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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, ladies and gentlemen. And thank you for joining the Northern Oil Third Quarter 2021 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] Please note that this conference is being recorded.
I will now turn the conference over to our host, Mike Kelly, Chief Strategy Officer. Thank you. You may begin.
Good morning, and thank you for joining us for our discussion of Northern’s third quarter 2021 earnings release. This morning before the market opened, we released our financial results. You can access our earnings release on our website and our Form 10-Q will be filed with the SEC within the next few days. We also posted a new investor deck on the website as well this morning.
I’m joined here with Northern’s CEO, Nick O’Grady; and our COO, Adam Dirlam; CFO, Chad Allen; and our Chief Engineer, Jim Evans. Our agenda for today’s call is as follows. Nick will start us off with his comments regarding Q3 and our overall strategy. After Nick, Adam will give you an overview of operations. And then, Chad will review NOG’s Q3 financials and our updated 2021 guidance. Finally, our executive team will be available to answer any questions.
Before we go any further though, let me cover our Safe Harbor language. Please be advised that our remarks today including the answers to your questions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to the 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 EBITDA and free cash flow. Reconciliations of these measures to the closest GAAP measure can be found in the earnings release that we issued this morning.
With that taken care of, I will now hand the call over to Northern’s CEO, Nick O’Grady.
Good morning, everyone, and thanks for joining us. We continue to fire on all cylinders here at NOG. All right. Let’s get down to it with five key points.
Number one, execution has been strong, and our business model is shining. Q3 is a testament to the work we put in year-to-date. NOG has signed three amazing transactions so far in 2021. These transactions have allowed us to take the company to the next level, which is evident in our financial results for the quarter. We are continuing to be very disciplined in our capital spending strategy and focused only on high return opportunities. Looking at Q3 specifics, our production was higher than our internal forecasts and unit costs and realizations have improved, which has allowed us to exceed our cash flow forecast. Consistent with last quarter, we once again achieved record adjusted EBITDA and free cash flow.
Number two, we’re not done. The fourth quarter is setting up to be materially stronger than Q3. We’ll experience the full power of our Permian acquisition in Q4 and a partial contribution from the pending Williston acquisition. Our completion count in both the Williston and the Permian will be up substantially in the fourth quarter, and we look for new record cash flow and even higher free cash flow as we close out the best year in the company’s history.
Number three, despite the incredible pipeline of M&A we have evaluated this year, the list is only growing larger with active prospects still totaling north of $1 billion. The window of opportunity for M&A opens and closes over the years, and we will not squander the opportunity for our investors while the window is open. I would add that with oil and gas prices up substantially, risk management pertaining to any M&A transaction is more important than ever. This translates into higher discount rates applied to our evaluations, along with a thorough head strategy aimed at locking in a sizable portion of the economics of any deal, but also leaving room for considerable upside over time. We continue to be thoughtful in how we evaluate future acquisition opportunities with the expectation that the acquisitions must meet the number one criterion that they are highly accretive to our stockholders. As Adam will discuss further, we’re also expanding our reach on the ground with more avenues and creative structures to aid operating partners in development.
Number four, the positive trajectory of our cash flow and balance sheet is noteworthy. Even after our pending Williston acquisition, we still expect to end the year with a run rate leverage ratio of less than 1.5x and to fall below 1x in the second half of 2022. We are also far exceeding our free cash flow outlook for 2021 with over $140 million cumulative year-to-date versus prior estimates of 160 for the full year. We are increasing our estimate to north of $175 million for the year, our third straight increase. The fourth quarter of 2021 is set up to be the strongest quarter for cash flow and preliminary indications for 2022 point to even further upward momentum.
Number five, dividends and returns to our shareholders are also increasing. We will recommend to our board of directors a further increase in our quarterly dividend to $0.06 per share for the fourth quarter upon closing of the Williston acquisition. If you’re keeping score at home, this would increase our quarterly dividend 100% since first declaring on only two quarters ago.
