Northern Oil and Gas, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The unaudited filing was signed November 2, 2023. Northern is a U.S. oil and gas company focused on non-operated minority working and mineral interests.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue, including commodity derivative gains/losses | $314.0 million | $791.6 million | $1,372.7 million | $1,200.2 million |
| Oil and gas sales, before derivative gains/losses | $511.7 million | $534.1 million | $1,354.4 million | $1,540.2 million |
| Operating income | $42.4 million | $604.6 million | $637.8 million | $685.7 million |
| Net income | $26.1 million | $583.5 million | $534.1 million | $628.2 million |
| Operating / net margin on reported total revenue | 13.5% / 8.3% | 76.4% / 73.7% | 46.4% / 38.9% | 57.1% / 52.3% |
Margins are calculated from reported total revenue and are highly affected by non-cash derivative mark-to-market movements. Q3 2023 included a $199.5 million net commodity derivative loss, compared with a $257.6 million gain in Q3 2022. Nine-month derivative results were a gain of $11.9 million versus a loss of $340.0 million in 2022.
- Production: Q3 averaged approximately 102,327 Boe per day, up 29% year over year; oil was about 62% of production. Nine-month production was 25.55 million Boe, up 26%.
- Prices: Q3 realized price excluding settled derivatives was $54.35/Boe, down 26%; including settlements it was $54.90/Boe, down 2%. Net realized gas and NGL price was $2.19/Mcf versus $8.43/Mcf a year earlier. Q3 oil differential to NYMEX widened to $2.84/Bbl from $0.84/Bbl.
- Costs: Q3 production expense was $8.76/Boe, down from $9.41; DD&A was $14.21/Boe, up from $9.06, primarily reflecting the larger acquired asset base and higher depletion rate. Nine-month DD&A was $334.8 million, up 92%.
- Cash flow: Nine-month operating cash flow was $841.0 million, versus $641.0 million. Investing cash use was $1,484.2 million, including $1,483.6 million of oil and gas property expenditures. Financing provided $653.7 million; cash increased $10.4 million to $13.0 million.
Balance sheet, debt, and liquidity
- At September 30, cash was $13.0 million, current assets $469.6 million, and current liabilities $602.5 million; reported working capital deficit was $132.9 million, compared with $24.5 million at year-end 2022.
- Total debt principal was $2.089 billion; carrying value, net of unamortized premiums and issuance costs, was $2.057 billion. Debt comprised $384 million drawn on the revolving facility, $705.1 million of 2028 notes, $500 million of 2031 notes, and $500 million of 2029 convertible notes.
- Liquidity was reported as $879 million: $866 million of committed revolver availability and $13 million of cash. The facility had a $1.8 billion borrowing base and $1.25 billion elected commitment. The company reported compliance with its financial covenants.
- After quarter-end, Northern issued 7.475 million shares at $38.88, generating approximately $290.6 million before offering expenses. The filing says proceeds were intended to reduce revolver borrowings.
Material changes and notable items
- Three 2023 acquisitions added interests in Permian assets: MPDC for approximately $319.9 million, Forge for $167.9 million, and Novo for $468.4 million. The filing also reports $172.0 million of other property acquisitions during the first nine months.
- Acquisition-led growth contributed to higher production and a 29% year-over-year increase in Q3 net producing wells. The company added 22.6 net wells to production during the quarter, excluding certain acquisition-related wells.
- In May, Northern issued $500 million of 8.75% senior notes due 2031. Nine-month financing also included $224.7 million net proceeds from a common stock offering. Interest expense rose to $37.0 million in Q3 from $20.1 million, reflecting higher debt and floating rates.
- The company released a significant portion of its deferred-tax valuation allowance in 2023. Q3 included a $20.7 million income tax benefit; nine-month tax expense was $19.0 million. The release materially affects reported tax expense and net income.
- Net commodity derivative liabilities were $271.7 million at September 30. Derivatives are not designated for hedge accounting, so fair-value changes run through earnings; cash effects occur upon settlement. Northern reported hedging approximately 65% of crude oil and 64% of natural gas and NGL production during the first nine months.
- Common dividends declared rose from $0.34 per share in February to $0.38 in August; an October declaration set a $0.40 dividend payable in January 2024. Nine-month common dividends paid were $88.7 million.
Outlook, risks, and contingencies
Management said cash, operating cash flow, and revolving capacity should be sufficient to fund budgeted capital expenditures and operating expenses for at least the next twelve months and, based on current expectations, over the long term. Near-term funding is expected from operating cash flow and revolver availability. Capital spending is discretionary and could be curtailed if cash flow falls short. The filing does not provide a clear numerical production or capital-expenditure guidance range.
Key risks include volatile oil and gas prices, regional price differentials and infrastructure constraints, cost inflation, reliance on third-party operators (all wells are operated by partners), geographic and operator concentration, acquisition execution and integration, interest-rate changes, and legal or regulatory uncertainty, including potential Dakota Access Pipeline disruption. A 1% increase in short-term rates on revolver borrowings outstanding at quarter-end would add about $3.8 million of annual interest expense. The company said ordinary-course litigation is not expected to materially affect its financial condition or results, while noting outcomes remain uncertain.
Investor verification checklist
- Reconcile reported revenue and earnings to derivative settlements and non-cash mark-to-market changes; assess the impact of the $271.7 million net derivative liability.
- Review acquisition contributions, purchase prices, integration, and returns, particularly for the MPDC, Forge, and Novo transactions.
- Assess liquidity and leverage after the October equity offering, including actual revolver repayment, borrowing availability, and debt-service costs.
- Verify sustainability of production growth, realized prices, differentials, and rising depletion and development costs.
- Evaluate the valuation-allowance release and the assumptions supporting deferred-tax-asset realizability.