Northern Oil and Gas, Inc. (NOG) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to Northern Oil and Gas Incorporated Second Quarter 2018 Conference Call. Currently at this time, all participants are in a listen only mode. Later we will conduct the question-and-answer session and instructions will be given at that time [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to Northern's Chief Executive Officer, Brandon Elliott. You may begin, sir.

Thanks, Demitris. Good morning everyone. We’re happy to welcome you to Northern's second quarter 2018 earnings call. Before we get to the results, let me cover our Safe Harbor language. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by 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 earlier this morning. All right, here's our plan for the day. I will quickly update everyone on our strategy and what we have accomplished so far this year. And I will turn the call over to Nick O'Grady, our CFO, to walk through the financials. Then we will turn the call over to Mike Reger, our Founder and President to talk about acquisitions. Then Bahram Akradi, our Chairman of the Board will talk about our vision for the next few years. And then finally, we will take your questions. Our strategy is honestly very simple. We are laser focused on being the best allocator of capital of any oil and gas company in the Williston Basin. We have three capital allocation buckets that we consider in order to earn the highest return for our shareholders. First, we utilize our substantial database of well information built from our participation in over 3,500 gross wells to best deploy our cash to the highest rate of return organic drilling opportunities that we receive on Northern's existing acreage base. This is the daily review and processing of inbound well proposals. We evaluate every individual well proposal and make a decision on whether or not to participate on a well-by-well basis. Organic activity also includes what we call the acquisition ground game, which our land acquisitions we make, again, utilizing our extension database to add additional acreage or interest in wells that are being permitted or spud. The individual interest we pick up maybe small, but this part of the strategy is definitely not inconsequential. This is the day-to-day ground game that helped build Northern and continues to fuel the Northern engine today. The second bucket is deploying capital into the M&A and A&D market. This should supplement our production growth and cash flow growth. It also grows our inventory of future core drilling locations. Year-to-date, we have been incredibly successful in this area with the announcement of $500 million plus dollars of accretive deals. Mike will talk more about these acquisitions later in the call. The third bucket is shareholder returns. This will come after we have been able to refinance all or a portion of our current debt with more traditional less extensive debt. The goal is to have a capital structure with very low debt metrics that can thrive and survive in all commodity cycles. Once we achieved that capital structure, we can then look to return some of the excess cash flow Northern will be generating to shareholders. Obviously, we have had some capital allocation successes so far this year. Activity is higher, represented by the increase we are seeing in organic net well additions. We increased our net well additions guidance by two net wells. The wells we expect to add this year generate some of the highest return on invested capital we see. This increase has come not only from inbound well proposals but the ground game I referenced earlier. This organic growth has not only resulted in the production and EBITDA growth we have experienced year-to-date, but has also built a backlog of wells in process that are some of the best wells Northern has ever participated in, and are clearly some of the best wells being drilled in the basin. When they are closed, the capital we have deployed to acquisitions will set the stage for 40% plus sequential production growth rate from the third quarter and fourth quarter this year, a step function change in our cash flow generation and is helping to create decades of high rate of return future drilling locations. Let me sum up my remarks by saying we are very excited about the rest of the 2018 and the continuation of the momentum we have built. Northern has come a long way from a year ago. We are extremely proud of all of the team has accomplished this year. We will continue to methodically and judiciously pursue additional avenues to drive growth, only when those opportunities are accretive to our shareholders. With that, we would like to welcome Nick O'Grady, Northern’s Chief Financial Officer to his first earnings call here at Northern. He will cover the financial and balance sheet highlights. Nick?