As I stated on our first quarter call that it was just the beginning and I meant it. It’s important to note that this is our base dividend only. And while it has been growing rapidly, our excess cash flow has continued to outpace the growth of the dividend, which currently represents less than 10% of our 2021 expected free cash flow. For those seeking more clarity, we will answer in the same consistent fashion that we have previously. We believe that the dividend will be able to grow more substantially as our leverage targets are achieved. Capital allocation is force-ranked here at Northern, whether for acquisitions, drilling capital, acreage replenishment or stock buybacks and dividends. We are dedicated to providing our investors with a competitive dividend yield, and we expect strong and steady dividend growth in the coming quarters and years.
I will reiterate my past comments that future dividend increases will be augmented and accelerated by smart M&A and continued leverage ratio reduction. That’s it for me this quarter. Thanks for listening. We are and always will be a company run by investors for our investors, and I truly want to thank each and every one of you for joining us today.
With that, let me turn it over to Adam.
Thanks, Nick. Northern continues its march forward operationally with disciplined capital spending, stable and growing production and solid improvement in operating costs. Our production was up quarter-over-quarter despite a quiet period for completions. We turned in line approximately 6.5 net wells in the quarter and expect activity to keep ramping into the fourth quarter, notably driven by our Permian assets. Drilling activity continues to pick up steam to. Operators have dramatically drawn down their drilled but uncompleted well inventory and new drill activity is picking up markedly as we head into 2022.
During the third quarter, we elected to over 80 AFEs, an increase of 44% from Q2, and we have already received over 40 AFEs in October. The increase in well proposals is more a function of NOG’s managed acreage footprint rather than an overarching trend in rig activity. We have also been encouraged with our operators’ discipline to remain in the core of our respective plays as the weighted average rate of return for our Q3 elections at strip is estimated to be well north of 100%. The potential for cost inflation has also been a hot topic.
During the quarter, new proposals averaged around $6.9 million, an increase of approximately 5% compared to our Q2 average. This increase was primarily driven by the operator mix and completion methodologies during the quarter. We do expect with casing and other items rising in costs to see moderate inflation as we head into 2022. However, we continue to remain conservative with our internal assumptions, modeling well costs at an average of $7 million to $8 million a copy, which should buffer cost inflation in regards to our spending plan. Most operators we speak with are reluctant to significantly accelerate drilling given tight labor and materials markets and the effect that would have on drilling costs, which means costs may rise, but will likely avoid the huge spikes we’ve seen in past high oil price environments.
In the Marcellus completions on our initial EQT well pad commenced in early July and production to date has been right in line with our expectations. This asset is obviously enjoying much higher cash flows at today’s commodity strip than we anticipated when we purchased the property. The Marcellus properties valued using an October 1 strip have a total unhedged PV-10 value of $468 million compared to our purchase price for the properties of approximately $140 million.
Turning to the Permian. Our outlook for NOG’s future in the basin gets stronger and stronger. We are screening multiple deals on a daily basis and continue to regularly pick up core interest in the Delaware. We’re excited to announce that our Permian expansion continues as we’ve recently signed a deal to drill over seven net wells in the Midland Basin starting in the fourth quarter and moving into the first half of 2022. Our M&A strategy continues to expand not only with our ability to buy acreage and assets with near-term development, but to also formulate direct drilling partnerships with operators in need of drilling capital and with better aligned structures to the drill codes of old with financial counterparties. We also continue to work with our operators to develop some of our operable acreage, something that gives us unique insight into the timing of development and strong economics. We continue to build out a top-tier position partnering with the best operators in the basin and have line of sight for the Permian to reach roughly 10% of our total production volumes as we exit the year.
As it pertains to overall deal flow for NOG, we are extremely busy both at the ground game level and with larger M&A opportunities, and there is no rest for the weary. We continue to work through the backlog with the same methodology and discipline we’ve always utilized. On the ground game front, we closed on six transactions in Q3, roughly in line with what we completed in the second quarter. In total, we picked up 2.2 net wells and over 1,000 net acres. We had transactions in both the Bakken and the Permian.
And as we moved into the fourth quarter, our Permian ground game has begun to grow market share as a function of high levels of activity. As we mentioned in Q3 of last year, we’ve seen a pickup in deal flow in the latter part of the year at a time when we often see our competitors and operators exhaust their budgets. As it pertains to the potential for larger M&A, we are currently evaluating three new substantial opportunities, focusing on high-quality assets with low-cost inventory in the top plays of the US. We have passed on a number of acquisitions in the past three months as we want the opportunity to focus on our core areas. The recent Williston transaction is a testament to this, where we purchased assets that had direct overlap with existing operations and the overall integration is truly plug and play. As I mentioned last quarter, being the largest nonoperator, we see consolidation as an important theme, but this has to be combined with our need to deliver strong asset returns to our investors.
