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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to Northern Oil and Gas Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mike Kelly, Executive Vice President-Finance.
Thank you, Brock, and good morning, everybody. We're happy to have you here for Northern's third quarter 2020 earnings call. In the room with me this morning, spaced a minimum six feet apart is Northern's CEO, Nick O'Grady; our COO, Adam Dirlam; CFO, Chad Allen; Senior Vice President of Engineering, Jim Evans; as well as Northern's Chairman, Bahram Akradi.
We will proceed as follows this morning. Bahram will get us started with his perspective on how Northern is positioned in the current environment. And then we'll turn the call over to Nick and the rest of the team to provide details on the quarter and to touch on our forward guidance and strategy. After that, we'll open it up for the Q&A session.
Before we go any further though, let me cover our safe harbor language. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward-looking statements. Those risks include among others, matters that we have described in our earnings release as well as in our filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.
During this conference call, we may discuss certain non-GAAP financial measures, including adjusted net income and adjusted EBITDA. Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued this morning.
With that taken care of, it’s my pleasure to hand the call over to Northern's Chairman, Bahram Akradi. Bahram?
Thank you, Mike. I'm very excited to be on this conference call today to update you on performance of NOG. We have a very interesting dichotomy between our strong financial performance and the performance of our stock price. Northern Oil and Gas is in a very enviable position. We entered 2020 expecting approximately 60% to 70% of our projected production hedged at $58 a barrel.
However, with the convergence of the Saudi-Russia price war followed by a massive demand hit stemming from COVID, our oil prices catered, and our production slowed abruptly. And we became almost completely hedged on every barrel of production. The positive impact of this situation for Northern Oil and Gas is that we collected $58 a barrel produced on – that was produced and stored our deferred production in the ground for free until oil prices recover. We have paid down $160 million of our debt year-to-date, and we will pay off our $65 million 5L note with free cash flow in early 2021.
Our banks led by Wells Fargo recently left our borrowing base unchanged $660 million, due to the stability of Northern Oil and Gas. 2021 also will be a great year for Northern Oil and Gas. Next year will remain in the same enviable position. If oil is under $35, we could spend as little as $15 million, but our free cash flow will be well in excess of $100 million. If oil is around $45 or higher, we spend a little more on CapEx and we'll see higher production and cash flow and our free cash flow would still be approximately $100 million. Under any circumstance, you can envision for 2021, Northern Oil and Gas will generate material free cash flow.
Our track record, if you reflect on the track record of Northern Oil and Gas over the last couple of years, nearly every quarter, we have been very busy. We have accretively grown the business, reduced debt-to-EBITDA and made the company stronger. This course of action will continue and it'll be done accretively and precisely. We will continue to make the company stronger and reduce our debt position.
We will position the company to be a very strong, publicly held, cash flow generating business. Opportunities in the Shale 3.0 era. Our high return non-op business model has a major competitive advantage in the Shale 3.0 era. As operated budgets take precedent over non-op budgets for traditional E&P, Northern Oil and Gas pipeline of drill-ready, non-op prospects stands at all-time high. We target less than three year payback on these deals. Thus, these investments are accretive to our already industry-leading return on capital metrics.
Slide 7 in our Q3 slide deck lays out this opportunity in more detail. Alignment and like-minded, management, the board, and approximately 40% of our investors are like-minded. And I am committed to take NOG to a strong cash flow generating entity with very low levels of debt. We want the company to enjoy borrowing at rates similar to our RBL.
I'm grateful for this amazing management group, has done and are doing every day. I'm thankful for the alignment from TRT, Angelo Gordon and other large partners. They're committed to building upon what we have done so far in the last couple of years and reaching the levels they just established earlier. Thank you again.
Thanks, Bahram. All right. Let's get down to it in nine points. Number one, it was a solid quarter. Production was up, costs were down and our conservative outlook has paid dividends. Cost savings have really started to flow through in the form of lower operating drilling costs. Number two, our focus on continuing to work on the balance sheet has a meaningful impact for our equity investors.
