Northern Oil and Gas, Inc. (NOG) Q3 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Northern Oil and Gas Inc Third Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Mr. Brandon Elliott. Sir you may begin.

Thanks Sandra. Good morning everyone. This is Brandon. We are happy to welcome you to Northern’s third quarter 2017 earnings call. I will read our Safe Harbor language and then turn the call over to Tom Stoelk for his remarks. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward-looking statements. Those risks include among others, matters that we have described in our earnings release, as well as in our filings with the SEC, including our Annual Report on Form 10-K, and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During this conference call, we may discuss certain non-GAAP financial measures, including adjusted net income and adjusted EBITDA. Reconciliations of these measures to the closest GAAP measure can be found in the earnings release that we issued last night. With the disclosures out of the way, I will turn the call over to Tom.

Thanks Brandon, good morning and thank you for joining our call today. Like previous quarters, I will start providing some color on our operational and financial results for the quarter and then we can get to your questions. Let me start up by saying the strong results provided in earnings release or reflective of the momentum, we are beginning to see from the effort to entire Northern team has made over the last year. Our focus on return based capital allocation process allows us to flex our capital spending based on the best investment opportunities while at the same time remaining disciplined in our balance sheet and liquidity management. We continue to selectively acquire incremental interest and actively developed areas and our recently completed credit facility provides the Company a run way execute on our business plan and benefit for future improvements in oil pricing. Turning to our results for the third quarter, production grew 14% year-over-year and 11% sequentially to reach 15,321 barrels of oil equivalents per day. Totaling approximately 1.4 billion Boe, what is really encouraging is that our growth in production as a result of three key drivers that we expect to be sustainable going forward. These key drivers are first to improved well performance from enhanced completions. Second, increased activity levels on our acreage. And third, our bread and butter game of acquiring additional well interest. This quarter increased production results was partially driven by high working interest on wells placed into production during the quarter, which helped produce some strong results, two notable wells as included Continental’s Wiley 7-25H and Wiley 5-25H, which we added to production in mid-August. Since coming online the combined net production from these two well averaged 1,500 Boe per day and increased our daily production during the quarter by 793 Boe per day. During this quarter, we also began to see increased drilling activity on the Slawson operated acreage in the Bakken field as well as completion of Marathon wells in Mountrail County. Currently, there are approximately 54 active rigs running in North Dakota. Strong activity on acreage costs consigning to 4.2 net wells during the quarter. Our well elections continue to be focused in the core of the play with approximately one-third of this quarter’s consent activity being driven by the acquisition of incremental interest in units that we generally already held in interest. We will remain return focused and continue to selectively invest in opportunities that offer the highest rate of return available to us. We estimate that the wells we elected to participate in during the third quarter had a weighted average EUR of approximately 880 MBoe and a weighted average IRR at the date of election of 35%. Based on the improved results we are seeing in our initial production rates in EURs, we continue to be very optimistic about the composition and quality of our in-process well inventory. During the quarter, we added 5.2 net wells for in-process inventory and reduced that inventory by 3.6 net wells that were added to production. As a result, at quarter-end, we had 18 net wells in the process which is our highest levels since 2014. Continental Resources comprised approximately 42% of our net wells inventory at quarter-end and a list that’s complimented by many of the best-in-class operators that the Williston Basin. Clearly a pace at which our backlog of in-process wells are completed will affect our spending in production levels for the remainder of 2017, should some of our operators accelerate completions in the fourth quarter we could see a higher net well addition number, which result in slightly higher capital expenditure spending. Based on the current rate of development activities, we are increasing the number of net wells we now expect to add to production in 2017 to 14 net wells. The higher number of net well additions year-to-date as well as growth of our in-process well inventory drove higher capital expenditures totaling 40.7 million for the third quarter and 98.7 million for the first nine-months of this year. In October 2017, we added an additional three net wells for in-process inventory list. As a result, we currently expect 2017 capital expenditures to total approximately 130 million. The capital spending increased over our initial plans that’s driven by higher number of net wells additions productions as well as growth of our in-process inventory which we expect will drive strong results in 2018. Given your year-to-date results and the increase in the number of net wells, we expect to add to productions in 2017, we are raising our annual production guidance to a year-over-year of between 5% and 6%. Crude oil differentials during the third quarter 2017 were $6.22 per barrel below the average NIMEX price that came in slightly better than our expectations with the Dakota access pipeline operational the overall increase in basin takeaway has lower differentials and we believe that differentials for the remainder of the year will range between $6 and $7 per barrel. Lease operating expense for the third quarter came in at $8.94 per Boe compared to $8.83 for the same period a year ago. The increase this quarter was largely due to higher processing and salt water disposal cost. We expect our fourth quarter lease operating expense per Boe to range between $9 and $9.25. General and administrative expenses were $8 million in the third quarter of 2017 compared to $2.1 million in the third quarter of 2016. The increase was due in part to a 3.6 million non-recurring charge in connection with the settlement of our former Chief Executive Officer during the third quarter and a 900,000 increase in legal and professional expenses compared to the third quarter of 2016, which was partially offset by a $400,000 decrease in cash compensation expense. In addition, general and administrative expenses in the third quarter of 2016 were reduced by a 1.8 million reversal of non-cash compensation expense in connection with the termination of the employment of our former Chief Executive Officer. We expect our fourth quarter of 2017 general and administrative expense to range between $3 and $3.25 per Boe. On November 1st, 2017 the Company entered into a 400 million credit facility with TPG Sixth Street Partners, we are excited about this relationship not only from a lending perspective, but the strategic opportunities this new relationships opens up for Northern. The company due to 300 million of the 400 million available on those facility with 100 million remaining committee and available under the lay drop basis for 18 months. The new credit facility replacement with Northern’s bank facility, which was due to mature on September 30, 2018. With the company’s maturity and liquidity profile vastly improved. The new credit facility provides a liquidity runway to executive on its development activities, make acquisitions and further company’s business plans, potentially repurchase debt or equity securities, if it is in the best interest of the company and shareholders. And we all hope benefit from the future improvement in oil pricing. Our available liquidity on November 1, 2017 was approximately 235 million, which included the 100 million of the lay drop capacity under the new credit agreement. Our new credit facility requires us to remain certain levels of hedging over rolling three-year forward period. As you can see in the earnings release from yesterday that we have already layered in the significant amount of that hedging. We will continue to add hedges to manage our commodity price risks and protect our future cash flows from downside risks. In conclusion, we will continue to use our flexible capital allocation process to protect the value of our assets and seek the highest rate to return available to us. The increases that we are seeing in well productivity and EUR give us confidence for 2017 and beyond. We have great momentum as we approach 2018 and our highly quality assets and return focus strategy provide a solid foundation to increased shareholder value. With that, I will turn the call back over to Brandon.

