Greetings, and welcome to the Northern Oil and Gas 2019 Earnings Conference Call. [Operator Instructions]. And as a reminder, this conference is being recorded. I would now like to turn the conference over to Brandon Elliott. Thank you. Please go ahead.

Thanks, Brenda. Good morning, everyone. We're happy to welcome you to Northern's Second Quarter 2019 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 a 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 measures can be found in the earnings release that we issued last night or in our updated investor presentation on our website. All right. With that out of the way, let's move on. First half, Mike Reger, Northern's Founder & Chairman Emeritus is going to comment on his departure. Then I will make a few summary comments before turning the call over to Northern's CFO, Nick O'Grady for his remarks. Northern's Chairman Bahram Akradi is going to lay out the forward strategy. And finally, we'll open up for the Q&A portion of the call. In addition to those I mentioned, we also have Chad Allen, our Chief Accounting Officer; Adam Dirlam, our EVP of Land; and Jim Evans, our VP of Engineering in the room with us as well. With that, I will turn the call over to Mike.

Thanks, Brandon. First, I couldn't be more proud of the team here at Northern. I founded Northern 13 years ago, and the current alignment of the team, management, the Board has never been better than it is today. Aside from the dislocated equity market, the company is in great shape and the shareholders are in great hands. It's been an honor and privilege to help build Northern into a top tier oil producer in the Williston Basin over the past 15 years, and particularly proud of what we have been able to accomplish during the last 18 months. Successfully acquiring over $850 million of high-quality accretive assets, recapitalizing and fortifying the balance sheet and growing print production over 40,000 barrels of oil equivalent per day. Northern's go-forward positioning and strategy, including the return of free cash flow to shareholders, is perfectly suited for the evolving preferences of public energy investors. And I'm confident that the management team and Board will continue to deliver on this strategy. Lastly, I want to thank Bahram Akradi for his dedication and commitment to transforming Northern into the company it is today and giving me the opportunity to help with its transformation. With that, back to you, Brandon.

Thanks, Mike. And obviously, thank you on behalf of all of us here at Northern. Obviously, none of us would be here were it not for you. We certainly appreciate your continued support and are grateful for opportunity to take Northern forward from here. And obviously, on a personal note, I want to thank you for inviting me to join this team just over 6.5 years ago. So speaking now of moving forward, let me cover some of the highlights from the quarter and comment on our strategy for the remainder of the year and beyond. Northern had another strong production quarter generating 66% year-over-year growth, essentially flat with the first quarter of 2019, despite the continued curtailments and shut-ins that we estimate reduced our production by 2,500 barrels of oil equivalent per day during the quarter. Our ability to hold our production flat and still land squarely in the middle of our production guidance is a testament to the success we have had allocating capital to the highest efficiency and highest return opportunities we see, both in the inbound well proposals we review every day and in our ground game acquisition program. This quarter, we nonconsented 20% of the net wells received because they did not meet our investment hurdle. As an operator chose to conduct some step out wells into what is currently a Tier 2 area. Our evaluation indicated the returns would not meet our hurdle rates, and we nonconsented those wells. Our robust hedging program helped protect us from recent volatility in the commodity markets. Operating expenses were essentially in line with our guidance except for the lease operating expenses that saw some negative effect from the level of shut-ins during the quarter. Cash flow from operations was approximately $100 million for the quarter. We focused…

