Northern Oil & Gas Inc. (NYSEAMERICAN : NOG) Q4 2020 earnings call dated Mar. 12, 2021
Corporate Participants:
Mike Kelly — Chief Strategy Officer
Bahram Akradi — Chairman of the Board
Nicholas O’Grady — Chief Executive Officer
Adam Dirlam — Chief Operating Officer
Chad Allen — Chief Financial Officer
James Evans — Executive Vice President & Chief Engineer
Analysts:
John Freeman — Raymond James — Analyst
Scott Hanold — RBC Capital Markets — Analyst
Dun McIntosh — Johnson Rice — Analyst
Derrick Whitfield — Stifel — Analyst
Neal Dingmann — Truist Securities — Analyst
Philips Johnston — Capital One — Analyst
Nicholas Pope — Seaport Global — Analyst
Gregg Brody — Bank of America — Analyst
Presentation:
Operator
Greetings, and welcome to the Northern Oil and Gas Fourth Quarter and Year End 2020 Earnings Conference Call.
[Operator Instructions]
It is now my pleasure to introduce your host Mike Kelly, Chief Strategy Officer. Thank you, sir. Please go ahead.
Mike Kelly — Chief Strategy Officer
And thank you, Donna and good morning everybody. We’re happy to welcome you to our fourth quarter 2020 earnings call. I’m joined here this morning with Northern’s CEO, Nick O’Grady; our COO, Adam Dirlam; our CFO, Chad Allen; our Chief Engineer, Jim Evans, as well as Northern’s Chairman Bahram Akradi.
Our agenda for today will be as follows. Bahram is going to give you the opening remarks and then he is going to hand the mike over to Nick. After Nick, Adam will give you an overview of our operations followed by Chad, who will review Northern’s Q4 financials and ’21 guidance. After that, we will head into the Q&A. Before we go on though, let’s cover the 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 non-GAAP financial measures, including adjusted net income and adjusted EBITDA. Reconciliations of these measures to the closest GAAP measure can be found in the earnings release that we cover this morning.
With that taken care of, I will now hand the call over to Northern’s Chairman, Bahram Akradi.
Bahram Akradi — Chairman of the Board
Thank you, Mike. As most of you know, I began investing in Northern in 2016 and subsequently, I filed a 13D, outlining changes that I thought were needed in order to transform NOG into a strong and exceptional business. I am pleased to report this morning that I believe that we have been successful in implementing almost every one of these changes and very excited about more improvements ahead.
We are in an enviable position. We have become the largest US non-op consolidator and the opportunities ahead of us are tremendous. We have a pipeline of acquisition opportunities and the capital to take advantage of these opportunities as well. The strategy is to continue to get bigger and stronger. However, we will do so in a financially prudent fashion, which includes a commitment to building and maintaining a fortress-like balance sheet. When I joined the Board in 2017, we had a leverage ratio greater than 6 times. Today, we project our leverage below 2 times for 2021 and our goal is to further reduce leverage to around 1 time in the next several years. We also have a great alignment between our shareholders, Board of Directors and management. This is a unique and clear advantage. Our Board of Directors are a significant shareholder in Northern.
Finally, we have assembled an all-star management team led by one of the most experienced and accomplished executives in energy sector Nick O’Grady. Nick originally joined Northern as a CFO in 2018 and I quickly realized that he was the executive that should be leading the company. Nick was promoted to CEO at the end of 2019. I have truly enjoyed partnering with Nick in developing and implementing the Board of Directors, the strategic vision for Northern. Our hedging strategies in 2019 provided Northern with financial security and stability in 2020. It provided NOG significant free cash flow last year while many other companies did not make it through. We’ve been able to secure and extend new financing and raise additional equity, which has allowed the company to significantly improve our balance sheet and our future cash flow, which is now approaching $150 million in 2021. I have complete confidence in Nick and the entire executive team at Northern to continue executing our long-term strategy.
We have accomplished a tremendous amount over the past several years but I am most excited about the future at Northern. We now have the balance sheet and acquisition opportunities that will enable Northern to accelerate its growth. I’m very excited to see our strategy play out through the remainder of 2021 and beyond. We are also in the position to start a responsible and modest dividend by this summer that we can grow over time. Because of my confidence in Nick and the leadership team at Northern, I no longer feel that it’s necessary for me to be on the NOG’s conference calls. Of course, I will continue to be a very active Chairman in formulating the vision and long-term strategy for the company with other members of the Board, Nick and rest of the executive team. Finally, I want to thank Wells Fargo, Bank of America and RBC amongst others for being great partners and supporting Northern throughout this exciting adventure.
With that, I will now turn it over to our CEO, Nick O’Grady.
Nicholas O’Grady — Chief Executive Officer
Thanks very much Bahram for the kind words in the vote of confidence in our executive team. All right everybody. As usual, let’s get down to what was six points. Number one, teamwork. I know that 2020 was a tumultuous time for investors for oil and for the industry. But as we sit here today, I’m exceptionally proud of how we’ve managed through it. Our team has worked around the clock and thanklessly at times. As painful as it was, no one wavered and we continued to plug away and not lose sight of our long-term mission. We entered the year, larger, stronger and with a clean de-levered balance sheet. When we started this path in early 2018, the company shareholders carried over $136 of debt and over $9 of annual interest expense for every share they owned. We project this year that number will be well under $15 of debt, less than a $1 of interest and expect production to be up this year over three-fold from 2017 levels. Put simply, our debt adjusted cash flow per share this year is expected to more than double from those 2017 levels. It has not been easy and our employees, Board of Directors and my executive team at Northern truly deserve credit for it all.