Alright, at this time, we will turn it over to the operator for Q&A. Sandra, if you could please give the instructions for the question-and-answer period of the call. Thanks.

[Operator Instructions] Our first question comes from the line of Neal Dingmann of SunTrust. Your line is now open.

Good morning Tom and Brandon. Tom a question, first just a quick on. On differentials you mentioned, I think around six. It seems like there is a few of the operator who are suggesting something materially lower than that. Are you just been conserve there or is there potential for some upside?

No, I think there is some potential for upside. I think our differentials in September came in at 578 kind of range. They have been trending down through the quarter. Typically and historically we have seen a little bit of uptick in the fourth quarter and that’s why, we kind of set the range where it was that. But definitely, I think there we are seeing a trend down and there is some upside there.

And now post the refinance which is good to see and you guys certainly have now more optionality I would call it. Tom I just wanted to sort of your process. Are you targeting sort of areas around that McKenzie-Williams area? Are you targeting sort of an operators. I’m trying to look at the strategy now that you are in a bit better position than the defensive position you guys have been in for a while?

Well, I think you point out. Those are two very high IRR areas both we Williams and McKenzie. So a lot of what we are focusing on is in that area, because as you know Neal a lot of our decisions or really all of our decisions are really rate of return kind of driven. You have seen build in our DNC list really since the beginning in the year. And it is really been by a lot of activity certainly in McKenzie little bit is done, as well as Montreal and Williams. We are excited about that and you know on some of the other calls, you heard continental talk about the record setting well, so Wiley where in our DNC list has 2.5 net wells still in that unit with another almost net well that’s directly offsetting that. Continental has had extremely good results. We are very exposed to them as I commented on in the script about 42% with waiting, we have got some offsetting wells to the [indiscernible] 30125 that you know they commented on I think in their call about a million or 1,500 Boe so we have got five wells directly offsetting that. So we have been through the year kind of setting it up and in my comments in the script, I talked about the momentum and you know I just want to stress kind of that word it’s something that the team has worked very hard at over the year kind of accumulating interest and we ended up the quarter with about 18 net wells. We had some opportunities in October and really I referenced in the call script as well. We added about three net wells to the DNC list at that point in time. So I guess say the composition is probably the best I have been since I have been here as far as the quality and the possible upside with respect to those wells.

And lastly, just as far as the working interest. Is that staying the same or you know for some of these key areas you are able to sort of step up and take a large position or is that the interest remain sort of the same, I want your outlook.

No to your point, I mean it’s a good point. In those areas we talked about our bread and butter ground game and that’s essentially going in and having an opportunity to roll of incremental interest in DSUs that we already participate in or we want to participate in. And so in generally you saw some higher working interest certainly on the Wiley and you take a look at the working interest in some of the offsetting they are higher. I think you know with 3000 gross wells you are not going to necessarily see the uptick in our average working interest in total, but certainly starting to take a little bit higher interest in some of those DSUs.

Very good. Thanks so much.

Thank you. [Operator Instructions]. one question has just come through from the line of Nate Streicher with Amtrust Financials. Your line is now open.

Hey guys how are you?

Good morning Nate.

Thank you, thank you. Quick question for you. Why don’t you guys use TPG for this new loan as appose to approximately going back to your bondholders for the refinancing?

I mean we picked it up and still had.

[indiscernible] the unsecured bondholders had approached the company to kind of talk about helping with the cap structure, but then you went with TPG and I don’t believe it’s one of your unsecured bondholders, I was just curious about that?

You know we did a fairly extensive process in the market where we contacted several providers. We have got a number of different proposals and we felt that you know we had some excellent representation through that process, the company was advised that process by both Evercore and Jones Day. You know and they presented the full information and analysis about the potential transaction really after a full of do consideration, the companies concluded that the proposal receive from TPG was the best and most exercisable transaction in light of the Company’s and other alternatives.

Okay. Thank you.

Alright.

Thank you. And I’m showing no further questions. And I would like to return the call to Mr. Brandon Elliott for any closing remarks.

Alright Sandra. We appreciate everyone tuning in, if anyone has got any follow-up questions, didn’t want to ask them on the call, please follow-up with us at your connivance. And with that Sandra we will turn the call back over to you to give the replay instructions.