Thanks for your time, and I’ll turn it over to our CFO, Chad Allen.
Thanks, Adam. I’ll give a quick summary on Northern’s financial performance. Our Q3 production was up 7% sequentially over Q2 and up 98% compared to Q3 of 2020. Our adjusted EBITDA and our free cash flow were up 2% and 22%, respectively, over Q2 ahead of Wall Street analysts and internal expectations. Our adjusted EPS was $0.84 per share and on a comparative basis to Wall Street analysts, which typically exclude the tax effect of adjustments, our adjusted EPS would have been even higher at $1.11 per share.
Oil and natural gas differentials were stronger during the quarter, which increased our cash flow. Operating expenses also continued to trend down in the third quarter. Lease operating expenses decreased 5% compared to Q2 on a per unit basis. Cash G&A was about flat on a per unit basis, excluding acquisition-related costs. Capital spending for the third quarter was also below Wall Street and internal estimates at $63.2 million, excluding the nonbudgeted corporate acquisitions.
As Nick mentioned, in the first nine months of 2021, we produced over $140 million of free cash flow, near our estimate for the entire year and roughly doubled of what we generated in 2020. We discussed in August on our Q2 call that the pro forma for the Permian deals, our revolver balance was approximately $350 million, yet we were able to pay down over another $30 million by quarter end. On the hedging front, we’ve added modest volumes since our last report, mostly in connection with the pending Comstock acquisition to derisk the high returns of our PDP cash flow stream, but our net exposed barrels to the stockholder have increased providing additional upside.
2021 guidance has been updated. We have increased the midpoint of our production guidance for the year, partly as a result of the pending Comstock acquisition and the rest from continued outperformance. That points to a fairly significant ramp in our production profile in Q4, where we expect significantly more well completions. Cost guidance, including CapEx ranges have all been lowered and our differential guidance substantially improved, reflecting what we’ve experienced year-to-date.
With respect to 2022 guidance, we are hard at work looking towards 2022 and are currently formulating our financial plan and forecast for Board approval, but I will provide some goalposts. Management currently sees no scenario where capital expenditures would be greater than $350 million in 2022, assuming no material M&A. This outlook should generate at current strip prices well in excess of $250 million of free cash flow and would result in modestly increased production volumes and consistent growth in our common stock dividend.
With that, I’ll turn the call over to the operator for Q&A.
Thank you. And at this time, we will be conducting our question-and-answer session. [Operator Instructions] Our first question comes from Scott Hanold with RBC Capital Markets.
Hey, good morning, guys. Adam, you had mentioned something about, I think you all will be participating in some Midland Basin wells. Is that a new, I guess, initiative? I know before you were a little bit more focused in the Delaware. Could you give us a little bit of color on where that might be, specifically in the Midland?
Yeah, Scott. With the CA in place with our operator and the fact that we’re working on a couple of other things that are in process, right, and I can’t necessarily get into the details in terms of kind of area and the structure. But what I’d say is net to the cost, our overall rate of return materially exceeds kind of our typical ground game transaction. From a structural standpoint, it also gives us a lot more transparency and control over well design, lateral lengths, timing of development, cost controls and other various kind of off-ramps. And from an operator’s perspective, it’s certainly a superior structure relative to the reversionary drill cost structure of old. And so it gives us the ability to flex our ground game strategy with higher returns and also gives us the ability to do larger quantities in kind of one sale swoop.
Yes. And Scott, to your question about the Midland, I would say we’ve been looking actively in the Midland as much as we have in the Delaware, I think we’ve generally struck out a lot more in terms of finding high-quality opportunities. This one came to us directly from the operator. And so it...
Yes, that’s right.
Yeah. The Delaware and the Midland and both been a focus. I think the Delaware has just been more not coincidence, but focused on quality operators and opportunities there.
