Northern Oil and Gas, Inc. (NYSE:NOG) Q3 2022 Earnings Conference Call November 9, 2022 11:00 AM ET

Company Participants

Erik Romslo - Chief Legal Officer
Nick O???Grady - Chief Executive Officer
Adam Dirlam - President
Chad Allen - Chief Financial Officer
Jim Evans - Executive Vice President & Chief Engineer

Conference Call Participants

Neal Dingmann - Truist Securities
Scott Hanold - RBC Capital Markets
Charles Meade - Johnson Rice
Derrick Whitfield - Stifel
John Freeman - Raymond James
Donovan Schafer - Northland Capital Markets
Noel Parks - Tuohy Brothers

Operator

Greetings and welcome to the Northern Oil Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce to your host, Erik Romslo, Chief Legal Officer. Thank you, Erik. Please go ahead.

Erik Romslo

Good morning and welcome to our third quarter 2022 earnings conference call. Yesterday after the market closed, we released our financial results for the third 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: First, Nick will provide his remarks on the quarter and our recent accomplishments, then Adam will give you an overview of operations. And last, Chad will review our third quarter financials and updates to 2022 guidance. After the conclusion of our prepared remarks, the executive 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 our 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 of these measures to the closest GAAP measures can be found in our earnings release.

With that, I will turn the call over to Nick.

Nick O???Grady

Thank you, Erik and thanks again to everyone joining us on today's call. I'll get right down to it with 5 key points.

Number 1, business is humming. We generated a company record $292 million of adjusted EBITDA this quarter and well over $100 million in free cash flow, the highest and third highest in company history, respectively. We produced over 79,000 BOE per day in the quarter and we have already generated a cumulative $370 million of free cash flow in the first 9 months of 2022. Leverage at the end of the quarter based on LQA adjusted EBITDA dropped below 1x even with the closing of our Williston acquisition in August. The increases to cash flow and decreases to leverage ratios quarter-over-quarter are even more impressive when you consider that oil prices were down substantially from the prior quarter.

Number 2, growth. As evidenced by the increase to our production and CapEx guidance, we are driving value creation through investment. It is translating into more profits but more importantly, the increase in capital for the year isn't being driven by inflation which is something we had already built into our expectations. Instead, the increase in capital is truly incremental investment in additional activity that will in turn drive cash flows higher in the coming quarters. With over $370 million in free cash flow generated so far this year, we are able to increase our investments in high-return projects and are thrilled with the organic and ground game opportunities that we continue to see. We expect our balanced total returns-based approach will continue to drive superior total returns for our shareholders. And we still expect to generate approximately $500 million of free cash flow for the year. We are extremely proud of this achievement, given the decreases in oil prices and acceleration of near-term capital spending.

Number 3, outperformance. Despite high prices and inflation, we're seeing notable outperformance in all 3 basins. Our Williston wells have thus far exceeded past years even in an environment where we would typically expect step-out wells. Our Marcellus assets continue to surprise as EQT's new pads materially outperformed and PDP declines have been shallower than expected. In the Permian, costs, realizations and well performance have all exceeded internal estimates. As I said earlier, business is humming.

Number 4, acquisition success. As you've seen from our flurry of deal announcements over the last few months, we have been very busy on the M&A front. Make no mistake about it, our discipline remains and we continue to underwrite acquisitions with the same rigor. Our success is a testament to our role as the preferred partner, a company with a reputation of execution and consistency with the capital availability and the ability to negotiate and close in an honest, straightforward manner. This often trumps price. And I want to stress that we are buying assets that are not just accretive to financial metrics but accretive to asset quality and future growth prospects. This means resilient assets that have the ability to outperform our underwriting. In short, we're confident that our recent M&A success will deliver both near-term results and long-term value for our shareholders.

Number 5, shareholder returns. Our goal is to provide our shareholders the highest possible total return over the long term. We have implemented a multipronged approach, including equity buybacks, repurchasing high-cost debt and increasing the cash dividends for our common shareholders.

A) During the third quarter and October, we repurchased and retired another $10 million of our 8.125% [ph] notes at less than 95% of par. This lowers fixed charges which boosts free cash flow permanently and retiring the notes at a discount to face value is accretive to enterprise value. We are prepared to continue to take advantage of opportunities to repurchase the senior notes.

B) On the equity side, we've retired $109 million year-to-date, including $51.5 million of common stock, the remainder being preferred stock. As a reminder, we have $98.5 million remaining on our common stock buyback authorization.

C) Last week we announced a 20% increase to our quarterly common stock dividend to $0.30 per share for the fourth quarter with the goal of providing an attractive yield for our investors. We strongly believe that the consistency of a stable and growing quarterly dividend is more valuable to investors and our equity value over time than special dividend structures which can introduce unpredictability and volatility.

D) We announced yesterday that we have executed a mandatory conversion of our preferred stock into common stock. This will have no effect on the diluted share count because the preferred was already included on an as-converted basis. The conversion will reduce annual cash dividend payments and also avoid future dilution through cash dividend adjustments made to the preferred stock each quarter. The preferred stock was created with our bondholders in 2019 to accelerate essential deleveraging of the company and we are thrilled with the successful outcome for our common and preferred investors. This conversion milestone will simplify our balance sheet and continue to underscore the strength of our company.

