Strong growth propelled Northern Oil and Gas Inc. (NYSE/AMEX: NOG) to set new records in production, oil and gas sales and adjusted operating earnings during the first three months of 2012, reflecting the non-operator’s success in increasing its net acreage and more than doubling its net productive wells.
The Wayzata, Minn.-based oil and gas independent reported net income climbing to $8.8 million, or 14 cents per diluted share during the first quarter of 2012, compared with a net loss of $7.1 million during the comparable period a year earlier.
Northern Oil’s production more than doubled, soaring 117 percent to 775,089 barrels of oil equivalent during the three months ended March 31, compared with 356,622 boe during the first quarter of 2011. The output, also up 21 percent from the fourth quarter of 2011, averaged 8,517 boe per day during the first three months of 2012, or about 115 percent more than the 3,962 boe per day produced during the same period a year ago.
The production growth was driven mainly by a dramatic increase in net producing wells, up 131 percent to 71.8 net wells from 31.0 net wells during the first quarter of 2011.
Sales up 141%
The company’s sales of oil, natural gas and natural gas liquids also climbed a record 141 percent in the first quarter compared to comparable sales a year earlier, driven primarily by more output and partially aided by a 16 percent increase in realized prices taking into account the effect of settled derivatives.
Northern Oil’s adjusted EBITDA for the first quarter jumped 141 percent to a record $44.8 million, compared with adjusted EBITDA of $18.6 million during the first three months of 2011. The company defines adjusted EBITDA, a non-GAAP measure, as net income or loss before interest expense, income taxes, depreciation, depletion, amortization and accretion, unrealized gain or loss on derivative instruments and non-cash share based compensation expense.
As a result of derivative activities, Northern Oil incurred a net cash settlement loss of $5.3 million in the first quarter, compared with a comparable loss of $3.3 million in the same period a year ago. As a result of forward oil price changes, mark-to-market derivative gains and losses were non-cash losses of $9.4 million in the first quarter, compared with non-cash losses of $21.3 million in the earlier period. Northern Oil’s derivatives are accounted for using the mark-to-market accounting method whereby gains and losses from changes in the fair value of derivative instruments are recognized immediately into earnings.
A ‘breakthrough’ first quarter
Northern Oil President and CEO Michael Reger said the first three months of 2012 was “another breakthrough quarter” for the company.
“The pace of drilling in the Bakken and Three Forks plays continues to accelerate, and our acreage position is turning to production at an increasing rate,” Reger said in reporting the company’s first-quarter 2012 performance May 7.
“Importantly, we are seeing a broader range of opportunities to acquire strategic, non-operated interests, which we believe will allow us to continue growing our acreage position in a careful and methodical manner,” he said. “We are pleased to see the additional efficiencies that are embedded in future wells through the use of pad drilling, which also indicates operators’ intentions to capitalize on future down-spacing in these plays. Our capital position remains secure, and we believe we are well positioned to develop and grow our asset base.”
Some industry analysts praised the first-quarter results, citing the value of Northern Oil’s underlying assets, oil and gas production and impressive growth as confirmation of the independent’s position as a strong-performing Bakken-centric oil and gas producer with significant future upside potential. The company’s stock closed at about $17.65 May 16 and had a price/earnings ratio of 19.57.
173,000 net acres in Williston
As of March 31, Northern Oil controlled some 173,000 net acres in the Williston basin Bakken and Three Forks plays, having acquired leasehold interests covering an aggregate of about 10,278 net mineral acres in its key prospect areas in the first quarter at an average cost of $1,672 per net acre and an aggregate cost of $17.2 million.
Northern Oil controlled about 90,700 net acres at the end of the first quarter that were either developed, held by production or held by operations, which represented about 52 percent of its total Bakken and Three Forks acreage position. The company controls some 101,000 net acres that are developed, held by production, held by operations or permitted, which represents about 58 percent of its total Bakken and Three Forks position.
Northern Oil participated in 112 gross (12.4 net) wells that were spud and 129 gross (13.9 net) wells that were completed and placed into production during the first quarter. The company also re-affirmed its previous guidance that it will participate in some 44 net wells to be spud during 2012 or roughly 10 percent more than in 2011.
Northern Oil’s developed wells totaled 793 gross (71.8 net) as of March 31, and another 158 gross (16.5 net) Bakken or Three Forks wells were being drilled or awaiting completion.
Bigger capital budget, debt offering
The company spent about $125 million on the drilling and completion of wells and had an average election cost for wells drilling or awaiting completion at quarter end of $8.3 million.
Based on Northern Oil’s current understanding of its operating partners’ development plans for 2012, the company said it expects capital expenditures in 2012 for drilling and completion of wells to total about $360 million. This estimate represents nearly an 11 percent increase from a previously announced $325 million budget and is primarily due to more pad drilling and a higher concentration of longer lateral wells, which Northern Oil said it believes will provide more favorable production economics and cost savings on future wells.
In addition to drilling capital expenditures, Northern Oil affirms its prior expectation to spend $60 million to $80 million for acreage acquisitions during 2012. The company spent about $17.2 million on acreage acquisitions during the first quarter, and incurred an additional $8.2 million of development costs in return for acreage interests earned through farm-in arrangements.
Separately, Northern Oil also announced a $250 million offering of senior notes due 2020 in a private placement to eligible purchasers. The notes will be general unsecured obligations. On May 15, the company increased the aggregate principal amount of the offering to $300 million and priced the 8 percent senior notes due 2020 at an offering price equal to 100 percent of par.
Northern Oil said it intends to use the net proceeds of about $291.3 million, after deducting initial purchasers’ discounts and offering expenses, to repay borrowings outstanding under its revolving credit facility, to fund capital expenditures, and for other general corporate purposes. The offering was expected to close May 18, subject to the satisfaction of customary closing conditions.
