Northern Oil and Gas, Inc. (NOG) Earnings Call Transcript & Summary

Good morning, I guess, it's morning, so -- maybe it's afternoon. Good afternoon, everyone. It's Lloyd Byrne from UBS Energy in New York. I am joined by my colleague, Will Atcheson. And today, we are very pleased to host Northern Oil and Gas and specifically, Nick O'Grady, CEO; Adam Dirlam, COO; Jim Evans, EVP of Engineering; and Mike Kelly, EVP of Strategy. Mike is going to start out with a short presentation, and then we'll do Q&A. But just as a little background. Nick became CEO in January of 2020 after previously serving as CFO. He's focused on finance for 20-plus years, including long/short private equity and investment banking positions and attended Bowdoin College. Mike Kelly is the EVP of Finance and as such, plays an integral role in Northern's investment and acquisition process, also financial planning and investor strategy. Mike joined Northern from Seaport Global Securities, where he's a partner, Head of E&P Research since 2011. And I'm going to turn it over to Mike for the short presentation, and then we can move to Q&A. Mike?

Great. Thanks, Lloyd. Good afternoon, everybody. Extremely excited to be here with you in what is Northern's first virtual conference presentation appearance. Like I said, I'm going to quickly take you through the pertinent details on the company and then also make the Northern investment case. After that, we're going to loop in Nick O'Grady for hopefully a spirited Q&A session with Lloyd. I'd also note that we published a new presentation to our website this morning, and I'm mainly going to talk on Slide 4 and 5 if you want to have a visual in front of you. All right. So let's get into it and frame the discussion on who is Northern. This is on Slide 4. Northern is a 183,000-acre Bakken pure play. We produced roughly 44,000 BOE per day in the first quarter of the year. And we've basically -- we've been in the Bakken basically since day 1 of the unconventional era. In fact, we participated in over 6,500 wells, which is more than 40% of the wells ever drilled in the basin. Our internal database, capturing these results is a real competitive advantage for us, which we'll talk more about in a bit. The map on Slide 4 is also meant to tell you that we're really not in the junky parts of the play. We're levered to McKenzie, Mountrail, Williams and Dunn counties, which are rightfully considered the core of the 4. And I think, first off, we've got to lead off, we got to talk about our business model. We are the largest publicly traded non-op E&P company, and we are definitively unapologetic about running with the non-op model. And I'd give 2 reasons why, why we're proud of it. #1 is our business generates the highest return on capital employed in the E&P space. In 2019, we recorded a 16.4% return on capital employed. #2, we are also poised to produce one of the very best free cash flow profiles in the E&P industry over the next 2 years. We're teed up to generate over $125 million of free cash flow in 2020. And if you listened to our conference call last week, Nick stated in his prepared remarks that we see cumulative free cash flow over the next 2 years, approaching our market cap, which was around $300 million at the time. Going on little bit further, we believe that there's 2 major factors that allow us to perform at such a high level on both the returns and free cash flow fronts versus typical an operated E&P. And I'd say, first off, we are lean. Northern only has 24 full-time employees. On a barrel of oil basis, we have the absolute lowest unit G&A cost in the space. And secondly, and this is -- I think this is probably kind of our secret sauce here, is that we are extremely conscious and extremely flexible with our capital allocation decisions. We work with 46 different operators across our 800,000 gross acres in the Williston Basin. We have a diverse set of wells, future wells ahead of us, close to 800 net drilling locations, and we are also routinely shopped working interest in very compelling wellbore deals that others need to pass on for a variety of reasons despite possessing really kind of no-brainer economics to us. So we call these our ground game acquisition opportunities, which has been a big part of our program the last couple of years. I lay all this out, really to highlight that we have choices as it pertains to where and when we spend. We're not the operated E&P who's tethered to 100,000 acres that everyone and their mom really knows is Tier 2 at best, yet remain -- that the company remains committed to track and make it work. It seems rather indifferent about incinerating capital along the way. That's not us. And as a reminder, we've been involved in over 40% of the wells drilled in the play. Our data set that we've built is a huge advantage for us. We've built out over 300 proprietary type curves covering the basin. We also have captured an immense amount of actual cost data by operator. We essentially force rank returns by operator and by area on a daily basis. And when we put money to work, we've got a pretty good idea of what the return should look like coming back to us. I also need to touch on our ownership structure and also management's incentives because I think that's a crucial part