Thanks, Brandon. As everyone can see, it’s been a busy start for me here in the Northern. Let me start off by saying this clearly to our investors. We have stated our goal to be the consolidator in our basin, and to do so in a disciplined and responsible manner for our shareholder and our creditors alike. I can say definitively we have achieved this in recent months. We are a different kind of oil Company. I want to reemphasis what Brandon has said earlier. Our asset is strong and net asset will produce capital that we can judiciously deploy in three buckets; organic growth, high return bolt-on acquisitions, and overtime shareholder returns through dividends and share repurchases. It’s a simple model and we will not lever from it. The non-operated model at times receives praise and occasionally derision from the investment community. Yet, I will remind investors of one powerful notion. Northern has signed agreements for over $500 million in acquisition this year. Yet, we will have not yet added one additional employee for these transactions, no additional teams and field officers, rig managers or engineers. We simply work with our strong internal departments to manage these assets as they are rolled into our machine. It is my role here as Northern CFO to find the best routes for us to execute upon our states goals, to build and maintain trust for the investment community and with that reward our investors with a company that can grow organically through acquisitions. And as go through the final steps of our balance sheet transformation in the next two years, provide forms of shareholder returns, given our strong cash flow generation. Here is a quick overview by the numbers. We generated $70.5 million of adjusted EBITDA in the second quarter, a 129% increase over the second quarter of 2017, that was driven by a significant increase in production and improve commodity pricing. Our second quarter production increased 53% year-over-year and 17% sequentially to average 21,046 barrels of oil equivalent per day. I’d note South Creek closed in June and only had a minimal impact on the quarter. The 8.1 net organic well additions in the second quarter coupled with strong continued well performance that has exceeded our expectations have set up nicely for the remainder of 2018. Based on the improved results we’ve seen with initial production rates and EURs, we are very optimistic about activity levels in the basin remaining strong, bringing forward activity and thus net present value to the Company and its shareholders. Despite the substantial increase in production, our drilling and development capital expenditures were approximately $52.3 million for the second quarter or $1 million decrease sequentially. In addition, we spent approximately $59.8 million on acquisitions, including South Creek. We now expect to add 25 to 27 organic net wells to production during 2018 using an updated D&C capital expenditure budget of $215 million to $230 million, which includes ground game acquisitions and workovers but excludes capitalized expenses and material acquisitions closed or pending. With the increased quantity and quality of wells, as well as closed and pending acquisitions, we’re also increasing our guidance on 2018 annual production, which we now expect to increase approximately 60% to 64% over the 2017 levels. Our fourth quarter guidance that we laid out in the release should give investors a clear picture of what Northern will look post close on the pending transactions. This now includes our South Creek acquisition and includes our other pending acquisitions for the fourth quarter Our realized price for the second quarter, including the effects of our settled derivates just 25% higher than the same period a year ago. The increase is driven by higher commodity prices and the lower oil differential. Our oil price differential during the second quarter averaged $5.77 per barrel, which was 16% lower than the second quarter of 2017. As we mentioned on our first quarter call, we did see some widening in our differential as the price of oil has moved higher and production continues to increase in the basin. However, in recent periods this has begun to moderate. In time, we are updating our guidance modestly for our oil price differential for 2018 to between $4.75 and $ 5.75 per barrel. Lease operating expenses continue to impress. In the second quarter, they came in at $7.60 per boe compared to $9.67 per boe in the same period a year ago. The continued decrease is seen year-to-date in parts of our growing production and the lower per unit cost associated with newer wells. We expect the stabilization in these costs, given the high level of activities we are enjoying at this time. For 2019, we expect the assets from our pending acquisitions to have a cost structure similar to or lower than our current corporate average. We are lowering full year 2018 lease operating expense per boe to a range between 7.50 and 8.50 per barrel. And our production tax as a percentage of our oil and gas sales remain at approximately 9.2%. General and administrative expenses were $3.3 million in the second quarter of 2018 compared to $4.3 million in the second quarter of 2017. As we close on recent acquisitions, we expect our G&A per boe to continue to decline. We are lowering expectations for full year 2018 total G&A expense per boe to a range between $1.50 and $2.50 or 22% reduction at the midpoint despite only one quarter of full contribution from our pending acquisitions. We believe cash G&A is a more relevant metric for the investment community and here and going forward we will break out our cash cost separately. All in, even inclusive of higher differentials, we expect our cost structure should decline approximately $0.50 per boe for 2018 versus prior guidance. We provided our current hedge book in our earnings release. It’s worth noting that for the first time in the Company’s history, we’ve entered into approximately 4,500 barrels per day of basis hedges for 2019 to lock in lower differentials. We will continue to work on adding this overtime as markets conditions allow. Debt reduction has been a primary goal for the Company. In May, we completed our senior notes exchange, which included $145 million equity raise to bolster cash and make acquisitions. In addition, in the second quarter and more weekly into the third order, we continued to attack the remaining unsecured bonds, equitizing over $77 million of them in a series of transactions, most with investor protective lockup structures. This has eliminated nearly 38% of the issues still remaining and annually saves the company over $6 million in interest expense. Finally, I'd like to talk about our liquidity. Investors have hopefully taken notice that when we said we would be the national consolidator in our basin, we would do it and do it accretively. Investors who help fund this both in our recent exchange offering as well as their common stock offering have been richly rewarded with how we deploy that capital. Northern on a pro forma basis will have more than doubled this annualized EBITDA from the end of 2017, yet its leverage multiples upon closing these deals this fall will have fallen by two-thirds since the fourth quarter of last year. In addition as pro forma for the closing of the most recent acquisitions, we believe Northern will now produce significant amounts of free cash flow in excess of overspending, and we'll have a significant amount of cash and ample liquidity at the end of 2018. In addition, we believe there is a substantial boost to free cash flow over the coming years when our refinancing window opens and it becomes economic for the Company to call its current secured debt structure. With that, I'll turn it over to Mike Reger, Northerners Founder and President to talk about acquisitions.