Number 2, execution. The quarter was strong as production and activity continued to ramp up methodically. Costs continue to be in control and the assets performed admirably. We produced over $30 million of free cash in the quarter, a record for the company. What’s more impressive is that our volumes have continued to improve despite significant shut-in activity with workover rigs going at a furious pace despite winter conditions in the Williston, we expect a further boost as the vast majority of these remaining shut and should be back online as we exit spring.
Number 3, consistency. I have explained in each of the last four conference calls that we have been dedicated to managing risk, continuing to deliver and that the non-op model gives us significant flexibility in the allocation of capital. As we stand today we successfully counter-cyclically invested in projects throughout 2020 that are beginning to bear fruit and will likely vastly exceed what we had underwritten. Risk management in the form of hedging meant that we were able to reduce debt in the downturn rather than lean on it and with higher prices today, that will accelerate.
Number 4, expansion. We exit 2020 very differently than we began. We entered it as a Williston pure play. We will soon be a three basin company, diversified and with increased flexibility to allocate capital to different commodities, different regions and simply put in the place that has the highest return on capital employed.
Number 5, discipline. While oil prices are high, and the market buoyant today, I want to be clear about Northern strategy. While we certainly welcome more normalized levels of drilling, we continue to be disciplined in how we deploy capital. As I have repeated ad nauseam, growth should be the output of good investment discipline not the driver of spending decisions. We are dedicated to responsibly returning capital when the risks are balanced properly for our debt holders as well as for our equity holders, which brings me to my final point.
Number 6, returns. As we integrate the Reliance assets and continue to deliver, we will begin discussions with the Board of Directors over the summer about establishing a long-term dividend strategy and we are watching others carefully as they craft their dividend policies to see what works best for investors in the marketplace. But it’s clear that higher prices in the short term are accelerating our cash flows to retire debt faster and with it the mission to deliver real shareholder returns.
In conclusion, to those that have stuck by us through thick and thin, thanks for the patients but we are not done. In fact, we’re just getting started. There are north of $10 billion worth of working interest opportunities out there that need to be rationalized. We are focused on making our enterprise stronger, more profitable and providing exceptional returns to our shareholders. But at the same time, we will not lose our strong financial discipline. We are not deal junkies. Everyone must win for anything to be even considered. These aren’t just words. We are a company run by investors for investors and I truly thank each and every one of you for your interest.
With that, I’ll turn it over to Adam.
Adam Dirlam — Chief Operating Officer
Thanks, Nick. Operationally, 2020 was a transformational year for Northern. And as we move into 2021, we see ourselves in an enviable position. Since expanding to both the Permian and Marcellus, we now have three premier basins to deploy capital in. With the expansion of our business model, the active management with allocating capital across a broader opportunity set will enable us continue to high grade our returns on capital employed while diversifying and taking risk out of the enterprise. In the Williston, curtailments are subsiding with the increase in commodity pricing and we expect that the remaining productions will be brought back online towards the beginning of the second quarter. While the rigs in the basin have stayed at lower levels, high quality ground game opportunities have never been better as operators focus on the core of the play. As a result, our wells in process are expected to be some of the most productive drilling projects, we have seen in years.
We saw well completion get pulled forward in the fourth quarter and once the seasonal weather of the first quarter subsides, we expect both completions and new drills to pick up moving into the second and third quarters of the year. In the Permian, we continue to build our position well by well and acre-by-acre, focusing our efforts with leading operators. Since we entered the basin last September, we have closed seven deals for approximately $32 million inclusive of development costs. Acquisition opportunities both at a ground game level and a package level are at multi-year highs. We screen each and every one of them with the level of discipline and specificity that is needed to prosecute only on those that meet or exceed our hurdle rates.
In the Marcellus, we look forward to closing our acquisition with Reliance in April. At the end of Q4, EQT took over operatorship of our asset and with the proposed operational changes, we are expecting improvements in both cost reductions and well productivity. Unique joint venture structure provides Northern collaboration and long-term transparency that will dovetail nicely with the active management of the rest of our portfolio. As we responsibly scale the business, the opportunities afforded to us have never been better or more abundant. We will remain disciplined with our allocation of capital as we work towards further reducing debt levels and returning capital to shareholders. With a balanced approach of investing in additional drilling and executing on high-quality acquisitions, we will continue to solidify Northern as the non-operated clearing house in oil and gas.
With that, I’ll hand it over to Chad.
Chad Allen — Chief Financial Officer
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 35,738 barrels of oil equivalent per day, a 23% increase over the third quarter and came in towards the high end of our guidance. Production continues to be impacted by curtailments and shut-in production, which we estimate reduced our fourth quarter production by approximately 4,200 BOE per day. Our adjusted EBITDA for the quarter was $94.3 million, up 14% over the third quarter due in large part to increased production levels and the pull forward of activity towards the end of the quarter. Oil differentials were $6.94 during the quarter, which was an improvement of approximately 35% over the lowest in the second quarter. Gas realizations continued to impact our revenues during the fourth quarter, but we saw significant improvement as we closed out the year and we expect these improvements to continue into 2021. Lease operating expenses for the fourth quarter came in at $28.2 million or $8.58 per BOE, which was down 5% sequentially compared to the third quarter. Cash G&A came in at $1.04 per dollar BOE this quarter and continues to be exceptional even with the impacts of our production volumes from curtailments and shut-in production.