of the story as well. Northern is 30% owned by the Board and management. I'd also argue that we have one of the most engaged boards in the space. If you've ever listened to one of our quarterly conference calls, you know that our Chairman, Bahram Akradi, who's, by the way, put in a considerable amount of his personal wealth in the company, really defines what it means to be an energetic and watchful board member. He's really a player, coach of sorts and is extremely engaged with management really on almost a daily basis. On the comp front, management bonus compensation over the last 2 years has been 100% in equity. And our cash compensation is really amongst one of the lowest in the industry. The net-net of all that is that you could bet that the executives are in this for the equity upside, and we're extremely motivated to do what's right for the long-term health of the company. Also, I want to note that on the executive front, we have a decent amount of new blood, [indiscernible] in Minnetonka, Minnesota, as Northern's management roster has been changed notably over the last 2 years. We've got a time line on Page 10 that lays out the progression, but I'll sum it up to you by saying that 2 years ago, Northern was close to 7x levered and had 0 operating scale to really speak of. At that time, Bahram Akradi became the Chairman of the company and ushered in some key hires and promotion. This really culminated, as Lloyd had mentioned, with O'Grady becoming the CEO in very end of 2019 and Adam Dirlam at the same time being promoted to COO. This was really in recognition for their key roles in helping really completely reshape Northern over the prior 2 years. Over that period, Northern executed on $1 billion worth of acquisitions that more than tripled the size of the production base without G&A really going up by any -- by more than $0.01. The structure of these deals or how these deals were structured also took the leverage profile to roughly 2x EBITDA, with free cash flow that really would have seemed unimaginable at the time at the beginning of 2018. Final point I'll make on this slide is that risk management is embedded in management's DNA. It's paid off massively in today's lovely environment. As we sit here right now with the majority of our oil volumes, not only hedged through 2020, but also through 2021, at prices ranging from $55 to $58 a barrel. Now let's flip over to Page 5, and this is really kind of the investment pitch on Northern. We really kind of hit on the first 4 bullets already. We talked about -- that we've got our returns and free cash flow profile, fairly fantastic proprietary data set being a huge advantage for us. We also got a great set of organic and inorganic growth opportunities plus the hedge book's value is now approaching close to $400 million in total. So we're not going to belabor those points, I want to skip you really to bullet 5, which talks on the valuation, which we certainly think it is very compelling today. If you look at it, we are trading at a free cash flow yield of 40% on 2020. The guidance we gave a week ago for 2020 EBITDA, we now trade roughly 4x that EV to EBITDA on '20, which of note is a considerable discount to our peers in the space. And then finally, I like to look back at 2019, which, if you like me, you think that, ultimately, the world is not going to end, and we're going to go back to, hopefully, a mid-50s type environment at one point. Well, that looks a lot like 2019. In 2019, we had earnings per share roughly $0.43 per share, and we trade right now just 2.4x that, so a normalized earning -- a normalized environment, you could see what sort of compelling valuation we have. All right. Before I hand it over to Nick, I did want to touch on a couple of recent events that we highlight on Page 6. And the 2 things that I would point out to you is that we remain very committed to paying -- taking out our highest cost debt, which is at 8.5% second lien or secured debt with a 2023 maturity. We have, to date -- year-to-date, taking out $111 million of this note. Also, we have reduced our revolver by $20 million in the second quarter as well as our free cash flow has ramped. The last thing I'm going to mention too, because I'm sure it's going to come up with the Q&A, it's come up in every single one of our one-on-ones this morning, let's talk about production. We produced 43.7 MBOE per day in Q1. We have seen a substantial amount of curtailments in April and May, not too far off. I think the North Dakota Oil and Gas Commission came out a couple of weeks ago and said over 1/3 of production has been shut in. We could see May production as low at some points at 25 MBOE per day. However, we would say that we're in a strange position in May of actually rooting for shut-ins. We are extremely hedged at $58 right now. And if we have the opportunity to collect on those hedges and preserve actual barrels for better days, that's a no-brainer for us. So our message to our operators was that's absolutely fine with us if you shut in those barrels, keep them in our reserve base, and they keep them hopefully for a much better environment. So with that, I'm going to hand it over to Nick to see if he needs to complete undo anything I just said. Also bring in Lloyd as well. Thanks.

