Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adjusted EBITDA increased by 31% year over year and 52% compared to two years ago.
- Quarterly cash flow from operations, excluding working capital, rose by 33% year over year.
- Return on capital employed was over 28%, significantly higher than peers.
- Production increased to over 123,000 BOE per day, driven by steady turn-in-line activity.
- Free cash flow more than doubled in the quarter, indicating strong underlying asset performance.
Negative Points
- Oil prices were higher, but gas prices were significantly lower compared to two years ago.
- Higher costs associated with oil takeaway in the Uinta Basin.
- Natural gas production is expected to decline by more than 15% in the second half of the year.
- Potential for increased CapEx if oil prices remain strong, which could impact free cash flow.
- Refrack operations, while promising, are costly and require careful technical evaluation.
Q & A Highlights
Q: How have deal parameters changed with larger deals, specifically regarding payback periods, PUD value, and undrilled location value?
A: Nicholas O'Grady (CEO) explained that while hurdle rates have increased over the last three years due to rising capital costs, the overall approach to deal parameters remains consistent. They seek a balanced portfolio, focusing on self-funding assets and development opportunities. Adam Dirlam (President) added that governance and asset specifics play a crucial role in their qualitative and quantitative reviews.
Q: Can you discuss the relationship between your active ground game and shareholder returns, especially in light of recent dividend boosts?
A: Nicholas O'Grady (CEO) emphasized that ground game activity and shareholder returns are not mutually exclusive. The company plans to sit down with the Board at the beginning of the year to discuss additional shareholder returns, particularly on the dividend side. Adam Dirlam (President) noted that ground game decisions also depend on the organic asset's performance, which is reviewed monthly.
Q: How does the recent XCL Altamont acquisition impact the original XCL purchase price and pro forma estimates?
A: Nicholas O'Grady (CEO) confirmed that the FTC approved XCL's acquisition of Altamont, which falls within their AMI with SM Energy. They are currently analyzing the assets and are encouraged by what they see. If they choose to exercise the option, it would add material acreage but be immaterial in terms of capital.
Q: What is the status of the mascot wells that were turned in line in June? Are they fully cleaned up, and will they contribute fully to Q3 volumes?
A: Nicholas O'Grady (CEO) explained that the mascot wells, part of a large cube development, are still in the process of cleaning up. He expects them to be at full capacity by the end of the third quarter, contributing significantly to Q3 volumes.
Q: How do you view the balance sheet and funding for future M&A activities, especially considering recent deals and potential opportunities?
A: Nicholas O'Grady (CEO) stated that they have the capacity to handle more M&A within their framework, targeting a leverage ratio of around 1.5 times. He noted that the timing of M&A is unpredictable, but the company's cash generation should allow them to manage additional transactions without significantly increasing leverage.
Q: Can you provide more details on the Uinta play, specifically regarding the different benches and their development potential?
A: James Evans (CTO) described the Uinta play as similar to the Permian, with multiple stacked zones proven vertically and now being targeted horizontally. The primary focus is on the lower and upper cubes, with deeper zones being considered for future development.
Q: What are the motivations for operators to partner with NOG in co-purchase deals, and what advantages do you bring to the table?
A: Nicholas O'Grady (CEO) explained that NOG acts as a "silent partner," providing technical expertise and underwriting support without the complexities of financial entities. This allows operators to manage their assets without stretching financially or dealing with the requirements of financial partners.
Q: How do you compare refrack opportunities to new drills, and what is driving the increase in refrack proposals?
A: Nicholas O'Grady (CEO) and Adam Dirlam (President) noted that refracks are locational and can be cost-effective, depending on the depletion and completion methodology. They have seen a significant increase in refrack proposals, particularly in the Williston, driven by operators like Grayson Mill and Devon.
Q: What is your appetite for acquiring assets in the gassier parts of the Delaware Basin, and how do you view the M&A landscape in that area?
A: Nicholas O'Grady (CEO) acknowledged the complexity of geology in the southern Delaware Basin but emphasized their focus on quality. He noted that as inventory becomes scarcer, they may need to adapt to new paradigms, continually refining their approach based on operator performance and market dynamics.
Q: How do you view the implied natural gas production guidance for the back half of the year, considering the strong growth in Q2?
A: Nicholas O'Grady (CEO) explained that the peak in gas production occurred in Q2 due to deferred production and new wells coming online. He expects a decline in gas production for the rest of the year, with another surge anticipated in the spring of the following year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