We have also given detailed cost guidance for 2021. One thing to highlight there is workover activity. We expect LOE to be higher earlier in the year as costs from higher workover activity flows through but to moderate as new wells turn to production. I’d also like to highlight cash G&A costs. Pro forma for the Reliance transaction and our growing oil volumes are projected to be approximately $0.80 per BOE, the lowest in our company’s history and by far one of the lowest in the industry. We significantly improved our leverage profile since the end of last year and remain focused on debt reduction. We reduced our debt levels by approximately $39 million during the fourth quarter and $178 million during 2020 in total. Capital spending for the fourth quarter was $48.9 million, which consisted of $17.9 million of organic D&C capital and $31 million of total discretionary acquisition capital inclusive of acquisition D&C capital. Northern’s 2020 development capital expenditures were $162.8 million, a reduction of 56% compared to 2019. In February, we disclosed reduced 2021 capital expenditure guidance and bumped up our production forecast at the same time.
In terms of cadence, as it stands today, we expect the second quarter to have the highest levels of capex for 2021, particularly for the Marcellus assets where the majority of the development is projected to take place mid-year. In closing, I wanted to highlight our recent capital markets transactions whereby we further strengthened our balance sheet through a common equity offering and a regularly unsecured senior notes offering. These transactions allowed us to fully equitize the Marcellus acquisition and extend our maturity wall by retiring the remaining $65 million of our VEN Bakken note and 95% of our second lien notes, of which the remaining will be called on or before May 15 of this year. The remainder of the proceeds were used to pay down the revolving credit facility. As of today, Northern has $287 million of borrowings outstanding on its revolving credit facility, leaving $373 million of available borrowing capacity. Absent further capital spending acceleration, we would expect the RBL balance to fall further by the end of Q1, prior to closing the Reliance Marcellus acquisition.
With that, I’ll turn the call back over to Mike Kelly.
Mike Kelly — Chief Strategy Officer
Great. Thanks Chad. Donna, we are now ready for Q&A.
Question & Answers:
Operator
Thanks. Ladies and gentlemen, the floor is now open for questions.
[Operator Instructions]
Our first question is coming from John Freeman of Raymond James. Please go ahead.
John Freeman — Raymond James — Analyst
Good morning, guys. First topic I wanted to address is just the comments that you all made about this summer looking to talk with the Board about potentially implementing a dividend strategy going forward. It’s just I realize we’re ways off before you are going to start to have those conversations. But just maybe some more color on how you’re thinking about just from a shareholder return perspective, a base dividend and a variable dividend like just sort of I guess how, you’re thinking about this just from a high level perspective going forward but very encouraging to hear.
Bahram Akradi — Chairman of the Board
So I think it’s, this is Bahram speaking back. We actually obviously intended to start the dividend last year and unfortunately the bottom fell out. But our vision has always been to get this company strong enough and that make sure as I mentioned, we have a fortress-like balance sheet and then start building a program for dividend where we can start small and have the opportunity to grow it regularly. We still have a couple of technical things we have to take care of here between now and May, June. And then we’ll start dividend. My intention is not — our intention is not to start with something substantive, just modest that we can grow responsibly over time, because as we to get through the end of this year, I think we will finally have gotten this company to that — my goal and Nick’s goal, company goal has always been to get to under 2 times, then under 1.5 times debt and then get closer to 1 time debt to EBITDA. We have, it’s — the situation is dynamic as these guys have said, there is billions of dollars of opportunities for acquisition. We just need to do this responsibly, grow the company and improve the balance sheet, at the same time. And then we will have the opportunity to continue to grow the dividend, but it’s just important for us to start being a dividend company this summer and then just — and then build it from there. Nick you want to add to that?
Nicholas O’Grady — Chief Executive Officer
Yes. And I would just say in response to the variable dividend, I think we’re watching it with keen interest. I think in my prior comments, I’ve been fairly skeptical that certainly in a robust oil market like today, people love the idea of a variable dividend but could it introduce volatility if there is a downturn at some point. And so, I think we’ll consider it. I want to watch and I think we’re going to spend a lot of time and data on some of the strategies that we’ve seen announced from peer companies and see which works best. So, I think we will remain open-minded to it, but I think to Bahram’s point, our view generally speaking is a dividend that can grow and as the leverage continues to decline and the risk overall to the business declines, you can accelerate that growth even faster. And so certainly the business can handle it. It could frankly — it could have handled it in 2020 but I don’t think it would have been the responsible thing to do, but it’s time and I think we have to have those discussions at the Board and I think when your Board owns 30% of the company, it’s our money. And so as long as the risks are balanced, we integrate the Reliance acquisition to Bahram’s point, we have some other technical things we have to take care of, but once we get through that period, I think it’s something that makes sense at this time.
John Freeman — Raymond James — Analyst
That’s great. And then my follow-up question now would the recent entries into the Permian and Marcellus and as you kind of phrased you’ve got a national non-op franchise now. Are those three legs to the stool? Is that kind of the way we should think about it going forward? Are there — are you all basically now basin commodity agnostic to where there is other basins in addition to those three that you all may consider in the future?