In closing, I'll remind you, as I always do, that we are a company run by investors, for investors and I want to thank each and every one of you for taking the time to listen to us today.

With that, I'll turn it over to Adam.

Adam Dirlam

Thanks, Nick. We closed the third quarter accelerating our investment program across the board, including our organic activity, ground game acquisitions and corporate M&A. Overall, we picked up the pace as we entered the second half of the year, turning in line 16.2 net wells, a 60% quarter-over-quarter increase. Permian completions were the primary driver, contributing over 70% of the additions at a nearly 100% increase over the prior quarter. Our operators in the Permian are driving efficiencies in order to keep well costs on budget. And as a result, we continue to see shorter spud to sales, down roughly 25% from our well spud in 2021.

Accelerated drilling activity and larger average working interest across most of our active basins has increased our overall wells in process to 61.5 net wells, an increase of 10% from the second quarter. Driving that increase, we elected to 190 well proposals during the quarter which was up 65% from Q2 and accounting for 40% of our consented net wells on the year. Our operators are drilling longer laterals to drive efficiencies in this environment. And in connection with that, we saw the average AFE rise to $8.6 million but only up 5% from the prior quarter based on normalized lateral lengths. Our weighted average well proposal remains well within our per well estimates that were already included in our CapEx guidance. Most importantly, the drilling opportunity set in front of us is expected to generate an average rate of return far north of 100%, further supporting our top-tier corporate level return on capital employed of 34% during the quarter.

With our ground game, we closed on 2 net wells and 965 net acres in Q3 and the acquisitions to date are expected to generate a full cycle return on capital of 49% next year. Strict emphasis is put on targeting the right operators in order to maintain capital efficiency in this environment. This stringent process, both from a planning perspective and the execution within the business development function has enabled us to largely avoid inflation wells affecting some of our peers, as well as grow the investment opportunity set. As competitors' budgets have been exhausted in the back half of the year, we have continued to raise our full-cycle hurdle rates. This ground game success has played a meaningful part in our elective investments.

Regarding corporate M&A, we've been extremely busy. We have executed and signed up some of the highest quality asset packages we have seen to date, tacking on meaningful production and even more impactful inventory across the Delaware and Midland Basins. On the heels of our Laredo transaction, we have recently announced 3 more premier acquisitions. Looking back from the billions of dollars in M&A opportunity with Canvas [ph] this year, these 3 all ranked at the very top in terms of quality, operating partners and inventory depth. The 2 Delaware acquisitions we announced, with Mewbourne Oil and Gas, one of the most active and cost-efficient operators and located in the core of New Mexico. As we closed these in December, Northern will directly benefit from their best-in-class operating team and capital efficiency.

Our recently announced Midland Petro joint development agreement highlights the expanding suite of opportunities available to Northern, as we reap the benefits of reaching a new scale in the non-op space. These JDAs add another arrow to the quiver where we have greater effective governance rights over the operating partnership, including scheduling out the long-term development programs of the assets as well as modification protections. This Midland Petro acquisition is structurally similar to in an ideal follow-on from our highly successful Southern Midland joint development program signed in Q4 of 2021. In fact, we are establishing momentum with this structure.

Conversations with other operators have begun in earnest and we are actively screening and co-bidding operated assets as well as discussing buy-downs of operated interest using this model. The expansion of the JDA structure establishes a new set of opportunities that will be unique to a scaled Northern and we will continue to drive value with a disciplined approach that is focused on returns.

With that, I'll turn it over to Chad.

Chad Allen

Thanks, Adam. I'll start by reviewing some of our key third quarter results which was again one of the strongest quarters in company history. Our Q3 average daily production increased 9% sequentially over Q2 and topped 79,000 BOE per day, a 37% increase compared to Q3 of 2021. Oil volumes were up 8% sequentially over Q2 and have normalized after the spring storms in the Williston Basin which is where we have our highest oil cut assets.

Our adjusted EBITDA was $292.4 million which exceeded consensus expectations and was a record for NLG. Our free cash flow was robust at $110.6 million despite increased CapEx spend driven by growing activity. We have generated approximately $370 million of free cash flow year-to-date, almost 2x more than the entirety of 2021, despite the additional spending and lower oil prices. Our adjusted EPS was $1.80 per share in Q3, above consensus estimates. Oil differentials were again better than expected in Q3 and came in at $0.84 per barrel due to continued strong Bakken pricing and having more barrels weighted towards the Permian which are at a premium to WTI. As a result, we're updating our oil differential guidance to a range of $3 to $4 per barrel. Additionally, we're tightening our gas realization guidance as well by taking the low end of our expected range up to 105%.

On the CapEx front, we invested $154.5 million during the quarter, roughly evenly split between the Williston and Permian Basins. Activity has been robust. As Adam mentioned, Q3 turn-in-lines were up roughly 60% and spuds were up over 50% [ph] from the second quarter, while days under development has been reduced roughly 25% from our 2021 levels. This has resulted in a record D&C list of 61.5 net wells and has contributed to the pull forward in our capital spending, along with our continued success on our high-return ground game investments. While these accelerated investments have led to an increase in our 2022 CapEx guidance, they are also expect to boost our 2022 production exit rate and reduce our 2023 maintenance capital requirements.

