Greetings. Welcome to Northern Oil Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Erik Romslo. Thank you. You may begin.

Good morning. This is Erik Romslo, Chief Legal Officer of NOG. Welcome to our second quarter 2022 earnings conference call. Yesterday after the market closed, we released our financial results for the second quarter. You can access our earnings release on our Investor Relations website and our Form 10-Q will be filed with the SEC in the next few days. We also posted a new investor deck on our website last night. I'm joined here this morning by NOG's Chief Executive Officer, Nick O'Grady, our President Adam Dirlam, our Chief Financial Officer, Chad Allen, and our EVP and Chief Engineer, Jim Evans. Our agenda for today's call is as follows. Nick will start us off with his comments regarding our second quarter and our business strategy. After that, Adam will give you an overview of operations, and then Chad will review our second quarter financials and updates to our 2022 guidance. After the conclusion of our prepared remarks, the team will be available to answer any questions. Before we go any further though, 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 today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income and free cash flow. Reconciliations…

Thanks, Nick. Operationally, the second quarter finished as expected, and we continue to see the year progressing right down the fairway. We maintained a healthy pace of development in the first half of the year, turning in line 10.1 net wells in the second quarter. Permian completions increased, contributing 60% of the additions, while the Williston made up about 1/3 of the activity. We also brought online our latest Marcellus pad, which increased NOG's production in the region by 11%. The new wells have outperformed internal forecasts, and we remain encouraged by the results. Elevated organic activity on our acreage position as well as the success we've had with our ground game acquisitions, boosted our total wells in process to 57 net wells across 500 gross widths. The breakdown by basin remains consistent with the first quarter as the Permian makes up almost half our oil-weighted wells in process, while the 2-year high in the Williston rig count is providing for additional activity. The pace of development on our acreage footprint continues to accelerate as we added an additional 16.7 net wells to the drilling and completing list, netting an increase of approximately 8 net wells in the quarter. The increase in CapEx during the quarter was attributable to the pull forward in drilling activity as our D&C list on average has incurred roughly 50% of the anticipated development spend and is consistent with the ramp in completion activity we are expecting in the second half of the year. Well costs came in as expected on inbound AFEs in the second quarter and averaged $7.2 million per well, up less than 3% from last quarter. We expect well costs to increase in the second half of the year, but well within our per well estimates, which is already incorporated within…

Thanks, Adam. I'll start by reviewing some of our key second quarter results, which was again one of the strongest quarters in company history. Our Q2 average daily production increased 2% sequentially over Q1 and increased 32% over Q2 of 2021. Oil volumes were down slightly, driven almost entirely by the spring storms in the Williston Basin, where we have our highest oil cut assets. Our adjusted EBITDA was $272.5 million, which exceeded the consensus estimates and was a record for NOG. Our free cash flow was robust at $114.3 million, the second highest in our company's history. Our adjusted EPS was $1.72 per share in Q2, above consensus estimates. Oil differentials were better than expected in Q2 and came in at $2.33 per barrel due to strong Bakken pricing and having more barrels weighted towards the Permian, which has a sub-$2 oil differential. Gas realizations continue to remain strong in Q2, which is leading to the increase in our annual guidance for gas utilizations. However, as gas prices have risen, the NGL spread has narrowed, which will lower realizations in the latter half of the year. Combined with the seasonally wider Marcellus differentials in the shoulder season, we expect gas utilizations below 100% of NYMEX in the third quarter. Fixed operating costs were $64.6 million in the second quarter or $9.77 per BOE, up on a per unit basis compared to the first quarter. This was fully expected and factored into our guidance for the year, driven by the second quarter occurrence of our annual firm transport costs in the Marcellus. Cash G&A adjusted for acquisition costs related to our recent acquisitions was $0.93 per BOE. We continue to experience elevated G&A costs for costs associated with a highly active period of M&A valuation and many of those costs…

[Operator Instructions] Our first question is from Neal Dingmann with Truist Securities.

Nick, my first question is on capital allocation. Specifically, your thoughts on balancing our suggested dividend and other shareholder return plan with what looks to be continued very opportunistic ground game. Nick O’Grady: I think it just comes down to capital allocation and kind of a risk-adjusted return. I think usually, when you run it at a pure corporate finance perspective, bolt-ons, ground game, still some of the highest returns. As multiples and valuations have compressed overall, obviously our own securities and dividend plans have started to compete with that significantly. You've seen us -- we designed this plan to have a lot of flexibility and so we've really been kind of ratcheting that up, especially as the opportunities come. But I think it's really still a multipronged kind of all of the above approach.

