Northern Oil & Gas, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. The company is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana.
Business and operating context
At quarter-end, Northern held 185,369 net acres, approximately 59% developed, and participated in 1,847 gross (150.8 net) producing wells. Average production was 13,287 Boe per day, about 90% oil, up 20% from 11,115 Boe per day in Q1 2013. It acquired 4,859 net acres during the quarter and working interests in 3.3 net wells for approximately $3.5 million.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Oil and gas sales | $96.8 million | $83.2 million |
| Total revenue, including derivative losses | $82.1 million | $67.9 million |
| Operating income | $20.6 million | $20.7 million |
| Net income | $6.6 million; $0.11 per diluted share | $9.0 million; $0.14 per diluted share |
| Cash from operating activities | $72.7 million | $56.4 million |
| Cash used in investing activities | $119.2 million | $76.1 million |
| Adjusted EBITDA (non-GAAP) | $65.1 million | $63.5 million |
| Adjusted net income (non-GAAP) | $11.4 million; $0.19 per diluted share | $18.1 million; $0.29 per diluted share |
Oil and gas sales rose 16%, principally from higher production, but realized prices excluding settled derivatives declined 3%. The realized price was $75.25 per Boe including cash derivative settlements, compared with $82.78 a year earlier. Production expense was $9.76 per Boe, production taxes $8.19 per Boe, and DD&A $30.19 per Boe. The filing does not present a standalone operating-margin measure.
At March 31, cash was $8.1 million; total debt was $647.2 million, consisting of $138 million drawn on the revolver and $509.2 million carrying value of 8% senior notes due 2020. Revolver borrowing availability was $362 million under a $500 million borrowing base. The debt-to-total-book-capitalization ratio was 51.3%. Current assets of $104.7 million were below current liabilities of $209.6 million; the company reported compliance with its credit-facility covenants. Cash increased $2.4 million during the quarter.
Material changes and unusual items
- Production grew 20%, while reported total revenue rose 21%; net income fell 26%, reflecting higher interest expense, DD&A and settled derivative losses.
- Oil price differential to NYMEX WTI widened to $13.42 per barrel from $3.62. Management attributed the increase to takeaway constraints and seasonal refinery maintenance, and expected differentials to return toward historical levels as infrastructure expands.
- Settled derivative losses were $6.8 million; mark-to-market derivative losses were $7.9 million. The net derivative liability increased to $25.8 million from $17.9 million at year-end. Open swaps covered 5.7 million barrels at a weighted average price of approximately $89.63; collars covered 180,000 barrels for the remainder of 2014, with a $90.00 floor and $99.05 ceiling.
- Capital expenditures for oil and gas properties were $119.2 million, up from $76.9 million. A further $158.4 million of property purchases and development costs remained in accounts payable at quarter-end.
- The company repurchased 1,018,897 shares under its buyback program for approximately $13.7 million. Interest expense, net of capitalized interest, rose to $9.9 million from $6.1 million, primarily due to the additional $200 million of notes issued in May 2013.
Outlook, risks and contingencies
Management said cash, operating cash flow and revolver capacity should be sufficient to fund budgeted capital expenditures and operating expenses for at least the next 12 months. Significant acquisitions or increased drilling could require additional financing; availability and terms are not assured. The filing gives no specific production or capital-spending forecast.
Key exposures include volatile oil and gas prices, Williston Basin differentials and transportation capacity, winter weather, drilling and completion costs, partner-operated drilling schedules, interest rates and access to capital. Hedging reduces price volatility but can limit gains when prices rise and may require cash payments before production receipts arrive. The company reported no oil and gas property impairment in the quarter.
A North Dakota quiet-title case concerns certain leases. An adverse final judgment could require reversal of approximately $1.58 million of previously accrued revenue, including about $41,000 attributable to Q1 2014; the company says it is vigorously defending its interest. Other ordinary-course legal matters were not expected by management to materially affect financial position, results or cash flows.
Important facts for investors to verify
- Whether the widening Bakken-to-WTI differential and the anticipated infrastructure improvements affect realized prices as management expects.
- Production growth, partner drilling and completion timing, and the pace and cash cost of the development program.
- Derivative settlements, hedge coverage and fair-value movements, including their effects on realized cash flow and reported earnings.
- Revolver availability after borrowing-base redeterminations, covenant compliance, and funding needs given rising debt and substantial unpaid capital costs.
- Developments in the quiet-title litigation and any resulting effect on lease interests or previously recognized revenue.