Q1 2024 Northern Oil and Gas Inc Earnings Call

Participants

Evelyn Infurna; Vice President - Investor Relations; Northern Oil and Gas Inc

Nicholas O'grady; Chief Executive Officer; Northern Oil and Gas Inc

Adam Dirlam; President; Northern Oil and Gas Inc

Chad Allen; Chief Financial Officer; Northern Oil and Gas Inc

Neal Dingmann; Analyst; Triust Securities

Phillips Johnston; Analyst; Capital One

Scott Hanold; Analyst; RBC

Charles Meade; Analyst; Johnson Rice

Derrick Whitfield; Analyst; Stifel

Donovan Schafer; Analyst; Northland Securities

Lloyd Byrne; Analyst; Jefferies

Paul Diamond; Analyst; Citi

Noel Parks; Analyst; Tuohy Brothers

Presentation

Operator

Greetings and welcome to the NOGs first-quarter 2024 earnings conference call. (Operator Instructions)As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Evelyn Infurna, Vice President, Investor Relations. Thank you. You may begin.

Evelyn Infurna

Good morning. Welcome to NOG's first-quarter 2024 earnings conference call. Earlier this morning, we released our financial results for the first quarter. You can access our earnings release and presentation on our Investor Relations website at NOGInc.com. Our Form 10 Q will be filed with the SEC within the next few days. I am joined this morning by our Chief Executive Officer, Nick O'Grady; our President, Adam Dirlam; our Chief Financial Officer, Chad Allen, and our Chief Technical Officer, Jim Evans.
Our agenda for today's call is as follows. Nick will provide his remarks on the quarter and our recent accomplishments. Then Adam will give you an overview of operations and business development activities. Chad will review our financial results. And after our prepared remarks, the team will be available to answer any questions.
Before we begin, 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 have been described in our earnings release as well as in our filings with the SEC, including our annual report on Form 10 K in 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. Reconciliation of these measures to the closest GAAP measures can be found in our earnings release.
With that, I'll turn the call over to Nick.

Nicholas O'grady

Thank you, Evelyn. Welcome, and good morning, everyone, and thank you for your interest in our company. I'll get right to it with four key points. Number one coming out strong right out of the gates. We saw significantly better than expected results in the first quarter, driven by two primary factors strong well performance and a pull forward of activity with more wells turned in line than we expected. We had highlighted strong well performance last quarter as well, but it was less noticeable in Q4 results due to a higher level of curtailments with the ramp at Mascot in full swing, our other JVs performing well and higher oil prices.
We are seeing organic activity accelerate, which bodes well for our 2024 production. Overall, the larger than expected TIL count increased our overall capital, but was more than made up for by higher cash flow and production that will benefit us as we head into the second quarter. We expect modest additional pull forward in the second quarter, though not to the same extent as good pricing continues to bring value forward for our investors.
This highlights one of the greatest facets of our nonoperated business model, which is the alignment with our operators when prices are high we typically see the economic incentives work their magic to bring forward value into the higher price periods like it did here. And additionally, as we talk about the asymmetry of hedging we produce more barrels when price is our higher, leaving us more unhedged than we expected and a higher priced period.
While we've seen development accelerate into the highest priced period of the strip for the year boosting our profits for the quarter. Our plans for all of 2024 remain largely unchanged with only very modest changes to the pace. Our hope would be to the extent that commodity prices stay robust and it warrants activity levels and returns that trend toward the middle or upper band of our guidance, which should translate into higher production as we exit the year and into 2025.
With that said, we want to remain flexible with our capital as always, to ensure we're earning significant returns, shadow highlighted further, but despite the lower headline free cash flow number under the surface, we've made substantial progress on the working capital front and made better progress than we anticipated on our balance sheet year to date after closing the last of our Q4 acquisitions, we paid about $40 million in dividends, spent about $20 million in share repurchases and still pay down about $50 million worth of debt. All of this was during a period of hefty investment. So we expect our free cash flow base to pick up even more meaningfully in the second quarter and continue as the year progresses.
Number two, waiting for the right opportunity. As we highlight nearly every year, our ground game business typically has a quiet first quarter and this one was no different. Characteristically see people aggressively spending their budgets early in the year. Additionally, strong crude prices can have an effect on risk-taking from smaller competitors who may not have the wherewithal to invest in the downside.
On the larger M&A front, we've been actively engaged. We've seen relatively wide bid-ask spread, negative rescue from high crude prices and asset quality that's kept us from being overly aggressive. The good news is that on the more scalable front, we continue to work on drilling partnerships, carve-outs and two, non-op and JV front on larger, more impactful and bespoke processes. We shied away from some of the less value added marketed processes that, in our view have been both lower-quality and saturated with returns that in many cases did not meet our thresholds.
These market conditions ebb and flow and can change within a given year. So we stay active in all facets of business development to capture the right opportunities given the overall backlog. We're staying disciplined for the right transaction to grow our business and have I have the utmost confidence that over time we will find great opportunities for growth.
Number three, dynamic capital allocation one oh one with a pause in acquisitions and relative weakness of our equity performance early in the year, we did elect to dynamically direct our capital towards share repurchases and simplifying our capital stack. Dynamic capital allocation is just that dynamic. Our flexible business model allows us to quickly adapt to changing circumstances.
The contraction in our equity valuation in the first quarter, as I highlighted in our last earnings call, provided a favorable time for share repurchases. We pounce on the opportunity at attractive prices. We also cleaned up the last tranche of our remaining equity warrants, which were issued as part of an acquisition in 2022 at lower prices than current in a net exercise style exchange.
Simplifying transaction both reduces short pressure on our equity as well as long-term dilution potential and another value added move. Most of those warrants were already accounted for in our diluted share count. But over time, the potential dilution from stock performance and dividend payments could have grown meaningfully. And we're very bullish on our outlook as we look forward.
One of the primary goals for this year is to put the business in a position to have increased optionality as we head into 2025, whether that's the further increase the dividend allocate more to buybacks or allocate more to growth prospects. The key dynamic capital allocation is to make decisions that maximize total return.
While dogmatic formulaic approaches may seem tempting over time they are prone to missed opportunities given weak natural gas prices, high interest rates and an uncertain economic outlook in an election year, there's a high probability we will have market volatility events, which could potentially create great buyback acquisition opportunities or chances to grow the dividend for us.
We want you to know that as always, we are watching closely and are highly aligned with our shareholders to deliver number four confident for 2024 and 25. We recently issued an updated and much improved ESG report, and I talk a lot about our philosophy of Kaizen here at NOG. Kaizen is a Japanese term, which basically means continuous improvement, and that's built into our culture here at NOG. After launching our AI-powered data lake system TrueCar last year, we continue to enhance and expand its functionality. And internally, we remain focused on improving data quality to further leverage our analytics, our underwriting and predictive capabilities to help grow our business.
Not a week goes by or I don't hear that one of our departments is building out new capabilities to exploit our massive trove of data. What that data is showing us gives me tremendous confidence in the people at NOG, our assets and our outlook for 2024, '25 and beyond. We continue to add systems talent and new processes to get better and better at what we do with Kaizen.
We're never satisfied leaving well enough alone for 2024 specifically, as I mentioned in my first point, our sound investment process and core tenant of both focusing on high quality assets is time and time again, proving itself out with better than expected well performance and our culture of conservatism has delivered the strong results we've seen to date.
While we reiterate our forecast for the year, we're working diligently to augment those results and find additional paths to growth before I hand it over to Adam, I'd like to thank the entire energy for team for their hard work and dedication for another great quarter, and thank our analysts and all of you for your interest in our company today. Thanks also to our operators out there for their incredible field work and the great partnerships we forged. We've had another great start to the year.
And while it's early, the assets are performing exceptionally well as we convert a lot of the money in the ground from the past six months into production and cash flow this year as 2024 progresses, I also expect we will see more growth opportunities emerge. And given what's in front of us today, I remain confident that NOG remains a superior investment product to our peers and that our growth trajectory is unmatched in the upstream space. As a management team, we are aligned and incentivized to maximize total return for our investors year in and year out. That's because we are a company run by investors for investors.
With that, I'll turn it over to Chad.

