Northern Oil and Gas, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; financial statements are unaudited. Northern is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana.
Financial and operating performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Oil and gas sales, before derivatives | $121.2 million | $79.6 million | $218.0 million | $162.8 million |
| Total revenues, including derivative results | $74.6 million | $96.2 million | $156.7 million | $164.1 million |
| Income from operations | $3.2 million | $47.7 million | $23.7 million | $68.4 million |
| Net income (loss) | $(4.4) million | $25.0 million | $2.2 million | $34.0 million |
| Net cash from operations | — | $128.9 million | $110.4 million |
- Q2 average production was 15,396 Boe/day, up 41% year over year; approximately 90% was oil. Six-month production increased 30% to 2.60 million Boe.
- Q2 realized price including settled derivatives was $78.45/Boe, versus $79.80/Boe. Oil sales price before settled derivatives rose to $90.75/barrel, but the Williston Basin differential to WTI widened to $12.25/barrel from $5.32.
- Q2 production expense was $9.30/Boe, down from $10.49; DD&A was $30.13/Boe, up from $26.79. Six-month production expense was $9.52/Boe and DD&A $30.16/Boe.
- Q2 settled derivative losses were $11.2 million and mark-to-market losses were $35.3 million. These losses materially reduced reported revenue and earnings. Management’s non-GAAP Adjusted Net Income was $17.3 million for Q2 and $28.8 million for the first half; Adjusted EBITDA was $81.4 million and $146.5 million, respectively.
Balance sheet, cash flow, and liquidity
- At June 30, cash was $14.3 million; current assets were $128.2 million and current liabilities $269.5 million. Accounts payable was $217.9 million, including substantial unpaid oil and gas property costs.
- Total debt was $706.8 million: $198.0 million drawn on the revolving facility and $508.8 million carrying value of 8% senior notes due 2020. Debt was $584.5 million at December 31, 2013. Stockholders’ equity was $609.5 million; debt to total book capitalization was 54%.
- The revolver had a $500 million borrowing base, with $302 million of availability, and matures September 30, 2018. The company reported covenant compliance at quarter-end. The notes bear fixed interest of 8%; revolver borrowings are floating-rate.
- First-half investing cash outflow was $228.9 million, principally development and acquisition spending; financing cash inflow was $108.6 million, mainly revolver advances. Oil and gas property costs included in accounts payable were $205.0 million.
- Management said cash, operating cash flow, and revolver availability should fund budgeted spending and operating costs for at least 12 months, but significant acquisitions or increased drilling could require additional capital.
Changes, outlook, and risks
- Production growth lifted sales before derivatives, but higher derivative losses, DD&A, interest expense, and production taxes drove GAAP earnings sharply lower. Q2 interest expense rose to $10.3 million from $7.8 million; first-half interest expense rose to $20.2 million from $13.9 million.
- Open crude oil swaps covered 6.8 million barrels at a weighted-average price of approximately $89.61/barrel: 1.92 million barrels for the remainder of 2014, 3.96 million for 2015, and 0.90 million for 2016. Derivatives had a net fair-value liability of $61.1 million at June 30.
- Northern held 186,695 net acres, about 60% developed, and acquired 11,681 net acres in the first half. It participates as a non-operator, so results depend on operating partners’ drilling and completion schedules.
- Management attributed the wider oil differential to takeaway constraints and seasonal refinery maintenance, and expected it to return toward historical levels as rail capacity and planned pipelines expand. This is an expectation, not assured guidance. The filing gives no clear numerical production or earnings guidance.
- Risks include volatile commodity prices, oil-price differentials and transportation capacity, weather, rising drilling and completion costs, interest rates, access to capital, and dependence on operators. The company reported no property impairment in the first half.
- A North Dakota quiet-title action concerns certain leases. An adverse final judgment could require reversal of approximately $1.6 million of previously accrued revenue; the company says it is vigorously defending its interest. Other ordinary-course legal matters were not expected by management to have a material effect.
- Related-party operator Emerald Oil had $4.1 million receivable and $16.6 million payable balances with Northern at quarter-end. A Northern executive’s brother is Emerald’s chairman and CEO.
Important facts for investors to verify
- Whether production growth, takeaway improvements, and the expected narrowing of the Bakken differential materialize.
- Hedge volumes and prices relative to forecast production, derivative settlement cash needs, and the effect of counterparties’ extension options.
- Revolver borrowing-base redeterminations, covenant headroom, the large accounts-payable balance, and funding needs if drilling or acquisitions increase.
- Progress and potential financial effect of the quiet-title litigation, and oversight of related-party transactions with Emerald.
- Updated reserves and development requirements; the reserve figures cited in the filing are as of December 31, 2013.