Northern Oil and Gas, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited quarterly results, including the quarter ended December 31, 2013. The company is a non-operating oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana.
Business context and operating results
- At year-end, Northern held 187,044 net acres and interests in 1,758 gross (146.2 net) producing wells. It participated in drilling and completing 531 gross (40.0 net) wells during 2013.
- Production rose 19% to 4.48 million Boe (12,261 Boe per day). Proved reserves increased 25% to 84.2 million Boe; 90% were oil and 42% were proved developed.
- The company is a non-operator and relies on third-party operators for drilling, development, production and marketing.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Oil and gas sales | $369.2 million | $296.6 million |
| Total revenue, including derivative results | $335.8 million | $311.6 million |
| Operating income | $118.0 million | $129.1 million |
| Net income / diluted EPS | $53.1 million / $0.85 | $72.3 million / $1.15 |
| Cash from operations | $222.8 million | $198.5 million |
| Cash used in investing | $358.5 million | $532.2 million |
- Total revenue increased 8%, but GAAP net income declined 27%. The 2013 results included $12.2 million of realized derivative losses and a $21.3 million mark-to-market derivative loss, versus a small realized loss and a $15.1 million mark-to-market gain in 2012. Adjusted net income, a non-GAAP measure, was $66.4 million versus $66.2 million; adjusted EBITDA was $268.0 million versus $225.3 million.
- Realized price including derivative settlements increased to $79.77 per Boe from $78.79. The Williston Basin differential to NYMEX averaged $8.68 per barrel for 2013 and widened to about $14.98 in the fourth quarter.
- Production expense rose to $9.35 per Boe from $8.61; depletion rose to $27.62 per Boe from $26.18. Interest expense increased to $32.7 million from $13.9 million.
- At year-end, cash was $5.7 million, total debt was reported at $584.5 million, and shareholders’ equity was $619.8 million. Debt to total capitalization was 48%. The $750 million revolving facility had a $450 million borrowing base, $75 million outstanding and $375 million available. The company reported covenant compliance.
- Capital expenditures were $439.1 million. Operating cash flow was below investment spending; financing activities provided $128.1 million. Current assets were $104.4 million versus current liabilities of $194.1 million.
Changes, outlook and notable items
- For 2014, management budgeted capital expenditures of $430–$440 million, including approximately $388 million for drilling and completion and participation in about 44 net wells. Funding was expected from cash on hand, operating cash flow, bank borrowings and potential debt financing. Management said it could adjust spending by reducing well participation.
- The company hedged 3.75 million barrels for 2014 at a weighted average swap price of $90.46 and 2.88 million barrels for 2015 at $89.02; 240,000 barrels of 2014 production were also covered by collars with a $90 floor and $99.05 ceiling. Derivatives are not designated for hedge accounting, so mark-to-market changes affect reported earnings.
- Proved undeveloped reserves were 48.7 million Boe. The company reported a negative 9.8 million Boe revision to prior-year PUD estimates, principally due to below-forecast well performance. Its plan called for drilling 144.5 net PUD wells through 2018 at an estimated cost of $1.2 billion.
- Management believed liquidity was sufficient for the next 12 months, while noting that acquisitions or accelerated drilling could require additional capital. It cautioned that funding over the next 24 months might not support continued acreage acquisitions and drilling.
- Lease acreage potentially expiring included 24,085 net acres in 2014 and 21,998 net acres in 2015. A North Dakota quiet-title action could require reversal of approximately $1.5 million in previously accrued revenue if decided adversely; the company is defending its interest.
- Asset retirement obligations increased by $1.1 million in 2013, largely from revised plugging-cost estimates and shorter estimated productive lives. No full-cost impairment was recorded. Deloitte issued an unqualified opinion on the financial statements and internal controls.
Key investor verification points
- Review the quality and sustainability of reserve growth, particularly the PUD revisions and actual well performance versus forecasts.
- Assess hedge volumes, pricing, counterparty exposure and the earnings volatility created by mark-to-market accounting.
- Confirm the funding plan for the 2014 capital program, borrowing-base capacity, debt service and covenant headroom.
- Track Bakken transportation capacity and price differentials, along with drilling, completion and operating-cost trends.
- Monitor lease expirations, the quiet-title litigation, and updated plugging and abandonment cost estimates.