Glad to hear that. And then second question on competition specifically, could you discuss -- Nick O’Grady: I mean, like any other cycle, we definitely see pockets of competition here or there. In the current environment, we've seen some competition for very small interests. And on the larger side of transactions for PDP heavy properties, that's fine by us. That's not something we're terribly interested in. The reason for this is that PDP properties are mortgageable and given how difficult raising equity capital has been, groups are using debt and asset-backed securitizations which are more readily available to fund these. And much like real estate, trying to arbitrage the “cap rate”. This of course assumes you have an accurate view of the PDP declines in cost structures to be truly safe investments. On sizable concentrated ground game assets and the larger packages, we always have some competition, but find that we remain highly competitive. Our biggest competition is generally the hold case and/or unrealistic development expectations. Sometimes we feel like we know too much, that we lose assets because buyers may be mismodeling the reserves cost or development timing. We're fine to lose if that's the case. As for SPACs, etc., all I would say is that there's a reason you go through the IPO process, which is to build alignment and create value, not just for the company, but for the new investors as well. It creates sort of a symbiotic relationship where the IPO participant gets assets at a perceived discount. The company then builds trust and over time, earns further access to capital. Being public and having access to capital are not the same thing. And it's not just a switch you simply pull. SPACs have an inherent misalignment, which are designed to give free value to…

Great details. And I always love these analogies. Nick O’Grady: Every quarter.

Our next question is from Derrick Whitfield with Stifel.

Nick, I love that analogy. With my first question, I wanted to focus on the production trajectory for Q3 and Q4. And thinking about the production outages in Q2 and the acquisition that will close in Q3, we have oil production increasing about 4,000 barrels in Q3 and then another 3,000 barrels in Q4. Does that seem about right? Nick O’Grady: I think we're only going to have, on the Williston acquisition, we're only going to have let's call it 45 days or so, Derrick, when we close in mid-August. The effective date goes back, but that will be in the purchase price settlement. We'll get that cash flow, but it won't be in the form of production. I think we see steady ramp, but I think you're going to have, in the fourth quarter, you're going to have a much, depending on the timing of WPX, you're probably going to see the largest impact from completions just because even if we have a very aggressive turn-in-line schedule in Q3, you're only going to get a portion of that volume. Jim, I don't know, you want to comment towards that?

Yes, Derrick, it's Jim. We've got some pretty large pads in the Williston right now that are working through. We expect those to be mostly towards late Q3, early Q4. That's when we're kind of expecting our big ramp in production from Williston which is obviously our highest oil cut area. We expect it to be later towards the end of the year that we see that big ramp.

Terrific. And then just as my follow-up, referencing Slide 15, could you share your thoughts on what's driving the stronger Bakken well performance in 2022? Is it perhaps longer laterals or tighter elections? Nick O’Grady: I think it's a combination of the operator mix and operators remaining disciplined. We're not seeing necessarily the step-ups that we've seen in oil runs in the past. You've got our low-cost and what we would consider some of our best, top 3 operators, contributing to that. I don't know, Jim, do you want to add anything?

Yes. I would say a lot of the stuff that came on in the first half of the year as well as what was elected to in 2020 where oil prices were a little bit lower, so operators were still kind of sticking to that core. As we've gotten into 2022 here with high prices, we've seen some operators start to step out a little bit. We would expect some well performance degradation towards the back half of the year and into 2023. But so far, we're very pleased with the performance that we're seeing.

Our next question is from Austin Aquane with Johnson Rice.

First question is, Northern seems to be one of the few companies who are not having to increase CapEx outlook due to inflation. Can you provide some color on how you set your inflation expectations at the beginning of the year? Nick O’Grady: Yes. I think the simplest part is that we baked in inflation this year, but we also didn't bake in deflation in 2021. We effectively were running cost structures from pre-pandemic. We never really changed that forecast and then added inflation on top of it. As it stands today, the only cadence, and frankly for this quarter in particular, the only cadence that really can change that is either if you have a pull forward of activity, which really is just borrowing from future quarters, or if we've had the lumpy success that you have in the ground game when you're acquiring. Because when you acquire the acreage and the wellbores, you're accruing immediately for the capital, so if the wells have been processed, it might not cost you very much money, but you're booking all the cost of those wells in process. That's why it can be quite lumpy. But frankly, as it stands today, we're really comfortable with the guidance where it is. If we had a material acceleration in development, it still won't really change that. It just changes the timing of that within the year. But we've been right in the middle of the goal posts pretty much all year. And I just think that the thing is that when we've done this historically speaking, we don't necessarily -- look, we try to look beyond our nose and we don't just look at where our cost structure is today. And based on small pieces, we spent a lot of time particularly at the end of last year as we were looking towards this because we had a fairly grave assessment from what we were seeing in terms of where costs ultimately, we're going to go. And we do expect costs to continue to increase throughout the year. But as you could note from our average E&P costs, we're still nearly $1 million well below where we've effectively budgeted it. That's our average for the year, but we actually budgeted for higher than that as you go throughout the year.

