Non-op E&P Northern Oil and Gas (NOG) picked up its third-quarter A&D ground game in the Permian Basin, snagging 5.7 net in-process or future drilling locations and approximately 514 net acres, the company said in a third-quarter activity update.

The majority of wells from the transactions were spud by the end of the third quarter and are expected to turn in-line to sales in 2024, the company said in an Oct. 25 activity update.

Capex related to NOG’s ground game acquisitions and an increase in development activity is expected to range between $215 million to $218 million for the third quarter, NOG said, excluding non-budgeted acquisitions. Increased capital spending in the third quarter was related to ground game A&D and pull-forwards of organic development primarily focused on 2024 turn-in-line activity.

So far this year, NOG’s ground game added an estimated 24.9 net in-process or future drilling locations and approximately 1,823 net acres through 31 transactions at what the company described as “attractive full cycle returns.” The company is also aggressively adding acreage through larger M&A in 2023, including three deals valued at nearly $1 billion.

“As we enter the fourth quarter, we continue to focus capital on growth opportunities for next year and beyond,” said CEO Nick O’Grady. “Our singular focus remains on executing on high return opportunities. In keeping with our practice, we have used recent commodity price strength to layer in additional oil and natural gas hedges, along with additional basis hedges, to protect our underwritten returns as we deploy capital.”

Adam Dirlam, NOG’s president, said the company saw “significant, counter-seasonal success in the ground game, especially early in the third quarter when oil prices were significantly lower.”

“These projects should, at today’s pricing, deliver significantly higher returns than we originally underwrote,” Dirlam said. “Additionally, we’ve seen notable increases in our Permian well proposal activity as commodity prices have improved. All of this points to increased growth prospects for 2024 and beyond.”

Northern has been steadily building its Permian footprint through small dealmaking and large-scale acquisitions. The company this year was a player in several major Permian deals, including purchasing a 30% stake in non-operated Delaware Basin assets from Forge Energy II Delaware LLC. In August, NOG likewise purchased a non-operated third of Novo Oil & Gas’ interests for $500 million. Earlier this year, NOG also upped its non-operated stake in the Midland Basin’s Mascot Project to 39.958% working interest. 

O’Grady, speaking in October at Hart Energy’s A&D Strategies and Opportunities conference, likened the recent scramble for Permian inventory to the third quarter of a game.

“We are not in the first half. That’s how I think about shale,” he said. “Investors are scared. … The follow-up act is quite challenging.”

NOG Basin Map
(Source: NOG Investor Presentation, September 2023)

Capex, well count up

Truist Securities analyst Neal Dingmann said NOG’s updated capex was slightly higher than analysts expected.

“While some short-term investors may point to the higher than anticipated near-term spend, our conversation this morning with the company and our belief is the incremental activity puts NOG in a much better 2024 position likely resulting in higher than expected production/FCF, while next year’s capital spend remains relatively flat,” Dingmann wrote in an Oct. 25 report. “We also appreciate the incremental standard and basis hedges to help lock in more future cash flow.”

Dingmann noted that NOG added incremental hedging on both the oil and gas side, along with basis protection. Truist’s rating for NOG remains “buy” with a price target of $57. NOG stock closed Oct. 24 at $38.44.

NOG reported it turned in-line an estimated 22.6 net wells during the third quarter compared to 13.8 net wells in the second quarter, a 64% sequential increase. NOG estimates its drilled and completed (D&C) list, or wells in process, increased to a record 74.2 net wells, up 6.2 net wells from the end of the second quarter.

Changes to the D&C list, combined with the levels of completion on those wells-in-process (WIP), can significantly impact capex in any given quarter. Higher third-quarter capex was driven in part by both an atypically higher completion status for the WIPs combined with the D&C list increasing by more than 9%.

NOG also reported accelerated well proposal activity in the third quarter, driven by improved commodity prices. Gross consents were up over 35% sequentially in the third quarter compared to the second quarter—and up more than 15% in the first nine months of 2023 compared to the same period in 2022.

NOG’s third-quarter earnings call is scheduled for 7 a.m. CST on Nov. 2.

NOG Production map
(Source: NOG Investor Presentation, September 2023)