Our interest expense was down 32% year-over-year, we retired 17.1 million of bonds and preferred stock this quarter through negotiated exchanges. With these deals, we captured $4.4 million of discount and an additional $1 million in annual fixed charge savings. This is real cash and real accretion to our enterprise value comprising over $30 million per year in run rate interest savings versus last year, which flows directly to the bottom line.
We should see another significant sequential drop in interest expense in the fourth quarter and first quarter of 2021. Number three, we continue to be well-protected, despite the challenging environment, it's important to understand that the company remains well-insulated in the coming 18-plus months. The world may in fact get worse in the near-term. And we're okay with that.
Our hedge book still has a gross value of nearly $150 million. And our cash flows will remain stable. As I have said in each of the last three quarters, the hedges and the cash flow that they provide means that we do not have to waste our volumes in a low price environment to generate cash flow.
As Bahram stated, they're simply being stored for free and we'll save them for better days ahead. Number four, the setup for 2021 is strong. While as a non-operator, timing is always the most challenging thing to forecast. We have built-in momentum through our large wells and process list. We expect to end the year with a record number. And these wells are of the highest quality as you'd expect in the downturn.
This simply means that as we look out the next year for perhaps some of the best capital productivity in our history. As we've shown in our guidance sensitivities, we're not throwing away our inventory in a low price environment.
We'll curtail and throttle back spending in a poor pricing scenario. None of these outcomes is a bad one given the number of wells and process we are carrying. Every $10 move in oil is roughly $2 million in revenue and free cash flow for a new well on an annualized basis. With 30 net wells in process, we don't want $60 million of additional revenue and free cash, potentially frittered away at low prices.
As noted in our guidance, we will govern our activity levels based upon common sense, spending driven by the oil pricing strip. There is no losing scenario given our hedge profile. If prices aren't supportive of development activity, we'll simply produce more cash flow and preserve that development for the future.
Number five, we are expanding. We closed on our first out of basin acquisition this quarter and the Permian has become front and center over the past two years, simply because of its high levels of activity. We continue to look in the Permian and other basins where we can build inventory, drilling prospects or producing cash flows that are either deeply discounted or meet or exceed our full cycle hurdle rates and preferably both. There will be more to come.
Number six, cash is king. We produced over $50 million of free cash flow this year-to-date, reduced our working capital deficit dramatically. And as our cash flow is actually accelerate in the fourth quarter, it will continue to free up additional liquidity throughout 2021. I have personally been observing almost every independent producers’ balance sheet. I continue to believe that Wall Street does not carefully monitor those carrying large working capital deficits, which is effectively shadow debt and are misconstruing company's debt reduction with the fact that they're simply deferring paying their bills, we have not done that.
Our working capital deficit is the lowest in years, which means the cash coming in the door can service debt, not past accruals. Number seven, every dollar matters. We continue to remain within our $200 million capital budget this year, the variants in our fourth quarter spend will be any incremental success in the ground game or if we see higher prices and accelerated completions. Many investors ask us about transformational deals, and my response is we're looking at everything.
Our backlog today stands at over $750 million in active M&A opportunities we're working through, but we focus on assets that make money. The key is to measure the benefits, costs and risks of every deal. Risk is the factor for these transactions that is not always appreciated, but something we spend an enormous amount of time analyzing. We continue to be on the hunt for big and small deals, but we will not sacrifice our standards.
Number eight, as you've seen, we actively manage our business through the ground game and larger M&A program. We are not just a passive ETF to the operators on our organic acreage. Anyone forecasting our business based on Bakken operators, the rig count or our organic footprint have been wrong over the past few years and will be wrong for the foreseeable future, opportunities are everywhere. As I just mentioned, our current backlog of producing assets and drilling prospects were evaluating right now, and the marketplace is nearly $1 billion.