And that's a function of the operating partners that we actively manage to participate with. We have an idea of our operating partners' cost structures, their propensity to overrun. And using that data in 2020 moving into '21 and into '22, you can leverage that and structure around it.

I appreciate the color. And as a follow-up, how would you prioritize your cash return to your shareholders? Is the top priority buying back the preferred shares, followed by the increase in base dividend, then debt reduction and finally, repurchasing out of common shares?

I don't know if it's that simple because I think it's really opportunistic. I would say the preferred stock is in the money. The delta between the preferred stock and the common stock narrows, especially as our common dividend goes up. The cost of capital difference between them is relatively de minimis at this point in time. I think common stock has gone up. I think we still -- we are a risk-adverse group, and so debt reduction still plays a big role. And I think there's a difference between paying down debt and buying in your bonds in the sense that to the extent that high Fed funds rate means that bond prices go down, we're not just retiring debt, but we're actually creating enterprise value because you're buying it at a discount to what you owe. That actually has an impact to the equity value as well as the overall debt levels. I think that we really try to stay flexible. I think that a stable and growing dividend is really important. We also are very mindful of managing the yield expectation on that. I don't think when companies have really low yield it doesn't matter. And when they really high yields, that tends to create its own set of problems and its own -- so we don't really want to go down either one of those paths. We have no interest in being an upstream MLP of old. But I think we will be very, very flexible. And we have put mechanisms both from an authorization perspective, and just in terms of our own internal mechanics around SEC rules to be able to be very, very opportunistic.

Our next question is from John Freeman with Raymond James.

First question, if I heard you right, Adam, I think you said that you all got just a lot of opportunities in the pipeline for acquisitions in Delaware, Midland and Williston Basin. And I didn't hear you mention the Marcellus. And I'm just wondering if that's by design or it's just other -- gotten really competitive or just any other reasons why that one wasn't mentioned?

We've looked at 2 or 3 potential acquisitions this year in the Marcellus. They just weren't a fit. I think my prepared comments were around kind of the 13 processes that are effectively current right now. We run those out kind of quarter and kind of put those to bed. We're actively looking. It's just a matter of not being a fit at the moment. Nick O’Grady: Yes, and we have one Marcellus prospect that was exciting to us, it just didn't trade, John, to be candid.

The old hold case. Nick O’Grady: Yeah, the old hold case came to bite us.

The follow-up I had, it's kind of on the prior line of questions, Nick, that you answered. You've obviously done a great job managing the cost line while most everybody else in the space is having continued CapEx increases. And I may not hold you to this, but just you're all going to have better insights than just about anybody given the number of operators and across the basins that you are in. I mean, do you have sort of an idea of what you would assume just as it stands now? What you would assume is a reasonable cost inflation number to plug in for next year? Nick O’Grady: It's difficult to know in the sense that I can certainly tell you how we see it exiting. But I think -- if oil prices are $50 next year, it's going to be a very different answer. I think it would be very presumptuous to make the assumption. I mean, I think ceteris paribus, cost increases tend to be sticky. I think we've got about what, Jim, about 15% between now and the end of the year in total, is that right?

Yes. That's about right. I guess the way that I kind of frame it up is it's going to depend on your operating partners. It's going to depend on your working interest associated with them. As we get towards the end of the year and kind of frame up and have a better idea of the cadence of kind of the deals and whatever else is kind of in the backlog in terms of AFEs that will be drilling into that, we'll be able to better frame that up.

Our next question is from John Abbott with Bank of America.

Sort of similar along the lines of the prior question on inflation, but given the pivot it seems towards going with larger companies versus smaller companies, can you provide any sort of color on the difference between AFE cost between a larger operator and a smaller operator at this point in time? Nick O’Grady: I've seen just from anecdotally, John, and I'll let the smarter people in the room answer the rest of this, but when we've seen kind of stand-up rig operators looking for development capital in the Permian, $2 million to $3 million a well difference. And that's because they're paying spot prices for every single item. They're borrowing the rig, they're borrowing the frac crew. We've seen at least one AFE that was $16 million for a two-mile lateral. We did not participate in that.

