Northern Oil & Gas, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; balance sheet compared with December 31, 2011. The company is an independent oil and gas producer focused primarily on non-operated interests in the Bakken and Three Forks formations in North Dakota and Montana.
Business and operating context
- At June 30, the company held 180,588 net mineral acres; approximately 43% were developed. It had 955 gross (87.6 net) producing wells and 150 gross (10.8 net) wells drilling, awaiting completion, or completing.
- Average production was 10,412 Boe/day in Q2 and 9,465 Boe/day in the first half. Q2 production was 93% oil.
Financial performance and liquidity
| Metric | Q2 2012 | First half 2012 |
|---|---|---|
| Oil and gas sales | $70.4 million | $135.6 million |
| Total revenue, including derivative results | $119.2 million | $169.7 million |
| Operating income | $75.2 million | $90.0 million |
| Net income | $43.6 million; $0.70 diluted EPS | $52.4 million; $0.84 diluted EPS |
| Net cash from operations | Not separately reported | $85.6 million |
| Capital spending and property purchases | Not separately reported | $283.9 million |
- Q2 oil and gas sales rose 99% year over year, while average daily production rose 136%. First-half oil and gas sales increased 117% and production increased 127% year over year.
- Reported earnings included unrealized derivative gains of $49.8 million in Q2 and $40.4 million in the first half. Excluding unrealized derivative results, net income was $13.6 million for Q2 and $28.1 million for the first half (company-reported non-GAAP measures). Adjusted EBITDA was $53.1 million and $98.0 million, respectively.
- First-half realized price was $74.97/Boe, including settled derivatives, up 6% year over year. Production expense increased to $8.01/Boe from $6.11; depletion rose to $25.44/Boe from $20.08.
- Cash was $25.2 million at June 30. Current assets were $117.1 million and current liabilities $153.9 million. The company reported no revolver borrowings and $300 million of borrowing capacity under its borrowing base.
- Total debt was $300 million: 8.0% senior notes due 2020. Stockholders’ equity was $558.2 million. The notes generated approximately $291.2 million in net proceeds. The company reported compliance with revolving-credit covenants.
Material changes and management commentary
- In May, the company issued $300 million of 8.0% senior unsecured notes; it used proceeds for its development and acquisition program, general corporate purposes, and repayment of revolver borrowings. The borrowing base was increased to $300 million in June.
- First-half operating cash flow increased from $35.5 million to $85.6 million, while investing cash outflow increased from $111.7 million to $284.0 million, reflecting expanded development and acquisitions. Financing activities provided $217.4 million.
- Management attributed production growth to wells brought online, including 29.7 net wells added to production in the first half. It said higher water production, trucking and disposal costs, workovers, and increased well-completion costs raised expenses.
- The Williston Basin oil differential averaged $13.89/Bbl in the first half, versus $8.32/Bbl a year earlier. Management cited weather-related supply, refinery maintenance, and transportation constraints; it expected added rail capacity and pipeline developments to help differentials return toward historical levels.
Outlook, risks, and contingencies
- Management reaffirmed a plan to participate in spudding approximately 44 net wells in 2012. Estimated average completed-well cost increased to $8.8 million from $8.2 million; projected capital for 2012-spud wells was approximately $387 million. Planned 2012 acreage acquisitions were reduced to $50 million from a prior $60–$80 million estimate.
- Key risks include oil and gas price volatility, Williston Basin price differentials and transportation capacity, drilling and completion costs or delays, partner activity, access to capital, and weather. Derivatives reduce some price exposure but can limit upside; fair-value changes materially affect reported earnings.
- Derivative instruments were a net asset of $28.6 million at June 30, compared with a net liability of $11.9 million at year-end. The company reported no impairment of oil and gas properties.
- The company described ordinary-course legal proceedings as not expected to have a material effect. A shareholder derivative action was dismissed with prejudice on May 7, 2012. It reported no material changes to previously disclosed risk factors and no material subsequent events requiring disclosure.
Important facts for investors to verify
- How production growth, well completion timing, and higher per-Boe production and depletion costs affect future margins and cash generation.
- Whether the $387 million drilling program and $50 million acreage plan remain achievable within available liquidity and the $300 million borrowing base.
- The sensitivity of reported earnings and cash flows to derivative valuations, settlements, oil-price differentials, and hedge coverage.
- Current reserve estimates and development economics: the filing cites year-end 2011 proved reserves of 46.8 MMBoe, but does not provide a June 30, 2012 reserve update.
- Debt covenant headroom and liquidity: reported GAAP current liabilities exceeded current assets, although management reported covenant compliance under the credit agreement’s definitions.