Northern Oil and Gas Inc

NYSE:NOG

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to Northern Oil and Gas, Inc. Third Quarter 2018 Conference Call. [Operator Instructions]. Also a reminder that this conference is being recorded.

I would like to turn the call over to Northern's Chief Executive Officer, Brandon Elliott. Sir, you may begin.

[Brandon Elliott, CEO]

Thanks, Victor. Good morning, everyone. We're happy to welcome you to Northern's Third Quarter 2018 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 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 earnings release that we issued last night.

All right. With that out of the way, here's our agenda for today. I will quickly update everyone on the strategy and some highlights from the third quarter. I will then turn the call over to Nick O’Grady, our CFO, to walk you through the financials. Then we will turn the call over to Mike Reger, our Founder and President, to talk about acquisitions. Then Bahram Akradi, our Chairman of the Board, will recap his thoughts on where we stand today. And then we will take your questions.

Like last quarter, I want to start by reemphasizing our strategy here at Northern. We view ourselves quite simply as allocators of capital. We view our options in 3 buckets: first, our organic activity; second is the A&D market; and finally, the third bucket is returning capital to shareholders.

At the beginning of this year, we were talking about the success of our organic activity, which includes both the daily evaluation of inbound well proposals and, what we call, our ground game acquisition strategy. As most of you know by now, this is where we utilize our extensive knowledge and proprietary database of the Williston Basin to pick up additional working interest and acreage in drilling units where well proposals have been issued.

During last quarter's call, we focused everyone on the tremendous success we were having in our second bucket, bolt-on acquisitions. Those $500 million of acquisitions have now been closed, are performing better than our original estimates and have completely reshaped Northern to what it is today.

Just to frame some of the successes we have had since this time last year. A year ago, in the third quarter, we were producing just over 15,000 barrels of oil per day and generated $35.7 million of adjusted EBITDA. This quarter production increased year-over-year 74% to 26,708 barrels of oil equivalent per day, and adjusted EBITDA increased 174% year-over-year to $97.9 million.

Costs have been and continued to trend lower as have differentials year-over-year. I know there has been some concern over differentials, so I will echo many of the comments from our operating partners in the basin that the issue seems transitory and one we have insulated the company from with some of the basis hedges Nick put on over the last several months, and he will cover our hedge book in more detail shortly.

So suffice it to say, we have seen some incredible improvements year-over-year. And while proud of everything the team has accomplished this year, we are just as excited about the momentum we are carrying into the fourth quarter and 2019. We are also just as excited about the strength of the company today and the ability of this strategy to, not only weather oil price and capital markets' volatility, but to thrive in this environment.

We talked last quarter that the third bucket, better returning capital to shareholders, would have to wait until we were able to refinance all or a portion of our debt with more traditional funding sources. During the third quarter, we made the decision to accelerate that process, and in October, we replaced our first lien term loan facility with a traditional and far less costly reserve base lending facility. We also extended our maturities by retiring all of our remaining notes that were scheduled to mature in 2020 and completed a tack-on offering of notes that mature in 2023.

Due to the position we are in as we enter the fourth quarter, we will begin allocating some capital for the return to shareholders bucket earlier than originally planned. As a result, we announced last night that we are reactivating our stock repurchase program and that we have already agreed to repurchase 7.36 million shares during the fourth quarter.

I hope our results so far this year are confirming to investors that we are communicating a clear and simple strategy. We are telling you that we are setting out to do and then trying to achieve those goals in a timely manner. Today, Northern is finally positioned as the free cash flow-generating company that was envisioned. We have improved our capital structure to one that is driving its leverage ratios below 1.5x debt to adjusted EBITDA, and we are growing our cash flow on a per-share basis.

All the while, we are looking for disruptions and dislocations in the market where we can add value, whether that is through our ground game acquisitions, accretive bolt-on acquisitions or through returning capital to shareholders, especially when we think a short-term dislocation is creating an opportunity to allocate capital to something that we feel will generate long-term value for shareholders.

I will say again, we are excited about how we see the last quarter of 2018 shaping up, and we look forward to talking with many of you over the coming months.

With that, I will turn the call over to our CFO, Nick, for his comments. Nick?

[Nicholas O’Grady, CFO]

Thanks, Brandon. This past quarter is seeing some tremendous strides for the company financially as well as a seamless integration of the large acquisitions we undertook in the third quarter. It should be evident to investors at this point, although there have been many moving parts, that the company has a simple balance sheet going forward, great liquidity and a consistent capital deployment strategy.

A year ago, the company was over 6x levered with a $45 million market cap. Today, our balance sheet is in excellent condition with $1 billion plus equity valuation. Combined with our hedge book, we have run scenarios down to $45 oil. And over a 4-year period, we do not believe in any one year our leverage could rise above 2x adjusted EBITDA. In short, the company's balance sheet is strong and will continue to be so.

I want to talk very quickly about capital allocation. Brandon has discussed this at length. But I want to be clear, we are in reality, in many ways, not just an oil company but a specialty finance company, an oil REIT of sorts. Our most important job is to allocate our investors' capital into the best buckets to drive net adjusted cash flow per share in what we believe will then ultimately drive a higher value for shareholders.

The first bucket is organic activity. This remains our highest priority, and we are happy to report we've seen substantial activity on our core acreage. Our investments here typically have the highest return on capital of any money we spend. Despite the uptick in activity, I want to remind investors we do not see a plausible scenario at this time where our organic drawing spend will exceed our cash flow. Our 2019 guidance is preliminary at this point. I can tell you we would expect at current strip prices to generate somewhere between $145 million and $200 million in excess cash flow in 2019.

The second bucket, of course, is A&D. As we've mentioned to investors on the road, there remain billions of dollars' worth of assets on the market. While we look at as many assets as we can, I want to assure investors that the bar remains high, and we will not buy things for the sake of getting bigger. We want assets that are accretive on a debt adjusted basis, add inventory and improve our return on capital employed. We also want to remind investors that given our massive acreage footprint, we simply have no need at this time to do anything unless we believe these deals are immediately additive to the enterprise and improve the quality of our asset base.