On Slide 7 of our earnings presentation on our website, we provided a walk from the prior midpoint to the current midpoint of guidance. The balance sheet is in great shape. Closed on a convertible notes offering shortly after quarter end that largely cleared out our revolving credit facility borrowings to fund our closed and pending acquisitions. The convertible notes offering had tremendous demand and the terms associated with it ultimately provide low-risk unsecured term debt with an all-in cost of borrowings below that of our current revolver and have further extended our maturity schedule at the same time. Additionally, due to the features we selected, there will be minimal to potentially 0 dilution to our existing holders and to the extent that there is, the company has options to manage this over time. We expect leverage will tick up slightly over the next couple of quarters with the closing of our pending acquisitions but the ratio should be back below 1x by the end of 2023.

Year-to-date, we retired $23.4 million of our 2028 notes and continue to monitor the interest rate environment as well as our bond levels. We continue to look for ways to efficiently reduce leverage if the market opportunity arises. With respect to hedging, since our last report, we opportunistically added hedges in the form of attractive costless collars that allow us downside protection with the opportunity to participate in upside of prices rally. We continue to hedge out volumes from each closed and pending acquisition based on our stated hedging strategy.

Finally, a few comments on our updated guidance which we laid out on Slide 6 of our earnings presentation. We increased the midpoint of our full year 2022 production guidance by 1,250 BOE per day and now expect to exit December at over 83,000 BOE per day which includes our Midland transaction that closed in October, a full month from our 2 acquisitions that are expected to close in December but does not include our pending MPDC transaction which we expect to close in January.

We bumped the midpoint of our full year CapEx guidance by $42 million as a result of the factors I mentioned earlier. Cost guidance has remained largely unchanged from prior guidance with a slight increase in LOE from increased field level costs. All in all, we expect to generate approximately $500 million of free cash flow for the year and from a value creation perspective, the exit rate cash flow and production volumes are substantially higher. With respect to 2023 guidance, we're hard at work and having board-level discussions over the coming weeks and expect to be able to provide our plan by early next year.

With that, I'll turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] We have a first question from the line of Neal Dingmann with Truist Securities. Please go ahead.

Neal Dingmann

Good morning, Nick and team. Guys, my first question is on '23. Specifically, you all highlighted in the press release and Nick in your prepared remarks all the continued attractive opportunities driving the boost this year, not necessarily the inflation. I'm just wondering, are you able to give -- I know you don't have specific 2030, I don't want to press you too much on that but I'm just hoping you could maybe give a little color on the latest increase on how that could shape '23 production and maybe more importantly, what type of CapEx increase you all might entertain next year?

Nick O???Grady

Good morning, Neal. I think what we'll tell you is this and it won't be as simple as sort of well cost times the number of wells. I think to grow to and sustain, call it, 100,000 barrels a day, we need to drill about 80 wells a year for 90,000, around 65%. And the building and maintaining of the D&C list and the associated CapEx accrual means the nuanced timing, total amount is far more complicated than just that simple math. And it will depend also on what region we allocate capital to and what role the ground game plays into it, if any. But this should be a helpful start for some bookends. I think the bigger questions for us are as the windfall develops from the Mascot project, do we have competitive reinvestment opportunities for that? Or would we rather harvest the cash windfall for our investors. I think we'll spend a lot of time at the Board level debating these topics in the coming weeks and months.

Neal Dingmann

Okay. So I mean, are you prepared -- I mean, you just on sort of a production or CapEx guidance, are you able to say just what you're able to let that maybe broad comments on what that might go up?

Nick O???Grady

Are you just talking about inflation?

Neal Dingmann

Yes, driving that. Are you -- that would probably be the more specific question. Yes. I mean, I think as it pertains to inflation, I think most of the reporting operators have been guiding to a kind of 10% inflation rate. I think that's a deceleration certainly year-over-year. I think we look forward to coming back soon with our overall investment plan and kind of our own views on the accuracy of that. I think but at current, I don't think we really have a differing opinion. So what I would tell you is that there's definitely leading-edge inflation. I would agree that it is somewhat decelerating and operators are enterprising folks and they're figuring out ways to offset them. I don't know, Adam, you want to add to that?

Adam Dirlam

I think once we get through Q4, kind of understand what that overall mix is basin by basin, operator by operator, we'll be able to nail that down a little bit better. So that's kind of how we're cautioning it at this point.

Neal Dingmann

Okay. And then Nick, something you just said on the growth versus shareholder return, like I don't think these days, I don't think Bob's on the call anymore. But I'm just wondering, Nick, as you mentioned, you're having the conversation going forward with the Board when addressing 23% production growth versus shareholder return. I'm just wondering kind of how those conversations go? I know for a long time, a lot of times the Board favored maybe more shareholder return but you mentioned that the goal is to provide the highest total shareholder return -- total return over long term. So I'm just wondering kind of how those conversations might go.