First again, I want to thank Mike Reger for his vision to start the company and helping me during the recapitalization period last year. And with his energy and enthusiasm with all crucial acquisitions since then. Next, I would like to summarize the steps we have taken so far and map out our next moves. As it has been evident to you, we have transformed NOG to a stable, free cash flow positive company with a significantly more robust outlook for 2020 and beyond, poised to start returning capital to shareholders. We have one more move necessary to be able to initiate a sustainable and growing dividend for our shareholders. That is to replace or renegotiate our senior notes. The worst-case scenario is to wait until May 2020 when our senior notes are callable. At that point, we can replace those notes and pay dividend for the second quarter of 2020. The more desirable path could be a function of negotiation with our bond holders, which I intend to lead in the next several months. If we can negotiate a win-win path for our bondholders and shareholders, then we could be able to initiate a dividend at that point, which may be sooner than May 2020. With the cash flow positive position NOG is in now, plus the accretive acquisition opportunities and the ground being in front of us we believe, we can: one, start a sustainable dividend; and two, grow our production, earnings, EBITDA, and our dividend on regular basis. Finally, while our stock price does not reflect the exceptional position NOG is in today, and it does not reflect the great work we've done in the last 20 months, we believe it is simply creating a great buying opportunity. Thanks. I look forward to answering any question during the Q&A segment, and now I'll return the call to Brandon. Brandon?

Thanks, Bahram. With that, I'll actually turn the call over to the operator for the Q&A portion of the call. Brenda, if you could please give the instructions for the Q&A?

[Operator Instructions]. And our first questions are from the line of Neal Dingmann with SunTrust.

And Mike, congrats. The question Brand, for you, when you all look at and discuss, you've been discussing sort of that active ground game in press releases and, again, today and then you also talked about today, the number of wells that you're nonconsenting. So my question was, could you discuss now, how you look at the required group rate or return on deals? Not just bigger deals but obviously on the ground game. And if this change is based on changes that you continue to see in your weighted average cost of capital?

Yes. I mean, I think we're -- we continue to be selective. And I think as you heard Nick say, ground game stuff is as busy as it's ever been. So in some ways, we almost view this that we are, kind of, investing almost countercyclically, right? You've got lots of investment opportunities in the ground game. So it provides us the opportunity to continue to be selective and keep raising our hurdles. I mean, I think we're in that, certainly, in excess of 20% to 25% IRR to get in the door. And again, being more and more selective as we see more and more opportunities out there in front of us.

Okay. And then just lastly for Nick or Bahram. Bahram talked about addressing the bond. And I'm just wondering, is it -- with different sort of free cash flow sensitivities coming into that, will that play into it? Or is it -- with the bondholders, could you maybe talk about -- because I agree, you all have a great, great free cash flow at most sensitivities out there. So I'm just wondering, how you look at as you get closer to that May of next year, I mean is it more on -- I am just wondering what are the factors that will play into that?

Look, this is a simple proposition for us. We -- and I'll go back a little bit to give you and everybody else a clear path of thinking. We did what we needed to do to get the company in the position we are in. We did a deal with TPG. I am grateful to the work they did with us. We were able to negotiate the unthinkable deal with our bondholders for exchange that allowed us to make some critical acquisition, which the team did a phenomenal job over the last 1.5 years. With the objective of creating, just like Nick said, a cash flow positive company that is focused on growing the free cash flow on a regular basis. That's our thought, that's our strategy, that's what we make every move for. We, basically now in a position where the company could pay a dividend starting today, had it not be in for the covenants that was negotiated in our second lien. And those covenants made sense at the time to negotiate both for them and for us, with the position the company in, the condition we were in, we had to do what we had to do. Today, that situation is obsolete, based on the condition of NOG. So the worst-case scenario, like I said, we just wait, we grow the cash flow as you can do the work, you see the 2020 cash flow, it'll be significantly higher than the -- free cash flow will be significantly higher than the 2019 free cash flow. And then we basically have to either redo our bonds and get the bonds and -- a revolver that is larger and a bond that is smaller and then has no peace as long as we keep the debt-to-EBITDA under 2x, which…

Our next question is from the line of Derrick Whitfield with Stifel.

And congrats Mike on Northern's progress during your time with the company. Perhaps for Brandon or Nick, could you speak to the specific midstream, just some expansions that are scheduled to come online in the second half and early 2020 that are expected to radiate your curtailments?