Adam Dirlam

Thanks, Nick. I'll open with some commentary on the first quarter's operational highlights and then shift gears to provide some additional color on what we're seeing on the M&A front. The first quarter picked up '23 left off with continued acceleration of development and marking the fifth consecutive quarter of record production for NOG.
Production increased 4% quarter over quarter, driven by well productivity and a pull forward in the Permian, which accounted for three-quarters of our well additions in Q1, partnering with top-tier operators across all of our respective basins with the likes of Mewbourn Permian Resources was sent in Continental, but helped drive the beat on production.
Unpacking this further, we saw 2023's ground game investments add nearly 5,000 barrels a day of production over the fourth quarter, while also seeing outperformance on our Noble and Utica asset turn-in-lines topped expectations with 25.3 net wells added in Q1 as the Mascot project pulled forward 2.4 net wells that were expected to come online in the second quarter.
The wells were added late in March. And as they clean up, we expect to receive the production benefit in the second and third quarters of the year with higher conversions in Q1, we had an expected draw to our wells in process and ended the quarter with 52.4 net wells in process 40 have been in our oil-weighted basins. The Permian now makes up 60% of our oil-weighted wells in process and our exposure to top tier operators remains consistent across all of our basins. Pace of AFEs was as active as in the fourth quarter, and we are seeing a healthy backlog of well proposals as we head into Q2 at the end of the quarter.
Well, proposals not yet spud totaled 24.7 net wells during the quarter, we were validated with over 180 AFEs and elected to over 90% of the proposals on a net basis, January and February kick things off with robust gross activity on our organic acreage, offset by lower average working interest. Recently, we have seen that turnaround as March and April had three times the net well activity that in January and February new well proposals are showing moderate signs of deflation as absolute and normalized costs in the Permian have declined and have been the lowest that we've seen in the last 12 months.
Estimated well costs in the Williston also ticked down 5% quarter over quarter. All that said, we continue to remain conservative with our forecasts, especially in light of a higher priced commodity environment, an accelerated development.
Turning to the M&A landscape and our business development efforts. Q1 was frothy as competition leaned in with new budgets as is typical to start the year and customarily, we are happy to let the bull run by and stay disciplined with our underwriting waiting for the appropriate opportunities. Despite some elevated competition in our ground game, we were able to pick up over 1,700 net acres of longer-dated inventory in 0.6 net wells in process in the Bakken.
We also closed on a joint development agreement, and we'll be kicking off development across four to five units in the third quarter. We continue to get creative with structuring and we see significant significant upside with this project having a sight line to add up to 10 more drilling units to the program. There is no shortage of shots on goal as we evaluated over 120 transactions in Q1, and we're already seeing momentum and conversions through April.
Shifting gears to the larger M&A landscape, we remain as busy as we've ever been evaluating opportunities for the right fit. In the first quarter alone, we reviewed over 30 potential transactions. The quality of properties had been variable at best quality has started to pick up and the mix of prospects have included non-op packages, joint development programs, minority interest, buydowns and the co purchasing of operated assets.
Looking ahead, we are actively engaged in over 10 processes with asset values ranging from $100 million to over $1 billion while continuing strategic discussions on other off-market opportunities. We're encouraged with the conversations that are taking place, but any potential transaction will need to have the right fit at an asset level as well as from a risk-adjusted return perspective.
With that, I'll turn it over to Chad.

