Northern Oil & Gas, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Unless otherwise noted, financial figures are in U.S. dollars. The filing is an annual report, not a standalone fourth-quarter filing.
Business context and reporting period
Northern is an independent oil and gas company focused primarily on non-operated working interests in the Bakken and Three Forks formations of the Williston Basin in North Dakota and Montana. At year-end it held 179,131 net acres, had interests in 1,227 gross (106.2 net) producing wells, and reported average fourth-quarter production of 10,865 Boe per day. It participated in 563 gross (48.3 net) wells during 2012; the company reported a 100% success rate in its Bakken and Three Forks wells.
Financial and operating highlights
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $311.6 million | $149.4 million |
| Oil and gas sales | $296.6 million | $159.4 million |
| Operating income | $129.1 million | $67.3 million |
| Net income | $72.3 million | $40.6 million |
| Diluted earnings per share | $1.15 | $0.65 |
| Cash from operating activities | $198.5 million | $85.1 million |
| Cash used in investing activities | $532.2 million | $300.9 million |
| Year-end cash | $13.4 million | $6.3 million |
| Year-end total debt | $424.0 million | $69.9 million |
- Production rose 95% to 3.76 million Boe. Oil and gas sales increased 86%; total revenue increased 109%, including a $15.1 million non-cash unrealized derivative gain.
- Average realized price, including settled derivatives, increased 4% to $78.79 per Boe. Oil production averaged $83.22 per barrel before settled derivative effects; the reported oil price differential to NYMEX was $9.79 per barrel.
- Production expense increased to $8.61 per Boe from $6.77. Depletion increased to $26.18 per Boe from $21.20. Production taxes were $28.5 million; general and administrative expense was $22.6 million.
- Adjusted EBITDA, a non-GAAP measure, was $225.3 million, versus $112.3 million. Adjusted net income was $66.2 million, versus $38.8 million; both exclude specified items and should be considered alongside GAAP results.
- Capital expenditures and property purchases drove investing cash outflow. Operating cash flow did not cover the $532.2 million investing outflow; financing activities provided $340.8 million.
- Year-end current assets were $94.2 million and current liabilities $100.5 million. The company reported $226 million of unused borrowing capacity and approximately $240 million of total liquidity, including facility availability.
- Proved reserves increased 44% to 67.6 million Boe; 45% were proved developed. Pre-tax PV-10 was $1.287 billion, a non-GAAP measure; the GAAP standardized measure of discounted future net cash flows was $1.041 billion.
Material changes versus 2011
- Operating scale expanded: production nearly doubled and year-end producing net wells increased from 57.9 to 106.2.
- Revenue and net income grew substantially, while production, production taxes, G&A, depletion and interest expense also increased. Interest expense rose to $13.9 million, principally following the May 2012 issuance of senior notes.
- Debt increased after issuing $300 million of 8% senior notes due 2020 and increasing revolver borrowings to $124 million. The revolving credit borrowing base was $350 million, against a $750 million facility commitment.
- Derivative fair value shifted from a net liability of $11.9 million at year-end 2011 to a net asset of $3.3 million at year-end 2012. Derivatives are not designated for hedge accounting, so mark-to-market changes affect reported earnings.
Outlook, risks and unusual items
- Management budgeted $420–$440 million of 2013 capital expenditures, including participation in approximately 44 net wells. It expected average completed well costs of $8.4–$8.8 million, assuming a 10% reduction from 2012, and planned approximately $20 million for acreage and $30 million for other capital spending.
- Management stated it expected available cash, operating cash flow and revolver capacity to fund the next 12 months’ budget and operating needs, while warning that acquisitions or increased drilling could require additional capital. It noted that funding over the following 24 months might be insufficient to sustain both acquisitions and drilling.
- At year-end, 3.1 million barrels of 2013 production and 2.4 million barrels of 2014 production were covered by derivatives, at reported average prices of $90.58 and $91.49 per barrel, respectively. These arrangements limit some upside and expose the company to counterparty, production-volume and price-basis risks.
- G&A included $5.5 million of severance-related costs associated with the departures of the former president and former COO. The former president’s departure also resulted in modified restricted-stock vesting and related compensation expense.
- Approximately 80,075 net acres were listed as subject to expiration from 2013 onward, including 20,915 net acres potentially expiring in 2013. Development timing depends substantially on third-party operators.
- A North Dakota quiet-title action concerns certain leases. An adverse final judgment could require reversal of approximately $1.3 million of revenue accrued since 2008, including $0.2 million for 2012; the company said it was vigorously defending its interest. Other ordinary-course legal matters were not expected by management to have a material effect.
- Key risks include oil-price volatility and Williston Basin differentials, transportation and infrastructure constraints, drilling-cost inflation, weather, environmental and hydraulic-fracturing regulation, reserve-estimate uncertainty, and reliance on third-party operators. Revolver borrowing-base reductions and debt covenants could constrain liquidity. The company reported compliance with its credit-facility covenants at year-end.
- The filing reports no full-cost ceiling impairment for 2012. Reserve estimates and PV-10 depend on prescribed price assumptions and are not presented as current market value. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile 2012 cash spending, capital commitments and financing needs against the 2013 budget and the stated liquidity available under the borrowing base.
- Assess debt-service capacity and covenant headroom, including the 8% notes, variable-rate revolver, and potential borrowing-base changes.
- Review the assumptions behind the 67.6 million Boe reserve estimate, planned conversion of 37.4 million Boe of PUDs, and projected $741 million cost to drill 87.9 net PUD wells through 2015.
- Check whether planned operator activity can hold acreage at risk of expiration and deliver the company’s non-operated drilling schedule.
- Evaluate the realized oil differential, takeaway capacity and hedge coverage versus actual production; distinguish cash settlements from non-cash mark-to-market earnings.
- Review the quiet-title case, severance and compensation costs, environmental and regulatory developments, and any subsequent updates not included in this filing.