Nick O’Grady, CEO of Northern Oil and Gas Inc., joined Hart Energy’s Jessica Morales by Zoom to discuss the company’s nonoperated position in the Bakken and surviving the current unprecedented oil market collapse. [Editor's note: This interview was recorded on April 3.]

Hart Energy:
How has the oil price shock affected business in the Bakken right now?

Nick O’Grady:
It has affected it two-fold. One is the forward price of oil is below economic threshold. Virtually no new well proposals will make an economic return. So, for activity in the basin it is going to slow down. In the immediate term, the double-whammy certainly I would say we have never seen in my lifetime is such a downward shock to demand. In the financial crisis, oil demand went down a little bit over a million barrels a day. There are estimates upward to 20 million bbl/d. That is manifesting itself, not just in the Bakken but in all U.S. basins where you are seeing local prices, forgetting Cushing for a second, starting to blow out. We have seen prices in the Bakken as low as $8/bbl. That is a function that there is literally no physical place to put those barrels. I fully expect in the coming months unless something materially changes to see either forced shut-ins of production by midstream operators who can't place the barrels they have firm transportation for and/or ultimately some sort of regulatory intervention that forces the hand of operators to make them do so.

Hart Energy:
How is the current oil market collapse different from past downturns?

Nick O’Grady:
I think the industry has already been suffering over the last few years. Capital is being pulled out of the space particularly for public companies. The availability of debt and equity financing has diminished. There have been very few public offerings. Even when oil prices were relatively healthy at $50 to $60, there were already some signs of stress in the basin. I think what's different about this one is…in the history of oil, I believe demand on an annual basis has only gone down two or three times-1980, 2009 and I believe one other period in the 70s. The point of that though is a simple fact, which is that the industry is facing an existential crisis. I think that market forces will be at work and I do believe at some point this year people will go back to work and demand will return. But, what has been put in motion already is that what was already a tight capital situation is going to accelerate. Especially for producers who didn’t prepare either their balance sheets or their businesses for flexibility in environments like this.

Hart Energy:
What is the plan to move forward? Can this be used to a company advantage?

Nick O’Grady:
As it pertains to our company, we are a bit unique. We have upwards of 80% of our volumes already sold for the next two years. It doesn’t mean we are immune to it. It doesn’t mean we won’t feel the impacts in the physical market. It is certainly going to impact volumes that would have otherwise been produced between now and next year. The thing about shale oil and oil production, in general, is that it is a very unique commodity in that production declines naturally unless it’s reinvested in. Even if production and drilling stops for as little as three months, the base production that you are starting from is going to be a lot lower as will the cash flow that they produce. For us, we have already seen one of our large operators, Whiting Petroleum, file for bankruptcy. I expect to see more. I don’t think that’s a surprise to anybody. We believe as one of the best capitalized companies in the space that we will be able to take advantage of it. I think it’s going to take some time. But as banks grapple with being handed the keys to assets over the next few months, I would expect there are a lot of assets that are going to shake loose at very attractive prices. While it might not make an economic return to drill a new well, there is certainly a price you can back into that will earn a return on existing production or prove develop producing production and I expect those to happen. I don’t think banks naturally want to own oil and gas assets. Therefore, I think that is coming. For some companies, whether it be they are debt trading at distress levels, they may be able to sell assets at otherwise distressed prices and otherwise be able to do some good with it. We certainly as a company hope to capitalize on that.

Hart Energy:
What is your take on the future of the Bakken from here? What do we know and what can we assume?

Nick O’Grady:
We are in the middle of a storm here from a demand perspective. The forward strip reflects that. But, the forward strip also is not always an accurate predictor of what is going to happen to oil. I think U.S. oil at a minimum needs $40 in order to have reinvestment. There is maybe a couple dollar difference between the best of the best in the Permian and the best of the best in the Bakken or other place. But, that is the reality and really to make a healthy return, it needs $50 plus. There is an old trader adage that the market can remain irrational longer than you can remain solvent. I think that is the period we are going to enter into over the next six to nine months. But, as I pointed out before I think that with production going into decline heavily I do believe we will all leave our houses at some point. When that happens I would expect the forward price of oil to react to that. I think the Saudi and Russian strategy was a sound decision at the time which was that you have the highest cost producer in the world being the U.S. growing at two or three times the world demand growth. I think why should the lower cost producers be cutting to make room for that over time. This will instill discipline in the U.S. I think some of that was already coming. I don’t believe that OPEC or the Russians for that matter really factored in the COVID-19 impact to that. Therefore, I do think there is going to be a reaction in the physical markets in the U.S. that the hands are going to be forced. What I do think is that for those who can make it to the other side of this, I think you are going to have much healthier oil prices. I think the other thing is that people have been drilling too fast. So it will extend the life of these basins. The Bakken is about in the middle of its life cycle. The Permian is probably one-third of the way through its life cycle. Instead of drilling faster, faster, faster and burning through that, I think it will extend the life. But, I do think it will start from a much smaller base. If the U.S. was producing about 13 million bbl/d before this, I think you are going to lose several million barrels a day over the next nine months. That is sheer momentum. Even if prices rally somewhat in the front, it’s not going to make a huge impact. I think sometime in 2021, maybe as late as 2022, but I am optimistic that you are going to see prices get to a point because you are going to need to replace some of those barrels. We do need this. I just say, I am a free market person. I generally don’t believe in bailouts. But, I do think there is a geopolitical thing that is not always fully understood, which is one of the greatest advantages in my lifetime has been the growth of U.S. production and the reduction in imported oil. Some people talk about energy independence. We’re not there. We produce 13 [million bbl/d] but we consume about 20 [million bbl/d]. Obviously, we export products and light oil and import heavy oil. But, the bottom line is from a trade deficit or anything you want to say, a million-plus jobs in the U.S. producing it here on our own soil is a really important strategic advantage. It’s what got the United States through World War II frankly, was the ability to be self-sustaining. [It’s] no different than how we subsidize our farmers to make sure we can produce enough food for ourselves, whether it costs a little bit more for people. I do think that people need to keep in mind that letting the industry die like it once did in the late 1980s is a pretty big disadvantage because by the 1990s we were importing 70%-plus of our oil and I don’t think that’s necessarily a good political decision. 



Hart Energy:
What is Northern Oil and Gas’ plan of attack in this new oil price environment?

Nick O’Grady:
We have a group of very supportive stakeholders. We have done a lot of moves to our balance sheet to prepare for this. As I mentioned, we have sold a good portion of our oil for the next two years. We are relatively well insulated. But, I do think in general as activity declines overall production will decline. We are a nonoperator, so we are a passive owner of these assets. Operators are reacting in real-time. What I would say is, capital is extremely scarce and we believe we have more access to it than most. I think we are going to be able to acquire assets through this downturn. I think that for capital calls on assets meaning wells that are being drilled and potentially ducked up [ducking up meaning drilled but uncompleted, not fracked] that capital is so precious to some people that we are seeing those being sold at fire sell prices. I do think we are going to be able to acquire assets and we are going to be able to come out of this a lot stronger.

Onshore