The third bucket is shareholder returns. We had stated to investors in the past quarter that as we refinance our debt in the next few years, we would ultimately look to deliver shareholder returns given our cash flow profile. The obvious steps are in the form of share buybacks and dividends. As Brandon mentioned, with the acceleration of some of our refinancing plans, we have begun to deliver returns ahead of schedule.

We recognize the apathy towards oil companies in the marketplace and the volatility that has ensued in the fourth quarter. However, with the crude strip not far from the levels seen in the summer, we think it is patently absurd that our stock, after executing on deals that have added over 20% to cash flow per share, in addition to reducing net leverage and making the company substantially net cash flow positive, are a recipe for a stock price that is actually lower than before these steps were undertaken.

I'd note our entire company valuation is below what our leverage multiples were just a few short quarters ago. We do not think this is justified in any way. Slide 19 of our quarterly presentation highlights we have some of the highest margins and highest cash yields among our peers, among the best balance sheets, yet we traded at or near the lowest valuations. As a result, subsequent to the third quarter, we have already agreed to repurchase 7.36 million shares and are reactivating our existing authorized share repurchase program.

Now for the typical rundown of the quarter. We generated $97.9 million of adjusted EBITDA in the third quarter, a 39% sequential increase over the second quarter of 2018 that was driven by a significant increase in production and modest commodity price increases. Our third quarter production increased 74% year-over-year and 27% sequentially that average 26,708 barrels of oil equivalent per day.

This quarter included the full impact of our Salt Creek acquisition but only 14 days from our Pivotal acquisition. The 9.3 net organic well additions in the third quarter, coupled with continued strong well performance that has exceeded our expectations, has allowed us to guide up fourth quarter production estimates substantially. While we did benefit modestly from the closing of Pivotal in September, adjusted EBITDA without Pivotal still would have been in excess of $95 million.

We are dedicated to disciplined capital spending, and we are pleased there has been a modest increase in organic activity on our acreage. Activity has continued to be robust, and we have seen more activity in Q3 and Q4 than we had initially forecast. This will have a direct and near immediate impact on cash flows in 2019 and beyond and brings forward substantial net present value.

With a substantial increase in production, our drilling and development capital expenditures were approximately $81.6 million for the third quarter or a $30.8 million increase sequentially. We now expect to add 28 to 31 net organic wells to production during 2018, using an updated D&C capital expenditure budget of $230 million to $250 million.

I want to remind investors that fourth and first quarters are seasonally slowest quarters, typically due to winter weather in the Williston Basin.

With increased quantity and quality of wells as well as better-than-expected activity from closed acquisitions, we're also increasing our guidance on 2018 annual production, which we now expect to increase approximately 71% to 72% over 2017 levels. Initial ranges for 2019 imply at the midpoint over 40% year-over-year production growth.

Our oil price differential during the third quarter averaged $4.16 a barrel, which was 28% lower than the previous quarter. As we mentioned in our second quarter call, we predicted some widening of our differential as the price of oil has moved higher and production continues to increase in the basin. We have fielded numerous questions from investors in recent weeks. In short, we believe the issue is temporary and, hence, will sort itself out in short order.

To protect shareholders, we took the opportunity over the last several months to hedge more than our potential exposure with 10,000 barrels a day of basis hedges in 2019 at attractive prices. In kind, we are maintaining our differential guidance for 2018 between $4.75 and $5.75 per barrel. So it's possible we could be closer to the upper band, depending on the remainder of 2018 and the fact that our fourth quarter production base is so much larger than in the previous 3 quarters.

LOE continues to impress. In the third quarter, LOE came in at $7.39 per BOE compared to $7.60 per BOE in the prior quarter. For 2019, we continue to expect from the recent -- from our recent acquisitions to have a cost structure similar to or lower than our corporate -- parent corporate average. We are lowering expectations for full year 2018 lease operating expense per BOE to a range between $7.50 and $7.75. And our production tax as a percentage of our oil and gas sales remains approximately 9.2%.

Cash G&A expenses were $3.1 million in the third quarter of 2018 compared to $1.9 million in the second quarter. The reason for the uptick quarter-over-quarter was significant noncapitalized costs associated with our recent transactions. Please note that our convention is not to remove these costs from adjusted figures.

We expect our G&A per BOE to continue to decline, particularly in 2019, as the full impact of our new production base is socialized across our G&A pool. We now expect full year total G&A expense, inclusive of stock compensation, to range between $1.50 and $1.88 per BOE. All in, we estimate our controllable cost structure should decline by over $0.40 per BOE versus prior guidance. This is the third time in 3 quarters this year we have reduced cost guidance.

On the hedging front, we were active in the quarter and early into the fourth quarter, given robust moves in the oil and in the strip. We provided our current hedge book in our earnings release. The hedge book has expanded dramatically since the last quarter, and this has further derisked our profile and the acquisitions we've made. We hedge for 1 purpose: to lock in the returns that our assets deliver as we commit capital to them.

I'd note that in regards to our basis hedging for 2019, it's up 5,500 barrels a day from last quarter. I'd also point out again, thanks in part to these hedges, that we would expect to generate both free cash flow as well as maintain a debt-to-EBITDA ratio of below 2x, even if crude oil were to average $45 a barrel in 2019 and for the foreseeable future, regardless of activity levels.

Finally, onto the balance sheet. In September, we completed our final 2020 note -- 2020 senior notes exchanges, which added up to over $100 million of equitization since June, and we called the remainder for cash in October. While not always the focus of equity investors, this eliminated our nearest dated maturity and the last potential overhang from the restructuring we begun roughly a year ago.

