Northern Oil and Gas, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited interim financial statements. Northern is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana.
Operating and financial results
- Production: Q2 averaged 10,896 Boe/day, up 5% year over year; oil was approximately 90% of production. First-half production was 1.99 million Boe, up 16%. At June 30, Northern had interests in 121.5 net producing wells and 182,400 net acres, approximately 55% developed.
- Q2 revenue and earnings: Oil and gas sales were $79.6 million, up 13% excluding settled derivative losses. Total reported revenue was $96.2 million, including a $17.0 million unrealized derivative gain. Operating income was $47.7 million and net income was $25.0 million, or $0.39 diluted EPS. Net income was down from $43.6 million in Q2 2012, when the unrealized derivative gain was $49.8 million.
- First-half results: Oil and gas sales were $162.8 million, up 20%; total revenue was $164.1 million, down 3% due principally to the smaller unrealized derivative gain ($2.1 million versus $40.4 million). Net income was $34.0 million versus $52.4 million; diluted EPS was $0.54 versus $0.84. Adjusted EBITDA, a non-GAAP measure, was $121.7 million versus $98.0 million.
- Costs and prices: Q2 realized price including derivative settlements was $79.80/Boe versus $73.19. The oil price differential to WTI narrowed to $5.32/Bbl from $13.72. Q2 production expense rose 43% to $10.4 million, or $10.49/Boe, reflecting water handling and workovers. First-half production expense was $19.0 million, or $9.56/Boe; depletion was $26.66/Boe versus $25.44.
- Cash flow and investment: First-half operating cash flow was $110.4 million, compared with $85.6 million. Cash used in investing was $186.4 million, including $187.2 million of oil and gas property purchases and development expenditures. Cash increased $4.7 million to $18.1 million.
- Debt and liquidity: At June 30, cash was $18.1 million, total liabilities $729.1 million, and stockholders’ equity $623.5 million. The company reported $500 million principal amount of 8% senior notes due 2020 and no revolver borrowings; the notes’ balance-sheet carrying amount was $510.3 million. The revolver borrowing base was $400 million, all available. Management reported compliance with its credit covenants.
Changes and notable items
- In May 2013, Northern issued $200 million of additional 8% senior notes at 105.25% of face value, bringing total note principal to $500 million. Proceeds supported development, acquisitions, general corporate purposes, and repayment of revolver borrowings.
- First-half interest expense increased to $13.9 million from $2.9 million, primarily due to higher average debt and the 8% notes. Production growth and improved realized prices lifted sales and operating cash flow, while production costs and depletion also increased.
- Derivative positions are marked to market through earnings, creating substantial reported earnings volatility. At June 30, open swaps covered 6.3 million barrels at a weighted average price of approximately $90.21; management also disclosed hedges covering approximately 2.0 million barrels for the remainder of 2013, 4.0 million for 2014, and 1.6 million for 2015.
- Management said existing cash, operating cash flow, and revolver availability should fund budgeted capital expenditures and operating expenses for at least the current year. Significant acquisitions or increased drilling could require additional financing; availability and terms are not assured. No specific production or earnings guidance is provided in the filing text.
Risks, contingencies, and management commentary
- Key exposures include volatile oil and gas prices, Williston Basin price differentials and transportation capacity, drilling and completion costs, weather, infrastructure constraints, operating-partner activity, and access to capital. Management cited elevated water-disposal costs and unusually high Q2 workovers.
- A North Dakota quiet-title action concerns certain leases. An adverse final judgment could require reversal of approximately $1.4 million of accrued revenue, including $0.1 million for the first half of 2013. The company says it is vigorously defending its interest; it considers other ordinary-course proceedings not expected to have a material impact.
- No oil and gas property impairment was identified at June 30, 2013. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate recurring operating performance from unrealized derivative gains and losses when assessing reported revenue, earnings, and year-over-year trends.
- Review the 8% notes, revolver borrowing-base redeterminations, covenant headroom, and the funding needed for planned drilling and development.
- Track production growth against rising per-Boe operating costs, depletion rates, and the remaining completion backlog.
- Assess hedge volumes and terms relative to forecast production, including the effects of swaps, collars, and Williston Basin differentials.
- Monitor the quiet-title action and the potential revenue reversal, along with lease expirations and the timing of unproved acreage moving into the depletion base.