Chad Allen

Thanks, Adam. Do I'll start by reviewing our first quarter results and provide additional color on our operations average daily production in the quarter was more than 119,000 BOE per day, up over 5,000 BOE per day compared to Q4 and up 37% compared to Q1 of 2023, establishing a new energy record oil production mix of our total volumes was in line with our guidance at just over 70,000 barrels a day and gas was a larger contributor as compared to the past, reflecting 2.3 net wells in Appalachia and a full quarter's contribution from the Utica acquisition.
Adjusted EBITDA in the quarter was $387 million, up 19% over the same period last year, but modestly lower than the last quarter, mainly due to lower average realized prices per BOE in the quarter. Free cash flow of $54 million in the quarter was lower sequentially and from the same period last year due to the pull-forward of activity in the quarter, but the peak of this growth capital should Crest as we reach midyear. We anticipate an acceleration of free cash flow in the second quarter as tools come online and we begin to see and begin to contribute to production and revenue.
Adjusted EPS was $1.28 per diluted share. Oil differentials were in line with our expectations at an average of $3.99 at the lower end of our guidance. Williston differentials range from a low of $6.60 in January to a high of $6.95 in February, while Permian differentials saw a market widening from $0.69 in January to to do up to $2.26 in February on the heels of higher production from areas with higher deducts within the basin.
We still expect oil differentials to moderate and have begun to see some evidence of that in late March and in April for natural gas realizations were 118% of benchmark prices for the first quarter due to better winter NGL prices and in season Appalachian differentials but we are still anticipating an erosion in gas realizations as we close out heating season with Waha gas solidly negative combined with shoulder season gas and NGL pricing, we expect markedly lower realizations in the second quarter, perhaps as low as the mid 70% range overall for the year. However, we believe our guidance remains solid. Bar has been plagued by not only capacity, but by maintenance driven outages, and we expect things to modestly improve later in the year.
It's also worth noting our net exposure to Waha is minimal with approximately $60 million a day hedged through Waha basis and Waha gas swaps for the balance of 2024 at very attractive prices. Loe was flat sequentially at $9.70 per BOE, reflecting continued workover expenses, a pickup in activity of our mascot project and a $2.3 million of firm transport charge in the Marcellus for transportation expense should moderate to quarterly charge of approximately $1.5 million per quarter through the end of Q1 2025.
As we discussed on our Q4 call, we anticipate LOE per BOE to be relatively flat through the second quarter before gradually declining as production ramps further in our mascot project and the transportation charge falls to a lower run rate. Production taxes were 9.6% in line with guidance as production ramp in the Permian, which has a higher production tax rate.
On the CapEx front, we continue to experience a pull forward of organic activity driven by the strength in oil prices. This drove CapEx to $296 million, inclusive of ground Gain Capital. It was a bit higher than anticipated for the first quarter of the $296 million, 68% was allocated to Permian, 26% of the Williston and 6% to Appalachia.
If we continue to see strength in oil prices. We expect to see CapEx trend toward the higher end of our guidance range for the year. But that said, the higher CapEx should be accompanied by higher production as our D&C list is actively converting tails and spuds and drawing down our working capital.
Specifically on the working capital front, excluding the impact of derivatives we have seen an improvement of approximately $40 million in working capital since the end of the year. At quarter end, we had over $1 billion of liquidity comprised of $32 million of cash on hand and $987 million available on our revolving credit facility, which was expanded at the end of April as a part of our semi-annual borrowing base redetermination.
Our borrowing base remained constant at $1.8 billion. We increased our elected commitments to $1.5 billion and added three high-quality banks to our syndicate at quarter end, net debt to LQA EBITDA was 1.25 times, and we expect this ratio to trend down throughout 2024 following significant cash M&A activity.
As Nick discussed earlier, we're actively repurchasing shares in the first quarter. Despite the limited open window, we repurchased 549,000 shares for $20 million of our common equity at an average price of $36.42. We are committed to allocating capital to share buybacks where there is a market divergence between our absolute and relative performance.
And finally, before we go to Q&A, I'd like to address a few adjustments to guidance. We anticipate production of 117,500 to 119,500 BOE per day in Q2, flat versus Q1. Given the pull forward in March following continued pull forward should see CapEx down sequentially and a significant improvement in our free cash flow. Our Q2 expectation of oil volumes is also in line with Q1.
We have tightened the range on production expenses, which are starting to come down as well as oil differentials, which quarter to date appear to be improving. We may make further adjustments when we report Q2 as needed.
With that, I'll turn the call back over to the operator for Q&A.

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions)
Neal Dingmann, Truist Securities.

Neal Dingmann

Good morning, guys. Good details on Nick. Maybe give to my first question is just on what I guess I would classify as maybe cycle time. It seems like your capital on the ground maybe increased has increased a little bit, but the setup I think as you And Adam, the guys describe it to me, it sounds like the future setup is better than ever.
Is this just a product of cycle time for some of the producers being a little bit longer or what's driving this? Because again, it does seem like I think your second half of '25 look as good if not better than ever seems like a little bit in Q4 and Q1 that was a little more in the ground. So if you can just maybe hit on that a little bit?

Adam Dirlam

Yes, I mean, look, Neil, this is a five to a little bit of some of what we are in a little bit of how things are changing. We're returns-based organization and obviously as a non-operator, the timing of capital expenditures can shift to market. But as I as I said last quarter, and I'll say again, the total capital expenditures are the same and to the extent it increases from one quarter to Enexus because we're getting more activity, you know, if we're getting more activity that meets our return, that's a good thing.
But at least what we've experienced in the last nine months is an acceleration of development. Now, you know, I would tell you in the last 18 months our average spud to TD timing has gone from 234 days to 110 days. That's a significant move, and that's hard to perfectly model come. I'd say the difference between last quarter and this quarter is that this quarter's acceleration also came with more tills, which obviously translated into significantly more production.
So you got a lot more cash flow and benefit from it than last quarter. And so it was a little bit less obvious last quarter. But I'd also say because we're an accrual shop and because these accruals roll off over an extended period of time. And as these invoices are received, it's not something that's done quarter to quarter and we don't run the business quarter to quarter nor the capital spend quarter to quarter, it's spent over the life of the wells.
And so over a 12 month period, generally, the capital and the returns you can see from our stand out corporate returns tends to play out, and I want to be clear, this is a good thing. Corporate Finance would tell you bringing capital forward is ultimately bringing net present value forward. That's capital that's corporate finance model, and we just brought forward significant production into the highest priced part of the strip and yet it brought forward some CapEx stayed the same CapEx that would have been spent later in the year at a backwardated strip. So I would argue this isn't about paying it off.

Neal Dingmann

They have great well site. And then just a quick follow-up on capital allocation. You mentioned just the shots on goal and I continue to think you all have more opportunities than almost anybody found. How do you balance that in your shareholder return given you have more prospects than I think, any company out there?