We also successfully called our TPG term loan and replaced it with the regular way $425 million revolving credit facility. With this transaction, we also did a tack-on offering of $350 million of our existing second lien notes, which were issued at 104% of par value.

With this, our balance sheet is now simple, our run rate interest expense is materially lower and our liquidity improves dramatically. In addition, with the ability to repay our credit facility in real time, we no longer have the negative carry associated with our prior term loan structure. In addition, our hedging capabilities and requirements are far more favorable to the company as recently witnessed by our ability to take advantage of multiyear highs in the strip to lock in much higher pricing.

As of November 5, we have approximately $60.8 million in cash on hand, $175 million drawn on our revolving credit facility and $695.1 million of senior secured notes.

In summary, what a difference a year makes. Northern has literally never been stronger financially. We are a cash flow and low leverage company with a simple debt structure and abundant liquidity.

With that, I'll turn the call over to Mike Reger, Founder and President, to talk about acquisitions and our consolidation strategy.

[Michael Reger, Founder, Chairman Emeritus & President]

Thanks, Nick. Hi, everyone. I'll be brief even though we have clearly had an outstanding year with acquisitions, both large and small. The third quarter was one of our busiest on record for organic ground game acquisitions. Aside from the roughly $500 million in larger acquisitions that we announced or closed in the third quarter, Northern spent an additional $18 million to acquire 4.7 net producing wells, 4.6 net wells in process and over 2,700 new net acres.

As we mentioned in the press release last night, in the fourth quarter to date, Northern has executed agreements on approximately 3,900 new net acres, 1 net producing well and 1.3 net wells in process for an additional $9.1 million in consideration. And that's just here so far in the fourth quarter. Totaling up all of this, Northern now controls over 155,000 net acres, which over 95% is held by production, and we have been seeing our deal flow increasing with the Williston Basin rig count. We continue to see a lot of deals being shopped in the market, both large and small. Our land and engineering teams evaluate every deal, utilizing our extensive knowledge of the basin and our proprietary database. And going forward, we will look to transact only on accretive deals, alongside our organic ground game acquisitions, using our significant free cash flow.

With that and the final -- and to finish the call, we'll turn the call over to our Chairman, Bahram Akradi.

[Bahram Akradi, Chairman]

Thanks, Mike. I would like to take the time to reiterate 4 key points about our strategy in the future for Northern and how we will create value for shareholders. One, our asset now produces tremendous free cash flow, and we will grow our company on a debt adjusted cash flow per-share basis.

Two, our balance sheet remains a top priority. With our leverage ratio trending below 1.5x, our balance sheet is pristine, and we will not compromise this in any way. Three, our equity is precious to us. We will look at the acquisitions, but we will not consider anything with our stock that is not accretive on all measures, near- and long-term financial accretion that will grow our inventory and activity levels and can compete with our existing asset base.

Finally, it has been a tremendous year for our company. While we're proud of all we have accomplished, we strongly believe the marketplace has recognized -- has not recognized this properly. Our stock price does not reflect the value we have created. At these prices, we will continue to repurchase shares, and we plan to do so.

With all that, I will turn the call back to Brandon. Brandon?

[Brandon Elliott, CEO]

Thanks, Bahram. With that, we will turn the call over to the operator for Q&A. Victor, if you could please give the instructions for the question-and-answer portion of the call.

[Operator]

[Operator Instructions]. And our first question will come from the line of John Aschenbeck from Seaport Global.

[John Aschenbeck, Seaport Global Securities]

Congrats on all the progress you've made over the last year. It's really a tremendous transformation over just a very short period of time. So yes, for my first one, I was hoping to dig a little more into your potential uses of free cash flow. You've reactivated the buyback authorization, and you can also use that cash for acquisitions. But I was hoping to get your thoughts around possibly establishing a dividend, if you have any interest there. And if so, what do you think the overall strategy would be with a dividend?

[Bahram Akradi, Chairman]

Let me take this. This is Bahram. I just want to make it clear that, as a Chairman of this organization, my focus is to keep alignment between our board and our executive team and keep this company extremely agile. In order to do that, we first had to do all the things that we have accomplished in the last 12 months. We literally had to get the balance sheet strong, create -- completely redo the capital stack multiple times until we get it to the position that Nick and Brandon have explained, make the company incredibly cash flow-positive. And that allows mechanical agility for the company. We have the ability to think through what's right, if our stock price is at a level where we believe it's a right value and it makes sense for us to use our stock to make acquisitions, we will make use of our stock to make those acquisitions. If our stock price is not understood correctly in the market, based on our opinion, based on our value proposition here, then we want to be in the position to buy our shares back. As a large shareholder, my goal is to do everything we can to give our shareholders the best return of capital. That can be done either through share buyback, or it can be done through dividends. So -- and I'm going to let Nick comment on this as well. But we want to be completely prepared to do whichever one is more accretive for our shareholders at any given time. With that...

[Nicholas O’Grady, CFO]

Yes, John, I think keeping it simple, our bonds are callable in May of 2020. We have the ability to call them before or at that time. And I think at that point in time, at some point in the next, let's call it, 12 to 18 months, a dividend would be -- would coincide with the refinancing of that part of the structure. And so I think it's something we are highly interested in. We are quite attuned as both former bystanders and, obviously, shareowners to the need for dividends in the marketplace. And we do think that, that is an appropriate thing to examine. I would say, just having seen the disaster of the upstream MLP, to the extent that we would create a dividend, we would want to do it in a way where it is sustainable and can be grown consistently over time.

[John Aschenbeck, Seaport Global Securities]

Okay. Great. Got it. That's great color. Appreciate it. And then kind of keeping with the acquisition theme here and maybe more of a higher-level question, if you will. I was hoping to get your thoughts on potentially transferring your business model to another basin, which I understand is a lot easier said than done. But if I just look at it from a high level, it seems like this dislocation in value that you see from sellers of Bakken non-op properties doesn't seem like too much of a stretch that a similar dislocation value could exist in other basin. So I would just love to get your thoughts on how you think of potentially, as the company grows, how you think of potentially replicating what you've done in the Bakken and taking that into a different basin.

