Northern Oil and Gas, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The company is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana. At quarter-end, it reported 186,947 net acres, approximately 55% developed, and 133.5 net producing wells.
Financial and operating results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Oil and gas sales | $107.2 million | $80.7 million | $270.0 million | $216.3 million |
| Total reported revenue, including derivative results | $69.8 million | $60.1 million | $233.8 million | $229.8 million |
| Operating income | $12.1 million | $5.7 million | $80.5 million | $95.7 million |
| Net income | $1.7 million | $0.3 million | $35.7 million | $52.7 million |
| Net cash from operations | — | — | $168.9 million | $136.7 million |
| Cash used for investing activities | — | — | $268.7 million | $419.9 million |
- Q3 production averaged 13,049 Boe per day, up 16% year over year; nine-month average production was 11,694 Boe per day, also up 16%.
- Q3 realized price, including settled derivatives, was $82.58 per Boe versus $79.38; the nine-month realized price was $81.78 versus $76.63.
- GAAP net income was affected by unrealized derivative losses: $29.4 million in Q3 and $27.3 million for the first nine months. Derivative gains and losses are marked to market through earnings, not designated as accounting hedges.
- Q3 production expense rose to $11.5 million from $8.7 million, and to $9.56 per Boe from $8.42, largely due to water hauling, disposal, and workover costs. Nine-month production expense was $30.5 million versus $22.5 million.
- Nine-month G&A declined to $12.1 million from $18.6 million; 2012 included $4.9 million of former-president severance costs. Nine-month DD&A increased to $85.5 million from $72.1 million.
- Net cash from operations less cash investing outflows was approximately negative $99.8 million for the first nine months. The filing also reports $319.5 million of development and acquisition capital expenditures on its capital-spending basis; $136.4 million of oil and gas property costs remained in accounts payable at quarter-end.
Balance sheet, debt, and liquidity
- At September 30, cash was $11.9 million; current assets were $118.8 million and current liabilities were $185.1 million.
- Total debt was approximately $554.9 million: $500 million principal of 8% senior notes due 2020 and $45 million drawn on the revolving facility. The notes had a $509.9 million carrying value, including unamortized premium.
- The revolving facility had a $450 million borrowing base, $45 million outstanding, and $405 million available; its stated facility size was $750 million. The company reported compliance with covenants, including the required current ratio. The facility matures September 30, 2018 and is secured by substantially all company assets.
- Debt-to-total-book-capitalization was 48%. Debt increased from $424.0 million at December 31, 2012. The company issued $200 million principal of additional 8% notes in May 2013.
- Operating cash flow increased year over year, while investing cash outflows decreased from the prior year. Financing cash flow included the notes issuance and revolver activity; cash declined by $1.5 million during the nine-month period.
Material changes, outlook, and risks
- Oil and gas sales rose with higher production and prices; the Williston Basin oil differential narrowed to $6.20 per barrel for the first nine months from $12.50 a year earlier. However, derivative results reduced reported revenue and earnings.
- Q3 settled derivative losses were $8.1 million, compared with a $1.7 million gain a year earlier. At quarter-end, derivatives were a net liability of $23.9 million, versus a net asset of $3.3 million at December 31, 2012.
- The company reported open oil derivatives covering approximately 1.0 million barrels for the remainder of 2013, 4.0 million for 2014, and 2.7 million for 2015. Management said hedging is intended to reduce price volatility and support capital spending, but can limit gains when prices rise.
- Management believed cash, operating cash flow, and available revolver capacity would fund budgeted current-year capital expenditures and operating expenses. Significant acquisitions or increased drilling could require additional capital; availability and terms of future financing were not assured. Capital spending is discretionary and may be adjusted for commodity prices, cash flows, and returns.
- Key risks include volatile commodity prices, regional price differentials and transportation constraints, winter weather, drilling and completion costs, infrastructure and service availability, and dependence on operating partners’ drilling and production activity. Management noted increased water-handling costs and higher future development cost estimates affecting depletion rates.
- A North Dakota quiet-title action concerns certain leases. If decided adversely, the company could have to reverse approximately $1.5 million of revenue accrued since 2008, including $0.2 million for the first nine months of 2013; the company said it is vigorously defending its interest. Other ordinary-course proceedings were not expected by management to have a material impact.
- The company repurchased approximately 2.04 million shares for about $26.1 million during Q3. It reported no material changes to the risk factors in its 2012 Form 10-K, and no subsequent events requiring disclosure.
Important facts for investors to verify
- How much of reported earnings and revenue reflects derivative mark-to-market movements versus oil and gas sales and settled hedge cash flows.
- Whether operating cash flow and the $405 million of reported revolver availability remain sufficient for planned drilling, development, and acquisition spending, particularly given substantial unpaid capital costs.
- The trajectory of production costs, water disposal expenses, depletion rates, and well-completion costs as production grows.
- The impact of the 8% notes and rising interest expense on future earnings and cash generation, and the effect of borrowing-base redeterminations and debt covenants.
- The outcome of the quiet-title litigation and the collectability of receivables, including the new $925,000 allowance for doubtful accounts.
- Non-GAAP adjusted net income and adjusted EBITDA should be assessed alongside GAAP results; nine-month 2013 adjusted net income was $52.7 million and adjusted EBITDA was $196.3 million, versus $44.8 million and $161.1 million, respectively, in 2012.