Nicholas O'grady

Yes. I mean, I think I don't see them. As I say, the same thing. We always would say is I don't think we view them as mutually exclusive. And I think I would also add that we look at a lot of acquisitions as things that can enhance those shareholder returns. So most of the assets that we're looking at are generally, you know, cash-flowing acquisitions.
So a lot of the assets that we look at, we think can enhance our dividends over time. But I would tell you that specifically, we would weigh a stock buyback as an example versus and the potential long-term benefits of that versus an acquisition. And we weigh those against each other every single day of the week.
And there are times where one might look more attractive long term, but nowhere in the like we talked about it might sound cliché, but it's not when we talk about maximizing total return, we really are serious about it, and we're paid to be serious about it. And so we have to think about it's over a three, five, seven year period of those decisions that we make today and what they're going, what are the long-term implications of those things, and that's how you end up for the equity and what those acquisitions versus the decision to buy back stock today are going to make on that. But I would tell you I think you can the answer answers. There's room for both.
Adam, I don't know if you want to add to.

Adam Dirlam

That is no. I mean, I know you touched on it in your prepared comments in terms of dynamic capital allocation, we're always actively managing the portfolio, reviewing what's in front of us and where we're going to allocate capital accordingly to what dislocations you're seeing.

Nicholas O'grady

Yes, I mean, I think even as it pertains to the stock buyback and admittedly, you know that we had a relatively narrow window in the first quarter. We spent a lot of time about the mechanics and just with the Board of Directors about, you know, how we would do it in about what what rules and regulations would be around it. And what what what would be the nuances about that and how we would weigh that against potential M&A and just the opportunity cost and to make sure we left room for that. But I would just say this that we're not short of opportunities.

Neal Dingmann

That's for sure, but helpful. Thanks, guys.

Operator

Phillips Johnston, Capital One.

Phillips Johnston

Thanks. So just to follow up on the CapEx for the year, possibly landing in the upper half of the range, assuming oil prices and activity remains elevated. Chad, you sort of alluded this you sort of alluded to this in your comments, but would you think that your net well count and your production volume for the year might also be a little bit biased to the upper half of the ranges, or do you think it's a little bit too early to tell just which are lag effects and whatnot.

Nicholas O'grady

We ourselves as Nick. I mean, I think I read your note and I have to object to one of the things said, I think you I think you misconstrued what we were saying, we're not suggesting that our CapEx assumes that oil prices will stay high for the rest of the year. It's quite the opposite.
What we were saying was that since oil prices have increased, we've seen an increase of an AFE activity on our acreage and that actually activity would translate into CapEx theoretically late later in the third and the fourth quarters of the year. And our comment was that we're returns-driven, right? So our consent activity on those AFEs is driven by oil prices and underwriting. Those returns. And so if oil prices stay high, we'll consent to that activity.
And ultimately then the CapEx would be higher, not the other way around. So we also notably the flexible because our business model, obviously, inherently is more flexible than an operated one. And so to the extent that oil prices were to change, obviously, if we pivot quickly, we're just suggesting that if things stay that as stayed as they are, we wanted to guide investors investors accordingly based on status quo.
So I would tell you that if oil prices stayed high we would probably expect to see continued elevated AFE activity because what we noticed was that as oil prices rallied early in this year, we started to see a notable pickup in activity. And that's going to translate, particularly that activity you see today is really going to be activity that's going to translate into well proposals that are going to start to come online towards the end of this year and point towards 2025. And so there would be time lines that would likely be towards the end of this year and chatter and then dovetails into your comments in terms of the split of the pill pulmonary embolism.

Adam Dirlam

Right now, we're getting well proposals, especially with elevated working interest and depending on who those operators are and how they're developing it, whether it's a one to two well development program or if it's a full cube development program that's going to dictate fill causing it or kind of on that cost as we see things socialized and development progresses, that's where we're at right now.

Nicholas O'grady

We're not deciding to spend the money and hoping oil prices are going to stay high. We're saying that if oil prices stay high, we're likely to see that kind of activity. That's what we suggest.

Phillips Johnston

Okay. I appreciate the clarification there. On shifting over, I guess, to your views on the gas market, we've seen '25 and '26 strip prices actually creep up since you guys reported Q4 despite kind of super high inventories and weak weak comp prices.
I saw your Nimex gas hedges for '25 and '26 on our unhedged are unchanged, excuse me, but are you tempted to sort of layer in anymore on activity, I guess, in the out years?

Nicholas O'grady

Yes. I mean, I think it's been proven time and time again, that contango is a bearish formation, right? And I think and we will probably act accordingly. And I think when the curve went into steep contango over 2024 last year, we began to hedge.
And I think you'll probably see us act accordingly. So I think the answer is yes. I mean, I think a contango tends to give a perverse incentive to producers, right? So it will tell them to keep producing. I know you're seeing curtailments right now, but curtailments are not necessarily a panacea because ultimately you're just turning something off that you can turn right back on and you keep drilling like you've you'll notice most natural gas producers right now are not cutting CapEx. They're actually still drilling and curtailing production.
So effectively, they're going to be able to turn it back on at a moment's notice that's not healing the market, in my opinion. And so to me, it does not make me feel overtly bullish on the market like the market seems to want to be and in a backwardated market is a much healthier market. And so what it's telling me is that we like we want to sell in that market look to I think gas is going to be $1.80 or $2. That's not a sustainable price morning. Naming those high prices are likely and those are obviously, very profitable levels for us. And so I think we'd be very happy to sell into those levels.

Adam Dirlam

Yes, Phillips. And just on the on the hedging comment, I think we have been adding some some cold call options out in those years. So flip it out in the 10 Q, but yes.

Phillips Johnston

Okay, great. Thanks.

Operator

Scott Hanold, RBC.

Scott Hanold

Look, I'm going to kind of come back to the CapEx conversation we could dumb, but take a little bit different angle on it, I guess correct me if I'm wrong, but you back half CapEx, the implied quarterly run rates around [160] to [170]. And could you just give us a high-level view. I think your production probably is going to peak, you know, somewhere in that one, 20 plus range in the third quarter.
And when you fundamentally think about like what CapEx run rate needs to occur to kind of maintain production by your non-ops? Is [160] to [170]adequate? Or does that sort of create a little bit of a tail off in production heading into '25.