All right. I don't know if Nick wants to start. Nick, do you want to start some comments or?

No. I mean, I think Mike covered the highlights. I would just say that we find ourselves in a pretty strong position in a pretty bad time. I think that having been a 20-plus year participant in the sector, I don't know if I've ever seen it acutely this bad, I'm not sure we have. But been through 9/11, been through the financial crisis. I started right after the 1998 Asian fiscal crisis, which probably was as bad for oil in some regards for different reasons. Oil went to -- I don't know, Lloyd, you could tell me $8 or $9, and the industry was equally stressed in that period in the late 90s. And I'd say that while we're not immune to this, we're certainly about as well protected as you can be, and we continue to see more and more opportunity in front of us, both to augment our existing business. And I think as stress continues to endure over the next 6 to 9 months, even if prices recover some, it's not going to fix a lot of the problems, and we find ourselves in a position in which I think we're going to be able to take advantage of that. How that takes place, I'm not quite sure yet. It could be in many different forms in fashion. But I'd say that, to Mike's point before, as this company was reconstituted a few years ago, we are nimble. We are creative. We have a supportive Board that are real owners of this business. They own roughly 1/3 of the business. And so therefore, what that means is that we are opportunistic. We're not going to tow the corporate line. We're not going to just do what everybody else does. We're going to find ways to make ourselves and our investors more money as it's appropriate. But to Mike's final point, I'd just say that we are extremely risk-averse. And so one of the reasons we're in this position today is that we have planned for this. We have not just reacted to it, but we plan for it and so that we can endure times like this, even though I think this is definitely on the extreme end of what I ever thought was possible. So Lloyd, I'll let you go from there.

That's great. Mike and Nick. You guys covered a lot of some of the questions I wanted to ask. But can you -- maybe, Nick, and Mike talked about it, can you talk about your Chairman a little bit and your management's alignment with the shareholders? Bahram certainly is an impressive guy. I have spoken to him before. What does it mean to have someone who's that involved in the business?

Yes. So for everybody on the phone for context, Bob Rowling and his TRT group who has 3 Board members, they own a little over 20% of our common equity. Bahram himself owns about 5%. Bahram, for everyone there, he's not an oil man by nature, he's a business man. He is a true self-made billionaire. He runs and is the Chairman and CEO of Life Time, which is a large fitness hotel, a hospitality company that was once public and is now private. So Bahram brings a lot in the sense that: one, he ran a public company for 11 years, and he understands the dynamics of a public equity of how to -- and he managed it through the financial crisis, and so he's keenly aware of that. Secondly, he's directly responsible for, frankly, the rescuing of Northern a few years ago, and he came up with a solution to help fix the company that nobody else did. And I'd say third to that is that he really -- when he hired me, when he promoted Adam and obviously, when we brought Mike and the rest of the team along the way and our engineering folks were really elevated to drive the process, he gave us really 2 tasks, which were: get the balance sheet completely fixed; and scale the business so that you can really enjoy the benefits of non-op. And what those benefits that we would talk about are the low cost, we are 24 people, we're basically an A&D machine. And so with that scale and with the data we had, we could really build a viable, scalable business. What I would say is that more important than that across the board is that Bahram is bold. We have done very creative things to solve very difficult problems. Northern was given a lease on life a few years ago, with financing that kept the company going, but by no means was it a long-term solution. And we have navigated a pretty tough oil dip over that period of time to both prosecute on the $1 billion of acquisitions that Mike talked about, but augment the balance sheet all along the way and continue to cut costs of our debt. So to give you a frame of reference, we're about 3x larger than we were currently. In 2017, yet our debt level is roughly flat, and our interest expense associated with that debt is about $30 million lower. So we've been able to increase margins, triple the size of the business and keep that debt flat. And that has not been cost free because many of those pieces of debt required significant sums of money to get rid of them. And so we've been able to do that all through that and all while building inventory and continuing to core up our properties. And Bahram is really directly responsible for that. That vision really is something that we've all executed upon. He calls me all the time, including during dinner and at 10:00 at night and every Saturday pretty much. And he is passionate about this. And this is at the same time, he's running a 40,000-employee company. So he's tenacious, and we have endured through this.

