Northern Oil and Gas, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results; dollar amounts below are in millions unless noted.
Business context
Northern is a U.S. oil and gas company focused on non-operated minority working and mineral interests. It reported average Q2 production of 90,878 Boe per day, up 25% from Q2 2022, with oil representing about 60%. Acquisitions and new wells drove much of the production growth.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Oil and gas sales | $416.5 | $549.6 | $842.7 | $1,006.1 |
| Net commodity derivative gain (loss) | $57.8 | ($108.2) | $211.4 | ($597.6) |
| Total revenue | $476.6 | $441.4 | $1,058.8 | $408.5 |
| Income from operations | $234.8 | $270.1 | $595.4 | $81.0 |
| Net income | $167.8 | $251.3 | $508.0 | $44.7 |
| Diluted EPS | $1.88 | $2.74 | $5.82 | $0.17 |
| Cash from operating activities | Not separately stated for Q2 | $577.1 | $364.3 |
- Q2 oil and gas sales excluding derivative settlements fell about 24%, as lower realized prices outweighed higher volumes. Including settled derivatives, realized price was $53.66 per Boe, down 8% year over year.
- Q2 operating expenses rose to $241.8 million from $171.3 million. Production expense was $10.20 per Boe versus $9.77; DD&A was $12.87 per Boe versus $8.28, reflecting higher production and a larger depletable asset base after acquisitions.
- Six-month investing cash outflow was $871.4 million, including $833.4 million of cash capital spending on oil and gas properties. Operating cash flow less that property spending was approximately negative $256 million.
- At June 30, cash was $14.8 million and working capital was a $7.0 million surplus. Gross debt principal was $1.705 billion; there were no revolver borrowings. Reported liquidity was approximately $1.01 billion, including $1.00 billion of committed revolver availability.
- Q2 margin pressure and comparisons are affected by commodity prices, acquisitions and derivative accounting. The filing does not present a single adjusted or derivative-excluded profit measure as the primary result.
Material changes and significant transactions
- Q2 production increased 25% year over year, while oil and gas sales declined due to weaker commodity realizations. Total revenue increased because derivative results swung from a Q2 2022 loss to a Q2 2023 gain.
- Six-month net income and revenue comparisons were especially affected by derivative mark-to-market results: the six-month 2023 derivative gain was $211.4 million versus a $597.6 million loss in 2022. These results include non-cash changes in fair value.
- Northern completed the $319.9 million MPDC Permian acquisition in January and the $167.9 million Forge Delaware Basin acquisition in June. It also issued $500 million of 8.75% senior notes due 2031 and raised $224.7 million net through a common-stock offering.
- Shares outstanding rose to 93.0 million at June 30 from 85.2 million at year-end 2022. The company paid $54.4 million of common dividends during the first half.
- The company released part of its deferred-tax valuation allowance in Q2, recognizing $30.5 million of deferred tax liability as it concluded additional deferred tax benefits were more likely than not realizable. This contributed to the period’s tax provision.
Outlook, risks and contingencies
- Management stated that cash on hand, operating cash flow and revolver availability should fund budgeted capital expenditures and operating expenses for at least the next 12 months, while noting that additional capital may be sought and is not assured on favorable terms.
- Northern agreed to acquire a 33.33% interest in the Novo Delaware Basin assets for $500 million in cash, subject to customary adjustments. A $37.5 million deposit was placed in escrow; closing was expected in August 2023, with revolver borrowings planned to fund the purchase.
- Management budgeted for a 5%–10% increase in drilling, completion and related costs in 2023 compared with 2022. The filing provides no specific production or earnings guidance in the supplied text.
- Commodity prices and differentials, inflation, infrastructure constraints, and the pace and decisions of third-party operators are key risks. All wells are operated by third parties; the company also remains significantly exposed to North Dakota and disclosed ongoing Dakota Access Pipeline legal and potential shutdown risks.
- Commodity derivatives reduced price exposure but create earnings volatility and can limit participation in price increases. At June 30, the net derivative liability was $67.0 million. The company reported compliance with revolver financial covenants; routine litigation was not expected by management to materially affect results.
Key facts for investors to verify
- Whether the Novo acquisition closed as expected, its final adjusted purchase price, funding mix and effect on debt and liquidity.
- How much reported earnings and cash flow depend on settled versus non-cash derivative gains, and the remaining hedge volumes, terms and counterparty exposures.
- Whether production growth and acquisition contributions can offset lower commodity realizations, rising operating costs and higher DD&A.
- Debt-service capacity and covenant headroom after the 8.75% notes issuance and planned acquisition financing.
- The assumptions supporting the deferred-tax valuation-allowance release and the durability of future taxable income.