Nicholas O’Grady — Chief Executive Officer
Yes, I mean I think I always talk about this and it sounds like just words. But it’s not. I think we are economic creatures. We actually — we’re not focused on drilling holes in the ground. We want to make money and so we are agnostic in the sense that we look at things that we want to make money, but there are different risks in different regions, and generally speaking in the oil and gas business, if you go where the rigs are and where activity is, you have a better chance of having lower risk. I think there are some places in the country that I think we would be reticent to enter. I think that the Oklahoma would be one that I will likely pass on. I think there’s way too much geologic risk, the DJ Basin as well has a ton of political risk. But I think the Permian, the Marcellus and the Williston are all active basins with high returns. There are maybe a handful of others that would make some sense. But I think we also want to retain focus. We’ve spent two years building up data in the Permian and it is the most active basin in this country. And so it’s the most logical to see the most deal flow and the most potentiality for return.
John Freeman — Raymond James — Analyst
That’s great, I appreciate the answers. Well done, guys.
Bahram Akradi — Chairman of the Board
Thanks John.
Operator
Thank you. Our next question is coming from Scott Hanold of RBC Capital Markets. Please go ahead.
Scott Hanold — RBC Capital Markets — Analyst
Thanks, good morning. And great performance in the quarter. I wouldn’t mind following up a little bit more on the dividend, because certainly, it’s a point I think that differentiates you all from some of your small cap peers, the ability and willingness to pay a dividend this year. Can you give us just sort of a high-level construct in what really drove the confidence to start it potentially this summer? Is it a combination of commodity prices and just where the business is going or is this trick a look the business is moving in the right direction, commodity is going to play a point into this, but certainly the business is a bigger driver? Because the point I’ll make is that if the goal is to get leverage to 1 times, certainly not paying a dividend gets you there faster. So with other small cap peers not paying one, just give us a sense of like, why now?
Nicholas O’Grady — Chief Executive Officer
Yes, I mean I think Scott to put it simply, number one, why now versus why later. One, we have a pretty clear path. I mean when we had analyzed this in 2019 we had stressed the business down to $40 and ironically oil averaged about $40 last year. But the volatility introduced from how violent it was to the rest of the space changed the dynamic to some degree. I think our bar for where aggregate leverage ratios had to be in order to prosecute, that went down and I think to Bahram’s point, as we get into the summer and fall, we’re going to be well on that path. And I think if you do a modest dividend that provides some return, it will have, yes, a modest impact on that pace of deleveraging, but not one that’s going to materially slow down and so ultimately it winds up being I don’t want to make the dividend sent out to be a rounding error but that the overall effect on the leverage might be. And so I think we feel like we can do both. I think we have the luxury of high-margin businesses with stability and we have a much lower decline curve than your average US oil company and what that means is that our base business is much more stable and that affords a dividend. The business was, as we’ve built it with a PDP centric focus over the last three years has afforded this. It was really — I would just say the final pieces that ultimately we have really cleaned up the balance sheet, we really have one piece of term debt outside of our revolver, we have a lot of liquidity. And Bahram, you want to add something to that?
Bahram Akradi — Chairman of the Board
Yeah, and Scott I remember when we had discussions you — we talked clearly about the company needs to be bigger and stronger. We want to be a multi-billion dollar market cap company as well as a bigger EBITDA business. So, but the opportunities are there, and I emphasize again, we’re going to start incredibly small, modest just because we want to be a dividend-paying stock company. Our focus here is to grow cash flow, be a very, very substantial cash generating machine as an entity. And so — but I think it’s important for us to put our commitment forward, start paying a dividend, but just like Nick said, not something that would hinder our original goal of getting bigger and stronger. So we have a clear path how we can do all this and then we want to also start at a level that we can steadily grow that dividend in the quarters to come as we go forward.
Scott Hanold — RBC Capital Markets — Analyst
Appreciate all that context. That’s perfect. And if I could have another question here. I’m curious with some of the stuff obviously with the Bakken still being obviously the largest portion of your production base right now or EBITDA growth. What are you seeing in the basin right now? One of your peers in the Bakken, I guess one of the operators out there has recently stated that there is a couple of their partners that have deferred some completions to maybe later in 2021. If you — and with I think roughly 15 rigs that are still in the basin right now, like where do you think that’s going? How do you see some of the operators progressing? Are you impacted by also some of those deferrals and this is really kind of provide a nice production ramp in sort of the back half of the year? And any color you have on just the basin as the whole, if we’re at 15-ish rigs now, where you all see that by the end of the year?
Nicholas O’Grady — Chief Executive Officer
Yes, I mean Scott I think you have to think about it and the operators think about it is how fast they can recycle their capital. So in the fourth quarter, we saw the easiest way to convert your capital to be productive was through the DUC count and so you saw a furious pace of completions, and that’s still ongoing now and as we come out of spring as everyone knows basically nothing happens for about two months in the Bakken and then it accelerates the margin in April and May. The other thing that we’ve seen is workover activity, and these are really high return whether it be GSP’s or flushing out wells that have been curtailed. And so that pace goes on very quickly because you can turn the wells on within a month. It’s a very productive use of your capital. As the DUC log — backlog burns down, we would expect and have indications that the rig count will come up some, but that’s not necessarily to drill baby drill, it’s not to grow the volumes. It simply going to be to replace development activity and so most of the operators have indicated that we should see the rig count rise. And I think in general, what’s been interesting, like in the other basins that we operate in, such as the Permian, which is that the bulk of our customer base acquisitions have been the operators and the operators who have been the most active in the Permian and accelerating have been the privates. In the Williston, we haven’t really seen that yet, but I would expect to see the rig count pick up fairly substantively in the middle of the year.