Got it. And are you all seeing more interest coming inbound from operators looking to either reduce sort of working interest or probably more important to them. It’s getting rid of not up. There was a prominent size Delaware operator that kind of mentioned that on their call that they’re working with someone to do that. Are you seeing more of those inbounds come into?
Yes, both. And I think as we’ve gotten bigger and our financial wherewithal is greater, it’s something that is picking up notably, I would say, in the last three or four months, we’ve had more phone calls and bankers looking to do introductions on this type of stuff than we’ve ever seen before.
Yes. And it’s across all our basins. I think we probably are getting three or four kind of onesie, twosie opportunities on a daily basis. And then we’re having more fulsome conversations with operators about packages as they kind of continue to pick up operated packages or merge, there’s always non-op that comes with that. And so for them to be able to kind of clean up some of that stuff, it’s not small packages. And so it’s everywhere from kind of the AFE to AFE unit-by-unit stuff as well as kind of the larger packages, and that seems to be picking up, Steve.
Yes. And one thing about that, Scott, is that for a lot of operators, they’re trying they’re trying to keep their leverage in check, they’re trying to keep their spending in check, but they still have lands they need to develop, whether it be expiry risk or other things, and so they’re looking for partnership structures. And I think from our perspective, similar to our Marcellus assets, if you can have a higher degree of control and you can share in those risks and have good alignment, it’s a superior structure, and I think you’ll see more of it from us.
Got it. And Nick, if I could squeeze in one more on shareholder returns. I mean you’ve got obviously some goals out there on increasing that dividend. Because have your thoughts changed on buybacks, variable special dividends? Like, has your thoughts changed on that? And where does energy go from here?
Yeah. I think on the special dividend part, I just want to couch it by saying we have a regularly scheduled board meeting in December. I think this is going to be a hot topic about how as we ramp the dividend, how the terminal structure is. I don’t want to speak on it until we really have that whole conversation. As it pertains to buybacks, I think where our company is today and where it’s headed, I think we still think dividends make the most sense. Deals like Comstock proved to us that we can create more value through growing the cash flows of the business and the potential per share or trading benefit to the shares of a buyback. But that’s where we are today, where we’re still relatively small.
Over time, I think it will be something we will inevitably look to do. But I think for now, we can continue to add assets and grow the dividend substantially. And as I’ve said before, buybacks carry significantly more cyclical risk to our investors and much less disciplined than a dedicated dividend strategy. So for the time being, dividends are the way to go, my observation is that investors like them because they’re tax efficient and because at least in the short term, they can make the stock go up. They’re also a lot riskier than dividends from a timing standpoint.
How many announcing buybacks today were doing so in 2020 when our stocks were actually low? And I also think that it’s a lot more fickle because companies can easily abandon them versus the consistency of dividends. And I would add that while they might not have the same instantaneous impact on a share price that a buyback would they do help provide stability in floors and they do incentivize short selling. And so I think that’s where we are now. But I think this is a fluid conversation. I think we have to achieve those leverage targets. And as we do, I think that will be a high-class problem to have.
Thanks.
Thank you. Our next question comes from John Freeman with Raymond James. Please state your question.
Good morning, guys.
Good morning.
Good morning, John.
First thing I want to touch on, Chad, you sort of touched on kind of the upper bounds of what CapEx could be in 2022. And just wanted to maybe get a little additional color on sort of the assumptions that go into that, let’s just say, the upper bound of your expectations in ‘22 in terms of if I was to compare it to, let’s say, the 38, 40 wells, you are expecting to add to production this year versus what maybe the upper bound of that CapEx would assume next year? And then what sort of like oil service inflation is sort of built into that number as well?
So I’ll answer the last part, which is on the inflation front. We never really cut our well estimates. So we’ve been cutting CapEx all year as we’ve actually enjoyed lower costs. But we never really on a forward basis, have ever really changed that. So it’s really more on an as-incurred basis. So while we’ve been enjoying $6 million to $6.5 million well cost on average, we never really stopped from budgeting at $7 million to $8 million. So I think we’ll be relatively well insulated from an inflation perspective. In terms of the, let’s call it, $350 million upward bound, I think the answer is that and I think Chad alluded to this, is that our view is based on we don’t have a formal board approval, but I would say that, that would be the upper bound, which would include a fairly decent chunk of some growth capital. And I think we certainly could grow modestly and spend somewhat less. And so we just sort of want to set the upward bound so that people don’t fear that we’re somehow going to have some massive blowout as we get to next year. Chad, I don’t know if you have anything to add.