[Brandon Elliott, CEO]

Yes. John, I think, I mean, obviously, anything we look at has got to compare favorably on a risk-adjusted basis to what we already see. And I think, as Mike mentioned and we've mentioned quarter in, quarter out, we truly think we've got a decided advantage buying stuff in the Williston Basin. And so I think that's going to be our primary focus. And we see -- clearly see a lot to still be done there. And it's clearly the market where we've got the greatest database. Could something compare favorably to that outside the basin? Let's never say never. But right now, we see exceptional returns on invested capital in our basin.

[John Aschenbeck, Seaport Global Securities]

Okay. Great. Appreciate that, Brandon. And maybe kind of digging into those comments there. When you talk about there's still a lot of work to be done in the Bakken, I was just wondering could you possibly frame just the overall opportunity set you see that's still there in the basin -- in the Bakken. I don't know if you have a ballpark figure on how -- a dollar amount of assets that are still being marketed. And then kind of going back to the -- if you were to potentially transfer to another basin, I don't know if you could entertainment me on this or not, but just keeping it high level, what would you need to do -- I mean, what kind of staffing would you need to place -- put in place? What would you need to do in terms of enhancing, kind of replicating the dataset you have in the Bakken? Yes, just any thoughts on that front.

[Brandon Elliott, CEO]

Yes. I mean, obviously, we've got a team here that if you wanted to look outside the basin, you'd have to replicate that, and you'd have to -- we'd have to be convinced internally that we could replicate not only the team, but the knowledge base. So that's going to be a gating item to looking outside our basin. As far as what we see in the basin, Mike, I'll turn it to you.

[Michael Reger, Founder, Chairman Emeritus & President]

So as I mentioned in the call, the activity levels in the third quarter and in just the first month or so of the fourth quarter had been really robust. And the third quarter and just the last couple of months have been as busy as we've ever seen on an organic front. To kind of go large to small, we're seeing some larger packages being shopped that are somewhat well-known and somewhat -- and some of them were off-market. Private equity firms are -- were looking to divest their non-op portfolio as oil prices got up closer to $75. As we go down through the opportunities that we're starting to see, operators who are looking to be more focused with their capital and achieve larger kind of cash flow-positive status, we're starting to see more opportunities from our operating partners as far as non-op deals. I mean, you could see from the third quarter and then the start of the fourth quarter, the deals -- the organic ground game deals that we've built Northern on 12 years ago, that's as robust now as it's ever been. Really, it's just because operators are focusing their capital elsewhere, and we are the natural consolidator of non-op in the Williston.

[Brandon Elliott, CEO]

Let me just add on to that. I think when we've been on the road, you've heard us talk about probably one of our greatest fears was higher oil prices and how difficult that would be in the A&D market. So the fact that oil prices have probably pulled back a little bit, a little bit make lemonade out of lemons is probably advantageous for us in the A&D market.

[Operator]

And our next question comes from the line of Jason Wangler from Imperial Capital.

[Jason Wangler, Imperial Capital]

I wanted to ask as you kind of give us that preliminary 2019 guidance, as you get maybe granular, do you see the similar historical kind of ebb and flow in the basin in terms of activity and production throughout the year? And by that, I mean kind of a slowdown in the first quarter, obviously, due to weather predominantly and then kind of ramping up. Or how do you guys kind of see that as you look at the program that you've kind of laid out with 2019?

[Brandon Elliott, CEO]

Yes, Jason. I think as you know, as we've talked, we've told everybody we do typically come into the year assuming about 40% of the net wells get added in the first half, given the seasonality in the weather, and then 60% in the back half. So that -- yes, that does usually imply flat-to-down 4Q to 1Q and then flat-to-down Q1 to Q2, depending on kind of how spring break up those. We, at this point, would assume that normal pattern. And Nick, what -- agree? What's your...

[Nicholas O’Grady, CFO]

Yes. I mean, I would just say, if you look at the guidance that we've given you today, that's updated already forecast, a slowdown in organic drilling activity from the third quarter to the fourth quarter. That's very typical. Obviously, with differentials where they've been, we've seen on a very small basis, we've seen some of the smaller operators defer some of the completions into Q1. So that could potentially hurt their Q4 activity. But then it bleeds into next year, you're kind of borrowing from 1 to take to the other. I would just say, we're very comfortable that we forecast it through all this stuff. Our engineering team does a spectacular job of risking and doing all these things. So I'd say, within our guidance, I think it accounts for all of those things.

[Jason Wangler, Imperial Capital]

Okay. That's helpful. And then Mike, this might be for you. Just in the Slide 10 that you guys kind of have, it looks like a lot of the acquisitions are really kind of focused in Williams and McKenzie. Is that just what deals kind of got consummated? Or are you seeing certain areas within the quarter in Williston that are maybe popping up more than others as you guys are kind of continuing down the M&A trend?

[Michael Reger, Founder, Chairman Emeritus & President]

This is Mike. I think we all know now kind of where the core is. And as we've looked to make acquisitions over the last year and over the last few months, we're focused on the core. The opportunities we're seeing that are highly accretive and have highest returns to us during the quarter. So we have a unique advantage as the primary consolidator of non-op in Williston and the excess cash flow. And just given our scale, just as the largest non-operator in Williston, we're able to strategically target just the best op. And Williams and McKenzie have been really good as far as drilling activity. You can see that from the rig count. So you're going to see us picking up higher-return opportunities where the rigs are.

[Brandon Elliott, CEO]

And Jason, this is Brandon. I think that since you've brought up that slide, you can see clearly see the highlighted wells in and around the acreage we've acquired. And obviously, one of those wells, right smack dab in some of the acreage we acquired. So again, to reemphasize Mike's point, clearly focused in the core, and activity level's kind of not too hot, not too cold for us to continue to accelerate on that ground game stuff.