What does low activity in the Williston mean for our business? The answer is nothing. As long as we're doing our jobs, I'm here to tell you that we control that not our operators and not the activity in the basin. The key managerial linchpin of this non-operated strategy is that we focus on quality and we focus on cost of entry. Based on deals signed or closed, we should have our first Permian production online this quarter, and the basin already makes up nearly 5% of our wells in process. And so focusing on just the net acres we've acquired is a key misunderstanding of what creates value.
Acres only have value when they're converting into cash flow. Adam will provide further color on some of our progress there. Number nine, watch what we do, not what we say. Since this management team rebuilt this company two and a half years ago, we've done $1 billion in equity centric cash flowing acquisitions and over $1.7 billion in gross financings to continue to improve the balance sheet and cut our cost of debt. We have taken many often painful steps to improve the balance sheet and cash flows of the business. We are not even close to done and we will do whatever it takes to ensure that Northern thrives on the other side of COVID.
We cannot control the stock market or what it wants to ascribe to a smaller producer in the marketplace today. But as our results show, we're still here, we're still making money. The model we've created is spitting off cash, and we're not going anywhere. While we firmly believe that the market will improve in the next year, hope is not a strategy. We'll take every step just as we have done in the past two plus years, regardless of what the market may say today. You don't have to believe what we say today, but you can trust in what we've done and what we will continue to do.
Thank you for your time, Adam?
Thanks, Nick. In the third quarter, our active management resumed during the second quarter left off. In North Dakota, the rig count continued to languish, but our ground game acquisitions picked up the slack. Targeting our best-in-class operators, we acquired 4.6 net wells in process and picked up around 650 net acres and 140 net royalty acres. This has continued to bolster our wells in process with some of the most productive wells in the basin and in the quarter at a recent high of 28.3 net wells.
As previously announced, we closed on our initial acquisition in the Permian during the third quarter and continue to screen more opportunities than ever before. Now more than ever, our operating and non-operating partners in the Bakken and Permian value the certainty to close that we can provide and it has enabled us to continue to bolt-on additional assets at attractive prices. We upped our hurdle rates significantly over a year ago, and our evaluation process remains unchanged, despite the lower strip. We'll continue to add here to our strict underwriting and return requirements to maintain our best-in-class return on capital employed.
While there are myriad of opportunities that we are evaluating, if commodity pricing or the quality of assets will not generate an acceptable rate of return, we will deploy that capital where it is better suited. Through the end of October, we have continued to maintain our ground game momentum and have committed to are closed on an additional 100 barrels a day, 3.2 net wells in process, 670 net acres and 420 net royalty acres. In total for the year that accounts for roughly two net wells turned to production, 10.4 net wells in process, 2,400 net acres and 630 net royalty acres.
And to be clear, all of this active management through our ground game is embedded within our stated CapEx guidance. At an operational level, we have been encouraged by our operators ability to respond to this environment with effective reductions in well costs. Our average proposed well in the third quarter, inclusive of facilities came in at just under $7 million, down from $7.7 million in the second quarter. As of late, we have seen well proposals from some of our operators in the $5 million to $6 million range, with some close to the bottom of that range. This will have a material impact on the embedded rate of return for these developments, despite the lower oil prices.
Third quarter’s well proposals remain consistent with second quarter’s activity levels. But with our operators retreating to the core, we are only seeing the best of the best areas get developed. Combined with the reduction in estimated well costs about 80% of the net wells that were proposed to Northern, met our hurdle rates and we're elected to it.
Production curtailments continued to pay during the third quarter with 3,500 barrels on average brought back online from the second. Heading into the fourth quarter, we expect similar levels of curtailments with roughly 11,000 barrels a day, either still curtailed or attributed to delayed IPs, given the current price environment. We are supportive of this move, particularly given the recent downdraft in prices. We were effectively storing high quality barrels in the ground for free, while our hedge profile allows us to preserve that value for a stronger environment. Regardless of the curtailments we continue to expect to produce between 30,000 and 40,000 BOE per day during the fourth quarter.