You said it right.
Yeah.
That’s exactly our thoughts.
So, I think, does that answer your question, John?
Yeah, it absolutely does. And then just a follow-up and maybe some of Al’s prepared remarks, kind of a to this as well. But just looking at each of the last several quarters now, you’ve been able to do some pretty sizable transactions, acquisitions on the bigger side, and I look at the ground game spend. And obviously, it was this quarter, third quarter was about half what it was in 2Q. And I’m curious just how much of that dynamic is, a, maybe some of what evolution the past, Nick, that it’s like in this commodity environment, the smaller deals are still quite competitive versus when you’re looking at the bigger deals, there’s just not that many people out there that can write that size check. Is it just sort of a shift of your attention maybe on the bigger deals, maybe more so than it has been in the past? Just any additional color on that?
Yeah. I think the deals that we closed this quarter, some of that is a function of timing. I mean, if I’m looking at October, we’ve already closed seven transactions, five of which were in the Delaware. And I think we’ve got maybe commercial terms lined up on another five. And so I think it’s really just finding the deals and going through them, we’re probably batting 200 to 300 as these deals come in, given the hurdle rates and the operators and the areas and everything else. And in this price environment, you’re going to get a lot of variability in terms of quality. So when we start running sensitivities, a lot of that stuff gets set to the side kind of at step one.
And so in midyear, a lot of times, we’ll see people start chasing things. And so that’s where we’ll kind of sit back. And so that’s where we’re able to kind of make hay in the fourth quarter similar to what I alluded to. You’re not wrong though, in terms of the overall competitive nature. I mean there’s the smaller stuff. There’s certainly more folks chasing kind of the onesie-twosie stuff. You start getting north of $50 million to $100 million and that buyer universe starts to shrink markedly. And so it’s really just taking a look and screening everything in our focus area that we can and enforce rate amongst each other.
Yeah. I think as it pertains to the strategy shift, I think we remain the dust buster. I think we still focus on opportunities, large and small. It really comes down to economics. But to Adam’s point, I do think capital still is relatively scarce in our business, except on the small scale. And I would say in the kind of June, July time frame, which is that midyear when you really first saw the big surge of oil kind of start to come through, and we definitely saw some pretty aggressive behavior and even as we head into the fourth quarter, it’s like clockwork every year where that stuff starts to pass by, and it gets more to real dollars. But I would say this that from big to small, the opportunity set is somewhat overwhelming. And I’m trying to make sure, Adam doesn’t want to kill me on a daily basis.
Well, thanks guys, and congrats on a really nice quarter.
Thanks, John.
Thanks, John.
Our next question comes from Neal Dingmann with Truist Securities. Please go ahead.
Morning, all. Nick, I just want to make sure what you’re kind of saying on shareholder return. Obviously, phenomenal job. It looks like prior numbers, you’re closing in on that one time, which going back a year or two, it’s just obviously a fantastic job of getting down there. I’m just wondering, once you do get down under sort of that 1x leverage, do you think you were talking about kind of on different shareholder even meeting with the board different shareholder options as well as sort of growth options with Adams Group. I’m just wondering, once you sort of hit that 1x, does that change how you think about things? Or maybe just give us conceptually how you’re thinking about it from that point forward.
Yeah. I think every target always is moving, right? So I think at the rate we’re deleveraging and with M&A kind of always out there as a possible catalyst to accelerate that path or some of the assets that we’re looking at, the cash yields and the IRRs are simply incredible. So you never have any surety. But if you can get them on your terms, we can really accelerate that. So we’ve talked about that one-third doctor as sort of a base plan, could we potentially get to a point where you’re not going to take your leverage to 0. But could you get to a point that at a mid-cycle price, your leverage is so low that you need to start to think about what to do with that [inaudible]? Absolutely.