[Operator]

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

[Jeffrey Grampp, Northland Capital Markets]

I wanted to maybe -- kind of related to the last question there with Jason. Can you guys talk at all a bit how the recent acquisitions have maybe changed at all your leverage to various operators in the basin? I know in the past, you guys kind of have those various pie charts. Has that changed at all dramatically? Or is -- would you say your exposure to the operator is largely weighted similarly?

[Michael Reger, Founder, Chairman Emeritus & President]

This is Mike. I think you've seen our similar operator set in the core over the years. Right now, we're really focused with Whiting and Continental, and that's kind of where the main horsepower is. We've seen additional activity from Slawson, where we have significant inventory in Southern Mountrail County. As you remember Slawson, it was a private operator with no debt who has always drilled within cash flow. They slowly developed that Southern Mountrail Van Hook Field. So we sit on a unique amount of inventory in the core of the core, just because Slawson, if you look at their units, they've got 1 or 2 or 3 wells in each unit, whereas to the North, on Sanish Field, you see, 8, 9, 10, 11 wells in the unit. So it's surrounded now. And I would say, that right now, our largest partners are going to be Continental, Whiting, Slawson, and then we've had a lot of exposure very recently with Conoco -- Burlington and Conoco. So again, the activity is where the rigs are. You'll see what our acquisitions look like throughout the year with that slide that we published. You can see who we're exposed to. It's all the best operators. One thing I'll note that I think everybody knows and somewhat goes without saying, the operators that we're participating with the most right now and throughout the past 12 months are best-in-class. And the good news is, almost every operator is coming into that best-in-class category just given the new completion design. I think everybody's adopted it. The core is unique, and we just have a unique exposure to the core. So we're -- you can see where our acreage is, and you can see where our activity levels are based on where the rigs are, and it's a good set of operators and really good technology right now.

[Jeffrey Grampp, Northland Capital Markets]

Okay. Great. That's really helpful, Mike. And for my follow-up, I was curious on the share buyback. Can you guys talk about your ability or interest in looking at expanding that down the road? And any potential constraints with your credit agreement? And do you guys anticipate the buyback to be relatively opportunistic? Or systematic? Or just how you guys might approach that?

[Nicholas O’Grady, CFO]

This is Nick. In terms of your -- the last part of your question, clearly opportunistic. We have our own views of intrinsic value, and we spend a lot of time on that and what drives really an economic return. Obviously, we do have limits in our credit agreement in terms of how much we can buy back. And candidly, we would never want to -- I want to make it clear to our shareholders and our bondholders alike, we are very leverage-sensitive. I said this in the last call, we very much want to keep leverage low. And we would not do this if we thought it had any material impact on our leverage ratios, which it does not. We do have limits, obviously. As we go through the final step of our refinancing, we will likely have an expansion of our capabilities. But I think I use this -- I overuse this phrase a lot, but we think of next year, walk softly and carry a big stick. And I think that when you're in a strong position, like we are now, we have the ability to flex the capital to where they -- to where it's best suited. I think our view, and I think we've said this ad nauseam at this point, but that, candidly, our stock trade is like a beta - -a high-lever beta stock, and we just simply are not that company anymore. And so therefore, when your stock is trading where you can generate a huge return on capital, we will opportunistically take advantage of that.

[Bahram Akradi, Chairman]

We need to think about our company in terms of capital efficiency. Our goal is to do our best to serve the entity, keep the entity strong. So entity itself can prevail in almost any environment, any condition. This was the goal. When we stepped in 12 months ago, we were not -- we did not have this luxury 12 months ago. Today, we have the luxury of really thinking through day by day exactly what's the right course of action for the company. And sometimes, if our stock is at $4 or $5, we're going to use our stock to buy -- make acquisition as long as it creates a positive arbitrage. If our stock is at $3, we like to methodically buy our shares. But just like Nick said, I want to emphasize, there is no chance that we will compromise our strong position of being a positive cash flow company keeping the debt-to-EBITDA below the 1.5 ratio. So it keeps us agile. It gives us the ability to make the right acquisitions with the arbitrage or buy our own stock back.

[Operator]

And our next question comes from the line of Neal Dingmann from SunTrust.

[Neal Dingmann, SunTrust]

First one here for Reger, that finance guru over there. It's more about acquisitions when you look at them these days. What rate of return now are you looking at, sort of required rate of return are you looking at before you sort of step into a new position? It seems, why I'm asking that, it seems there's a number of plays out there selling around for PDP level. So I'm just wondering, I guess, has that required rate of return continually gotten higher this year. And so I guess my question is what is that rate of return? And Mike, are you seeing a number of opportunities that fit this bill?

[Nicholas O’Grady, CFO]

Neal, it's Nick. I'll let the A&D guys talk about this a little bit. But in terms of our actual rate of return, it's obviously quite high. I don't think we should probably tell you on the call because, obviously, it's what we use when we analyze these things. But what I would say is that it's pretty systematic in its approach, where we analyze obviously, the difference -- the rate of return needed for a PUD versus a PDP are very different. And so obviously, the risk factors rise with those things. But we have -- we use a pretty regimented process as we look at every single deal that comes in place. I mean, you can see in our slide deck 55% has been about the average rate of return on the wells we've consented to year-to-date. And obviously, we, at a corporate level, every acquisition we look at has to earn our WACC and derisk down materially. So that no matter what happens, it does earn that and then some.

[Michael Reger, Founder, Chairman Emeritus & President]

Neal, this is Mike. I'll just put a bow on that. One thing that Northern does better than anybody and we have for a long, long time is know the timing and development schedule of this field. So when we're bidding on something, we know -- anytime we buy something, we know who's going to drill it, when they're going to drill it, how many barrels are we going to get and how much -- it becomes more of a science to us because the art is already in the bag because we know the field better than anybody. And the science is really just understanding the timing. And that's where we bid, and that's where our edge is.