Adam Dirlam

Our decline rate is moderating as the year starts or overall maintenance capital is coming down, right? So we feel like we're losing about what, Jim five points of decline rate throughout the year. So as the year as the year progresses, our overall maintenance capital is coming down meaningfully. So the answer to your question is utility. It's a little bit of a fuzzy number, but I'd say that it really depends from a pull forward perspective in terms of the capital.
But but the answer, as you know, when you have not determined within the year, exactly how obviously we have we haven't determined where we want to go for '25 at this point in time. I mean, obviously, we have had we have a long and storied history of growing. So our and we're incentivized to grow. So make every day, I would make everything assumption that we would plan to find ways and paths to grow as we move towards next year come.
But I think the answer here to your question is that we, as it as it pertains to this year from a path or a Jim of them. Yes. I think the answer to this year is that yes, effectively through the past, our overall capital gain can step down throughout the year and then Chad and then production will peak and then slightly decline in the fourth quarter, but but not meaningfully, even though the capital falls off materially.

Scott Hanold

Yes, no, no, I appreciate there's a lot of gives and takes with accruals and stuff like that and that all makes sense.

Adam Dirlam

And remember, it's not it's not a meaningful amount.

Scott Hanold

Got it. Okay. And then I'm sorry, go ahead.

Adam Dirlam

It's just it's just not a meaningful step. It's not a problem.

Scott Hanold

Okay. You all had discussed in some of your prepared comments that some of the stronger production results was due to some pull pull-in of activity, but also some well performance. Can you be a little more specific on that I mean, you obviously have a couple large joint ventures with Masco to Novo.
Can you kind of qualify or quantify what you're seeing with some of those those wells? And is that what's really driving that performance? Or is it more broad-based than that?

Adam Dirlam

I guess a combination or two as far as kind of the projects go, they're all at or above expectations in terms of the new development activity that we've been seeing of Novo at the our New Mexico assets are unique. Assets are outperforming. We've seen some meaningful performance in Williston as well with the likes of Continental and Conoco and exposure to Slawson and Marathon. And they're all kind of sticking into the core where we've got some outsize working interest so it seems to be a combination of all the above.

Scott Hanold

Got it. Thank you.

Operator

Charles Meade, Johnson Rice.

Charles Meade

Nick, Adam and Chad. I want I want to pick up perhaps right where we just left off on the source of the production beat. I wondered if you could look at it or tried to answer it in this framework in late February, you guys thought that there was going to be a slight decline and until you came in with, call it 4% growth on the quarter. So it was there were specific I think this is you I guess you already asked about the geographies. I guess what what changed in in March and that led to that, that led to that result. It was different from what you guys saw at the end of February.

Nicholas O'grady

Well, I think as you're talking about what changed in what we were seeing. I think it's going to be a combination of what wells came online in March as well as as these wells are cleaning up in January and February. You've got very limited data in terms of what you're seeing. And so you've got to let it play out over an extended period of time. And then, Jim, I don't know if you want to comment on anything else in particular.

Chad Allen

But yes, Charles and honestly, we saw a pull forward of activity as well, right? So we had three extra net wells that we weren't really accounting for. So that added some production there to fill. Again, I mentioned with the view that they continued to clean up performed better than we had expected at that time as well as we have some new wells come online kind of mid February on the Noble asset that have significantly outperformed our expectations so that's another driver as well. And then as we showed in the Williston, Nielsen new Continental wells that look really good compared to our expectations. So just kind of the combination of all those things really kind of drove Q1 performance versus what we are modeling kind of that mid to late February timeframe?

Nicholas O'grady

Yes. Sorry, for just a lag in information, right. I mean, we might be getting this information on a daily basis, but you need to be able to bring it in house, socialize that against the model and then putting all the pieces together, you're going to have pushes and pulls everywhere.
And then it's just going to depend on what your working interests are, the timing of that development and information yet.

Adam Dirlam

And there's certain things to Charles from an assumption perspective, like using the Freeze Off event in the Williston, we were very concerned, not necessarily about the Freeze Off event in and of itself.
We had a pretty good handle on that. But we were pretty concerned that it was going to push particularly a lot of the completions out. So we had scheduled the assumption that a lot of the completions will be pushed out multiple weeks. And then you know, later on in February and March came to find out that a lot of that stuff had actually come right on schedule, right?
So that you're going back and rejiggering that as you actually get the well status reports. And so a lot of the a lot of the stuff we had anticipated kind of getting delayed, one of not being delayed. So then ultimately, it's good. It's not just the tills themselves having more tools themselves, but even within the quarter, things being more on-time and being accelerated and you thought so you're getting the benefit of time within a quarter, not just the actual additional activity on top of that.
So that's all that's all helpful incremental detail. And just I will tell you what we mean, I mentioned this in my prepared comments, and we are just seeing flat-out better well performance and we saw that in our jeans and you may not see it because obviously our Permian mix this year is more with the Midland Basin. It is obviously maybe a bit lower than our average last year year-to-date, but it's certainly better than what our internal forecast. And so in general, we've been doing a bit better than we had anticipated coming out, John.

Charles Meade

Got it. And then, Nick, I had another question on the CapEx, and I want to I'm sure that I'm sure that I want to get the benefit because I'm sure you participated a lot internal discussion generic and Vinod, and I want to make sure I understand what you're saying and and how are you thinking about the right applications going forward. I mean in 4Q, you guys had a big CapEx.
It came at a lot higher expected pre release that we got to know one here this quarter. If I if I understood you correctly, the two main drivers appear to be increased cycle time or reduced cycle time. So a increased pace and a higher oil price, which leads to more of a FE. proposals in, if that's if that's correct. What is your are those two vectors? Are they are they are they flat going forward?
I'm not sure I follow are or 0.8. I mean, are we do we still if those are the two big drivers and you go different direction if you want. But the question is as we look at 2Q and 3Q, are those areas still pointed out or are we going to have further decreased cycle times and in Ireland and the oil prices going up but perhaps perhaps there's a is there a building wave of AFEs or is this kind of an iceberg and that's given out.