Scott Hanold — RBC Capital Markets — Analyst
Okay, that’s clear. And any kind of comment, are you also partner…
Nicholas O’Grady — Chief Executive Officer
On the deferrals I don’t know the specific case. I mean we have things that move up and back in the drill schedule all the time. I can say that with the exception of one mega large operator that tends to do things on like a three-year basis, we haven’t seen anything pushed to the right, but I would say in fact it’s largely been the opposite. I would expect in the middle of the year that we will see some things that we have forecast to be later to come sooner if oil prices stay robust.
Adam Dirlam — Chief Operating Officer
That’s right. I mean we saw completions get pulled forward in the fourth, everybody would take a breather through the winter and then things will start picking up in the second and third quarter.
Scott Hanold — RBC Capital Markets — Analyst
Yes that makes sense. Thanks.
Nicholas O’Grady — Chief Executive Officer
One item just for what it’s worth, and it is a little different from basin to basin. The lead time as for capital from AFE to sales date for a Bakken well can be six to nine months. And so, the time lag between rigs being picked up and being dropped is a little bit slower — the cycle time in the Permian is sometimes three or four months, and it’s just a function of how the pads are developed. So that’s probably why if you’re wondering why the rig count hasn’t spiked right now it’s because you’re still working through six to nine months of development from prior. So it just it tends to — it’s like steering a cruise ship as opposed to a speed boat.
Scott Hanold — RBC Capital Markets — Analyst
Yes, I think the NDIC said what, there is 650 to 700 DUCs still out there. So that’s a pretty big backlog.
Operator
Thank you. Our next question is coming from Dun McIntosh of Johnson Rice. Please go ahead.
Dun McIntosh — Johnson Rice — Analyst
Good morning, Nick. Good. I’m also been — Could you just give a little bit of color maybe for Adam, but a little bit of color around the production and capex cadence over this year, now that you’ve got the Bakken, you’ve got the Permian and the Marcellus? How should we kind of think about product mix and spend over the course of ’21?
Nicholas O’Grady — Chief Executive Officer
I mean, Chad and I can handle the spending piece. I’d say that we would expect to spending in the first quarter be to be lower than the fourth quarter just because you had some bring forward. I think the highest capex by far will be in the second quarter just because we expect the bulk of the Marcellus capex, we gave the guidance $25 million, we would expect, most of that to incur in the second quarter and a little bit into the third. And then I would expect it to then kind of step down ratably in the third and the fourth quarters. We’ve built in a decent chunk of consistent ground game activity within that particularly in the back half of the year. We’re inundated with stuff now but when prices go up, we become a little bit more selective because risk becomes a bigger factor.
Chad Allen — Chief Financial Officer
That’s right. I mean 2021 is effectively big. So, I mean 90% of the activity is effectively going to be allocated toward the Bakken and then it’s really going to boil down to what we’re seeing both from an organic a ground game activity in terms of the mix between the Permian and the Bakken and what I’d say is, even with 13 to 15 rigs within the Bakken, we’re still seeing some of the best ground game opportunities that we’ve seen in a very long time and we’ve capitalized on that. And so I think we’ve got two or three kind of under our belt within the first quarter and we’ll continue to kind of keep our ear to the ground there and then as we kind of look towards 2022, I would expect with the ground game and just the function of opportunities within the Permian that might start taking a little bit more market share, but it’s really going to be just based on really what we’re pulling organically and then what we’re seeing and what we’re able to kind of prosecute and stuff that’s going to meet or exceed our hurdle rates.
Nicholas O’Grady — Chief Executive Officer
Yes. And on the production cadence Dun, I would just say this, that we would expect on the gas properties, the first completions I think are scheduled for June right? They go to go to sales in June. So you’ve had no completions on those properties really until ET took control and so we would likely see a large surge in the back half of the year on the production. So it should kind of gently crest down in the first half and then we should see it advertised sort of later in the year. On the Bakken, it should be more linear. Obviously, the winter period is a slow period. We tell people this every quarter, but generally speaking, nothing happens for about two months in North Dakota. But we are seeing that workover activity, which has a pretty short cycle time and so we would expect to see a pretty meaningful ramp from the first quarter into the second quarter kind of more in tune with our sort of annual guidance. And then I think, Jim, correct me if I’m wrong, but peak production will be sometime mid-year and then be fairly stable thereafter. So, overall I think no surprises really there. I mean I think the only thing that Chad highlighted in his comments is just about that workover activity and we started to see it pick up meaningfully in December when prices did because the economics are there and we think that peaks out about March.
Dun McIntosh — Johnson Rice — Analyst
All right, thank you. And then I guess taking on to that a little bit with the ground game and everything, you have made tremendous progress on the balance sheet but also clearly have a pretty big desire to continue to grow and scale up to model. So how should we think about opportunities, whether it’s ground game, whether it’s something like the Reliance transaction kind of with respect to your capex budget, the $200 million to $250 million for the year, should be more ground game deals this year, would it be fair to assume that if the right bigger deal comes along, you’d be willing to take it, transact on that yeah?