With that, I'll turn it over to our CFO, Chad Allen.
Thanks Adam. I have a few highlights to go over this quarter, starting with a quick summary on Northern’s financial performance. Our production averaged 29,051 barrels of oil equivalent per day, a 22% increase over the second quarter and came in at the high-end of our guidance. Production was significantly impacted by curtailments, shut-in production and delayed development plans by our operating partners, which we estimate reduced our third quarter production by approximately 11,000 barrels of oil equivalent per day.
In our earnings release this morning, we've given 2021 production and CapEx guidance based on sensitivities to oil price decks. Our base case for 2021 is based on oil average and at least $40 per barrel, but in scenarios where WTI is below 40. We actually expect we’ll generate significantly higher free cash flow due to a lower CapEx spent. Oil differentials were $6.54 during the quarter, which was an improvement of approximately 40% over the second quarter. Gas realizations continue to impact our revenues during the third quarter, however, recent upward moves in the natural gas strip should lead to higher realizations as a percentage of NYMEX in the fourth quarter due to fixed costs absorption.
Lease operating expenses for the third quarter came in at $24.2 million, down 9% of that total basis and down 27% on a per unit basis from the second quarter. And we expect to continue to see basin-wide cost savings during the remainder of the year and into 2021. Cash G&A came in at $1.39 per BOE this quarter, and continues to be one of the lowest in the industry, even with significant impacts to our production volumes for curtailments, shut-in production and delayed development plans.
We significantly improved our leverage profile since the end of the year and our focus continues to be on debt reduction in these challenging times. As we speak here today, we've reduced our total debt by approximately $160 million or 14% since year-end, this reduction alone has reduced our run rate interest expense by over 45% compared to last year. We finalized our fall borrowing base redetermination this week, maintaining our borrowing base at the existing $660 million level, with a 100% approval from our lenders and our bank group.
This is a testament to our hedging strategy, high quality PDP asset base and healthy leverage metrics. We expect to have ample liquidity and we'll expand our liquidity profile through free cash flow generation over the next 12 to 18 months, inclusive of the near-term maturity. We ended the quarter with $571 million outstanding on our revolving credit facility and have since further reduced that balance to $550 million inclusive of our $8 million of interest coupon payments that were made on October 1.
On the working capital front, we continue to work down our operating current liabilities, which were down 45% since the beginning of the year. And we expect to do several revolving credit balances by another $15 million to $30 million by the end of the year from its current levels. Capital spending in the third quarter was $43.8 million, which consisted of $27.7 million of organic D&C capital and $16.1 million on total discretionary acquisition capital, inclusive of acquisition D&C capital. As you saw in our earnings release this morning, Northern is reiterating its 2020 capital spending guidance to be in a range between $175 million to $200 million, a reduction of over 50% compared to our actual development capital expenditures in 2019.
With that, I’ll turn the call back over to Mike.
Great. Thanks Chad. Brock, let's open up for Q&A.
Thank you, sir. [Operator Instructions] Our first question today comes from Duncan McIntosh of Johnson Rice. Please proceed with your question.
Sorry, I was on mute. Good morning, Nick. First question comes off the SHALE 3.0 side. You all highlighted pipeline of lot of drill-ready prospects, and I guess is that where we should kind of expect the majority of development beyond the organic D&C to go to kind of flow more towards is drill-ready prospects going forward?
I think that we talk about being an active manager all the time. The organic base – we built a company three years ago to have generally larger cash flow than necessarily the organic asset would ever pull. And so we moderate and throttle our activity based on that, obviously in an environment like this, the sort of frank answer is that operators simply can barely fund their own drilling obligations let alone their non-operated obligations, and where their cash flow is cramped even if they wanted to.
And so, we are inundated with those and we sift through them. They go through our engineering and land processes, and if the best ones can pass muster and we can agree on terms, we can buy the acreage and the development all in one, and we view that as no different than an organic prospect. But it goes to my – the point in my speech that I said before, which is that anyone who's thinking about just sitting here waiting to get an AFE in the mail or something like that, he’s going to be sorely disappointed.