Nicholas O'grady

I got a question. I got a question on 2018 line versus our gear being. Okay. No, is the productivity improvement in the Bakken done? Because, you know, well, cost wells have gone so much better and fracking has gotten so much better. And every single year, they found ways to make wells better.
So you know, and I got the same question last year and I got the same question. The year before. And the answer is the industry is amazing.
They found ways to go faster and faster and faster. And frankly, you know, the onus is on us, but we look we've we have candidly struggled to keep up with the pace. And we've been I mean, I don't view it necessarily as a bad thing, but the speed at which our operators gone. It obviously takes us by surprise to some degree. But at the same time, like I just I don't really see this as total capital.
You can see it in our weighted average cost of a well, we're not we're not blowing through. We're not having inflationary pressures. If you look at the overall capital Delta, we drilled three extra wells this quarter right. So and you saw them top line results, right? So I don't think again, I don't really see a major disconnect here.
The delta last quarter is masked by the fact that ultimately, it's really a percentage of completion thing as opposed to additional tools. You're ultimately, yes, you're seeing cycle times. I cannot predict if the operators are going to stop going faster. I don't I don't know if I can make that prediction because that will be predicting something that I don't control. And I would say operators are incentivized to make more and more money.
So I'd say there whether oil prices are going up or down, I'd say if oil prices go down, they're going to still trying to find a way to make more money. So they're going to find a way to go faster and faster and make more money. So I would say no, they're going to still find ways to go faster.

Adam Dirlam

And it's just going to depend on the operator mix and the development links in the working interest that we're getting in the door. Right. And you don't necessarily have that view at a at these because they might balance to a it is a one week and then they follow it up with six more and they all end up being on the same path. So those are things that we need to digest. You don't truly understand. I think the AFE activity has picked up. We've seen that in March and April and we would expect that in this environment, all things remain the same that it's been on development cadence and everything else will continue, but that can change on a dime.

Charles Meade

Thank you.

Operator

Derrick Whitfield, Stifel.

Derrick Whitfield

Thanks. Good morning all. First one regarding the larger asset packages, how would you characterize the competition you're experiencing in that market at present, aside from the quality and wider bid-ask spreads you saw on Q one. Is that still a robust market, an opportunity for you?

Nicholas O'grady

Yes, I mean I haven't we haven't at the larger package, Derek. I don't think we felt like there's a ton of money. We've certainly seen bankers trying to make give the illusion of competition in a couple of cases where we haven't really seen much competition a little bit behind in reality. I think where the challenge has been more that I think there's been I think of late, it's been harder for us to find assets that we've really wanted to lean in on, meaning like where you knew the clearing price.
And we really feel like they were assets that we would be willing to, hey, what I knew it was required to take it out and I guess is where I'm just framing it up in a different way for I mean, we're certainly seeing more entrants from family offices and private equity groups and some crossover from the minerals side, which is obviously validating in terms of other sources, recognizing the power of the business model, but that's largely limited to smaller funds.
And so where I think you're seeing maybe a little bit more of an elevation and competition is on the smaller ground inside, and we're just we're playing in different sandboxes what you're starting to talk about asset packages that are north of $150 million in terms of funds that are being raised in being able to handle potential concentration, those types of things. And so I take it up what we're seeing in that regard is generally stay status quo. Obviously, that can also change. But based on kind of what we're seeing and the feedback that we're getting, I don't see a material material change on the large?

Adam Dirlam

Yes. I mean, I guess I'd say where we see people, yes, we've definitely seen buyers of PDP centric assets, and that's we're very happy see that because that's just not where we're generally focused. Yes. I mean, from time to time, I think we see some groups at risk capital deploy it in a meaningful way or is that one group that we saw it ended up paying north of 75% of where we were coming out at that and we're happy to let them have it.
And frankly, they shot their one and only bullet and we haven't heard from them again so and they can digest that for as long as they do. And then if they want to sell it and maybe at that point, we're taking another look at it, but not at those prices yet in the United States.
And I would just tell you that I don't think there's been an asset that we've coveted yet that we really felt was very attractive to us that we haven't felt that we were out match for, you know, when people really love the quality that you've seen us execute on where we've really had to stretch your, you know, go out of our comfort zone four. And I think that that's a testament to where we are terrific.

Derrick Whitfield

And as my follow-up, I'm really thinking about Permian macro regarding the pipeline outages and tighter egress conditions that are expected until Matterhorn comes on in Q3 are you guys expecting the industry to adjust turn-in line activity to match supply growth with egress grew?

Nicholas O'grady

Yes. I mean, you're definitely seeing, especially for some of the smaller operators they're going to have to they're having to navigate around it. I mean, I think we're blessed with the fact that most of our operators in the Permian are bigger operators. What more integrated midstream systems and better access points, but even they have to navigate around these issues, Derrick. And so it's not a small issue, and I don't want to sugarcoat it and you can see that I think we for sort of better for worse.
And I would I would like to say we were geniuses, but we basically have almost zero why exposure this year, um, you know, financially speaking, at least we effectively hedged all of it away. And I I'd love to say we did it completely out of, you know, on purpose. But we just really were we were a little bit concerned coming into the year, and I think we just had a heavy hand on about your hedging it and partly because we are so acquisitive last year, but I think that it's going to take some time, but some of it is rightly highlight. Some of it is it's been made worse by maintenance.
But I don't think it's necessarily going to get, you know, magically better this year. So I and next year, I don't think it's I think it's still going to be a wide issue for some time. I think to answer it a couple of years, you're going to need more and more to be built out. So I do think it's going to limit some growth, particularly in the Delaware for the next yourself.

Derrick Whitfield

Makes sense. Very helpful.

Operator

Donovan Schafer, Northland Capital.

Donovan Schafer

Hey, guys. Thanks for taking the questions. So I wanted to ask about I know we've already had a couple of people ask about the better than expected well performance and so especially beating a dead horse, but I kind of want to I want to get it really. So the core of it. So and in the sense of like to what extent should we should we care so on was this and if we just talk, let's forget about the wells being pulled forward or whatever we're just talking about on like a well on a well on it for a given well, the performance of that well versus your own expectations.
And if we just focus on that, you know, and you said I think, Nick, you said flat-out better well performance. If you who could get sort of the credit for that. Is it just a chance phenomenon and it just had you just there's a statistical distribution and it just happens to be that the rolls of the dice or were better at this time around? Or was it can you identify changes in sort of well design? Or do you feel like this support strength of particular operators or is it alternatively liking it as you know, a matter of conservative underwriting like that?
Another way to put it is, should this be seen as a an achievement of some kind somehow tied to acumen agency? Or is this just a matter of chance? And if it's some sort of like achievement who who gets that credit? Is that a reflection of your business model? Is that a reflection of your operators? Yes, that would be really great.