Thanks Nick. Northern is the largest non-operator in Williston Basin. We were early did a play in 2006 and we know the basin as well as anyone. In 2018, we have reestablished the Company as the dominant and natural consolidator of non-operative Bakken and Three Forks assets. Over the past few months, we have signed agreements to acquire nearly $500 million of new assets, all of which were acquired using both cash and stock. To recap the size and impact of each deal, I will walk through our recently announced transactions. The first large deal we announced was the acquisition of Salt Creek Oil and Gas, which we announced in April and closed in June. This asset consisted of 1,380 barrels of oil equivalent per day and eight net wells of million plus type curve drilling inventory. We paid $40 million in cash plus 6 million shares of Northern common stock for this highly accretive acquisition. Next, in mid-July, we announced that we had entered into an acquisition agreement with Pivotal Petroleum, and we expect to close that deal near the end of the third quarter. This asset primarily producing wells is currently producing about 4,100 barrels of oil equivalent per day. We agreed to pay approximately $150 million comprised of 45% cash and 55% stock. Northern shareholders will benefit from this highly accretive acquisition with cash flow and production base this asset brings to us. Most recently, we announced that we’ve signed an acquisition with W Energy Partners, which we also expect to close near the end of the third quarter. This deal will contribute 6,750 barrels of oil equivalent per day at closing and comes with over 10,000 acres with some of the best core drilling inventory in the basin. We played approximately $100 million in cash and 56.3 million shares of stock, which is one third cash, two third stock and another very highly accretive transaction. Going forward, we expect to have a significant consolidation advantage in the Williston Basin. We have the largest database of information in the basin and an unparalleled knowledge of the basin. We have participated in approximately 25% of all of the Bakken and Three Forks wells drilled in the basin since 2006. In addition, we will have one of the strongest balance sheets of our public peers in the basin and we are prepared to use our public currency to acquire additional accretive assets as evidenced by our most recent accretive acquisitions. Finally, stay tuned for more acquisitions. We have the best land and technical team in the basin and we continue to evaluate every opportunity, both large and small to strategically consolidate additional accretive non-operated assets. With that, I'm going to turn the call over to Northern Chairman, Bahram Akradi to talk about our vision and goals for the next few years.

Thanks Mike. First, I want to thank the Northern Oil & Gas management team for their exceptional performance and exemplary execution of our strategy over the past several months. As Brandon mentioned earlier, we have executed faster than we have originally hoped, so now I want to raise the bar and out a new set up aspirational targets for the next few years. To do this, I would like to map out a two year plan for Northern Oil & Gas. Our goal is that by the second quarter of 2020, Northern Oil & Gas has become a midcap size company with a debt-to-EBITDA ratio of an investment grade entity, 1.5 times or less. This will put us in a position to replace the first lien and the second lien with a normal revolving credit facility. This alone will provide approximately $30 million plus of additional cash flow for our company, which will be function of lower interest rates based on our credit at that time. When we recapitalized the company this spring with the completion of the bond exchange and the equity raise, our goal was to get Northern to $300 million of run rate EBITDA by the end of 2018 and $400 million of run-rate EBITDA by the end of 2019. As it is evidenced to you, Northern’s management has executed in such a manner that at the closing of the Pivotal Petroleum and W Energy in 60 days, our fourth quarter 2018 annualized EBITDA, based on our current consensuses, will be already in excess of $400 million and cash flow positive. Therefore, I’m resetting the bar higher and setting new goals of approximately $600 million of fourth quarter 2019 annualized EBITDA, along with investment grade debt metrics of 1.5 times or less. We are clearly on our way to achieve the objectives of making Northern Oil & Gas a company that can create positive cash flow regardless of commodity prices. We are committed to be a responsible fast growing company, and I’m thrilled with the progress Northern has made already. With every passing quarter, we will update you and lay out additional goals and objectives as I hope we continue to achieve our goals at the schedule and set new ones as we drive to increase shareholder value. With that, I will turn the call back to Brandon.