Yes. There are, I believe, six gas processing plant expansions going on in the basin. The major players for Beacon and Morgan, [indiscernible]. in addition, also has some major NGL expansions. Some of those will come on late in this quarter. It obviously may take some time for those wells to turn to sales even as the plans come online. Some of them are later in the year, and I believe that, that makes 2 plants come on in the first quarter of next year. But what I would say is that I had a lot of discussions with investors in the fourth quarter of last year when all the differentials went to minus 20. And investors were in a full panic about it and said this would last, oh gosh, this is going to last for the whole year and all those thing went, and you looked at about, it was really a temporary issue. I think we see this largely the same way. And particularly, panicking about today is a little humorous to me because these plants are actually coming online. These plants and the NGL expansion that's associated with it should likely set the Basin out for another 3 or 4 years of material access capacity. So I would expect -- [indiscernible] when it's all done that you'll see NGL yields improve, gas pricing improve as well as -- frankly, we know what shut-in, and where we're being curtailed, but we don't even know if there's the potential that some of our existing production is also being modestly held back. So this really should have a material positivity on the entire basin.

Great. And then perhaps to stand with you, Nick, regarding the revised LOE guidance for 2019, as I understand that's largely attributable to the VEN transaction and production curtailments? How do you expect that to project throughout the year and into 2020? Nicholas O’Grady: Yes. So I think the VEN assets, they have an LOE that's closer to the $10. There is a benefit that comes from that. Some of that's just a -- those are -- it's an older vintage program meaning that's why it has lower declines, but you obviously have higher unit costs. The other part is that, they also have some additional processing cost but that yields in typically better gas pricing for those assets than our corporate average. So you'll see some benefit there. I think, in terms of if you back into where our guidance is for the rest of the year, I think it would largely be potentially flat -- I guess, flat to up, kind of, for the rest of -- the remainder of the second half of this year. I do think that the combination if we're looking out into 2020, it could mean some relief from that and perhaps and some moderation in 2020 and beyond.

Very helpful. And if I could sneak one more in, I think Brandon noted in his prepared comments that Northern elected to nonconsent on 20% of the inbound low [indiscernible] in Q2. Were the step outs -- well, did you guys referenced primarily attributable to one operator?

Yes. One operator and -- yes, divide county, one BSU.

And your next question comes from the line of Jeff Grampp with Northland Capital.

What's curious, I know you guys obviously haven't put anything out formally in 2020, but just conceptually wanted to approach the topic, is it fair to think -- I know, kind of, seasonally the years tend to start a little slower with weather in completions. But given some of the ground game stuff you got going on and in the midstream relief, should we expect 2020 to maybe start a little quicker than it has in near past? And do you guys have any sense of, kind of, year-over-year? What completed well count, could look like is it stands today? Nicholas O’Grady: Jeff, it's Nick. I think that Williston weather is always a wildcard. And so while -- what you're suggesting, it is possible that we have a, kind of, counter normal first quarter and we have very strong production. It's also possible that you have really cruddy weather and a lot of those completions get pushed out into the second quarter, it really depends. So I think it's a little early for that. I think, when we guide to 2020, I mean I think in terms of the impact for the year, it might not have a huge impact, but it may have an impact on the cadence. And so I think the best part for us is that we generally report our fourth quarter in March. And so by then, we'll have a good idea of what that looks like. So I would say, in an abundance of caution, I think it's always safe to push some of that activity because the winter is always a wildcard.

Okay, that's fair. I appreciate that. And my follow up. You guys obviously have had lots of success with the ground game this year up in the budget, seen some good opportunities. I was curious, did you guys have an opinion on what the longevity is of that, kind of, buyers' market in the ground game? I mean, do you guys think that this is, kind of, an abnormally high year? And maybe that steps down in 2020? Or is this, kind of, a multiyear, kind of, tailwind that you guys can see on the ground game? Nicholas O’Grady: I mean, I would just say, judging by the public equity markets and what we're observing here today, I don't think this is going away anytime soon. I do think that this has been an abnormal year, and I think that it'll really depend on where oil prices are next year and how much the industry has gotten closer to center in terms of their own cash flow obligations. So I think it's a little early to look at 2020 and beyond. But what I would say is that if we're a free cash flow entity which we are, we obviously want to allocate a portion to this. And as Bahram stated, a portion to our shareholder returns. And so we'll be pretty thoughtful about how we budget it on an absolute dollar basis going forward.