Nicholas O'grady

I mean, I think I would certainly want to give credit to the operators for their great performance. And I certainly they do all the hard work and I don't want to I don't want to not give credit where credit's due. But to our engineering team, we were really hard to set a standard and underwrite accordingly and then trying to meet and beat those expectations and so I think that, you know, we tried of under and then obviously for you guys to under-promise and over-deliver, and it's not it's not all told to lowball or anything like that, but you really do it's a risky business, right?
It is a risky business and wells. And I think it is the oil and gas business is filled with Optimus right. And I always joke that as a non-operator, you really need to be pessimistic because because there are you find out there, many operators they make, they make a change in well design and they say see better IPs and they carry it forward and think everything was going to be better or they do a reef one, re-frac is good. And I think all refracs are going to be better and it turns out that locational, right?
And so we tried really hard to be take a skeptical lens and be conservative about this and I think that's why generally are reserves have been conservative and we tend to do well. So I want to give a lot of credit to our team that we tend to see better of their results and not, but it also it comes down to a philosophy, and I talked about this in my prepared comments, both assets, number three, which is that you can't engineer bad assets, which is that you can tie to pay a high discount rate for really bad assets.
But at the end of the day, those assets aren't going to be resilient. And you know, I it goes when I when I was a stock analyst back in the day, I would always rather pay a premium for a really good management team and a really good company.
Then you pay a low price for a really bad stock because the chances were overtime that bad stock or that cheap stock, something bad was going to happen because it was a bad company and it was not going to be resilient. And it goes the same thing for oil and gas assets, which is that you buy really high quality reservoirs and really high-quality operators and chances are they're going to do good things with them. And I think that's what our team really focuses on here, which is that we focus on the best operators in the best areas, and you tend to be pleasantly surprised on, Jim, if you want to add to that.

Chad Allen

Yes, I think the other thing you think about too is that operators are always trying to innovate and be more efficient. So it's not just about getting more. You are more reserves out of it, they're also trying to optimize their artificial lift operations. So that's constantly changing. And we're constantly updating our type curves based on what the operators are doing. And so some of it is they're just getting oil out faster, right? Not necessarily that they're going to get more. You are over the life of it. They just found a way to get more out more efficiently through the first 12 to 18 months, which which is a big driver of NPV and IRR, which is what we want.
And so we're constantly taking that into account. And like Nick said, yes, we want to make sure that more often than not that the wells outperformers versus 100 performance. So that's just part of our culture here of how we look at things. And we do we do constant look-backs on performance, you know how well they're doing versus what we originally underwrote.
And over the last three four years, we've been less than 5% off in terms of that. So so we feel very confident about our underwriting here. This is just kind of a pleasant surprise. I and are operators in really good areas and they found a way to just do better than what we expected.

Donovan Schafer

Okay, great. Thank you. It's very helpful. And then a follow up So Nick, in your prepared remarks you called out and I thought I thought this was kind of a good thing to call out and kind of a good insight is the potential for increased volatility you're talking about with respect to your own positioning as a company and the importance of kind of financial flexibility because volatility gives you different levers or things to Polar opens up opportunities on.
But I'm curious kind of just specifically, because I think you were saying well with such low gas prices and also you might I think maybe you mentioned just that it's an election year and or maybe there's just other sort of the geopolitical dynamics sort of or but it does seem like a setup that we could see more volatility between now and November December. And so I'm curious, were you specifically talking about Blake in terms of thinking about what may happen with your own?
And you know, that with the volatility of stock, unlike other securities you could potentially bring in, are you talking more broadly like commodity prices as well and the potential for any type of wild swings around anything like that that they just I wanted to be clear because I thought that was a good point, but I'm just curious what you're thinking. Are you talking what what things are the volatility you're talking about price, commodity stocks, bonds, all of it.

Nicholas O'grady

Yes. I mean, I think advertising, I mean, I think volatility means volatility. I think that and if you look at our track record over the last few couple of years, we bought our bonds, we bought our stock. We have five assets right now. We buy gas assets we bought oil assets, we've done a lot of key. Oh, I would say we are things during periods where we bought them. We spent $200 million buying distressed assets during 2020, right, 90% of our capital, our organic capital basically went to zero during 2020. Right.
And so I think during the year that there are peers, you want to be in a position, you know, to be able to act extreme events happen now obviously, you're at an extreme point in natural gas spot pricing. I'm not sure you're at an extreme point in terms of the strip or in terms of asset pricing or you haven't seen no distress?
Certainly again. Yes, I guess for the assets themselves necessarily and but I think the overall market, to the extent we see a change in the interest rate cycle or things like that, we could definitely see things happen. And so I think we have to see what happens with the overall economy. Yes, it is an election year and typically you can see changes in policy and other things that could potentially happen and so I think we just always want to be in a position to act, and I always use that term dynamic.
And I think it's because we want to have the flexibility to make changes to those decisions. And that's why having a business, you know, the walk softly and carry a big step right group to have that cash flow to be able to make those dynamic decisions and make changes. We've been able to buy our bonds in the low 90s now that traded at well north of par, right? You have those ability to make good decisions when the market gets.

Donovan Schafer

Yes. Okay, very helpful. Thank you, guys.

Operator

Lloyd Byrne, Jefferies.

Lloyd Byrne

Hey, guys. Thanks for all the info, it's really coming back the CapEx differently. It seems like there's a lot of concern. But if I look at the CapEx versus the tails, it feels like the AFEs are either in line or coming down and maybe you can comment on that. And then also, you talked about a little bit of that deflation at Mascot and Novo and so maybe you can just comment on that as well.

Adam Dirlam

Yes. Hello. This is Alan. But I made some comments in my prepared remarks that we're definitely seeing it across the board, both from an absolute and normalized on a lateral foot basis. And we've certainly seen that with our mascot assets as well as our Novo assets. I think that's both a function of what we're seeing in terms of it's drilling as well as just kind of spudded deal timing as well.
I think that on some of the tangibles CASING, those types of things are still pretty sticky, but operators are doing a pretty good job of being able to kind of pick away around the edges. And you see that persisting Copeland

Lloyd Byrne

And then, Nick, just remind us more free cash flow going forward. Our debt targets.

Nicholas O'grady

Yes. I mean, we still we still target around one times. And you know, I think we were about [1.1] last quarter. We were about just over one two this quarter, and that's just a function that we closed our Northern Delaware acquisition. So we did that. We should see absent any material change.
And again, we're already close to May here a material step down this quarter, again, absent some unforeseen change in commodity prices over the next couple of months, but just given the fact that CapEx is scheduled to step down somewhat. So we should see a material step down the revolver balances in the second quarter.