We have debt securities outstanding. We have preferred securities outstanding. We have common stock securities outstanding. I think the thing that I would just lead is patients, which is that we can grow the dividend substantially. I think the overall terminal structure of it, whether it includes some sort of special mechanism or we really feel comfortable enough to do it all through a base dividend. I think that’s a conversation with the Board that we really haven’t solved for yet. I think that the main plan has been grow the base dividend as fast as we feel we can comfortably. But I do think that I’m keenly aware of what a lot of the large companies are doing. Now granted, we’re not a $30 or $100 billion business yet, but obviously, they’re paying out really large sums of their cash flow. And is that a possibility down the road.
Of course, I think the real question is that we just want to achieve these targets. And then I think it really – like I said earlier, it’s a high-class problem to have and which what I can promise you is we’ll try to put something very formulaic and very transparent so that people can really understand what they’re going to get. We just want to make sure we do it in a thoughtful way. I don’t want to be keeping up with the Jones and because one company did something, we do it that way. I think we want to be a little more thoughtful than that. And I think that’s where our meeting with the Board in December, we’re going to prepare a lot of different scenarios and see what sticks.
No, like the optionality. And then secondly, just a question for Adam. I know you don’t have the full sort of activity or quarterly guide out there, but you mentioned just the limited completions just this last quarter, kind of surprised, I guess, given some of the private activity both by some key guys, obviously, in the Bakken, and it sounds like what we’re seeing in the Permian, would you assume a little bit of step-up activity? And if so, is that more coming from kind of just all around or more some of your privates, if you could talk a little bit about that.
Yeah. I think it’s a combination of two things. I think we had a pull forward in Q2, where some of the planned completions in Q3 were pulled forward. And then to your point, I think Q4 is going to be pretty robust in terms of completions. I got a quick look at what October looks like. And I think we’re going to see a step up there. And I think just from activity levels based on kind of our acreage position and exposure to the various operators, both in the Delaware as well as the Williston. I mentioned we’ve got four AFEs in the month of October. So I would expect things to continue to keep cooking.
Very good. Thanks, guys.
Our next question comes from Charles Meade with Johnson Rice. Please state your question.
Good morning, Nick, and the whole NOG crew there. I want to go back to a comment you made, Nick, in your prepared comments when you said the M&A window opens and closes, and right now it’s open. What does that look like to you? How would you characterize the window being open? And what would be some of the signals that is closing?
Well, the old adage is that bear markets and bull markets and when they are neither of any of them left. So in a bar mark, if you want to use a bear market that oil and gas were in by the middle of 2020, I couldn’t find anyone that was bullish and low and behold here we are today, and bull markets and when everyone is bullish and convinced and that will be probably around 2014. And so I would say that I think that in general, I would say there is a window over the next three years, I would say, where a lot of capital that’s been deployed in the space for the last 10 years in what I would call temporary hands kind of finally consolidated and transfer us through. I think we’re in probably the third or maybe the fourth inning of that in which there’s a lot of money sitting in private equity hands, family offices that never really intended to own it long term.
I also think that there are a lot of businesses just in general that need to either be consolidated or subscale or you’re not going to be able to take a new company public anytime soon in the space. And so I think people have to kind of really weigh those strategic alternatives and what they need to do. I think that as it pertains to the market today, I think it’s as robust as we’ve seen in the last several years. Our competitiveness ebbs and flows. But I think in general, our focus remains in kind of our core areas.
We have looked at assets in other basins, nothing that really got us too excited so far. But where I would end it is just say, look, we don’t want to squander opportunities where we can make meaningful across the board, whether it be total return on capital every per share statistic, that’s what’s out there right now because like any other market, if this lasts long enough, people will copy cat and see that it is a profitable business, and they’ll want to join in and then ultimately, those arbitrage windows close.
But I don’t think we’re anywhere close to that point. And I think that the overall macro pressures on the energy space in general, we’ll keep a lid on that for some time. So I think it’s pretty goldilocks for us, frankly. But the hardest part about this job for our entire team is keeping focus and keeping discipline and that’s something that we just won’t change our stripes. It’s sort of our way or the highway. We’re very mechanical in how we do this. And one of the best comments I got from one of our bankers recently was like you’re very different than most of our clients because you’re totally willing to walk away. And we are because we know there’s a lot out there to do.
And if we can’t get it on our terms, we’d rather not get it at all. There have been plenty of transactions that we’ve looked at this year that if we just sweetened it by a few million dollars even on large transactions that could have been ours, but we’re not willing to do that. And that’s the discipline it takes to be able to be consistent as a roll-up strategy, which is what we are.
