Northern Oil and Gas, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; filed August 4, 2022. Northern is a U.S. oil and gas company focused on non-operated minority working and mineral interests.
Financial and operating performance
- Q2 revenue: Oil and gas sales were $549.6 million; a $108.2 million net commodity-derivative loss reduced total revenue to $441.4 million. Q2 2021 total revenue was $24.8 million, including a $200.9 million derivative loss.
- Q2 earnings: Operating income was $270.1 million and net income was $251.3 million, versus operating and net losses of $74.9 million and $90.6 million, respectively, in Q2 2021. Net income attributable to common stockholders was $238.1 million; diluted EPS was $2.74.
- Six-month results: Oil and gas sales were $1.006 billion, offset by $597.6 million in derivative losses, for total revenue of $408.5 million. Operating income was $81.0 million, net income $44.7 million, and common-stockholder income $13.6 million; diluted EPS was $0.17. In first-half 2021, total revenue was $46.2 million and net loss was $180.9 million.
- Production and prices: Q2 production averaged approximately 72,689 Boe per day, up 2% sequentially; total Q2 production rose 33% year over year to 6.61 million Boe. Oil was 57% of Q2 production. Realized price including settled derivatives was $58.55/Boe, up 47% year over year. Q2 production expenses were $9.77/Boe; DD&A was $8.28/Boe.
- Cash flow: First-half operating cash flow was $364.3 million, investing cash outflow $545.8 million, and financing cash inflow $173.5 million. Capital expenditures on oil and gas properties were $524.2 million; cash declined by $8.0 million to $1.5 million.
- Debt and liquidity: June 30 debt principal was $1.104 billion: $367.0 million drawn on the revolver and $736.6 million of 8.125% notes due 2028. Liquidity was reported at $484.5 million, including $483.0 million of committed revolver availability. Working capital deficit was $253.1 million. The company reported compliance with revolving-credit financial covenants.
- Other balance-sheet items: Total assets were $2.192 billion and stockholders’ equity was $152.7 million. Derivatives were a net liability of approximately $606.0 million, versus $277.7 million at year-end 2021.
Material changes versus the prior comparable period
- Higher commodity prices and acquisitions lifted Q2 oil and gas sales 144% year over year, while production increased 33%. Q2 NYMEX averages were $108.59/barrel oil and $7.50/Mcf gas, compared with $66.19 and $2.92 in Q2 2021.
- Derivative losses remained significant: settled derivative losses were $162.3 million in Q2 2022 versus $27.9 million in Q2 2021. Derivative mark-to-market changes make reported revenue and earnings volatile and do not necessarily reflect current-period cash flows.
- Veritas acquisition closed January 27, 2022, for estimated consideration of $390.9 million cash plus warrants valued at $17.9 million. Its post-close results contributed approximately $130.1 million revenue and $95.9 million operating income through June 30.
- First-half capital spending increased substantially, including $369.7 million for acquisitions and $152.9 million for drilling and development, versus $130.8 million and $72.6 million, respectively, in first-half 2021.
- The company repurchased $81.2 million of preferred stock, $12.8 million of common stock, and $13.4 million principal amount of 2028 notes during the first half. It also amended and extended its revolver in June 2022, with maturity in June 2027.
Outlook, commentary, risks and contingencies
- Management said cash on hand, operating cash flow and revolver capacity should be sufficient to fund budgeted capital expenditures and operating expenses for at least the next 12 months. No specific production, earnings or capital-spending guidance figures are provided in the supplied filing text.
- Management noted persistent cost inflation, labor shortages and supply-chain disruptions, but expected significant free cash flow at then-current commodity prices. The company may curtail capital expenditures if cash flows fall below expectations.
- Hedging covered approximately 61% of production in the first half. Commodity derivatives reduce price exposure but can limit upside; open contracts had substantial mark-to-market liabilities. A 1% rise in short-term rates was estimated to add about $2.7 million in annual interest expense.
- Key risks include commodity-price volatility, operating-partner decisions and performance (all wells are operated by third parties), regional concentration, infrastructure and transportation constraints, cost inflation, acquisition execution, and interest-rate changes. The company remains disproportionately exposed to North Dakota despite geographic diversification.
- The company maintained a full valuation allowance on deferred tax assets. Management said ordinary-course litigation was not expected to materially affect financial position, results or cash flows, while noting outcomes are uncertain. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of the reported earnings and revenue movement reflects realized operating performance versus unsettled derivative mark-to-market changes.
- Hedge volumes, settlement prices, option exposure and potential cash requirements under derivative agreements as commodity prices change.
- Availability under the borrowing base and elected revolver commitments, covenant headroom, and the impact of rising floating rates.
- Acquisition integration, production contribution, and the returns on the Veritas and other acquired properties relative to their cost.
- Whether inflation, working-capital needs and planned development spending affect management’s stated 12-month liquidity outlook.