Thanks, Bahram. All right with that, I’ll turn the call over to the operator for Q&A. Demitris, could you please give the instructions for the Q&A portion of the call.

Thank you [Operator Instructions]. And our first question comes from Neal Dingmann with SunTrust. You may proceed.

Mike my question for you first on the acquisitions, just looking at some of your older slides. Could you talk number one about how you thought obviously in the last couple of acquisitions have been a little bit different as far as going out and bringing in essentially private acquisition that way versus doing some of these bolt on and smaller asset deals. Could you talk about you seeing both of these going forward and that’s going to continue to be a strategy, or how do you see that going forward?

I think it’s to pronged, our ground game every day where we’re waving in new acreage and AFPs that book of business has never been better than it is right now. As far as the larger deals, as you know at Northern, we proactively source our own deals in both large and small. And if they’re accretive, we’re going to act on them. There are handful of deals that were available in the first and second quarter that we looked at. Several of them, as you know, we’ve transacted on. And with the opportunities that we see, primarily the off market privately sourced deals that we do here, we continue to see more and more deals that we uncover. And if they’re accretive we’re going to act on them. So everything is hitting on all cylinders here, Neal.

And then one just follow up on acreage, interest to hear your opinion I have for some while before you had opinion of where you deem that tier one, tier two. Now the way things have continued to improve in the Baken if I look at -- again let’s just look at maybe where William is on trail, Mckenzie has done, all come together there. Could you talk about are there certain areas that you’re targeting? Again, obviously you don’t want to give away your game plan. But I’m just really wondering how useful to view it today versus maybe year or two ago given the improvements and efficiencies we’ve seen in the play with some of these just monster wells in the Bakken?

Yeah, I think the new completion design just changed the game completely. I think over the last two years, one, drilling costs have come down, let’s say, from 2014 to today, drilling costs have come down $2 million or $3 million and EURs have increased anywhere from 50% to 100%. And I think that’s just the function of the new completion design with 45 to 60 stages, 10 million plus pounds of sand. And I think almost everyone of our operators has adopted the new completion design. And I guess to sum it up when we used to look at the core and say, two, three four years ago, anything that was in that 700,000 EUR range, we considered core -- now the core is as big as tier one and tier two and its all million barrel plus country. So the new completion design really unlocks this rock and we’re lucky to have a really nice bite of this play.

And our next question comes from Jeff Grampp with Northland Capital. You may proceed.

Curious just going off the comments on the 2020 goals here. Maybe some of the background behind those goals, the $600 million, is that just where you guys think you need to be to get that investment grade type of rating or is it maybe also based on some of the organic and inorganic opportunities that you see in front of you guys obviously with all the acquisitions that you did. It seemed like you had some good insight to get to those earlier targets that you put out. So just maybe help me to expand on those comments a little bit more.

This is Bahram. Myself and nick will take this on and try to give you the best answer. First, as I had the stated initially when I got involved with this company, the goal is to create a company that is able to create positive cash flow earnings for our shareholders in any reasonable commodity prices. I didn't really want to be a large investor in a company that could only make money if oil is 65 or 70 bucks. And we have the ability and now we are already there, I think it's just matter of now executing what we have been doing. There are plenty of opportunities in our site right now that could get us to this $600 plus million dollars of EBITDA. We would only be doing these when we can use our shares accretively to our metrics, to our returns and also for our shareholders. But the opportunity is there to do so. We're going to do the debt to EBITDA so that we have a large entity that its investment grade credit. So you guys all understand with this business there's plenty of demand for the cash as you have to reinvest in the additional opportunities for new wells. And the key is to be in control of our own destiny. I want to make sure that not only we have grown to that size. We also have the ability to easily and naturally retire the one and two out. I want to thank enormously TPG and our bondholders who were so great to allow this deal come together and recapitalize and make Northern Oil & Gas a company that can do all the things we have done. However, as we all know it's a very expensive debt. We were totally fine with doing that structure because it allowed us to get to where we are today but it has this course. And we will definitely do everything we can to position the company so we can have normal RBL type financing available for us to do this exactly on the day we can pay those things up reasonably. And that's May 15, 2020 is when we can pay those off with the right economic return and change things. So I want to turn it over to Nick to add to that.

