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

Greetings, and welcome to Northern's Marcellus acquisition conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference will be available for replay. It is now my pleasure to introduce your host, Mike Kelly, Executive Vice President of Finance. Thank you, Mr. Kelly. You may begin.

Good afternoon, everybody. We are excited to have you join us to discuss Northern's transformative Marcellus acquisition. Here's how we're going to proceed for this call after knocking out some forward-looking statements. Northern's CEO, Nick O'Grady, will run through the M&A presentation that we posted to our website. Since we are raising debt and equity concurrent with this transaction, there will not be a Q&A portion of this call. Okay. As it pertains to the safe harbor language, please be advised that our remarks today 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 presentation we released today or our most recent earnings report. Okay. I am now going to hand the call over to Nick.

Good afternoon, everybody. I'm pleased to announce that Northern has reached a definitive agreement with Reliance Industries to purchase their nonoperated Marcellus position. Net to Northern, the cash price is $175 million, and Northern has issued warrants to the seller in Northern stock, which have an exercise price that is roughly 40% above last closing of our stock. We're tremendously excited about this deal for 7 primary reasons: number one, the valuation metrics speak for themselves. It is an extremely compelling deal; number two, it is accretive across all the key metrics; number three, it provides a major increase to our free cash flow; number four, there is considerable upside associated with EQT now operating the assets; number five, this deal should provide the catalyst for a meaningful balance sheet improvement; number six, it adds diversity to the commodity mix and our geography; and finally, number seven, we believe strongly that the outlook for natural gas is the strongest it has been in over a decade as U.S. supply matures, associated gas stabilizes and the demand outlook remains stable to growing, both domestically and in the export market. All right, on to Slide 5. We're purchasing a 70% interest in Reliance's non-op Appalachian position. The remaining 30% will be purchased by Arch Energy Partners, who we have partnered with on this transaction. Arch believes in the Northern story, and we're pleased to announce they'll be investing a significant sum in Northern's common stock. As it pertains to the asset highlights, it's 64,000 net to Northern in terms of acreage position. There were 120 million cubic feet a day as of July, which is the effective date on this transaction, which takes our pro forma production up about 50% on a BOE basis. It's a large average working interest across the sections at about 28%. There are 1,200 future gross locations with attractive IRRs. There are over 22 net wells in process with about $50 million of capital already spent that we will not reimburse them for. And finally, governance agreements that give unique ability to budget and work directly alongside the operator for multiyear development. Slide 6 shows comps for our purchase price versus similar gas deals. I'd just highlight, it's less than $1,500 of flowing MCF, approximately 3x cash flow based on the strip on January 20. Obviously, the strip has improved since then. And it's about a 20% discount rate applied to the PDP and the work-in-progress wells. Two of the transactions to the right of us on this slide are conventional assets, which, obviously, would warrant a substantial discount. Slide 7 shows that despite getting the deal at a PV20 value, meaningful upside exists. The $175 million purchase price, however, if you believe, which we do, that EQT will do the following: One, in the '21 to '22 budget we already have in hand from the operator, we've seen plans to, one, take G&A down meaningfully versus the prior operator; two, reduce well costs 15% versus the prior operator; three, improve productivity 20% versus the prior operator; and finally, keep the asset in stable form. We believe the value of the asset is literally 2.5x what we paid for or greater than $425 million. Slide 8 shows you what we think this asset can do. The key takeaway is that we view this as a maintenance-plus asset with production that will stay roughly flat to slightly growing over the next 4 years and focus on generating significant free cash flow. Over the next 4 years, on a pro forma basis, we'd expect the assets to generate $125 million cumulative unlevered free cash flow. Additionally, this is a high-return asset that will be accretive to Northern's already industry-leading ROCE metrics. That's critical because it only represents roughly 20% of Northern's stand-alone cash flow, yet it will have a meaningful impact on our total ROCE. Slides 9 through 11 provide backup to our claims that the asset is of high quality, has considerable wells in process and the EQT upside scenario has merit. Slide 13 shows what Northern looks like post this transaction. Who is Northern after this transaction? Northern will be balanced by commodity mix. Northern will have avenues for stable development in key active basins in the United States with a focus on the best operators. We will be able to maintain and lower our already industry-leading G&A profile with little, if any, additional personnel required from Northern. The key tenet of our strategy is based on allocating capital and allocating that capital to the highest returns on capital employed we can. Growth is not the goal. It's the output of our process, and these assets will deliver yet another avenue to compete for capital. Slide 14 expands upon the pro forma makeup of Northern. We're paying the right price and buying an asset with high returns day 1 with significant upside both from future development and improvements from the shift to a marquee operator. We have strong governance agreements that give Northern even better control over its capital and well selection. Leverage metrics will improve dramatically. And Northern estimates we will be well under 2x debt-to-EBITDA in 2021, falling into the ones over the next few years even at a backwardated strip. We expect material improvements to the borrowing base, liquidity and maturity schedule through the pending transactions. We will retain strict risk management practices. We continue to have an excellent oil hedges in place. And over time, we will hedge the new assets aggressively to lock in returns, including basis risk. The Reliance deal will increase our production nearly 50%. It will take EBITDA up a minimum of 20%, and most importantly, increase our free cash flow meaningfully over the next 4 years. Slides 15 and 16 talk about our non-op business and how it's positioned extremely well in the current environment. Shale 3.0 is a real event. Operators are desperately trying to shed CapEx dollars in an effort to produce free cash flow and ultimately return cash to shareholders. With this mindset, divesting of non-op properties regardless of the return opportunity has become prolific. That is a fantastic opportunity for Northern, and our success with our Ground Game program in 2020 speaks to this. We spent $19.6 million this year to gain exposure to what we believe are high-return wells. As we lay out on Slide 16, this investment will be accretive to our corporate ROCE and provide meaningful free cash flow for us in the near future. Slide 17 speaks to why we're excited to increase our gas exposure. Associated gas risk is way down, with rig counts down greater than 50%. Marcellus and Haynesville rig counts are below maintenance levels. Gas demand remains robust. It's a clean fuel whose future is bright. $2.75 gas prices, the Reliance assets have a recycle ratio that exceeds that of our Bakken and Permian properties. Slide 18 lays out our hedge book. As we have stated continuously, risk mitigation is a key tenet of management. Majority of our '21 hedge oil is hedged at $55 already, and we expect to hedge 75% of PDP gas production in this transaction over a multiyear period. Slide '19 gives a quick update on NOG stand-alone. We had a really strong Q4 despite still having 3,000 barrels a day of production off-line. We retired $39 million worth of debt, and the CapEx was elevated, but it was effectively just a pull forward of Q1 '21 activity and so we've been able to reduce our 2021 CapEx guidance. But from the benefit of that timing, we've also increased our '21 production. Slide 20 provides some added guidance on the Marcellus assets. We see robust production, which will incline throughout the year, 4.5 to 5 net well adds and $25 million to $30 million of CapEx. All right. Slide 21 sums it all up. What are the new Northern highlights? It's an attractive Marcellus entry point, PV20 on PDP plus WIPs with considerable upside on the asset. We become a national non-op franchise, a principal ROCE leader diversified by commodity and geography. It meaningfully improves our balance sheet and free cash flow profile on a go-forward basis. We are the Shale 3.0 beneficiary. We believe this is the beginning of the golden age for non-op. Thanks for your time, and have a good day.

Thank you. To access the digital replay, please dial (877) 660-6853 or (201) 612-7415 and enter access code 13716200. Thank you for your participation. You may now disconnect your lines at this time.