Nick O???Grady

Yes. I mean I think it's the age-old question, Neal, of getting $1 today versus making that dollar worth more tomorrow. It's a challenging debate with our Board, with investors and it's the crux of our capital allocation process. The biggest challenge, as I read sell-side notes, as an example, is that at this point in the year, much of the capital we're putting to work will translate into volumes and cash flows in next year, not necessarily right away. I think also factoring that we're pretty conservative by nature. And so we certainly could give you a scenario that would give you immediate gratification but we want to make sure we achieve those things before just promising the moon and the star. So I think trust is a big driver. And investors should know and trust that these dollars are being put to good work and will drive stronger results.

And let's put it into perspective too. We're still going to generate $0.5 billion in cash this year even with the extra elective investment. So this isn't a reckless decision. I can tell you empirically that those companies that have focused exclusively on free cash flow have lagged over the short and the long term. And those that have gone for broke and kind of spent and have outperformed certainly in the short term. But admittedly, that's a strategy that's way too risky for us and it's been bolstered by strong pricing. So over the long term I'm not sure that that's the right strategy either. So we constantly repeat ourselves but we're focused on balance, finding a way to generate growth and additional recycling of returns but also never getting over our skis and delivering solid shareholder returns.

So I think in the next several quarters, I think the logic of both the acceleration we just announced today as well as the robust cash on the back end will play out for investors.

Neal Dingmann

Great answer. Thanks, Nick.

Operator

Thank you. We have next question from the line of Scott Hanold with RBC Capital Markets. Please go ahead.

Scott Hanold

Yes. Thanks, guys. Nick, maybe -- can you give us a sense of this, I guess, joint venture acquisition you all did. I mean, how big do you think that opportunity set is going forward, say, relative to, what I'd say more of the traditional kind of deals that NOG has done over the last several years?

Nick O???Grady

Yes. I mean, I think it's early days. It's certainly been encouraging in terms of the reverse inquiries that we've gotten after announcing the Midland Petro deal. That's on the heels of, call it, a drill co light that we signed up late last year that we're finishing up here and that's frankly been a home run for both the operator as well as Northern. I think it's unique to us because you need to be able to move the needle for some of these operators. And you can frame it up in a couple of different ways. You can co-bid assets, operated assets that are on the market. Maybe there's an independent that doesn't want to issue equity or doesn't want to, or can't wear it on their balance sheet. And so you can carve out a non-operated interest out of anything. And we can come in, underwrite it with our technical team and effectively take down a minority interest in that and then subsequent or in parallel with that, you can put together the joint development agreement and kind of plan the business around it.

I think there's other operators that are out there that have run some failed processes over the past year, whether it's drilling obligations or whatever it might be in terms of getting kind of the right bid from other operators where they've got to socialize that with the rest of their inventory. And so I think there's an opportunity to kind of come in and buy down again, an undivided interest, minority interest and put together a joint development program. And we've got at least 2 or 3 that are live right now. I don't know if they'll necessarily meet our return thresholds and we've had significant kind of reverse increase after the fact. So it's certainly encouraging but we'll just have to see how that shakes out relative to some of the other typical non-op packages that we continue to screen.

Scott Hanold

Yes. And into those typically -- because I know this recent one you all did had a pretty high working interest. Did they typically come with high working interest. And how does -- how do you think of that in terms of like a risk profile?

Nick O???Grady

Yes. I mean -- sorry, I didn't interrupt you. But I think, Scott, you have to think about there's concentration risk and then there's control and timing risk, right? And so each set of assets have similar, right? If you buy a traditional non-op assets, you certainly don't have the same concentration risk in most cases but we have to really spend a lot of time on the art and the science of the timing of that development to ensure that we're earning our IRRs. And so the neat part about it is as we get larger, more concentrated interest don't really rock the boat. And so that timing factor can make up for a lot of those things. And that's why you'll notice we're spending a lot of time on super high-quality areas, right? You're talking about the guts, probably some of the best pieces of land in North America which is why you can and are able to take those risks but also a project that's over 30% complete.

So, you have well control and an understanding of how that area is performing already. And so that can give a lot of confidence to the underwriting. I would tell you, we're not known for being optimistic here. And so I think that that's critical to that beginning phase. But I think it's going to be an all of the above approach. We recognize that these projects are a bit different, especially when you're thinking about it, not as a 10-year asset but as an asset you're going to go and move down. But I will tell you, as it pertains to the Midland Petro project, that is the highest underwritten return we've ever done. And so I think while it might seem weird and different, I think over time it will prove its fruits to our investors.

Scott Hanold

Okay. And when you look at -- obviously, a lot of discussion this past quarter on well performance for various operators. And look, I know you guys do your diligence to take a look at different types of permitting that your partners are going to do. But how do you get comfort in sort of that kind of more mid- to longer-term view on the quality of inventory that your operators have and how do you -- kind of comfortable with that assessment? Maybe I'll leave it with that.

Nick O???Grady

Yes. Are you referring to that project in itself or in general?

Scott Hanold

Just in general, not any specific project, just in general in terms of your partners depth of their well inventory and the quality of it.

Nick O???Grady

Yes. I mean, I think -- look, we do our own work, right? Every piece of leasehold that we own, we draw our own sticks. We have our own EURs. I mean, nearly 400 type curves in the Williston alone. So we certainly with no offense to any particular operator but we're not listening to their views on what they think those wells can do or what that inventory will do. We do our own work. And so every acquisition we do is bottoms-up engineered by our own team. I don't know, Jim, if you want to add to that?

