Northern Oil and Gas, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results; dollar amounts below are in millions unless noted. Northern is a U.S. oil and gas company focused on non-operated minority working and mineral interests.
Business context and operating performance
- Average production was 87,385 Boe per day, up 23% year over year; oil represented 62% of production. The increase primarily reflected acquisitions and new wells.
- Northern participated in 827.8 net producing wells and held approximately 259,890 net acres; 88% were developed.
- In January, Northern completed the MPDC acquisition, acquiring a 39.958% working interest in a Permian Midland Basin development project for approximately $319.9 million in cash.
Financial results and liquidity
- Oil and gas sales: $426.2 million, down from $456.5 million. Higher production was outweighed by lower realized commodity prices.
- Total revenue: $582.2 million, compared with negative $32.9 million in Q1 2022. The comparison is substantially affected by non-cash derivative mark-to-market results: a $153.7 million gain in Q1 2023 versus a $489.4 million loss in Q1 2022.
- Net income: $340.2 million, versus a $206.6 million net loss. Diluted EPS was $3.98, versus a loss of $2.92 per share. The large year-over-year swing should be viewed in light of derivative accounting volatility.
- Operating expenses: $221.6 million versus $156.2 million. Production expense rose 43% to $78.1 million; DD&A rose 78% to $94.6 million, largely reflecting higher production and acquisition-related depletion. Production expense was $9.93 per Boe versus $8.50.
- Cash flow: Operating cash flow was $269.3 million, up from $154.0 million. Investing cash outflow was $461.2 million, including $289.6 million for acquisitions and $170.2 million for drilling and development. The resulting operating-cash-flow less investing-cash-flow deficit was approximately $191.9 million. Financing provided $195.5 million.
- Balance sheet and liquidity: Cash was $6.1 million; working capital was positive $50.6 million, compared with a $24.5 million deficit at year-end 2022. Reported total liquidity was $437.1 million, including $431.0 million of committed revolver availability.
- Debt: Principal debt totaled approximately $1.774 billion: $569.0 million under the revolver, $705.1 million of 8.125% senior notes, and $500.0 million of 3.625% convertible notes. Debt carrying value, net of premium and issuance costs, was $1.757 billion. The company reported compliance with its credit-facility financial covenants.
Material changes and management commentary
- Production growth and higher settled hedge gains supported operating cash flow, while unhedged realized prices fell. Oil averaged $73.31 per barrel before settled derivatives, down 20%; natural gas and NGLs averaged $3.91 per Mcf, down 44%.
- Settled commodity derivatives generated $13.7 million of gains, compared with $105.2 million of losses in Q1 2022. Unsettled derivatives generated a $140.0 million gain versus a $384.2 million loss. Derivative fair value was a net liability of approximately $97.5 million at quarter-end.
- Interest expense increased to $30.1 million from $18.0 million, primarily due to higher debt and revolver rates. A 1 percentage-point increase in short-term rates on quarter-end floating-rate debt would add approximately $5.7 million in annual interest expense.
- Management said available cash, operating cash flow and revolver capacity should be sufficient to fund budgeted capital expenditures and operating needs for at least the next 12 months, while noting capital spending could be reduced if cash flows weaken. The filing does not provide a specific production or earnings forecast.
- Management budgeted for 5%–10% increases in drilling, completion and related costs in 2023. Weighted-average gross well authorization costs were $9.6 million in Q1 2023, versus $8.0 million for wells elected in 2022.
- Northern maintained a full valuation allowance on deferred tax assets, but said a release could be possible as soon as Q2 2023 if sufficient positive evidence emerges. Timing and amount remain uncertain.
Risks, contingencies and other notable items
- Results remain exposed to oil and gas prices, regional differentials, transportation and infrastructure constraints, operating-cost inflation, and drilling and completion decisions made by third-party operators. The top four operators accounted for 38% of Q1 sales; operations remain concentrated in a limited number of basins, particularly the Williston.
- Commodity hedges reduce some price exposure but can limit benefits from rising prices; mark-to-market changes can materially affect reported revenue and earnings without corresponding current-period cash flows. Hedged production was approximately 42% of oil and 40% of natural gas and NGL production in Q1.
- The revolver’s borrowing base was $1.6 billion, but elected commitments were $1.0 billion; available capacity was therefore subject to the elected commitment limit and future redeterminations. Revolver borrowings are floating-rate and secured.
- Potential additional cash consideration from the 2022 Alpha acquisition depends on oil prices during the first six months of 2023. Northern recorded a $6.2 million fair-value gain on this liability in Q1.
- Ordinary-course litigation was not expected by management to have a material financial effect, though outcomes are uncertain. The filing reported no material changes to the risk factors in the 2022 Form 10-K and no material control deficiencies.
- Northern repurchased $18.4 million of senior notes and $8.0 million of common stock during Q1. A $0.34-per-share dividend declared in February was paid on April 28, 2023.
Important facts for investors to verify
- How much of reported earnings and revenue reflects derivative mark-to-market gains rather than realized operating performance and cash receipts.
- Production, realized prices, hedge coverage and derivative settlements in subsequent quarters, including exposure to regional basis differentials.
- Cash requirements for drilling, acquisitions and accrued capital costs, and whether operating cash flow and revolver availability continue to cover spending and shareholder returns.
- Debt levels, borrowing-base redeterminations, covenant headroom and sensitivity to floating interest rates.
- The outcome of the Alpha contingent consideration, and whether evidence supports releasing any deferred-tax valuation allowance.