[Neal Dingmann, SunTrust]

And then let me ask, maybe for Bahram or for Brandon, given sort of the opportunities you're seeing, is there any thought about going in the operating side? Or definitely you'll stay on the non-op side?

[Bahram Akradi, Chairman]

I'll take it, then I'll give it to Brandon. We have developed in my mind, the all-star team, to play this non-op game. We love the model. We love the ability to act or react or participate or not participate. As you guys know, I run a large company. I think it's about maybe perhaps $0.5 billion in EBITDA with 40,000 employees. So I love a company that can do $0.5 billion to $1 billion of EBITDA with 20 employees. So this is an amazing construct here. I just love what this team has built so far and what the capabilities are. There is really no reason for us to start thinking about something else. There is so much white space, so much opportunity with what we are doing. No one needs to start thinking about something different. Brandon?

[Brandon Elliott, CEO]

Yes. Neal, I don't think I can add anything to that. I think it's exactly how we feel. And with the runway that we see out in front of us, yes, Bahram covered that one.

[Neal Dingmann, SunTrust]

And then lastly, Brandon for you or Nick, in your prepared remarks, you talked about -- I just want to dig in a little bit on the Bakken name. It certainly seemed to be getting run over more than some of the other group out there. And I think Nick, you're spot on, it's because of the diffs and, potentially, just people nervous about the oil waiting. I guess my question for you around that is, are you seeing -- I guess, could you talk maybe just to reemphasize on the diffs, are you -- how long a problem are you seeing that? And then on activity-wise, have you gotten any indication that anybody would even consider slowing down yet?

[Brandon Elliott, CEO]

Yes. Neal, I don't think so. I mean, I think as Nick mentioned earlier, some operators that may see some delays in some completions and bringing wells on the production into 2019 is a possibility. As Nick also mentioned, we would expect that it maybe trends towards the upper end of our guidance just given everything that's going on. But I'll say a couple of things and turn it over to Nick. Obviously, it was something we were watching, and to Nick's credit, put on fairly significant, i.e., 10,000 barrels a day and probably much more than our exposure to Clearbrook in differential basis hedges early. So we feel incredibly happy about that. But yes, we do think it's probably a transitory issue. But Nick, you've got more detail.

[Nicholas O’Grady, CFO]

Yes. I mean, I think in case there are people on the call who don't quite understand this, we do not market our crude. We get the same marketing agreement that Continental or Whiting gets. So we get those same prices. You've all listened to their calls and statements on the matter. And most of them have near- and medium-term solutions. At a larger level, it's been a bit of a perfect storm and caught the basin off guard. I mean, I think someone asked us why we raised diff guidance last quarter, and I think now we feel very glad that we did. I don't think that with a situation like this where there's plenty of takeaway, they simply moved the railcars in the basin to react in real time. Now the economics are strong, but you have to think about the fact that the railcars actually have to be there. You have to be willing to sign a contract. And usually, when something is temporary like this, people don't want to do that. So the answer to the question is just time.

Could it lead -- it should begin to resolve itself through the end of this year. Could it bleed a little bit into the first quarter? Possibly. As it pertains to the hedges, I mean, just to give you a frame of reference, I mean, the mark to market on those hedges that we have today, if those prices were to be real, it's something like $60 million. But I'd also tell you that -- in our favor, obviously. But I'd also tell you that when we look for quotes in that for next year, they have like a 5 handle on them. So it's telling you that this -- and by the way, no one wants to transact because it's what you -- they're afraid that they're being too reactive. So we know what the sort of long-term takeaway cost is even with a growth in production in the basin. And it's certainly not $15. But it may take some time to resolve itself, and we're well protected. Like Brandon just mentioned, you might see a little bit of deferral of activity from here to there.

We've certainly modeled and risked for that type of stuff. And I'd just say, you've already seen a handful of announcements. I think Continental talked about this. Obviously, Energy Partners has talked about this, that you will see modest improvements that will add up to a lot over time. And I just don't -- I don't think this is a huge issue. I'll end with this, which is that if you guys look at the Permian Basin here, you had a takeaway problem in the Permian Basin for the better part of this year. And diffs were $17 a few short months ago. Now they're less than $4. When the majority of those -- the infrastructure projects don't come online until the end of next year. So I'd say that markets are fickle, and they price bottlenecks in extremes at times. But it's not necessarily indicative of the long-term economic issue.

[Brandon Elliott, CEO]

And I'll restate what Nick said is the fact that we've taken some of those 10,000 barrels hedge and tried to put those back on the market at prices, probably half of where they're trading today and we can't get any takers, so we think that market's probably not indicative of what everyone's seeing on their Bloomberg's.

[Neal Dingmann, SunTrust]

Brandon, that's why I was going to ask you with thoughts if it is temporal about trying to monetize some of those great hedges and taken that cash and plow it in.

[Brandon Elliott, CEO]

Yes, we've -- I think we've tried. I think I hit Nick the other day and said, "Hey, why don't I go ahead and put 1,000 barrels a day out there at $7 and see what happens?" And I don't think there's...

[Nicholas O’Grady, CFO]

Yes. I mean, I think we could probably monetize some -- their annual hedges, we could monetize some for, say, the first quarter, where this issue probably goes through in the worst-case scenario. Remember too that refinery maintenance has played a big role in the sort of time our Canadian production has kind of been filling up some of those pipes. And I just want to reiterate for one more time, I've had this discussion 400 times with investors, but Clearbrook is not Bakken-pricing. It is about 15% of the takeaway. Obviously, all pricing will be impacted when you have pinch points. But when you're staring at your launch pad all day, these are not the prices that we receive day in, day out. There are companies that have full throughput or full access on DAPL that their prices haven't moved an inch. So I just want to make that clear.