Jim Evans

Yes. And obviously, we're looking at the inventory that we think the operators have left. We can go out there. We've got everything mapped across the entire basin. So we can look at units, have an idea of how many years of inventory we think a specific operator has left, how they might target that. And that's part of our proactive management where we can go in, target specific issues that we know that the operators are going to have to move to within the next couple of years to get developed. And so we use that to help augment and then on all the acquisitions that we do, again, we're using that to augment our inventory. So all the acquisitions we've done over the past couple of years have been to improve the remaining inventory that we've got left in our portfolio. Got it. Thanks for that.

Operator

Thank you. We have next question from the line of Charles Meade with Johnson Rice. Please go ahead.

Charles Meade

Yes, good morning, Nick, to you and the whole NOG crew there. I wanted to go back and ask something about the -- about what you're seeing in the ground game and if there was a little bit of an uptick there we saw in 3Q, I guess, I'm really interested -- how much of it not -- obviously, you've given the guide for 4Q but how much of that of your 4Q guide is, are you expecting to see an uptick in more opportunities to elect in the wells or participate where other people now -- I think you mentioned this in your press release but I wanted to get an idea of the magnitude.

Nick O???Grady

Yes. I mean, I think a lot of the raise in CapEx is ground game that's already been really in process. So there's, I would say, beyond the normal course business. I wouldn't say that there's an anticipation of a material increase from here going through the end of the year, Charles. I would say this and I'll let Adam or Jim chime in at any point which is that we have found a big return disparity as well as competitive disparity in what I would call chunkier ground game opportunities. There are a lot of people chasing at 10th of a wellbore or 5 or 10 acres here or there. What we're seeing are just attuned to what we were talking about with Scott before in larger ground game interests, materially higher underwritten returns for us and a lot more success rate. And so that's a good thing but it also means that when you have that success, it's obviously going to be actually more impactful to our capital over time which is one of the reasons that we sat down with our Board and really had to make some tough decisions in terms of how much money we wanted to spend in the last few months.

Adam Dirlam

Yes, that's right. I mean, it's the competitive universe when you get into these larger, more concentrated deals where subscale not up, frankly, don't have the wherewithal to spend the money or don't have the risk tolerance because they don't have that base. And so we've continued to raise our discount rate as we move through the end of the year as people have exhausted their budgets have been successful in that regard.

Charles Meade

That is helpful color. And then, Nick, going back to your convertible bond offering, can you give us kind of a narrative of your evaluation, your selection to go with that kind of financing route rather than either some mix of straight equity and/or straight debt? And whether this was something that you decided was the solution you wanted, you were looking forward to whether it was the other way around that maybe the market came to you and said, we've got favorable terms.

Nick O???Grady

Yes. I mean, I think let's take a step back for like 30,000 foot. We've been looking at convertible bonds, or Chad and I've been looking at them for 4 or 5 years. And the various -- it is a very bespoke instrument. I had a board member once tell me that it sounds like a witchcraft to them which I appreciate. And the complexity is interesting. Look, the reality is that you can make a convertible bond whatever you want. And obviously, the embedded optionality and it provides a lower cost which is particularly sensitive in an interest rate rising environment like we're in today. But ultimately if you look at the instruments that we chose for this bond and Chad mentioned this in his prepared comments, effectively we've been able to boost it to a $52-plus conversion rate. But even at that conversion rate, there is no dilution. Effectively, we pay back the bond in cash.

And so therefore, if you -- and Charles, I think I provided you with some of the kind of Excel metrics on how this works. But ultimately it provides all the good things of a convertible bond which is a lower coupon with really minimal dilution on the back end. And because we use the cap call where we can control it, we can always, over time, move and manage that to prevent any dilution if we so desire with a minimal impact to the overall cost of capital. So we've really threaded the needle here. I will tell you the convertible bond market is heavy in tech and biotech. And so they're not used to profitable corporations being part of it, so the demand was off the charts. We recognize when you do and price this and just the mechanics of the derivative is going to hurt your stock for a day but I think as you saw, it was really a one-and-done type scenario when it goes through there.

I mean when you compare it to common equity, we don't really feel like this wasn't really a function that we felt like we needed to manage our leverage ratios. In fact, they'll flex up for a quarter or 2 but we didn't really need an equity injection. And I think that we feel like the high-yield bond market is too expensive, just simple. And so this instrument provided all the good was really none of the bad and I think it was a fairly obvious choice, admittedly a more complicated. Thank you, Nick.

Operator

Thank you. [Operator Instructions] We have next question from the line of Derrick Whitfield with Stifel. Please go ahead.

Derrick Whitfield

Thanks. Good morning, all.

Nick O???Grady

Good morning.

Chad Allen

Good morning.

Derrick Whitfield

Throughout earnings, I think Scott touched on this earlier but co-development has been a subject of focus, particularly in the Midland based on industry commentary. Regarding your Mascot project, could you speak to the co-development strategy there?

Nick O???Grady

In terms of -- I mean, we will spend pretty much every long -- are you just talking about in terms of structure, Derrick or in terms of communication and all those sort of things.

