Some of it just has to do with think of it as the the statistical average, you know, in the bell curve, which is that some of our operators, who are active in development have worked really hard to work down their cost structures. And so our average has fallen as they become a bigger slice of the pie. The other factor is just that we never really budgeted for the downtick that was really experienced late last year. So as Adam mentioned in his call, we've been budgeting 7,000,000 to $8,000,000 in those numbers and experiencing significantly less than that. So to the extent that there is inflation, it won't really affect our numbers because we never really set that bar at those levels.
Speaker 5
And then it's just a function of the active management of the overall portfolio flexing to the most efficient operators. And so that's what you're seeing in this quarter.
Speaker 13
Great. Great. Alright. Thank you.
Speaker 4
It is worth noting that, you know, we have effectively cut our budget three times this year as we realized the delta between those two pieces. And so in some of that, we got asked that question last call. And obviously, when we made the Permian acquisition, we reduced the base CapEx alongside that and obviously doing it again today.
Speaker 0
And our next question is from Scott Hanold, RBC Capital Markets. Please proceed with your question.
Speaker 9
Yes, I just got a follow-up. And you talked about seeing some opportunities across a number of basins. And certainly, your focus has been Bakken Permian so far. But like can you give a little bit of color on other opportunities or areas you're seeing? Has the Eagle Ford popped up in there?
Has there been other basins that are of interest? And can you remind us places that you wouldn't expect to see Northern pursue?
Speaker 4
Transactions. Unfortunately, none of them have really passed muster. And I think the issues with the Eagle Ford, we really want the trifecta, which is we want assets that have solid base production, have a bunch of upside and obviously have good economics. And so in the Eagle Ford generally, we've seen assets that are either in the Tier two or Tier three areas that are going to be very vulnerable to any price volatility or in the core areas we've seen the more they've had limited remaining inventory. And so that's really made it difficult to find the one that's in the right spot.
But it is a play we've done a lot of work on and we have looked at them. Obviously, the Permian being the most active basin is dominant in terms of the actual deal flow. The Bakken has been surprisingly much busier than we've thought coming into this year, given the overall rig count. But obviously, that's been slowly but surely changing. And then I'd say, there are basins that are a struggle.
And what I would say is that like if it was pure economics or rock alone, I think the DJ Basin would be an area of focus. I think the political concerns make it difficult. I think the geologic and performance issues in the Anadarko Basin make it largely a non starter. That being said, sometimes these packages have assets in these basins that kind of come along with it. So to the extent we can value it at a zero, I think we're fine with doing that or at a deep, deep, deep discount.
But I don't think we would ever pursue assets based on those basins themselves.
Speaker 5
Yeah. Nick, we've taken a look at a handful of additional Marcellus packages as well and haven't been able to get them across the finish line, but they're certainly there as well.
Speaker 12
Yeah.
Speaker 4
And so I don't want to make it seem like we're distracted. We're pretty focused on the basins of interest. Sometimes some of these portfolios might happenstance have assets in other places. And to the extent that they came along with it, so be it. But I don't think it would be an area of focus.
Speaker 9
Got it. Thanks, Nick.
Speaker 0
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