[Operator]

[Operator Instructions]. Our next question comes from the line of Derrick Whitfield from Stifel.

[Derrick Whitfield, Stifel, Nicolaus & Company]

Congrats on the transformation you accomplished and the top-tier outputs you noted on Page 19. Perhaps for Mike, building on your last comment, regarding acreage added 4Q to date, it was a fairly meaningful chunk of acreage. Could you speak to the general location and the activity you're expecting on that acreage?

[Michael Reger, Founder, Chairman Emeritus & President]

Yes. I think the -- we've got a nice project going in McKenzie, where we've been picking up a lot of acreage. And then just generally speaking, McKenzie and Williams are where we're seeing the opportunities. The rig count improved, as you know, up to the kind of through the end of the third quarter. Williston Basin got up to about 70 rigs. And where we really saw a lot of activity, which is what Northern built a business around, starting 12 years ago, is the acreage we're acquiring under AFEs. We've been -- we're the primary consolidator of AFEs in Williston, and that stepped up here in the third and beginning of the fourth quarter. We're also really -- as you can imagine, our systems and processes here are unique and proprietary in how we proactively acquire from our database. If you look at our entire portfolio now, we've got over 5,000 producing wells. Think of all those wellbores or those units where we have data of who owns what. So any time a new well is proposed in any unit, there's about a 35% chance or more that we have the data of who owns what, and we're talking to those people. We're talking to those people when those permits hit the dockets, not just get permitted. And so we have a unique business model here, and we're good at it.

[Derrick Whitfield, Stifel, Nicolaus & Company]

That's great. And then maybe for yourself, Mike or Brandon. With the improvements that you guys have seen by operator and well performance this year and really based on the refined completion designs, how far west and north do you think the industry could drill a 1 million-barrel a well per day?

[Brandon Elliott, CEO]

We got our resident engineering expert right in the room with us. So we're going to let Jim Evans comment on that one.

[Jim Evans, VP, Engineering]

Yes. I think it's expanded pretty far. We're seeing wells drilled on the Western side of McKenzie and Williams County and into Montana that are performing really well. We've got wells that we're seeing kind of Northern Williams, up in the border near Divide that are performing very well also. It's very early time. So we'll keep an eye on them. But we think that the core has expanded pretty far.

[Derrick Whitfield, Stifel, Nicolaus & Company]

That's great, guys. It's very helpful. And Nick, to your credit, I think the quants returned from their workout this morning and saw your Slide 19. Your stock is behaving well now.

[Brandon Elliott, CEO]

I patted him on the back there a minute ago, what a genius slide pacing that was.

[Nicholas O’Grady, CFO]

Yes. Thank you.

[Operator]

And our next question comes from the line of Geraldine Swanzy from Capital One Securities.

[Geraldine Swanzy, Capital One Securities]

I just have a quick follow-up question on your 2019 plan, just trying to get a better feel there for those initial numbers you've put out. That production guidance implies only about 3% growth really over 4Q 2018. And so even with those seasonal issues that impact the first half of the year, that 3% just seems really low with how things have been going for you guys. So would you agree that your initial guidance is pretty conservative? And that there may be some upside to those numbers?

[Brandon Elliott, CEO]

Yes, Geraldine. It's Brandon. I think we typically don't give you your forward guidance at this point in the cycle. We typically wait until Q4. But we did just given the fact of all the changes we've been through. We wanted to at least give you some brackets around that. Yes. Certainly, with activity levels where they are and with the ground game acquisition success we've had, sure, there could be some upside to that. But the 30 to 36, that range, from a capital discipline -- capital allocation standpoint, I think it's a good bogey to start the year with. And I don't know, Nick, would you...

[Nicholas O’Grady, CFO]

I would just say this that in terms of -- we want to make money. We don't want to grow our production. Growing production is a residual of that. And so therefore, if we grow 3% with a huge free cash flow yield, our net adjusted growth will be substantial. And we can shrink our enterprise accordingly and grow value per share. So -- or we could obviously see accelerated organic activity and create value the same way. I mean, obviously, if we spend our cash flow at the rates of return that, that guidance implies, you would have an enormous amount of organic growth. As a non-operator, obviously, we're beholden somewhat to our operators. But obviously, I think that the goal of our management team is to -- with that excess free cash flow, obviously, the base plan would be we just pay our revolver down and wait for opportunities. But if we can augment that with ground game and A&D, we obviously can do that or if additional activity comes. But I think the fallacy of what happens to many companies is that they either grow well beyond their cash flow, and then they're in trouble when the cycle turns. Or activity for someone like us picks up, and they simply don't have the money to fund it. There's almost no scenario in which we don't create per-share value creation.

[Operator]

And our next question comes from the line of Joshua Gale from Nomura Securities.

[Joshua Gale, Nomura Securities]

So I can cross off share buybacks, May 2020 bond call and Clearbrook off of my list here. So I'd like to ask about A&D opportunities. And I may just be summarizing excerpts of your answers to other's questions, but it sounds like the mom-and-pop bolt-ons get expensive in a $75, $80 environment. And in a $45 environment, you can probably get the best bargain. But maybe the market opportunity isn't that large because activity slows, and then you don't have as many of those activated minority interest that motivates sellers. So $60 environment is kind of a sweet spot for you. Is that a fair assumption? And then in your 2019 preliminary look for those ground game adds, is -- are those -- is there an assumption in there? Or would that be all incremental to your budget that you laid out?

[Brandon Elliott, CEO]

I'll take the last one first, and then Mike can take the other one. I think the last one is, we typically do not build a tremendous amount of ground game stuff into it. There is some in there, but we'll evaluate that as time goes. And to Nick's point, we're evaluating them on a well-by-well basis and a deal-by-deal basis. And they've got to be accretive, so that's what we're focused on. And as far as the mom-and-pop's, I'll let Mike take that.