Derrick Whitfield

More associated with how you're going to develop the suite of intervals.

Nick O???Grady

Yes, yes. So we began negotiations and discussions with MPDC back in June. And they laid out their view of development and optimal development and we spent a lot of time with our adviser and our technical team reviewing that. And it's -- candidly, it's changed like anything else over time. And then ultimately, we memorialized it when we built a joint operating agreement which both gives us obviously RipCord features and protections along the way but also a strong level of confidence in how it's developed. I think it's really important, too, in these units to really develop them all at once to maximize the EURs and the ultimate IRRs on those wells and that was something that we very much agreed to both experientially and just in terms of how the Midland in communication between those units -- between those wellbores works. So it's very important.

I'm sorry, go ahead, Adam.

Adam Dirlam

No, that's right. I mean, the short answer is that's exactly what's going to happen. I mean what they've done and you can see it on the gun barrel in the presentation that drilled the deep rights to HBP acreage than the offsets in order to mitigate any sort of frac communication with offset operators and then they're effectively just moving east to west across the board.

Jim Evans

Yes. And you can see this is a 4 unit development. So one of the units is already fully developed across the entire suite of zones. So we can see the impact of the parent wells versus the child wells. And going forward, as co-develop, we can model that out with our expectations. And obviously, we're -- as Nick mentioned earlier, we're always a little bit conservative. So I think here in this area as well, we're being conservative with our assumptions here and there's probably some upside to what we think the actual results will be.

Derrick Whitfield

That's great. And maybe just a build on where you ended there in light of how active you guys have been in A&D. I wanted to ask if you've had a chance to perform work back on your 2021 acquisitions to see how close your projections were. I'm sure as you guys have noted, you've been quite conservative in your assessments.

Nick O???Grady

Yes. I mean I can tell you, universally, I think we've destroyed every single forecast that we put forth. I mean, I think we mentioned it on our -- in my prepared comments about the Marcellus and just the overall performance. Remember, we underwrote that as if Chevron still operated it. And I think both performance and cadence of development on Veritas which is our largest one has materially exceeded our estimates. I mean, I think literally if you go deal by deal over the last 1.5 years. And frankly, I think almost every transaction we've done since 2018, I think we don't talk about it -- the flywheel transaction we did back in '18 which is heavily leveraged [indiscernible] has turned out to be a home run and they've been one of our marquee operators in the Williston over the last year or two.

Derrick Whitfield

Terrific. It's very helpful. Thanks for your time.

Nick O???Grady

Thanks, Derrick.

Operator

Thank you. We have next question from the line of John Freeman with Raymond James. Please go ahead.

John Freeman

Hey, good morning, guys.

Nick O???Grady

Good morning, John.

John Freeman

The first thing I want to touch on, obviously, you have done a remarkable job growing the base dividend over the past year plus. And just a year ago, roughly like last December, you had a presentation you put out that sort of gave sort of more detailed kind of look around the base dividend kind of growth plan and kind of how you all thought about the structure. And I just sort of want to revisit that kind of initial concept. So initially that was based on $50 oil, $3 gas and you basically said that price that could be able to grow kind of 20% on average kind of quarter-to-quarter growth rate through '23 and that would sort of equate in '23 to like 1/3 of your free cash flow after maintenance CapEx at that price deck. I'm just trying to get a sense for -- obviously, you are almost a year ahead of schedule, a combination of mainly M&A has obviously been much more than you all were assuming in that plan which didn't assume any M&A.

But when I think about like going forward, obviously, you've made it clear kind of what your view is on the special dividends. But should we think that like on a go-forward basis, the base dividend, it's always going to kind of run kind of that rough idea of a price deck at the 5.3%, 1/3 of free cash flow post maintenance CapEx? Or is there in your thought at all about longer term, like maybe what the large caps do in having this kind of fixed plus variable component or just assume the base dividend kind of is what it is. And as you do acquisitions, maybe that kind of goes up with it. You keep the conservative price deck and then you just sort of layer on from time to time, the buybacks like you'll have.

I'm just trying to get some more color around how you think about long-term because you all obviously been way ahead of what you all originally projected.

Nick O???Grady

Yes. I mean I think we noted in our quarterly presentation. I think this quarter's dividend is about 43% higher than what we promised last December when we launched the plan. I think it's a little more complicated, John, in the sense that we want to provide a solid and growing dividend. I think the rules that you're discussing are healthy and consistent and true. But also we think about it, too, in terms of what is the yield you're providing to investors. Too much yield is not a good thing for the business long term and too little yield is not a good thing. I mean, I think we're -- this sounds sort of boiler, we really are focused on delivering the best risk-adjusted total return value proposition for the stockholders. And this -- it means consistent well, underwritten base dividend, premium cash flow growth. It is one of the highest base dividends in the space and that's partly because I think we have higher ROCE even average.

And I think it's a disciplined approach from acquisitions over the last 2 years as well. I think we can continue to drive capital allocation, balancing current income with future cash flow growth and again, targeting that superior total return. But I think they are out in the public forum. I think we've targeted by the end of next year to get to about $0.37 a share per quarter and we've fairly consistently accelerated upon those plans. And so if and as we achieve those internal goals, I think we hope to keep delivering better returns. We may shift our capital allocation over time, though, because the factors that will drive that will be the valuation of the stock, the yield of the stock and the opportunity set in front of us in totality. I'll take dynamism over kind of dogmatic plans any day from a long-term value creation perspective.