Yes. And Dun, this is Adam, maybe just to give you some context. I mean, in Q3 we had about 45 well proposals sent our way. And when I look at October, we're looking at 22, so you've already got 50% of Q3’s activity in kind of the first month. And so, it's a process that our engineering and our land team are reviewing on a day-to-day real-time basis, right? So we're taking a look at what the economics are, on what's coming in the door from our organic footprint and then it's – comparing that to the active management and the ground game and feathering between that to get the right mix of the economics and opportunity sets.
All right, great. Thanks. And then, I guess, just to dovetail off a little bit, jumping over to Slide 11. The production on your new wells exceeding the type curve at 30%, what are some of the drivers or is this more of a high grading locations? Is it an high grading operator? Or maybe just some color around what you've seen and I'd imagine you are pretty pleased with what you've got so far this year, and I'd have to imagine there is more on the come for next year.
Yes. Hey Dun, this is Jim. So what we're looking at here is we always take a pretty conservative view of well performance in the area, we've always been one where – we like to see enough history before we kind of make the assumption that bigger completions, that are operating will generate bigger EURs. And so what we're seeing here is really just optimization by the operators, kind of coring up in certain areas and then optimizing their completions, optimizing the way that they produce these wells. So not necessarily generating bigger EURs per se, but getting that oil out faster than kind of what we expected, which helps drive some of those rates of return.
So that's really kind of, what's driving this. We would expect this to kind of continue in this kind of environment, operators really focus more on their operations of current wells and near-term wells, and then just trying to run 10 rigs out there. So we would expect this kind of optimization to continue across our portfolio.
All right. Thank you.
The next question is from Jordan Levy of Truist. Please proceed with your question.
Good morning. The pipeline out of the Permian that you guys pointed to is really impressive. Just wanted to see if you guys could compare kind of what the deal flow looks like in the Permian versus the Williston, if there's any kind of contrasting dynamics at play that you're seeing over that?
Yes. I'll give a little color, and then I'll let, Adam probably tell the better truth about it all. But what I would say from my observation is that, the Permian is all over the map, we find ourselves very competitive in certain situations. And then other times we're seeing bids that are quadruple what we would be willing to pay. We do still see some – we've been looking for a long time, candidly, there was – like anything else, whether it’d be any hot commodity in oil and gas at the moment, minerals, the Permian basin, when capital is being thrown into an area, people are relatively undisciplined. But definitely see the discipline coming, I would say it's spottier. So from a batting average perspective, our batting average has been relatively low, although we continue to grind away. And we've had some really good success even since we did our initial deal.
In the Bakken, we really are the clearing house, and so generally when we don't win something, usually the person says I can't accept that price and I'm just not going to sell it at all. And so, that being said, the difference in the Bakken is frankly – we know it’s so well at this point, a lot of this stuff doesn't even pass the smell test and things wouldn't be interested in at any price. I don't know if you want to add to that.
Yes. I mean, I guess if you – if we're talking rig up opportunities, looking at the Permian you got 10 times as many rigs. And so you can just kind of extrapolate in terms of the deals that are walking themselves in the door. That being said, you have a much wider disbursement on the overall economics. And then to Nick's point, you've got a handful of sellers that are still living in the rear view mirror. And so it's a matter of swinging the bat and getting the volume in order to make sure that we're deploying our capital towards the appropriate projects with the appropriate operators at the right hurdle rates, those sets of things.
In North Dakota, with 15 rigs running in the basin, they've all effectively retreated to the core. And so when we're seeing opportunities there by and large it's stuff that's going to be penciling in this particular price environment have been really encouraged on the economics that we're seeing there. And just the stuff that we've effectively closed in Q4, largely that's been Williston basin opportunities, and then sprinkled in with the handful of Permian stuff that we're looking at. So encouraged on both fronts, just kind of different dynamics and we continue to just proactively look at things in both basins.