Jeff, in terms of our balance sheet from a credit metric perspective in our opinion we’re there. Obviously, I think the structure as Bahram just mentioned, we’ll have to change over time. But I think the way to think about this is Bahram is creating an aspirational goal for us. There are, as Brandon talked about on the call, there are the three avenues that we're going to go towards that organic and inorganic. But let it be clear to our investors and everyone that this is a management team that we are compensated in our shares and we set targets not just for growth but for also for ourselves. And so therefore everything we do is designed to grow value and to theoretically create value per share. So this is truly a corporate finance exercise of sorts and we will not -- the goals here are we have opportunity within our basin to both do things that are accretive without risking our balancing in any regard.

Does that answer your question?

That’s perfect, I really appreciate it. And just for a follow up more on the operational side. I noticed the well costs that you guys quoted for well process like $8 million or so, I think that would be maybe up a little bit from where you guys have recently talked about cost. And I’m just curious if you guys are seeing any service cost inflation, what’s driving that or maybe it’s just more where those wells in process are concentrated throughout the basin?

Jeff, I think we did see that average number came up a little bit. I think we had a little bit of mix of some higher longer laterals in 2Q. So that had net average come up a little bit. When we look at the wells that we’ve seen come through in July, the numbers are down from that eight number. So I’d probably model something in the 7, 7.5 to 8 range. And obviously increase completion designs and more fluid usage is also increasing that average cost a little bit as well.

And our next question comes from Derrick Whitfield with Stifel Financial. You may proceed.

Good morning all. Congrats on the strong 2Q and impressive set of two 2019 goals. Perhaps for Mike with the increase in the completion activity you’re expecting to see in the second half. Can you comment on the ground game gains that you’d expect to see in the second half versus the first half?

I think what we saw if you remember our original guidance where we started the year, I think we’re estimating, I think we were on 18 to 22 net wells. We thought we would bring on just organically on our existing asset base we’re looking at now 25 to 27 net wells that we’re going to bring on this year. And again this is exclusive of any of the acquisitions. So it’s really -- what we’re seeing is operators are continuing to drill more drill faster. I think we come up over the course of the year from about 50 rigs to about 65 rigs. As these rigs are all drilling big pads, Northern has a significant working interest in the continental pad that just came on, for example, which is 24 pads in the federal well -- 24 wells in the federal pads. I think what we’re seeing is more and more wells are being proposed. Northern has an unusual high percentage in a lot of this activity in the core. So as we go, we expect to see that the rig -- if the rigs count stays where it is, we can continue to see that number creep up continually. There is more and more activity in it. What our ground game does, as you know Derrick better than anybody is, as more wells are proposed it creates more opportunity for us to consolidate a smaller working interest. Again, if we have about 10% working interest in a well that’s get proposed within a week of all of the working interest owners receiving their ASCs in the mail, we can probably consolidate on other 5% to 10% in each of these wells. So I think what happens is the more activity breeds more activity and it just builds on itself. So we’re excited about the momentum in the field. We just happen to have a really disproportionally high bite of the action right now.

And then perhaps for Nick with regard to your decision to increase the older rental for 2018. Shouldn’t I think about the recent widening and the Brent-TI spread actually is helping your second half differentials, and with that logic…

The answer is, yes. We’ve definitely seen it moderate in July and into August. We’re just been conservative.

And our next question comes from Jason Wangler with Imperial Capital. You may proceed.

I was curious with the acquisitions you guys have announced and closed. I mean, as you think about the operator mix and just who we should be thinking about is your big focus. Is that changing at all or is it still pretty much similar to what we saw in the past?

I think what we’ve seen over the last several quarters are dominant operators are Continental, Whiting, Conoco or Burlington and Oasis and Hess. I think we’ve seen a lot of activity from all of those. Some of the big drivers over the last quarter, primarily been some of these monster Continental wells and these big pads they’ve been bringing on. We’ve had significant working interest in some of these great pads, and Continental continues to be our number one operator.

And, Mike, are those similar trades with some of the acquisitions as we think about the fourth quarter and beyond, or is there any differences really in there?