I think people love formulas. And I think there are formulas you can set at baselines but I think flexibility in making the best decision for the business over the medium and long term will trump that over time.

John Freeman

I appreciate that, Nick. And then just my follow-up, just touching back on M&A again. I mean, last quarter, in August, you mentioned that there was just a number of sellers out there with unrealistic expectations. You talked about how the bid-ask spread was very real. And it's just, I guess, sort of remarkable just from August to now what you all did with those 3 pretty meaningful acquisitions during the quarter. And I'm just trying to get a sense of like what do you think sort of changed? Like is it, I don't know, private backed entities that just need to monetize or just something that caused all of a sudden for a bunch of things to kind of dominant for you all to be successful as you were on the M&A front.

Nick O???Grady

Yes. I mean, I'll give my commentary and let Adam finish it up. But I think my view is a lot of this is timing. You get a lot of bluster and then people threaten and say we're going to go run a process and we say, sure, go ahead and then we come into the process and we realize whether we have the highest price or not, we're certainly the most viable and likely to close. I would say that in the recent transactions, when you do one, it's kind of funny. You do want and it actually seems to exert pressures on the others because they're afraid that then you're going to be out of the market and suddenly people are willing to negotiate. So I would say that as we've had the success on those few, it has tended to actually bring down the expectations from others in our opinion.

But honestly, we are always -- you guys might be surprised at how many transactions we were able to accomplish. I think we would be just as equally surprised. We don't -- we go into this with a fairly -- I don't want to call it mean-spirited but fairly mechanical approach. Sometimes it works, most of the time it doesn't and when it works in a rapid succession, color or a surprise that we certainly don't go looking for this.

I don't know, Adam, is going to finish it up.

Adam Dirlam

Yes. I think 2 of the 3 took effectively 6 to 9 months from kind of start to finish and sell, I think the next point a bit unexpected. We would have been thrilled to have one of these and the fact that we're able to tuck in all 3 is a bit, I think, coincidental in terms of signing them up on top of each other. The third acquisition was frankly a group that we had done a prior acquisition with the prior years. And so that was easy in terms of prosecuting and negotiating the PSA effectively just to take the same one off the shelf. And as we look forward, I think or look back in terms of the tracking list of last quarter or this year. These were ranked 1, 2 and 3 is, call it the most desirable in terms of asset quality and balance.

As it stands today, there's probably another $2 billion worth of live opportunities that are out there but the quality of the assets, I think, is hard to compare with what we've been able to sign up to date. And all that said, if these come in, in a linear fashion. And so to the extent that there's something compelling, we'll certainly be screening them.

Nick O???Grady

Yes. And I mean, just to give you a frame like how much of a crapshoot this can be sometimes, there was a Williston asset for sale this summer. And I think somewhat outbid us by like close to 50% or 40% for it and it's an asset that we were in 2/3 of the properties. And so people have different views on value. And -- if someone wants to -- we're happy for the seller if they can get that value and we're certainly happy not to have it if it's going to trade for that value. And so like I said, we're pretty mechanical. And sometimes we have success and a lot of times we have failure and it's just the way the cookie crumbles.

John Freeman

Thanks, guys. Well done.

Nick O???Grady

Thanks, John.

Operator

Thank you. We have next question from the line of Donovan Schafer with Northland Capital Markets. Please go ahead.

Donovan Schafer

Hey, guys. Thanks for taking my questions. In the Q2 call you guys talked about, I think, as an example, you mentioned an AFE that came across your desk for a 2-mile lateral that was like $16 million and you went non-consent. It seems sort of like a no-brainer. But I've also heard that sometimes operators might inflate their AFEs as a way to sort of discourage the non-operated interest holder from participating. So I guess, first, my question is just is that kind of true where you might get some inflated AFEs where they're trying to kind of trick you into not participating? And if it is, then how do you know the difference in those cases, whether you should go non-consent or whether they're just kind of trying to fool you?

And then, I guess also if there's a competitive advantage there where someone that might get scared away by a pad at AFE but you can look at it and say, no, no, no, we know we can see through this. So just any clarification on that or if that's even the same.

Nick O???Grady

We certainly see it from time to time. What I would tell you is that's a very slippery slope because these operators are legally obligated to give us their best estimates. And so if they're caught doing that, they're going to create a whole host of other problems for themselves and it's a small universe, people talk. We've had it happen, probably it's been a few years at this point. We approached the operator. They kind of went about faced and reissued the AFEs. And so I think, by and large, there's certainly contingencies within the AFEs and those are things that our engineers are looking at on a line-by-line basis but you're generally not seeing that sort of trigger going on in the space because the ramifications are high.

Jim Evans

I would say Donovan, we're in almost 9,000 wells. You have 100 operators and we generate $1 billion in cash flow a year. I don't think that the high-cost AFE is going to scare us. And because we're in all those wells, if we see it something that looks out of school, our data???s kind of tell us in advance.