Yes. And just, it's not every day that we announce a small acquisition that's like 66 acres, right. And I'm sure there are plenty in the peanut gallery with a snarky comments over that. But the reality is that, as much as we want our investors to understand that we're expanding it, that's really not just for the investors, but for deal flow purposes to understand that we're actually active, we've been looking for some time, but that we're actually prosecuting on it. I would just tell you the number of new prospects that came our way after that announcement probably quadrupled overnight.
And Jim and Adam also got lots of resumes for else worth, tough times in the oil and gas space. But, I would just tell you that in alone that we are active now, one thing I just want to end with is that, if you look at what we do generally, we're very careful. So in the Permian basin, there is a lot of Tier 1 and Tier 2 stuff for sale. We have really kind of focused – zoomed in on the areas that we think are high quality and are very resilient in pricing. And so there is a lot of stuff in the outskirts of the Delaware basin and then the Northern and Southern Midland basin that gets a bit sketchy. You're not going to see us transact there.
And so, one of the reasons that we do it at a small ground game level deal-by-deal, you've got we're in the middle of an election, there is risk over federal acreage, you're buying wells that are already permitted right in federal areas. And so you take that risk out, we could go buy 10,000 acres in the Permian right now in Lea or Eddy County. And if something changes in the regulatory environment in a year, you would have destroyed a lot of value.
Makes sense. I really appreciate the color. Thanks guys.
The next question is from Jeff Grampp of Northland Capital Markets. Please proceed with your question.
Good morning, guys. Hey, Nick, just kind of a strategic one for you. Can you talk about kind of the balancing act, you guys kind of want to thread the needle with in terms of kind of, I should say, using your free cash flow to delever the balance sheet versus some great buying opportunities that are out there. And maybe if you could discuss the possibility of equity, or I don't know, maybe even preferred equity as a source to fund deals in the order to preserve the liquidity, which I know is important for you guys.
Yes, I mean, I think look, for anything transformational, you've got to be sensitive to your balance sheet, right. So anything upscale, we build our base capital budget to provide roughly a third of that budget in this day and age for these acquisitions. So we have plenty of firepower within that to do a really healthy amount of them, especially we're actually aided by the fact that the organic activity that Williston's relatively low. So it allows us to really throw that up some.
What I would tell you is that people ask me all the time, well, the stocks keep going down so doesn't that preclude you from doing M&A? My answer is if the stocks are going down so to a private valuations, and so that doesn't preclude anything. Listen, we are extremely balance sheet sensitive. A third of this company is owned by the founders, and we always talk about the fact and something that I think is oftentimes lost on investors is do you want to own 100% of nothing or 80% of something.
And I think a lot of companies that have overly focused on not diluting their shareholders, I can think of a number of them that are in Chapter 11 right now, or on their way for that matter. And so, if we can do things that are a win-win for the existing holders, and we can structure something there, we will do that, especially anything upscale. I don't think you're going to see us do a Sanchez and lever up when we're already levered up. That's just not – that's not my style. I don't think that we're going to do that.
But what that means sort of as a default is anything that would involve any form of equity security, whether it be preferred or common, is going to have to be net beneficial to every holder right now, where they're going to be happy that we're doing it. And I think that that's easy for us to tell you that because our Board of Directors are the owners of this business.
Yes, good to hear. That's what I was looking for. Thank you. And for my follow-up, just on the cost side, don't pick a big drop down in the AFEs and I think in the prepared remarks, you guys talked about things headed even lower. How sustainable do you guys think that is? And as we think into kind of the 2021 budget, what – can you tell us, what's kind of assumed there in terms of, where well costs are headed?