No, I think it’s really similar. One thing I’ll notice around a note that in the Pivotal acquisition in the W acquisition, it almost have very similar look at the operator mix that we have organically. Again, primarily Continental, Whiting, Hess and as we go forward, we continue expect Continental to be a primary driver. One thing I always like to note is that Slawson Exploration, who is a private operator, they very, very lightly drill their Van Hook field in southern Mountrail County where we have significant working interest, and approximately 20% working interest and roughly 65 units that Slawson has there. And Slawson who is a company with no debt has always drilled within cash flow, is very lightly drill that core of core field in Southern Montrail and that presents us with a very unique concentration of core drilling inventory. So Slawson starting to get after it as well, Slawson is utilizing the new completion design as well. As of late, we brought on a couple really big well this quarter with Slawson. We continue to see more action from them. But generally speaking, your mix is going to be going forward primarily Continental, Whiting, Burlington Conoco has Slawson. So the typical mix of A-plus operators.

[Operator Instructions] And our next question comes from Owen Douglas with Baird. You may proceed.

I just have a quick question here. Just in terms of understanding on a go forward basis as you guys look to do any acquisitions similar to what has come your way. With the stock price moving up nicely. Just wanted to understand the appetite for doing more equity-linked deals versus more debt issued? I know you guys have been talking about trying to get the leverage down to very low levels. And I just want to understand the parameters of how you may look to fund future deals going forward?

This is Bahram. Let me just first make some comments about our other things that dovetails to your question. I have been in contact with a number of large shareholders, as well as people who have had their – basically they have a lockup of including some of my own shares. And we absolutely love the company, we love the execution of the company and we see substantial potential in where this company can go. And so I think there is probably a little more concern out there about potential people just dumping shares, as soon as the lockup is over. And I think that will take care of itself it will show the Street how much support there is from the people who got the shares on the exchange. And they'd like the company and they want to stay there, that's one important factor. We think, just like Nick said, that first of all for acquisitions, we want to have the right balance of equity and debt. So that it’s consistent with the long-term, the two to three year strategy of the company to stay in this investment grade metric. So as long as our shares are moving up and we can do transactions accretively using our shares accretive to our performance, to our EBITDA numbers, to our earning numbers, as well as accretive for the current shareholders is on share price, we're going to continue to use shares and cash or some versions of that mixed in. But I want to emphasize, we actually at this point need to do nothing, we're going to respond to you opportunities. But when you look at where the company is at as we've already repeatedly said at the conclusion closing of Pivotal and W, this company will be very, very nicely cash flow positive. We have amazing inventory that we can continue to invest in out of our cash flow proposition. So we will do any of these things only when substantially accretive. We don't have to do anything at this point and that's the best position to be. Nick?

And just I think as zeroing on what I think you're getting to all of you on the phone can do the math in terms of where our pro forma debt metrics look like in the very, very healthy. Obviously, we could be more levered at this appoint. But I think our view internally is this is a cyclical business. I don't - the list is long of E&P companies that get themselves into trouble with large amounts of leverage. And therefore, we're going to be very careful. But I think with that being said, as it pertains to equity, we also want to do things to maximize accretion on a risk adjusted basis. Meaning that we will look at each deal individually, which going to Bahram's point, the debt levels may fluctuate modestly up and down, the equity ratio is may ratchet up and down. But I think just -- and just going back to Northern's recent history, it is a lot easier to re-lever than it is to de-lever. And so I think that ultimately for us given that we put ourselves in a strong position now, we want to do everything on a responsible manner and test it to the downside.

And if I could one more question, just in terms of -- so now you guys are going to be a bigger company through pro forma for these acquisitions. What should I think of them in terms of the number of net well additions needed each year to keep production flat to slightly up?

It's probably for ’19 probably in that 26 to 28 level of net well additions for ’19. And then it probably would step itself down, call it a couple of wells range, two well range every year thereafter to hold it flat. And that’s flat at the Q4 average rate we’ve got it to.

And that’s pro forma.

Yes, that’s pro forma for the acquisitions.

Playing off of a significantly larger payoff…

Okay, that’s very helpful guys. I’ll hop back in queue. Thank you.

Operator, I think it looks like that was our last call. So we’ll…

Thank you, ladies and gentlemen. That does conclude our Q&A portion of the conference today. I will now turn the call back over to your host, Mr. Brandon Elliot. You may proceed, sir.

All right Demitris, thank you. And thanks everyone for the participation in the call and the interest in Northern Oil & Gas. Obviously, please make note we have a busy schedule the next several months at some various conferences at around the country and those details are included in our press release. So we look forward to seeing some of you on our travels. And we’ll plan to talk to you again next quarter. Demitris, you can give the replay information. Thanks everyone.

Ladies and gentlemen, thank you for attending today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.