Nick O???Grady

Yes, that's right. I mean I would almost even look at it on the flip side, you're going to have certain operators that have drinking their own coolie [ph] from a well cost standpoint, having that data to really understand which operators have the propensity to overrun is probably more important.

Donovan Schafer

Okay. Okay, that's helpful. And then as a follow-up, it looks like you had some good Marcellus production that came in during the quarter. So I'm just curious, was that on acreage that you already had in place at the end of the second quarter? Or was some of that from incremental non-op opportunities, AFEs or things that you were able to sort of pick up during the quarter?

Nick O???Grady

No, Donovan it's all organic. We don't -- we have not really had an active ground game in our Marcellus properties. It's a large, right, joint development with EQT.

Donovan Schafer

Okay. And then if I could just squeeze one more in real quick. So the MPDC, the Mascot project, it's -- I may be completely off the mark on this but my intuition or just sort of Texas is a super friendly jurisdiction. So that's all really positive. But you could see that you're sort of drilling under the city of Midland there. And I'm wondering are you guys in a better position to kind of underwrite that if there are any -- is that the type of thing that would discourage other potential bidders that you can look at it and think through it and say, well, there's -- I don't know if there's any kind of risk or guidance there, maybe other people have a superficial reaction the same way I'm kind of thinking about it on the face of it.

Nick O???Grady

I'll give you the easy answer to that which the answer is no. I think that while it's under the city of Midland, the land and service where it's being drilled from is outside of the city of Midland, both Pioneer Endeavor about these acreage and are doing the exact same thing. I think what gave us an advantage in this was that the operator did not want to sell the entire project. They wanted to stay in it. And so I think it's just as simple as that. And that ultimately gave us a strategic mandate. And believe me, there were plenty of operators ultra-circling, hoping to take the entire concept.

Donovan Schafer

Okay. All right, great. That's very helpful. Well, thank you guys and congratulations on the quarter. I'll take the rest offline.

Operator

Thank you. We have the next question from the line of Noel Parks with Tuohy Brothers. Please go ahead.

Noel Parks

Hi, good morning.

Nick O???Grady

Good morning, Noel.

Noel Parks

Just a couple of things. And you talked about the process of coming up with what 2023 is going to look like on the budget side, I'm just curious about your degree of visibility this year. And I'm just wondering if you're in a position of waiting for more AFE input into your own calculations? And whether what you're seeing for AFE are looking relatively stable or in line with your expectations or sort of trending up? And I just ask about the AFE timing because operators have been pretty unanimously reluctant to give much of an idea of budgets with many, many deferring until early '23. So I was wondering if that was rippling through into sort of your information flow?

Nick O???Grady

I mean, I would say from a visibility perspective, we'll end '23 with the highest level of visibility we've ever had as a company, anchored by a bunch of important projects but also just given the levels of AFE activity we're seeing right now that is really targeted towards 2023. I think the question that really surrounds our 2023 budgeting, Noel, is very simple which is what level of activity and production do we want to target? Like what do we think is the appropriate way. And I think that there are various schools of thought within the business. And I think that's what's driving why we want as much time as we do.

I don't know, Adam or Jim, if you want to add to that?

Adam Dirlam

No. I mean from an AFE activity standpoint, I think we have doubled the gross AFEs or close to kind of quarter-over-quarter with a relatively flat average working interest and a lot of that is driven by the Williston as operators kind of get ahead of things before winter weather sets in and all that's going to be 2023 activity. And then to Nick's point, I think we need to be dynamic in terms of the acquisitions that we've signed up, the joint development agreements that we've got in place. And then what role does the ground game and the opportunity set looks like as we move into 2023. And so it's a matter of balancing all of those 3 prongs, actively managing it all and high-grading for that matter.

Noel Parks

Great, thanks. And then, I just wanted to sort of in a bit of housekeeping trend to the hedges. And you mentioned the addition of some really attractive collars. And I think with the different deal announcements you've done, you had updated the hedge in full accordingly. But I'm a little unclear about sort of the effective date of the numbers you put out because it just seemed to me that there was maybe a little bit of shifting in the numbers in the presentation. I don't know if it was a little bit of trimming here and a little bit of adding there. But any insight on that would be great.

Nick O???Grady

Yes. I don't know what you're talking about there, Noel but we did add some pretty attractive collars. Maybe it's just the timing of the presentations that we did but I don't recall -- I don't know what you're talking about.

Noel Parks

Yes. No, the things I saw were just like super minor. So maybe even just been rounding everything...

Nick O???Grady

Would you have one small rent linked edge which would maybe move the dollar figures ever so slightly. That's the only thing I can think of. I mean, I think it's like 1,000 barrels a day or something next year, right? That's the only thing [indiscernible].

Noel Parks

Okay, great. And those are all as of 9/30, right?

Nick O???Grady

Those would be as of today.

Noel Parks

Okay, thanks a lot. That's all for me.

Operator

Thank you, Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to Nick O'Grady, CEO, for closing remarks. Over to you, sir.

Nick O???Grady

Thanks, everyone, for joining us this quarter. We'll work extremely hard and we'll see you on the next one. Thanks.

Operator

Thank you. To access the digital replay, please dial 877-660-6853 or 201-612-7415 and enter access code 13733042. I repeat, 13733042. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time and thank you for your participation.