Lloyd Byrne

So awesome but at least we expect we should be right now the trend within that, yes. Thank you, guys. Got.

Operator

Paul Diamond, Citi.

Paul Diamond

Thank you. Good morning. Thanks for taking my call. I just a quick one on the M&A topic or purchased cadence. So you had a pretty good clip in Q1 facing the same type of opportunity given current current pricing levels and know as you look forward through, would expect be a relatively volatile period in the market?

Nicholas O'grady

Yes. I mean, there's certainly no shortage of opportunities. I think it's always about balancing the risks. You right. It's just about, you know, I think I would just tell you, I think the higher though, but lower the price goes. I think our risk appetite increases. I think the higher the price of oil does probably the more where you were going to become.
So you have sort of, I'd say from a $65 to $85 range, you know, it's probably a better range than above those, I'd say below $70. I think you're going to find that some sellers are probably going to dry up because they're going to feel that they're not getting good value for their assets. But I think that in that range. That's sort of a good enough environment from a pricing perspective. And I think that and we're in a relatively decent market. I think that again, the beginning of the year is always kind of a tricky.
If you look at our pattern, generally, we've done less M&A in the first half of any year. Historically speaking it for whatever reason, it's just if you go back historically speaking, yes, very little stuff in calendar going back my entirety of my time here. And so it tends to be something that happens towards the middle or the back half of the year. So stay tuned. But I do think they were not short opportunities. I can tell you that much of a factor.

Adam Dirlam

I mean, I think you nailed it. I think it's a function of, you know, banks and organizations bringing these packages to market and what the lead time is on a lot of that stuff you've got it now smaller competition kind of coming in with a bullish view on oil pricing, which creates some volatility in terms of the ground game. What I'd say, I mean, even just looking at some of our April activity as we've been making and some pretty strong headway in that regard, being able to pick things up across all three of our respective basins.
And that's the next point that's really just going to be a balance of what that quality looks like. Seller expectations or expectations can be wildly different, especially in a volatile commodity environment. And so for bumps along at a relatively static pricing, very extended period of time, that generally level sets expectations and narrows that bid-ask spread. But if you have serial step-up or a material step down in the short term. That's going to just slight.

Paul Diamond

Understood. Thanks for the clarity. And just a quick follow-up. We've talked pretty much pretty at length about the productivity improvements on the oil side. Are you I mean what is your process or what is your perspective sit on the nat gas side? And I know it's a much smaller perspective or a much smaller piece yet going forward, should we expect to see that kind of a similar cadence in your view?

Nicholas O'grady

Yes. I mean, I would just say like our I mean, I just tell you from my perspective and I'm not the engineer here, but are our Marcellus assets outperform really from the get-go. They have outperformed our internal modeling literally every quarter since we've owned them literally, I think there's not one month, Jim, tell me I'm wrong, but in both they have done an excellent job, but I think we've had a little bit less development than we had initially modeled, but the decline rates have been shallower. They have just consistently outperformed and no wonder if gas was $1.80, right, because they just simply don't decline on a competitor.

Chad Allen

Yes, that's right. Yes, EQT, they completely change the design of these wells from when we originally bought the asset they widened the spacing, completion design change of flowback methodology. And so these will just continue to hang in much better than we had expected. And obviously, there's not a ton of activity that's happening out there. And so kind of our modeling, so kind of based on old methodology, and we continue to update that as we go and we see more but yes. Like Nick said that the Marcellus that's just continued to outperform and you have the you could be in the first quarter as well. Those wells continue to clean up better than we had expected. So that was nice about it. Our performance there as well.

Nicholas O'grady

Yes. I mean, it well, it's not huge for us. If you actually model out our Appalachia asset and just how much cash flow it has generated for us over the life of its ownership. It has been an amazing investment for us because it is paid out paid out in less than a year. And that just continues to for very little capital. Investment continues even with low gas prices to generate significant cash flow for us. And the great best.

Paul Diamond

Yes. Thanks for the clarity.

Operator

Noel Parks, Tuohy Brothers.

Noel Parks

Yes, hi, good morning. Just had a couple on. I was wondering, do you have any sense of maybe where incremental service cost trends are heading in your basins? I feel like so far in earnings season, what you're getting sort of a mixed mixed picture just depending on location and type of service. So any thoughts you have would be great.

Nicholas O'grady

I would say no, very modest deflation you've seen year to date, but I would imagine, you know, as oil prices have increased, I would guess that a flattening trend credit.

Noel Parks

Fair enough form bomb cap. So I was just wondering on you did mention what we are seeing with some or your gas in the Permian so forth. And I believe over and over time, you've discussed that you are pretty vigilant about the state of infrastructure when you're looking at potential deals out there and look to steer clear of various, we have a many questions are about. I'm just wondering, are you are you getting deals brought to you that fall into that category these days?

Adam Dirlam

Yes. I mean, I think a lot of the, you know, specifically a lot of assets in parts of the Delaware, you have to be very wary around, particularly as you get out of parts in Mexico and other parts where they might be brinci, they may not have access to. It might have access to midstream systems and you have to understand that going into it, you know who your operator is.
And so I mean, all of that goes into the equation. You know, your operators today have no firm access, are they interruptible? Can they be kicked off the system, all that stuff? That's why we tend to you hear us talk a lot about this, but knowing who your operator is doing, what kind of midstream access are going to have is critical.
I think as an issue overall, I think it's something that it's the Permian Basin. So it will over time get solved. But I think it's going to be chronic for some time. In the end, it's a minor economic annoyance, meaning it doesn't really destroy overall the and just destroy the economics of the wells, it just something that we can model and still make the world's economic, but it certainly doesn't help that or you just need to make sure that you're modeling it.

Noel Parks

Yes, the right agreement cost as well as the development timing standpoint,

Adam Dirlam

I think if I was we're trying to buy something in Alpine High or something like that. It might be a different equation.

Noel Parks

Great. Thanks a lot.

Operator

That concludes our Q&A session. I will now turn the conference back over to Nick O'Grady for closing remarks.

Nicholas O'grady

Thank you all for joining us today. We appreciate your continued support forward to touching base with you in the coming weeks.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.