Nicholas O’Grady — Chief Executive Officer
I mean, I think on the ground game, we’ve budgeted a fairly, within that $200 million, $250 million, when we talk about ground game it’s in there. I think we felt like we don’t want to, I think by budgeting for that ahead of time, it just that the free cash that you model is truly free and I think it’s the right way to show it to our investors. And so we budget for that. So frankly, if we didn’t remain active, the number would only probably go down. We are opportunistic, we are inundated with opportunities candidly, and that is what we spend a lot of our days on beyond our day job. But the bar is pretty high Dun, we haven’t even closed on this existing transaction. We see huge opportunities, but it has to be on our terms. And as I mentioned in my comments, it’s got to be an immediate win for everybody. And so for anything to be even considered, it’s got to be credit enhancing, materially accretive to the equity holder and beneficial to the overall long-term strategy of the business. So we’re not deal junkies, there is a huge backlog of non-op that needed to be rationalized in the next several years. If you look at our pattern, we’ve typically been about 18 months in between every large transaction given prices are up, could that change potentially, but I want to say that the bar is always very high and we face a very mean spirited Board with almost anything we want to do and they really want to understand why they win when we do something. So I understand that everything will go through the same process, we will be very careful and judicious but don’t think we’re just going to go back to back to back. If the opportunities call for it, I think largely, we would hope that if we do get to that point in 2021 where there is another opportunity that you’re all suggesting that it was an obvious thing as we felt that we got from the Marcellus transaction.
Dun McIntosh — Johnson Rice — Analyst
All right, thank you all.
Operator
Thank you. Our next question is coming from Derrick Whitfield of Stifel. Please go ahead.
Derrick Whitfield — Stifel — Analyst
Thanks. Good morning all and great update. Staying on the last topic, perhaps for you Nick or Adam, regarding your comments on the ground game and the size of the ground game opportunities, could you offer some additional color on the degree of deal flow you’re seeing by basin and comment on your potential and desire to add more depth in the Marcellus?
Nicholas O’Grady — Chief Executive Officer
Yes, I mean I think I’ll cover the first part, the Marcellus part and I’ll let Adam talk about the risk as he’ll know better than me from the split, but it remains to be seen. Since we executed in the Marcellus transaction, we’ve been inundated with packages, small and large in the Marcellus of potentiality. I’m not sure the same type of ground game kind of wellbore by wellbore, acre-by-acre type business exist there because it’s fairly blocked up and mature at this point. It does not mean and I think the operators have largely treated with each other. So it doesn’t mean there won’t be any opportunities. I just don’t think it’s going to be the same level that you see in the Permian and the Williston and I think you can talk about the kind of split.
Adam Dirlam — Chief Operating Officer
Yes, that’s right. I mean I think the Marcellus is going to be more on kind of a packaged by package level. What Nick alluded to in terms of kind of what we’re seeing on a daily basis I would say that there’s probably one to three ground game deals that walk in the door from the Permian. What I’d say is there is much more variability in terms of the overall kind of economics, just given the breadth and number of rigs that are out there. And so we’re certainly, our batting average is a lot lower in that regard because we’re picky as the way that we weigh it against a lot of the stuff that we’re seeing in the Bakken and kind of goes back to my comments, if there is only 15 maybe rigs within the basin, the stuff that we’re seeing in North Dakota, both from a competition standpoint as well as just the overall quality of the ground game opportunities that we’re seeing have been really encouraging. I think it kind of goes back to the old Shale 3.0 paradigm and that you’ve got operators and other non-operators like that just can’t necessarily write the ticket for some of these pad well developments, especially in North Dakota. And so it’s giving us an opportunity to that kind of step in there. And so I’d say the quality of the opportunities in North Dakota is clustered much more closely relative to the Permian, but just the function of the overall activity in the Permian gives us plenty of looks, that’s for sure.
Derrick Whitfield — Stifel — Analyst
Great. And regarding my follow-up, your Q4 production curtailments at 4,000 barrels, could you offer, any color on the nature of the curtailments and if it’s concentrated with one to two operators?
James Evans — Executive Vice President & Chief Engineer
Yes this is Jim. It is pretty concentrated with just a few operators and some of it is due to offset activity where wells have been shut in as completion crews come into frac new wells. That’s a function of part of it. And then the other function is just wells that got shut in in the middle of the year. They run out of pressure, they need to work over to install ESPs. But the quickest way to get production back on is you turn new wells on. So they focused on that first. And like Nick mentioned, there is a flurry of workover rigs running out there now. One of our operators I think had seven workover rigs and so they’re installing ESPs as we speak and we expect a lot of that production to be coming back on. I think we still had in January roughly that same number. But as we moved into February, that number was coming down quite a bit. We probably had 1000 to 2000 barrels come back on in February. And so, again I mentioned by kind of early second quarter, we expect a lot of that to be back on.
Nicholas O’Grady — Chief Executive Officer
And if I can make a skeptical comment, I saw some smarty pants research pipelines grapeshot try to suggest that there is no deferred production because as the curtailments came off production didn’t match the prior curves, that’s typical, because one of the things you saw with almost every US independent was massive reductions to LOE in the back half of last year. That’s because you’re not spending, you may turn the well back on, but you haven’t spent that maintenance capital yet and that’s a decision you’re going to make when you’re going to — you’re going to make that one its economic when prices are higher. So you’ve got some of that production back, but you get the rest of it back when you go through the maintenance cycle and that’s what we’re seeing right now.
Derrick Whitfield — Stifel — Analyst
Great. Nick, just to follow up on that and to clarify, I’m not the smarty pants…
Nicholas O’Grady — Chief Executive Officer
No, I’m not accusing you Derrick. You are very smart though.
Derrick Whitfield — Stifel — Analyst
The 4,000 barrels that you referenced, would it be fair to assume maybe 1,000 barrels of that would be offset completion so that would kind of be a residual impact that you will continue to see throughout the year.