The variability is certainly why in the Permian, just given the number of different operators you have maybe relative to Williston. I guess the only other thing that I would qualify it with is that we're not necessarily just focused on well costs, right? I mean we're solving for a required rate of return. It's going to also need to take into consideration completion methodologies, offsets, all those types of technical aspects to it. We're happy to elect to maybe above average AFE to the extent that it's going to meet our hurdle rates.

Appreciate it. And it sounds -- the second question is sort of on maintenance CapEx. It looks like you have a very strong trajectory at the end of this year, which probably will help your spending potentially in 2023. But if you had to guess at this point in time, where do you think maintenance CapEx, just sort of thinking about inflation, is overall? And if you do have the color, what do you think about it in terms of your various areas?

Well, when you say maintenance CapEx, what's the production level you're picking, right?

Let's just choose the 77,000 BOE per day exit rate, potentially somewhere around there.

Yes. I mean that's 58 to 62 wells probably. But remember, it's going to be let's call it $450 million to $500 million handwaving. Again, I think it's a little early to kind of make those assumptions.

Our next question is from Noel Parks with Tuohy Brothers.

Maybe as a subset of the discussion about what you think about cost trends, I've been hearing here and there from operators that they're starting to see a little bit of trouble with materials delivery and with that sort of backing its way up into slowing completions. Even though the estimated costs aren't different, they're just starting to see that there's schedule padding or schedule slippage. I'm just wondering, are you hearing about anything like that in any of your regions? Nick O’Grady: Yes, absolutely. And I think we've seen material delays as much as 6 months on pads. What I'd say is, if I remember when I looked at June, I think we had an entire net well, or excuse me, half of a net well delayed and 1 well that came on 6 months early. It's always a push and pull. There are always delays. The deals are very, very tight. But statistically speaking, it hasn't really been a major issue for us.

Well, and that's the beauty of the diversification and the 500 wells that we have in process, right? We don't have one particular operator creating a big problem for us to the extent that they've got a big problem for themselves. Nick O’Grady: Yes, I think our secret sauce, Noel, is that we generally don't take everything at face value, meaning that we make assumptions that things take longer and they cost more, and that's why we are where we are at this point in the year with roughly a budget on schedule.

Got you. And there definitely has been an error of caution among operators as far as committing or even previewing what their expectations are for 2023. I guess I’m just thinking, in your view, if they pick a number by this time next year, we’re up another 10%, 15%, 20% whatever, do you have any sense of whether we might be peaking in terms of the service environment? I’ve heard from some operators we are paying the most we’ve ever paid for services in a particular basin. And then others have been saying that they do see signs of new equipment coming online from the service companies. Not at the pace that you have seen in past blooms, but that sort of steady trickle is on the way. Again, just wondering if you had any insight on that. A –Nick O’Grady: I think that follow the money, I think I’ve been involved in the energy business for 22 years now, and I’ve never seen a cycle in which the service provider makes a ton of money with relatively low barriers to entry and new equipment doesn’t enter the market. So yes, this won’t go on forever. There’s no – I think I said this in the last call, there’s no shortage of the ability to make steel pipe or sand in the United States or frankly, just make a pressure pump even. It’s really just timing and fixing some of those issues that are plaguing frankly the entire world economy. I have a lot of optimism that this in time will pass. And frankly, what I would say is that there are a lot of other risks that can solve those issues for you, right, the oil and natural gas prices themselves. To the extent that you see weakness in pricing, you will see slowing activity. If delays become so rampant, then ultimately, that will become self-defeating to some degree. So yes, I think that there will be a peak within the next year or this year, I’m not sure. There are certain items that we have seen start to slow down. Things like labor take a lot of time to fix when you have these issues, but eventually capitalism is a beautiful thing they usually do.

[Operator Instructions] Our next question is from Nicholas Pope with Seaport Research.

I was curious if you could kind of expand a little bit looking at kind of the split of CapEx spending in 2Q? There's a pretty big jump in Permian as kind of a split. And is that really the opportunity set? Is that where you're seeing kind of the returns are driving that CapEx? Or is that kind of the rate we should expect as kind of splits between these 3 assets right now?

Nick, we had guided I think 45%, 45% and 10% for the year, and I looked at it yesterday, and it's about the same for annual. I think it's just happenstance. Nick O’Grady: Yes, I think it's just cadence of development. If I look at our adds during the quarter, been looking at kind of our working interest between the Permian and the Williston, our average working interest in North Dakota was around 8%. Whereas, our Permian was around 18%.

There are no more questions at this time, so I would like to turn the conference back over to management for closing comments. Nick O’Grady: Thank you all for joining us today. We very much appreciate your interest and we'll see you next quarter. Thanks.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.