Northern Oil and Gas, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results. Northern is a U.S. oil and gas company focused on non-operated minority interests; all of its wells are operated by third parties.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Oil and gas sales, before derivative effects | $534.1 million | $259.7 million | $1,540.2 million | $642.7 million |
| Net commodity derivative gain/(loss) | $257.6 million | $(128.2) million | $(340.0) million | $(465.0) million |
| Total revenue | $791.6 million | $131.5 million | $1,200.2 million | $177.7 million |
| Operating income/(loss) | $604.6 million | $27.0 million | $685.7 million | $(112.3) million |
| Net income/(loss) | $583.5 million | $12.6 million | $628.2 million | $(168.4) million |
| Net income/(loss) per diluted share | $6.77 | $0.13 | $6.92 | $(2.97) |
- Q3 production averaged approximately 79,123 Boe per day, up 9% sequentially. Quarterly production volume increased 37% year over year; acquisitions and new wells contributed to growth. Oil was approximately 57% of Q3 production.
- Q3 realized price was $56.21 per Boe including settled derivatives, versus $38.34 a year earlier. Settled derivatives reduced the Q3 realized price by $17.16 per Boe. Per-Boe Q3 expenses were production $9.41, production taxes $5.81, G&A $1.41, and DD&A $9.06.
- Derivative accounting materially affects reported revenue and earnings: the Q3 $382.5 million unsettled mark-to-market gain was non-cash for the period, while settled derivatives generated a $124.9 million cash loss. The nine-month net derivative loss was $340.0 million.
- For the first nine months, operating cash flow was $641.0 million; investing cash outflow was $858.5 million, including $825.5 million of capital spending; financing cash flow was $217.1 million. Cash ended at $9.1 million. Cash flow from operations less oil and gas capital expenditures was approximately negative $184.4 million.
Balance sheet, debt and liquidity
- At September 30, 2022, total debt carrying value was $1,169.2 million, including $441.0 million drawn on the revolving facility and $729.6 million principal of 8.125% notes due 2028. Debt carrying value was $803.4 million at December 31, 2021.
- Revolver borrowing availability was $409.0 million; cash plus availability totaled $418.1 million. The company reported a $5.1 million working-capital deficit, improved from a $112.2 million deficit at year-end. It was in compliance with the credit facility’s financial covenants.
- Shareholders’ equity was $709.1 million. The balance sheet showed $292.8 million of net derivative liabilities. The company maintained a full valuation allowance against deferred tax assets.
Material changes, outlook and risks
- Compared with Q3 2021, higher commodity prices and 37% higher production drove substantially higher oil and gas sales. The larger unsettled derivative gain also lifted reported Q3 revenue and earnings; it should not be treated as equivalent to recurring operating cash generation.
- Acquisitions expanded the portfolio beyond its historical Williston focus. The 2022 Veritas acquisition added Permian properties; Incline added Williston properties. Nine-month acquisition spending was $551.5 million. Higher production and acquisitions also contributed to increased production costs, DD&A, interest expense and debt.
- Management said it expects cash from operations and revolver capacity to fund budgeted capital expenditures and operating costs for at least the next 12 months, but noted capital spending may be curtailed if cash flows decline. No specific production or earnings guidance is provided in the filing. Management cited persistent service, labor and material cost inflation.
- After quarter-end, the company issued $500 million of 3.625% convertible notes due 2029, used proceeds in part to repay revolver borrowings, paid $36.1 million for capped calls, and repurchased $30 million of common stock. It also completed the Laredo Midland Basin acquisition for estimated consideration of $110.1 million. The company exercised mandatory conversion of its Series A preferred stock; conversion was scheduled for November 15, 2022.
- Key risks include commodity-price volatility, hedging that can limit upside, inflation and supply-chain constraints, reliance on third-party operators, regional concentration, infrastructure and transportation limits, interest-rate exposure, and potential Dakota Access Pipeline disruption. The company hedged approximately 61% of production during the first nine months. A 1% increase in short-term rates was estimated to add approximately $2.7 million of annual interest expense. Ordinary-course legal matters were not expected by management to materially affect results.
Important facts for investors to verify
- How much of reported earnings reflects cash operating performance versus unsettled derivative mark-to-market gains and losses.
- Expected production, capital spending and acquisition funding needs, including the integration and returns of recent and pending acquisitions.
- Debt and liquidity after the October convertible-note refinancing, subsequent revolver repayments, and the Laredo acquisition.
- The effect of remaining commodity hedges on future realized prices and cash flows, and the company’s exposure to commodity-price and interest-rate changes.
- The impact of preferred-stock conversion on common shares outstanding and dilution, alongside continuing share repurchases.