That is all really helpful. And then just one quick discrete follow-up. Adam, you mentioned that you guys, I think you said saw 80 – you elected in AFEs in 3Q and that you’ve seen in October. Can you give us a sense how many AFEs did you opt out of in 3Q? And how do you see that same ratio for the four you’ve seen in October?
Yes. So of the, call it, $80 or whatever, they’re about 3 that we ended up nonconsenting. And I think it goes kind of back to my comments of being pretty encouraged with our operators discipline in this particular environment. I think in years past and in prior kind of high oil price environment, you saw a lot of operators step out and start getting after some of the science experiments, and that’s where you saw a lot of our non-consent. And I think based on the position that we’ve been able to put together and how we continue to keep managing things, our average rate of return at the strip today for the wells that we elect to do is north of 100%.
So that’s been the biggest thing that I think we’ve been encouraged on. And it’s really kind of you’re seeing similar operators that we’ve been partnering with in the past, your continentals and [inaudible] and moving to the Delaware EOGs and new burns make up a large majority of that, and they’ve stuck put to the rocks that we’re certainly comfortable with participating in here and at any sort of level of pullback.
Thanks for that detail.
Thank you.
Our next question from Derrick Whitfield with Stifel. Please state your question.
Thanks. Good morning all and great update.
Thanks, Derrick.
Thanks.
And great update. With my first question, I wanted to focus on your deal flow on the larger side. Over the last few quarters, you’ve steadily evaluated 10 to 15 larger A&D deals. Could you comment on the quality side and focus of what you’re seeing and how that’s trending in a higher price environment.
Yes. It’s funny. In 2020, we were hell bent on buying as many assets as we could to be a countercyclical investor and see what we could. And the funny thing is it’s challenging to buy quality assets in a down market, unless there’s some form of significant distress. So it kind of cuts both ways, the best quality assets only come to market, generally in an environment such as this one. Make no mistake, there’s a lot of garbage hitting the market, too. The issue you have is that the convexity and the risk changes when oil is $80 versus one that was in the 30s. And so that convexity is something we’re very mindful of.
And so what that tends to translate, and I think we talked a little bit about this in our prepared comments, is about discount rates, risk management strategies, the fact that incremental moves in oil at this point probably get less credence from us than typical. And if you look at the Comstock transaction and the implied discount, ultimately, sellers are often focused on the total proceeds. And so the discount rates may, in fact, increase substantially as prices go up, a function of that risk that happens in higher price environments and the fact that people are oftentimes solving for total dollar amounts versus their invested capital, right?
And so if you invested $100 million and something and you can sell it for $200 million today, you’re probably less focused on the PV discount and the IRR than you are and the fact that you’re making money. And I think that, that’s something that’s very helpful. But I would say the quality of assets that are coming to market now, especially on the larger side, is better than what we’ve seen in the last few years. I would say that being – in terms of a mix, we do see a lot of garbage for lack of a better term as well when it just goes right in the trash is that I’m going to say.
Yes. We’re certainly seeing the good the bad needle. And I think as important as the asset quality is also kind of the social dynamic, right, because a lot of the counterparties that we’ve dealt with have wanted or needed to pivot towards other things and based on kind of the hurdle rates that we’re underwriting to triangulating that between the asset quality is kind of the fee for success.
Yeah. And we’ve got plenty of counterparties that want some sort of participation agreement where they look at our multiple and say, "Well, I’m not telling you that for 2.5x, we sit there and say, "Well, that’s irrelevant what it’s we’re buying your assets not your company, and we want to know what’s the implied return on those assets, and that’s what’s going to dictate what we can pay. And the multiple or where we trade or any of that stuff is irrelevant. And those are those social issues that oftentimes break these things down.
Yeah. Great color. And then on my follow-up, perhaps for Adam, as we understand, there were fairly material production events in the Bakken in Q3, including processing outages and DAPL [ph] line fill impacts. Could you comment on your sense and your estimates on your exposure to those?