Nicholas O’Grady — Chief Executive Officer
Yes, that’s sounds about right. But we always in our guidance, we always maintain, we always maintain a sort of a downtime factor. So that’s within our guidance. That would be normal course. When are clarifying the full amount, it’s just to make the point of what we saw and to Jim’s point, what we were, it was interesting to see as we were pleasantly surprised at how fast some of the completed but delayed wells returned back to sales, and I think we’ve been waiting kind of been watching the environment in which we see that workover activity take on and it’s going at a pretty robust pace right now. So, I really think as we get into April and May we’re going to be pretty much full bore.
Derrick Whitfield — Stifel — Analyst
Very helpful. Thanks again for your time guys.
Operator
Thank you. Our next question is coming from Neal Dingmann of Truist Securities. Please go ahead.
Neal Dingmann — Truist Securities — Analyst
Hey guys hopefully I can be in that smart camp at some time — some point as well. But my first question — my first question really, I guess Nick for you to add them one of the guys. On your deal focus, you mentioned in the prepared remarks a lot of deals since last summer — a lot of very successful deals I might add. Could you talk a little bit more just when you look at these now going forward, you brought in all the guys transaction wise, is it just purely looking at best returns in cash flow? Or now that you have more of a size behind the company, would you prefer larger working interest? Are there other variables other nuances that sort of play in there that when you were smaller and growing at a more — a different position that you now might consider?
Nicholas O’Grady — Chief Executive Officer
I mean I think our methodology is largely unchanged. I mean, we’ve raised our hurdle rates significantly over the last couple of years and I think that that’s been a good thing. But generally speaking the methodology is all — is basically the same thing. It’s all return on capital employed focus sort of total return IRR, soup-to-nuts including everything not pretending acreage costs don’t exist or something like that. In terms of the working interest, I mean I think the Marcellus deal is a good example of that. It’s a much higher working interest than we typically do. But it came with governance that matched and took some of that risk off. I think we get offers every day to farm in at 50% of a well. And usually we run far away from that because that comes — why would anyone want to give up 50% working interest without — and you bear a lot of that risk. And so I think generally speaking, we — it has to come with some substantiality to support that. In the case of the Reliance deal, it was obvious. I don’t know, Adam, you want to add?
Adam Dirlam — Chief Operating Officer
Yes. And I mean, I guess with the scale of the business provides us a different landscape from — just from a competition standpoint, when you’re looking at ground game deals where you’ve got maybe 30%, 40% working interest within a unit. A lot of times, that’s going to be much too large and concentrated for a lot of our competition. And so when we start looking at those types of opportunities, we see a lot of our competition maybe falling by the wayside. And the other thing I’d add is, when our competition might be looking at those types of deals it might also be an opportunity for us to partner with those types of things and collaborate on it. So — and we see that. That doesn’t mean that we’re not looking at the five, 10, 15 acres at a time. We’re still the dust buster out there. And so we’re not going to skip over those types of opportunities just based on size. But I think it’s been an interesting kind of shift in terms of the landscape of overall competition and what we’re seeing in some of the larger packages.
Nicholas O’Grady — Chief Executive Officer
Yes. And governance is key on that, Neal and I just complete the thought by just saying that we all think you’re brilliant. So don’t worry.
Neal Dingmann — Truist Securities — Analyst
My second question just to make sure I understand this. On Slide 5 looking particularly at that Williston, I like that math you guys have in there. Knowing that winter activity upcoming again for the next winter is always going to be a bit weaker in the Bakken. But notice also there’s — I like that you put the wells in progress very notable. You did talk around this in prior questions, but I’m just wondering can you talk a little bit more? I’m just wondering as you look forward to the next winter, how we should think about is these wells in progress that you all mentioned on there for your Adam or the guys again is that — are those wells that we should see likely would come on in the very — if they are already in progress is that wells that you’ll likely see come on before the winter? And then you’d still have that kind of a bit of a weak period in the winter? Nick, I’m trying to just get a sense of timing I guess for the latter part of this year.
Nicholas O’Grady — Chief Executive Officer
Yes. I mean I think I’ll let Jim cover most of that. But I would just say that, if oil as an example, Neal, I think if oil had been $65 in December you might see the operators buck the trend and be much more aggressive. They plan months in advance. And so they can’t necessarily shift it there. I think it was we had a mild winter maybe two winters ago and we saw operators plough right through it and we saw huge volume gains in the first quarter. So it can vary from time-to-time. So it really will depend on where the strip is when they’re planning that activity, but I’ll let Jim cover some of the details as it pertains to the next winter.
James Evans — Executive Vice President & Chief Engineer
Yes, we would obviously expect as you kind of go into the winter season that activity levels will drop. This year was a little bit different because one of our operators spent a lot of time just completing wells throughout the third quarter. So even when winter weather started to kick in they were able to turn those wells on because they’d already completed the wells. I think the site will be a little bit different, this time where wells will be getting drilled and completed in the second and third quarter and then activity levels kind of declined through the fourth quarter and into the first quarter kind of what we see with typical winter seasons.
Neal Dingmann — Truist Securities — Analyst
Great details, guys. Look forward to the upcoming day and all the upcoming activity.
Nicholas O’Grady — Chief Executive Officer
Thank you.
Operator
Thank you. Our next question is coming from Philips Johnston of Capital One. Please go ahead.
Philips Johnston — Capital One — Analyst
Hey, guys. Thanks. Just a couple of housekeeping questions. First is just a follow-up on the production cadence. Obviously, you updated production guidance under the Reliance acquisition a couple of days ago to $75 million to $85 million a day for the full year. But can you give us a ballpark in terms of what the net production level will be on that asset when it closes in April?
