Northern Oil & Gas, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Northern is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana. It reported 184,747 net acres, approximately 62% developed, and average Q3 production of 16,448 Boe per day, up 26% year over year.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Oil and gas sales | $119.2 million | $107.2 million | $337.1 million | $270.0 million |
| Total revenues, including derivative mark-to-market | $180.8 million | $69.8 million | $337.5 million | $233.8 million |
| Operating income | $103.6 million | $12.1 million | $127.4 million | $80.5 million |
| Net income | $58.0 million | $1.7 million | $60.2 million | $35.7 million |
| Net cash from operations | Not presented for quarter | $209.4 million | $168.9 million | |
| Cash used for oil and gas investment | Not presented for quarter | $345.3 million | $269.4 million |
Q3 diluted EPS was $0.95 versus $0.03; nine-month diluted EPS was $0.99 versus $0.56. The large GAAP earnings increase in Q3 reflects a $68.6 million non-cash derivative mark-to-market gain, compared with a $29.4 million loss a year earlier. Excluding mark-to-market effects and specified legal settlements, adjusted net income was $15.6 million for Q3 and $44.7 million for the nine months, down from $20.0 million and $52.7 million, respectively. These are non-GAAP measures.
Production increased 26% in Q3 and 29% for the nine months. However, realized price including settled derivatives declined 10% in Q3 to $74.13 per Boe and 7% for the nine months to $75.93 per Boe. The oil differential to NYMEX WTI widened to $12.92 per barrel in Q3 and $12.84 for the nine months. Nine-month operating costs per Boe included production expense of $9.59, production taxes of $8.29, and DD&A of $30.16.
Balance sheet, debt and liquidity
- At September 30, cash was $8.0 million; current assets were $106.4 million and current liabilities were $239.1 million.
- Total debt was $736.4 million: $508.4 million of 8% senior notes due 2020 and $228.0 million drawn on the revolving facility. Debt was $584.5 million at December 31, 2013.
- The revolving facility had a $550 million borrowing base and $322 million of remaining availability; it matures September 30, 2018. The company reported covenant compliance.
- Stockholders’ equity was $668.3 million. Management reported a 52.4% debt-to-total-book-capitalization ratio.
- Cash increased $2.4 million over the nine-month period. Operating cash flow did not cover investment spending; financing cash flow was $138.3 million, primarily from increased revolver borrowings. Oil and gas properties included in accounts payable totaled $211.2 million at quarter-end.
Changes, outlook and risks
- Production growth drove higher sales and operating cash flow, but lower realized prices and higher interest, operating and depletion costs contributed to lower adjusted net income.
- Capital investment was $345.3 million for the first nine months, including $302.2 million for drilling and completion. The company acquired approximately 17,050 net acres and working interests in 10 net undrilled wells during that period.
- Management said available liquidity and expected operating cash flow should fund budgeted capital expenditures and operating expenses for at least 12 months. Significant acquisitions or increased drilling could require additional capital; no specific forward production or earnings guidance is provided in the filing.
- Oil hedges covered approximately 1.0 million barrels for the remainder of 2014, 4.0 million barrels in 2015 and 0.9 million barrels in 2016, at weighted average swap prices of $89.77, $89.43 and $90.00 per barrel, respectively. Hedging reduces downside exposure but may limit gains from rising prices; fair-value movements can materially affect reported earnings.
- Key operating and market risks include commodity-price volatility, widening Williston Basin transportation differentials, weather and infrastructure constraints, rising drilling and completion costs, and dependence on operating partners for drilling and production timing. Floating-rate revolver borrowings also expose the company to interest-rate changes.
- Ordinary-course legal matters were not expected by management to materially affect results. A North Dakota quiet-title action could require reversal of approximately $1.7 million of previously accrued revenue if resolved adversely; the company says it is defending its lease interest. Nine-month G&A included $0.6 million of dispute-settlement expense.
Investor verification priorities
- Separate recurring operating performance from the substantial non-cash derivative mark-to-market gain when assessing Q3 GAAP earnings.
- Review the borrowing-base redetermination, remaining revolver availability, covenant calculations and the high level of capital spending relative to operating cash flow.
- Assess whether production growth can offset lower realized prices, wider differentials, higher DD&A and rising interest costs.
- Verify hedge volumes, prices, counterparty terms and potential cash-settlement timing, including any extension options.
- Monitor the quiet-title litigation, lease expirations and the company’s ability to develop its undeveloped acreage through non-operated partners.