The next questions are from the line of Lenny Raymond with Johnson Rice.

Just one quick question. So the ground game's been the focus on acquisition side as of late. But can you guys provide an update on your current appetite for a large-scale acquisition following the closing of the VEN Bakken deal? Nicholas O’Grady: Lenny, it's Nick. Those opportunities are out there, but I think we feel fairly satiated at the moment. I think we've got -- we're -- tickle the death with the deal that we did. And I don't -- I wouldn't hold your breath thinking we're going to do anything anytime soon.

And then just quick, you said the opportunities are out there. You all used the right numbers out there. How much you all saw in the basin? Is there a number right now that you all see, like, $200 million? Nicholas O’Grady: $5 billion worth of stranded assets out there.

Our next questions are from the line of Mike Kelly with Seaport.

First off, Mike, congrats, what you built in Northern, and best of luck in your next venture. First question, I'm going to steal from a client that just a [indiscernible] to me with this, and you guys are intimately better equipped to handle it. And the question was, given what we heard from Whiting yesterday about the current state in the Bakken and constraints, why do you think that Northern's second half guidance isn't at risk?

Yes. Mike, it's Brandon. I'll start and then I'll let Nick chime in. I think -- one, obviously, we watched this on an operator-by-operator basis with our exposure across the basin. So we think -- we think we've got that pretty well dialed in, obviously, as you heard in our prepared remarks. We're taking a pretty conservative stance on when the production comes back. And it certainly gauged a little bit on what Nick said about infrastructure additions in the back half. So I would say we feel pretty good about where we've got it and rest in the back half. Nick? Nicholas O’Grady: Yes. I mean I think it's important to understand the context that the Bakken varies greatly from one part to another. So there are gassier portions, there are oilier portions. And certain operators that may have been mentioned, maybe developing parts in high-gas GOR areas in the basin, particularly as you look to that bull's-eye in McKenzie County. So there are parts of -- if you were developing some of those parts right now, you may face extreme curtailments. And then there are other parts of the field that are operating just fine and normally with pointing of capacity. So the bench that we have is a nonoperators that we're across an entire basin. And I would just say rest assured, there are always unexpected things that occur. But we've taken a pretty hard whack to our guidance, it's been a lot of time between our land and engineering personnel. And we're obviously monitoring the completion cadence and the DUC cadence of the operators, in particular. They try to make sure that we're risking this accordingly. It doesn't mean we're always right. But the other thing I'd just say, in terms of our back half cadence, for example, with the flywheel assets. The flywheel assets here are not experiencing any material curtailments at all. And so largely, a lot of our quarter-to-quarter growth is driven in part by that. So I think we feel pretty good about it. Candidly, I think we feel that the potential of the assets is a heck of a lot greater, but we'll have to see depending on the timing that when that comes on.

And switching over to free cash flow and where are you going to be in 2020? We saw bus in second quarter, $87 million of annualized free cash flow and even with our updated model it has a much more conservative view commodities in 2020 cash flow. Our free cash flow is significantly higher. So above 3, to, kind of, talk about the balance of where this could be bucketed in 2020? I'm kind of curious if you'll come up with something that's more formal on this approach? Or if this is really going to be dictated by the opportunities you see in the ground game? Nicholas O’Grady: Mike, we're financial guys here by and large. And so I think we believe in formulaic response to that. And so I think when -- as Bahram mentioned, we're in the beginnings of moving towards that period. And I think once we have the confidence that we're through any refinancing or renegotiating of those bonds, we'll be able to lay out a strategy that will be very sensible, that people can feel comfort about what that return should be a year.

[Operator Instructions]. Our next questions come from the line of Jason Wangler with Imperial Capital.