Nicholas O’Grady — Chief Executive Officer
In April, yes. So Jim you want to walk through kind of a rough kind of guideline in terms of sort of second — or second, third and fourth quarter kind of?
James Evans — Executive Vice President & Chief Engineer
Yes. So obviously, the effective date was July was doing about $90 million a day in July 2020, because the lack of activity production has been declining. It’s probably going to be doing about mid $60 million a day through the first quarter. And then going into the second quarter, they’re going to start completing some of those wells in process, and we expect that to pick back up to closer to the $75 million to $80 million a day kind of range and then kind of hold that flat throughout the rest of the year on the Marcellus side. And so that kind of gets us to our guidance of $75 million to $85 million. And then on the Williston side, kind of what we’ve laid out we expect kind of Q1 to be relatively flat with Q4 as we go through the winter season and activity levels stay low. And then going into the second quarter, we expect that to be one of our busier quarters and so production should ramp pretty quick through the second quarter and then hold relatively flat through the rest of the third and fourth quarter to meet our mid-quarter guidance.
Nicholas O’Grady — Chief Executive Officer
Yes. And on the gas asset, we just had our budget meeting with the operator yesterday. So no surprises there. The timing has stayed consistent. And so we should see a bunch of IPS, I believe in June. And so you’re going to see kind of above that average for a good portion of the back half of the year, just because you’re starting at a lower. And just so everyone is crystal clear on this we want to make sure, we’ve given a full year guidance it will close April 1. So the first quarter of production and all those things will be received in the form of a reduction to the purchase price that — so those are full year numbers. So the actual quarter and I can understand, why you’re asking Phillips. So I just want to make sure that everybody understands that, we’ve given a full 2021 you will really only have three years on the books, but the first quarter we will own it, or that we will own those cash flows so we’ll receive those cash flows in a purchase price reduction.
Philips Johnston — Capital One — Analyst
That’s perfect. Thank you for that. And then obviously, you guys are cash tax payers today, and you have a fairly large NOL position. But I know, there was technically ownership changed during 2018 that sort of makes those in those NOL subject to some limitations. My question is, as we look out to the next few years when you start generating a ton of free cash flow. Would you guys expect to start paying cash taxes at some point?
Adam Dirlam — Chief Operating Officer
No.
Nicholas O’Grady — Chief Executive Officer
No. The way — there’s a three-year rolling structure on it long story shortage that we would have to do something pretty extreme in order to…
Adam Dirlam — Chief Operating Officer
That’s right. That’s right. Yes. We would — I mean, we’ve got a lot of that three year actually happened in 2018. So that stuff will roll off here too. So no, we don’t — we expect we’ll be fine from an NOL standpoint.
Philips Johnston — Capital One — Analyst
Excellent. Thank guys.
Nicholas O’Grady — Chief Executive Officer
It’s in our standardized measure, I think in the K, when it comes out you’ll see it’s a minimis amount.
Philips Johnston — Capital One — Analyst
Okay. Thank you.
Operator
Thank you. Our next question is coming from Nicholas Pope of Seaport Global. Please go ahead.
Nicholas Pope — Seaport Global — Analyst
Good morning, guys. Couple of quick questions. Just wanted to clarify a few things, the Marcellus asset win with that preferential rights being exercised. I wanted to clarify, what that working interest looks like? I guess, what current production looks like? And what it is going forward? Just to clarify that a little bit.
Nicholas O’Grady — Chief Executive Officer
Net to us it’s about 27%, 28%, right? It’s 40% across the PDA, but we have a 30% partner. So it’s about 27%, 28%. And it should be fairly consistent unless the overall units change or acreage ownership changes over time.
Nicholas Pope — Seaport Global — Analyst
Got it. And then just with the dynamic of how the dividend is going to work out relative to the cumulative preferred how exactly does that play into it? I think is it around $20 million that’s been accumulated right now as a non-cash dividend on the preferreds and that needs to be paid kind of concurrent with the dividend being paid? Is that how that — am I correct in that?
Adam Dirlam — Chief Operating Officer
Yes.
Nicholas O’Grady — Chief Executive Officer
Yes, but it’s not $20 million.
Adam Dirlam — Chief Operating Officer
It’s — call it $16 million-ish.
Nicholas O’Grady — Chief Executive Officer
Yes. I think it might — yes, let’s call it, $16 million. So, obviously, prior to a common dividend we would have to begin to put the preferred back into pay status, which obviously we would intend to do for discussing a common dividend.
Nicholas Pope — Seaport Global — Analyst
And is that a cash payment? Or are there other options with how that kind of structured for the cumulative?
Nicholas O’Grady — Chief Executive Officer
There are options.
Nicholas Pope — Seaport Global — Analyst
Okay. That’s all I need. That’s very helpful. Congratulations again.
Operator
Thank you. Our next question is coming from Gregg Brody of Bank of America. Please go ahead.
Gregg Brody — Bank of America — Analyst
Hey, guys. My question was just on the preferred. But when you think about the other options to pay the preferred where are they?
Nicholas O’Grady — Chief Executive Officer
If I can punt that question, Gregg, I don’t think we’re prepared to talk about that publicly.
Gregg Brody — Bank of America — Analyst
Got it. Thank you for letting me on.
Operator
Thank you. At this time, I’d like to turn the floor back over to management for closing comments.
Nicholas O’Grady — Chief Executive Officer
Thanks everyone for joining this morning. We’re excited about the future about 2021. Thanks for everyone for sticking with us through thick and thin, and we’ll see you on the next one.
Operator
[Operator Closing Remarks]