We don’t assume many of those well costs, but I think we're still running like $7 million to $7.5 million in that budget. But I think the reason that you want, we're doing that conservatively is because the fact of the matter is if – for whatever reason, if the God speak in oil prices, rally really hard, there may be a scramble. We may see the vast majority of the costs are incompletion. What you're seeing now is disposal costs, water costs are all falling, obviously, both rig rates and pressure pumping rates are at significant lows. And those can fluctuate. So I think some of this stuff is going to be – every time we've had a downturn, it feels like we have a downturn every two years in this space, over the last decade.
But every time you have one of these downturns, there's going to be a portion of it, that's going to be structural and a portion of it, that's going to be sensitive to price. What I'd tell you is I think – I don't personally see in this environment that you're going to see a lot of inflation. There's so much slack in the service system. It's going to be very hard to push pricing.
But I would expect that if you have a real scramble of oil, if the oil strip goes above 50, and you start to have people forced to put completion crews to work to go to those docks, you could have some of that cost come back. Just simply because most of these people have been furloughed and laid off, and you're going to have to pay people to come back to actually join frac crews so I think caution is, of the order, but I do think most likely in most scenarios, we're going to be able to keep most of those savings over the next several years.
All right. That makes sense. Appreciate the time, guys.
[Operator Instructions] Our next question is from John White of Roth Capital. Please proceed with your question.
Good morning. Thanks for taking my question. Looking at Slide 9, the map of the Permian and Delaware, Midland and Delaware basins, and reflecting back on your previous comments, regarding this region? In my career, did I hear you correct about you're going to be focused on the Delaware basin and not really focused on the Midland basin?
No, not at all, I mean, we've looked at several deals in the Midland, I would say. Particularly in the core of the Midland, it's pretty blocked up, right. I mean, you have like four operators that control a vast majority of it. So we don't see as much stuff in the Midland, frankly, at a deal level. When we do see it, it tends to be in the outskirts, we have seen a handful of some really good non-operated properties in good areas in the Midland.
I think what I would tell you is we're snobs and so we're going to be focused on the places where the wells are the most economic and the most resilient. So that could be in the Midland. It could be anywhere, frankly. I mean, we're just economic creatures. It's about focusing on rate of return, your cost of entry that affects that rate of return, which is sometimes forgotten by people and then really running different price decks and seeing how resilient those assets are. Because there are assets that have very similar rate of returns at $60 oil, when you run 30, that answer can be very different.
And so we try to focus on things that can make – and it's easier for us today, frankly, because the strip is so low. It sort of by default kicks out a good portion of stuff that would otherwise work in a normal environment.
Thanks. And I believe you just answered my follow up, and that is what you just said. You're not necessarily focused on the New Mexico side of the Delaware. You're looking all over the basin.
We're looking everywhere, but I would tell you that what we have to zero in on is that, there is sort of a football shaped area, and Lea and Eddy, and then some loving county. And it does spread out in some other areas. But you have to go area by area. There are H2S issues in parts of the Delaware that you have good properties, but that can be a major problem from a development perspective, but it's a pretty complicated analysis as we go through it. We're looking…
Yes, and it's no different than the North Dakota, right. We're triangulating the areas and the operators and then ultimately the economics. And so we're looking at Texas on both sides of the fence and we're looking at New Mexico, just happens to be that we've gotten a handful of things done in New Mexico. That's not to say that we have submitted bids in Midland or the Texas side of the Delaware.
Okay. So it sounds like the fragmentation in the Delaware is suited to your operating style, to your advantage?
That's right. And I think also, frankly from an NRI perspective, given that some of those things are federal acres, it really helps the economics that the fact that the royalty rates are lower. And so that can have a material impact on those wells. But obviously you also get that federal risk with it. So, we focused on buying acres that are being developed and permitted not going and buying 10,000 acres that could be thrown away if something materially changes at an administrative level.
Thanks very much for all the detail and congratulations on your continued progress.
Thanks, John.
There are no additional questions at this time. I'd like to turn the call back to Mike Kelly for closing remarks,
Yes, Brock and thanks to all our investors for dialing in this morning, during a busy and eventful week. Please give us a call if you have any further questions. Thank you.
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