I wanted to ask, obviously about some of the second lien in during the second quarter. Maybe Nick, can you just talk about kind of the pushes and pulls there. As far as paying back the facility versus getting some of the second lien in? And just kind of how you think about that going forward? Nicholas O’Grady: Yes. Jason, I mean, I think -- look, on a return-on-capital basis, obviously buying any second lien as IRR return and paying down the revolver, the offset is the obvious, which is you're not creating liquidity. So those are things that we have to be mindful of over time. When people ask about the second lien and dividends, it's -- I don't want to be dismissive, it's extremely important. But the biggest feature in those bonds that is difficult to swallow is the fact that it caps our revolver. And so whereas our reserve base would support our revolver substantially higher than it is today with a much lower cost to capital, its capped. And those reasons are obvious when those bonds are created, but it not appropriate for where we are today. And so what I would say is that when we are freed from those tethers, obviously then dealing with those bonds and dealing with the liquidity constraints simply don't exist anymore.

And I want to add, this is Bahram. The reason we are dealing with these, sort of, limitations of the bonds covenants today, it's only because we have accomplished everything we wanted to accomplish in 3 years, in 1.5 years. We are way ahead of our goals and objectives and the strategies we laid out when we negotiated the exchange. And therefore, we just have the opportunity to deal with those things very sooner. That's it. I mean, it's not because there is anything wrong, it's just we have over-performed our own expectation in terms of how fast we were able to grow this company, how fast we could make it become a cash flow positive. So we're -- this is all great news, there is no bad news in here. We just have to, kind of, deal with this. This is just our next step and last step, in my opinion, I can't think of anything else. But we really are somewhere between 90 days to 180 days before we have a clear picture of what path is the most of appropriate path, which one is the most cost-effective for our shareholders? We obviously aren't going to pay a whole bunch of fees. One way or the other, we're going to do a most sensible deal for the shareholders of the company. So again, I'm excited to jump in and start dealing with that. But hopefully, we'll have a lot more to share with you on the next call, three months from now. And one more component piece is in here, is that by end of October, everything that is happening in terms of the shares that we issued to [indiscernible] or the extra cash that we have to pay for those acquisitions, all of that will be gone by end of October. And we will have a much, much more clear path on how everything will shake out. It's totally -- like I said, all the pictures will be significantly more clear by the end of third Q, and when we report to you guys again.

And then Nick, just quickly on the second liens. Are you guys under the threshold to no longer pay the take. I just want you to confirm that? Nicholas O’Grady: Confirmed.

And our next questions are from the line of Phillips Johnston with Capital One Securities.

My question's just on the cadence as to net worth/wealth of sales in second half of the year. I think you're expecting around 22 or so in that wells in that timeframe if the math's is right. So should we think about 11 or so in each quarter? Or is it a little bit more weighted towards Q3 or Q4?

Probably slightly more weighted to Q3, which, again, somewhat normal weather cadence but yes, slightly more related to Q3. Nicholas O’Grady: And just remembered that fellas, depending on when they come on within the quarter, if we came on in September, it's going to obviously have more of an impact on the fourth quarter. So the cadence of it doesn't necessarily translate instantly into production.

That's right. Plus you got the curtailments issue that we've clearly mentioned.

Okay. And then, it still seems like a well [indiscernible] trending just over $8 million or so given your organic fallback in you net well guidance.

Yes. We actually saw the AFEs come down to $7.7 million, the stuff that we consented in 2Q actually came down a little bit. So hopefully, that may provide a little bit of downward average well cost later but, again, those are wells we're consenting to now. So those are 2000, in late'19 or more likely 2020 ads but well cost, good and probably trending slightly in the good direction, which is down.

Thank you. We've now reached the end of our question-and-answer session. I would like to turn the floor back over to management for closing comments.

All right. Thank you, everyone, for the -- you participation in the call, and your interest in Northern Oil and Gas. Obviously, please take note we have a pretty busy schedule the next several months, conferences around the country. And some of those details are included in our press release. So we look forward to seeing some of you on our travels and plan on talking to you again next quarter. Brenda, you can please give the replay information. We appreciate everyone attending today.

Certainly, to access the digital replay, please dial 877-660-6853 or 201-612-7415, and enter access code, 13692790. Thank you for your participation, you may now disconnect your lines.