So Nick, when you came in as CFO, one of your biggest focuses was debt. And you talked about -- Mike talked about it a little bit, the 8% piece of paper out there. Can you talk about just -- you're going to have free cash flow this year because of very pressure hedging and next year, what are the uses of that free cash? And also, how do you bring that to the next level or how do you think about the E&P model and how that's changing and returning capital to the shareholder?

Yes. Yes. I mean, I think in terms of returning capital to shareholders, that's obviously at below threshold pricing, meaning below the price that pretty much anyone makes money. I think that's a challenging model at current, even for, say, minerals businesses that don't have any costs associated with them. The declines they're going to face and if they have any debt, they're going to have to focus on that. So we're definitely focused on that. We have retired significant amounts of debt in various forms. We had a 2020 maturity when I came on. In 2018, we didn't even have a revolver, we just had a term loan that was about 12%, probably in cost all in. So we've navigated through that. We built a regular way revolver with low-cost. I think the hardest part right now is that in the distress that we've seen in the space has been -- we've seen our bonds trade at significant discounts upwards of 30% yield to maturities. And the temptation is on a cash return that can certainly compete with a wellhead return, and those are the best uses of those dollars. The flip side to that is that in a good $55 to $60 world, we have 100% return opportunities. I know a lot of E&Ps say that, but I truly mean on that incremental dollar true huge sets of rates of return. And so the balance of taking that return that's in front of you today and building liquidity for the future is important. I think everybody is aware, but the bank market is in terrible distress right now. We -- ourselves, everybody will face redeterminations that lower that somewhat. Now we do not need virtually any liquidity to operate our business, certainly not over the next few years. And maybe not ever, but we want to maintain liquidity for optionality in that. So I think that a good portion of that cash flow will be used to build liquidity in the short term. Now with the bonds trading at a discount, we use a lot of creative structures to retire them. We've retired $112 million of the -- we came into the year with $417 million of them. We've retired over $112 million of them year-to-date. Some of that's been with cash flow, but some of it has been with forms of equity. And before you think you're just doing a straight swap, the yield to maturity on some of those has been in the high 20s on a return on capital basis, so it's been net accretive to the shareholder to do so. And so we're creative guys, and we'll continue to look at ways to whack that balance down. But not only are you getting that return, but you're also permanently stripping interest expense. And so we've retired a little over 10% of our debt by midyear of this year, I think we'll continue to do that. But I do think we will focus on the revolver, not just for the returns for now, but for the coming distress and the opportunity set that will come because demand will return some and may be depressed for the next year or 2. Supply is certainly going to be permanently impaired in the interim. And so I do think that market will come into some sense of balance in the next 12 months. It might not be at a great price, but we want to make sure that we have the liquidity to prosecute on those opportunities. And I think we will continue to whittle the balance sheet down. I think we have lots. We've had more inbounds for people looking to provide us capital than we have in my entire time here. I think they look at us and view us as a winner in the cycle based on the way we have come into it. We're not immune, but I think for smart opportunities, there's always money available and where we can find arbitrage opportunities, we'll continue to do so.

That's great. Let's move to -- Mike talked about it a little bit, but the -- what you call the ground game. And maybe you can -- you or Adam can explain that to people dialing in? And then what are you seeing today with respect to that? And how many -- what are your non-consents? Just give us a little background or color around what you're seeing from some of the producers in the basin.

Sure. This is Adam. From a ground game standpoint, that's our day-to-day acquisition activity. Over the past 12 months in 2019, we put together over 100 transactions, a lot of that was focused on near-term drilling opportunities with sideline the development, rig on AFE in hand and partnering with non operators and operators alike to pick up kind of interest on a real-time basis, and so we're looking at that. We've got a continuous leasing program. We take a look at minerals, PDP packages, you name it. And so that was a lot of the activity that we had gotten done in, call it, the last 12 to 18 months, obviously, with the downturn in pricing and rigs getting laid up. I think we're at 12 rigs in North Dakota right now and maybe 1 frac crew. Those near-term drilling opportunities have obviously dried up some, and we have no intention of moving our hurdle rates or required better return. And so those types of opportunities are going to be set to the side at this stage in the game, and I think we'll start to take a look at a shift in terms of potential distress or other areas where we can potentially pick up some long-dated inventory, those types of things. And so the opportunity set is certainly shifting. From a non-consent standpoint, in Q1, we were around 75% non-consent rate and generally, on any given year, call it, 2018, 2019, where we've been in the high 80s, and that's again a function of where we're deploying capital from an acquisition standpoint. We're focused on picking up stuff in the core of the basin that's going to have resilient inventory and lower for longer price environments. And with everything slowing down in, call it, March, April and effectively coming to a stop in May, you'll see that non-consent rate ticked up. But that being said, a lot of the operators have kind of done the work for us in this go around in terms of renegotiating rig contracts or even just laying them down and opting to just kind of stand by for the time being.