Yeah. Hey, Derek, this is Jim. I’ll go ahead and answer that one for Adam. Yes, we did a look back. We heard that Continental and Marathon had some shut-in production due to some midstream downtime and wanted to reduce their flaring. We did a look back on what we had estimated for our Q3 production versus where actuals came in and we maybe saw about a 10,000 barrel difference than what we expected versus actual. So we didn’t really have the impact that some of our operators are talking about. It may just be a function of where our wells are located versus where they were seeing the impact.
It’s just a testament to the diversified strategy of our portfolio, right? No one thing ever makes that big of an impact.
Very helpful. Thanks for your time.
Our next question comes from Alex Vrabel with Bank of America. Please state your question.
Hey, guys, good morning.
How are you, Alex?
Good morning.
Yeah. I wanted to ask. I saw you guys added some oil hedges didn’t do that on the gas side. It looks like you’re kind of maintaining that 18-month forward outlook on hedging. I’m just kind of curious, like you mentioned in your prepared remarks, the Marcellus obviously looks like a still early time acquisition. How are you thinking on a go-forward about gas? And then I mean as far as hedging, we’ve heard from other operators and seeing actually, you could do some pretty attractive collars and whatnot. So any kind of color on how you think about gas and then maybe the mechanics of how you think about hedging on that go forward.
Yeah. We actually did add about, I think, 20 million a day of collars. They’re just not in the swap schedule that you probably saw. So I think they’re 4/775 and 350/750, I think, is what they are. So agreed. I think the gas market hedging it for next year has been a little bit challenging just because of the steepness of the curve. And so you’re either kind of forced to take an average year hedge, which is going to be significantly lower in the front and better in the back or you can obviously hedge it month by month. But given you’re going into the winter, which is going to be really volatile one way or the other, we wanted to make sure that we’re very careful about how we did it.
And so the collars we have added those collars. So very thoughtful on that side. And on the oil front, we’re just plotting along very steadily. I don’t think we’re quite at our 60% to 65% target for next year just yet. But I think as we exit the year, we should likely be there. Obviously, the average price will continue to go up. I think it’s north of 57% now, and I would expect to see it meaningfully go up between now and then.
Got it. Very helpful. And I guess kind of speaking of average prices going up, I’m curious, right, you guys have generated, it looks like about $140 million of free cash in the first three quarters of the year. You’re telling us greater than $175 million for full year. CapEx looks pretty ratable. Prices are higher. Why is it not a lot higher than that? I guess, is a very simple, maybe dumb question.
Our internal term for that here is Northernomics, which is that we try to under promise and overdeliver.
Very clear. Thanks, guys.
Thank you. [Operator Instructions] Our next question comes from Phillips Johnston with Capital One. Please state your question.
Hi, guys. Thanks. Just a follow-up on John’s prior question on 22. I’m curious what the geographic mix might look like, whether it’s net wells or absolute CapEx dollars. If we’re assuming 75% to 80% or so of net well count is in the Bakken with the balance pretty evenly split between Permian and Appalachia. Would that sound like it’s in the right ballpark?
Yeah. The plans are obviously kind of still in flux. As it stands today, notwithstanding out of the Marcellus wells that are in process, we’ve got about a court between kind of the Bakken and the Delaware. We’ve got about one-fourth of the wells allocated towards the Delaware. You take the Midland program that will get underway. I think we received our AFEs first log kind of here and those will all be coming online kind of between Q1 and Q3. And then you’ve got, call it, 20 net wells, give or take, in the Bakken. So still in flux. We’re still kind of finalizing all of that, but that’s kind of how it stands today.
Okay. And then obviously, there’s been a few acquisitions. I’m just kind of looking for I guess, an updated net well count that could sort of keep your -- I guess, your pro forma production flat going forward.
Yeah, we’re still kind of modeling somewhere in that 40 to 45 net wells to kind of hold production flat. Obviously, with the Comstock acquisition, the decline rate on that is fairly low, lower than kind of our corporate decline rate, which is in the low 30s. So adding that kind of volume, we only need an additional one to two net wells to hold that production flat. So as Chad mentioned, kind of the $300 million to $350 million CapEx range is what we have modeled for maintenance CapEx to slight growth.
Yeah. Okay, perfect. Thanks, guys.
Thank you. And there are no further questions at this time. I’ll turn it back to management for closing remarks.
Thanks, everyone, for joining us this quarter. We’ll see you on the next one.
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