[Michael Reger, Founder, Chairman Emeritus & President]

Yes. We've never really seen a major shift in those types of assets. We continue to consolidate those, whether it's $50 oil or $75 oil. But I do have to say, and I think you mentioned it, there is a sweet spot. $60 oil is a fair price for this basin. $75 oil gets a little harder to make a larger acquisition. So just a month ago, when oil was $75, looking around the boardroom, I think we were probably hoping for a $60 or $65 oil price just because it really is a sweet spot for us and kind of a Goldilocks scenario from an acquisition standpoint. So we like where all this sits, we love our hedge book, really love Nick's basis hedge book and we feel really good about our place in this basin.

[Joshua Gale, Nomura Securities]

All right. Yes, that's $50 million in the black trade so far. And then just to follow up on kind of the larger acquisitions in Salt Creek, Pivotal, W, obviously, those are all private entities that could use your equity's public currency to exit. There's probably a handful of large non-op positions held by public companies that wouldn't necessarily want your equity as consideration. But it looks like in 2019, you're going to have cash burning a hole in your pocket. So do you think that there's a larger set of opportunities for you with buying off of public operators if you can tweak the cash portion up a little bit? I think we saw that you did it at the last hour with the W deal. And maybe you'll have more flexibility to do that next year.

[Brandon Elliott, CEO]

I'll start with where you ended, which is the flexibility standpoint. And yes, I think we do have more flexibility today. And I think the issuing equity to the sellers was an excellent transaction at the time. And we've certainly -- the company today is a little bit different. So yes, we think we've got much more flexibility today to decide how we want to acquire assets and how we want to pay for them. I'll leave it at that.

[Operator]

And our next question comes from the line of Phillips Johnston from Capital One.

[Phillips Johnston, Capital One]

Just one question for Nick or Bahram. I just wanted to follow up on the topic of share repurchases versus dividends. You guys certainly aren't the only E&P company out there that's issued stock in your 10-year lows only to announce the share repurchase program at prices that are significantly higher than where you issued. So I don't want to pick on that decision, especially since, as you rightly pointed out, the company is in a completely different position back in April. But I guess, I wanted to ask if you guys have ever considered adopting a policy of special dividends. I think, Nick, in your prepared remarks that you mentioned that you consider Northern to be a specialty finance company, almost like a REIT. So why not operate with a low leverage ratio like you're doing now and take the free cash flow that you generate in times of higher oil prices and return most of that to shareholders? And then in times of low prices, just conserve the cash and maybe focus on picking up acreage on the cheap and let the leverage ratio creep up some? So essentially, sinking your cash flow distributions with the cash flow generation of your assets.

[Brandon Elliott, CEO]

Are you going to answer?

[Nicholas O’Grady, CFO]

Phil, this is Nick. The fallacy of oil companies is that oil prices go up and they generate more cash and then they spend more. And then the cycle goes down, and that's money they've spent, they destroy. So what you talked about is not lost to me. I mean, I think as it pertains to the stock issuance and the repurchase, I don't really look at our April stock issuances. I mean, that was during a period of financial restructuring. So I don't really think about it. We issued stock to sellers at significantly higher prices, and obviously, the market price is somewhat lower now. So that's really the way I look at it. As it pertains to special dividends, I think we hear you loud and clear. I think we're obviously in a depleting business. And so therefore, we do not want to put ourselves in a situation that some oil companies put in, where we do not reinvest in our business.

And I think we obviously have to -- the rate of return can fluctuate with the cycle. And so you have to be careful about deploying your capital dollars, but we also have to maintain, overall, a healthy inventory over time. So we want to maintain that flexibility. I also think -- but I do think that from a shareholder perspective, and this is just from my public market experience, a consistent regular dividend is worth more to me than a special dividend. And part of that is because if we can retain that capital that our investors can entrust us to allocate it at times, there may be points where I would much prefer in those rough times than just dividending the money out and to having a materially underlevered balance sheet, and then we can take advantage of that if prices crack. So I think what we would target is some sort of a tax, so to speak, on our business that we can grow consistently over time so that we can grow that cash flow per share and the dividend alongside with it over time.

[Bahram Akradi, Chairman]

And I'm going to add on here. Once again, we need to be in a position to create arbitrage for our company. And that means we need to have ability to react and use our currency. When our currency is trading at a fair value or above, we're going to use that currency to make the acquisitions, to issue stock, do what we need to do. We also need to keep ourselves in a position, so if our currency takes a dip, we will be able to get back in, buy shares back and support that currency, so we have it available as a tool to take advantage of opportunities. We don't operate as again the benefit of this non-op. We have incredible insight engineering, knowledge of the basin. And we basically need to be opportunistic in the market at all times, agile and always on. And so this team is always on. We are working constantly every day. 7 days a week, they're in communication with each other in terms of looking at the opportunities. And we just feel like we can make the right decisions at the right time. And our balance sheets today allows us to do what's right for the company and the shareholders and the bondholders, et cetera.

[Operator]

And our next question comes from the line of Lenny Raymond from Johnson Rice.

[Leonard Raymond, Johnson Rice & Company]

Historically, you have participated in about 25% of rigs in the Bakken. Have that increased with the closing of the recent deals?

[Brandon Elliott, CEO]

No. I don't necessarily think -- that's probably a pretty good average. But obviously, today, with the core today, it's probably up a little bit.

[Nicholas O’Grady, CFO]

A little bit, yes. Maybe 200, 300 basis points.

[Operator]

And I'm showing no further questions at this time. I'd like to turn the call back to our CEO, Brandon Elliott, for closing remarks.

[Brandon Elliott, CEO]

All right. Victor, thank you. And we certainly appreciate everyone's participation on the call and the interest in Northern Oil and Gas. Please take note that we have a very busy schedule the next several months. Some various conferences around the country, and those details are in our press release. So we look forward to seeing some of you in our travels and look forward to talking to you again next quarter. Victor, you can give the replay information. Thanks, everybody.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.