And Adam, in the current market, are you seeing the laydown of the activity generally across the board? Or is it in the core? Is -- just some more details around where are you seeing the activity and then I'll come down.

Sure. I mean, it's effectively been across the board. I think we actually received a handful of AFEs today with a best-in-class operator and a best-in-class area, but it's truly been few and far between. And so you're seeing -- if any operators have rig commitments, they're all collapsing to the core. They'll drill these wells, they'll dug them and then wait for a more conducive price environment to bring these online. I think we had 6 net wells that were completed, fracked and ready to be turned online in Q1, and those have been held back. And I think 95% of the wells that we have in process right now are delayed or going to be delayed in some way, shape or form.

And are you seeing any indications that as you go above $30 that, I guess, you can call it turn up or not constrain the wells, is there more production coming on as we go above $30? And at what dollar level do you think it takes you guys or the peers to put money back into these assets?

Yes. So I think the price matters, Lloyd, but I also think that duration matters. So just because oil goes to $30, it doesn't mean everyone is going to nominate their barrels and go and spend the money and time that go turn them back to sales. So I think in the mid-30s, you probably can justify, at least on a PDP basis, probably turning some of those wells to sales, I think some of it will be dependent on what the differential associated with that is, but assuming a relatively tight differential, I certainly think you could make an economic case to turn some of those wells on. But I think the operators are going to be very wary of the lag of round-tripping that. And so while June should look like -- and June nominations would have just passed in the last few days. Operators, theoretically, on an economic basis, could be turning those back. I think you're going to see some caution, and it's probably to be more gradual. I think some of the wells that are being shut in, it's being done by omission of work, and so those workovers are not being done. Those wells will not easily return to sales as they can, but it requires some cattle to do so. And so there will be a portion of the production that goes off-line that won't come back on until prices are quite higher -- quite a bit higher, and that's because those wells are probably older-vintage, higher-cost operating wells to begin with. So in terms of completing wells, the Williston is very conducive to shutting in and as well as for the wells that are fracked, we've been calling them CDs, completed but delayed. Those completed wells that you can hold them off for some period of time. It can affect the IP rates, it generally has no EUR impact and actually can help LOE a little bit, it tends to push some water out and so lower the saltwater disposal. But what I do think is that there will be some pressure from some, whether it be for midstream commitments or leasehold maintenance or other things to bring some of those barrels back, but I think it will be fairly gradual and fairly measured. I think operators and ourselves alike, we certainly are rooting for shut-ins for the time being. We don't want our wells produced. You're getting to a point where it probably can make a slight incremental benefit to us, but I think given how tenuous any recovery in prices is right now, the worst thing that they can do is turn those on, only to have to turn them back on -- off again a few months later. And so I think you'll see operators wait for the market to overshoot a little bit before you see them really go after it. And that will -- that price response will be the market demanding more barrels. And you've already seen that in-basin pricing, where Bakken has gone from massive discounts when the market was running out of physical capacity to being at premiums to WTI, and that's because they're probably not enough Bakken barrels available at the very moment, but that can obviously shift very quickly if too many barrels come back online.

And Nick, just on that line, how do you think about the differentials going forward? Like what is a reasonable differential?

So just to give some context to that. Northern's differential, many operators, what they do is they give a separate line for gathering, processing and transportation. So they'll give their LOE, and then they'll give like a $3 charge for the transport, and that's basically taking it from the wellhead to the terminal, and then the ultimate differential is just the terminal to the point of sales. We -- some of that gathering and processing cost goes into our LOE, but the remainder of it is in our diff. So we averaged around a $6 diff in 2019, which would represent, let's call it, $3 of that transport cost and a $3 diff. The cost to transport via pipeline to the Gulf Coast is somewhere between $4 and $6, and the oil on the other end of that is getting usually a $3 to $7 premium. So that means that on a DAPL basis, you could see, depending on the price of MEH or Gulf Coast crudes, either flat to WTI or even potentially a premium or a slight discount, the local markets are more volatile. They're thinner, and so that would be like a Clearbrook, Minnesota, which is line 3 on Enbridge, and that goes to local refineries or gets in line on that pipeline, and that can be -- that generally is a better price than the DAPL price because it doesn't have to go as far, but it's thinner, and it can be much more volatile. What I would tell you is that over the past 2 years, the Williston has been tight on both gas processing and NGL capacity as well as crude takeaway. The DAPL was filled in late '18, and it's been volatile since then. Gulf Coast pricing has not been quite the premium or was then, too, so that's impacted the diff. But with about 1/3 or more of Williston activity shut in right now, and when it does come back, it's going to start at a lower base. There's going to be plenty of available takeaway and in that aggregate diff that we talk about that includes the most expensive forms of transportation, such as a rail. And so with cheaper forms of transportation making up a greater percentage of the overall Williston volumes, I would expect tighter differentials for a long time. And so while the second quarter, especially in the beginnings of it, were some of the worst we've ever seen, and that was really at the peak of physical stress in the market. You saw that in April, but that's really a month ahead, so that's really for May barrels. So the peak probably will be in this month. And then I think long term, I think we're extremely bullish on takeaway differentials. I think the Bakken barrel, it's basically a perfect Brent barrel. It's a great blending crude. It's higher quality than most U.S. crudes, and so there's always going to be a strong demand for it. And it is a premium product, albeit farther away from market, but I do think you could see differentials, which have sort of been $5 to $10 with a lot of volatility in the last few years settle out at something like to $3 to $6 on a permanent basis. There will always be some cost of that transportation. But depending on the demand for -- excuse me, depending on the outlook for those Gulf Coast linked pricing, I think you can see Bakken barrels trade at much better prices than they have in a long time. And remember, it's like an airline, that the more packed the airline is, the more the price goes up. And so as the basin has been pumping up against its capacity for the last few years that's really had a lot of choke points, I think those times are behind us for the foreseeable future.

That's great. And can you just talk a little bit about one of the concerns constantly about the Williston is the Tier 1 inventory and where you see that today and where you see Northern within it? Mike talked about where you're focused, but a little background on NOG's inventory.

Yes. So what I'd say is that when you look at the Williston as a whole, there are 3 large public companies or, I guess, 4, if you include Hess, that make up the bulk of that Bakken production to the investors' eyes. And I'd say 2 of those 4 have been relatively inventory-challenged for several years, and so I don't want to say the baby with the bath water, but I'd say, look, it is a mature basin. It's in the probably mid-life cycle of its life. And I think we're at a point in the cycle where there are haves and have-nots. And I'd say, number one, our production has been levered to Continental, Slawson, ConocoPhillips, to a lesser extent, Hess and XTO, and those operators and Marathon to some degree, and those operators have been going at a steady pace. And those operators have been much better about managing, they had larger inventory to begin with. And so inventory is not one of our general concerns, we're younger than a lot of those publics in terms of our core. Slawson, as an example, is our largest private operator, he laid down rigs in '15 and '16, he did not drill through this. And as a result, he left a large swath of core inventory that has been developed at a much more gradual pace. And I'd also just say that all producers are going to come out of this downturn with lower cash flows, not just from pricing, but their base production when we exit 2020 is going to be at lower levels, they're going to have lower levels of liquidity. So one of the issues that I think the U.S. has faced in the last 10 years is that people have just been drilling too fast. They've been drilling faster and faster, trying to grow more and more, and those decline curves have been very steep. As you base out at a lower level, you'll have less money to actually drill more wells and less capital availability, but it really will stretch the life out. And I'd say as a nonoperator, and I'll let Adam talk a little bit about this, but it really is a lot different in terms of our ability to grow our inventory, for a core operator to find more core acreage at this point in the life of the basin is nearly impossible. But for us, where we're buying fractional interest, those interests come up for sale every single day. So with our continuous leasing program, we've been able to add core inventory to where the development is. So just because X, Y, Z operators production in the core is declining, so long as they have activity, we can actually see our production flat to inclining if we're continuing to augment our working interest in the right places.

Yes. I mean the way we look at it, we're active managers and active capital allocators. So we're going to identify not only the best areas, but the best operators to deploy that capital to. And so we can rely on the ground game in a continuous leasing program in order to source that kind of just-in-time inventory, so to speak, but do that within the core of the play. We're not holding to a contiguous concentrated acreage position that then you need to bolt-on and build it out that way, we can look across the entire basin and pick exactly the opportunities that we want to pursue.

That's great. And as we're running low on time here, I guess, one quick question to Nick is I always get asked, can you just explain the difference between the royalty model and the working -- the non-op working interest model? If you'd spend 2 seconds on that, and then I have one more question for you.

Yes. So they're very similar business models. They're both nonoperated models. The royalty, obviously, you buy the royalties, and you get a slice of the revenues, and you have no costs associated with it, but the underwriting risks are the same. What I would tell you is that in the past 3 or 4 years, because of the public valuations afforded to yield vehicles, minerals have been a hot commodity and pretty much every energy-focused private equity firm and their mother have been funding teams to go buy minerals everywhere. We see minerals as a part of the package as we look at all the time. What I would tell you in a big picture is that the minerals is a lower risk, much lower return business, and the risks to capital destruction in some cases are greater. So if in 2019, you were a Permian minerals company, you were going into the Permian and you were buying minerals from either unleased minerals or from surface owners who own the mineral rights and you were underwriting at probably 8% return based on the future development on those properties, so those numbers are -- can be huge numbers given the fractional interest in those minerals. So you paid [ PV-8 ] based on future development on those properties. Now if no one drills on those wells, like they're probably not in this environment, and those cash -- that cash doesn't come, you deployed $50 million to something that is producing almost no return and so that present value can get degraded very quickly. For the working interest business, we pay some for the lease upfront but the vast majority of the cost. So just use a typical spacing, if a well is roughly 100 acres, if we pay $10,000 an acre, that's $1 million for 1 well. So you pay $1 million upfront and then $7 million or $8 million when that well is drilled. If the world goes to hell in a handbasket as it as today, you spend $1 million, and then the well doesn't get drilled and you're out of $1 million. And when that well does get drilled, you obviously have that return, but you haven't put the full amount of capital, but also that the return you're underwriting is probably at least double that what you would have had to pay for the minerals. Now what I would say is that there is -- there are operating costs associated with working interest. And so therefore, your return is more sensitive to pricing, and you don't have the same -- that you don't have -- you don't have the same risk profile, but that is obviously why we hedge as aggressively as we do to make sure we lock in those returns. And so I would say that we do buy minerals, specifically to augment our working interest in our higher end properties as we go around. But I would say that I think the working interest business is less competitive and a superior return over the full cycle.

That's great. All right. So we're effectively out of time, Nick. But why don't you take 2 seconds to just restate the investment thesis in NOG and why you think it's an opportunity today?

Yes. I mean, I'll try to do as well as Mike Kelly. He's much better salesman than I am. But I'd say it's pretty simple. We're a high-return business. We have one of the most flexible business models out there. We prepared financially for this. We've got relatively low leverage, high free cash, and we're really poised, both for this environment to endure or if things get better. I think we are active and nimble, and we're still small enough that small little things that add up. Adam did over 200 deals in the last few years, which have added materially to the business. And I'd say that we continue to be a company led by its owners, and I think that, that really differentiates us where some of the lowest paid executives in this space were paid when investors benefit. That's not always that fun in an environment like today. But it's -- we were doing right by our investors long before the market called for it. We are incentivized to create value, and I think that, that incentive and that hungriness that we feel drives every decision that we do every day. Our team has -- sits down and makes these decisions together in a real-time basis, and we're not run by some corporate mantra of just comparing ourselves to what everyone else is doing. I think we'll do what's right and what makes economic sense. And I think ultimately, we've created a really good business model that we can continue to take advantage, and I just end with this, which is that the distress that the space is under, in the next 9 months, I think, could potentially be a true transformational period for this company if we're able to prosecute on some of the opportunities that are likely to show up. It's still early days, but I truly believe we may be able to buy assets at fractions of what their long-term worth is based on the financial distress in the space.

That's great. Thank you very much. Thank you to all the listeners. Thank you to Northern, Nick O'Grady, Adam Dirlam, Jim Evans, Mike Kelly. We appreciate your time today. And that closes the fireside chat with Northern Oil and Gas. Thank you, gentlemen.

Thanks, Lloyd.