Northern Oil and Gas announces 2012 fourth quarter and full year results

Friday, March 1, 2013      
 
  • Annual production increased 95% over 2011 to 3,760,123 barrels of oil equivalent ("Boe"), or 10,274 average Boe per day.
  • Net income increased 78% over 2011 to $72.3 million.

Northern Oil and Gas, Inc. (NYSE MKT: NOG) announced fourth quarter and full year results, year-end proved reserves, and 2013 production and capital budget guidance.

2012 HIGHLIGHTS

  • Annual production increased 95% over 2011 to 3,760,123 barrels of oil equivalent ("Boe"), or 10,274 average Boe per day
  • Total revenues, including the effects of derivatives, increased 109% over 2011 to $311.6 million
  • Net income increased 78% over 2011 to $72.3 million
  • Adjusted EBITDA increased 101% over 2011 to $225.3 million
  • Proved reserves increased 44% over 2011 to 67.6 million barrels of oil equivalent
  • Added 563 gross (48.3 net) wells to production bringing total producing wells to 1,227 gross (106.2 net)

MANAGEMENT COMMENT

Michael Reger, chairman and chief executive officer, commented: "2012 was a year of operational transition in the Williston Basin. Throughout the year, drilling costs peaked and abated, wellhead price differentials peaked and subsequently improved to some of the play's best levels and operators began the transition to pad drilling. As the play evolved, Northern responded with a strategic capital efficiency effort that resulted in an enhanced liquidity position. Combined with a strong hedge position, our liquidity should allow us to fund our 2013 capital expenditure requirements."

RESULTS OF OPERATIONS FOR 2012

The following table summarizes the full year operating and financial results for 2012 as compared to 2011:

Year Ended December 31,
2012
2011
Change
Net Production:
Oil (Bbl)
3,465,311
1,791,979
93%
Natural Gas and other liquids (Mcf)
1,768,872
800,207
121%
Total (Boe)
3,760,123
1,925,347
95%
Average Daily Production:
Oil (Bbl)
9,468
4,910
93%
Natural Gas and other liquids (Mcf)
4,833
2,192
120%
Total (Boe)
10,274
5,275
95%
Average Sales Prices:
Oil (per Bbl)
$ 83.22
$ 86.01
(3)%
Effect of oil hedges on average price (per Bbl)
(0.11)
(7.48)
98%
Oil net of hedging (per Bbl)
83.11
78.53
6%
Natural Gas and other liquids (per Mcf)
4.67
6.63
(30)%
Realized price per Boe(a)
78.79
75.85
4%
Average Production Costs (per Boe of production):
Production Expenses
$ 8.61
$ 6.77
27%
Production Taxes
7.58
7.43
2%
General and Administrative
6.02
7.08
(15)%
Depletion, Depreciation, Amortization and Accretion
26.31
21.38
23%

(a) Realized prices include realized gains or losses on cash settlements for commodity derivatives.


In 2012, oil, natural gas and natural gas liquids ("NGL") sales, including the effect of settled derivatives, increased 103% from 2011, driven primarily by a 95% increase in production due to the addition of 48.3 net wells during the year. Northern's average oil price differential to the NYMEX WTI benchmark during 2012 was $9.79 per barrel, as compared to $6.30 per barrel in 2011.

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As a result of oil price derivative activities, Northern incurred a net cash settlement loss of $0.4 million in 2012, compared to a loss of $13.4 million in 2011. As a result of forward oil price changes, mark-to-market derivative gains and losses resulted in a non-cash gain of $15.1 million in 2012 compared to a non-cash gain of $3.1 million in 2011.

Production expenses were $32.4 million in 2012, compared to $13.0 million in 2011. Northern experiences an increase in aggregate operating expenses as it adds new wells and maintains production from existing properties. On a per unit basis, the average production expenses per Boe increased from $6.77 per barrel sold in 2011 to $8.61 in 2012. The year-over-year increase on a per unit basis is primarily due to increased costs associated with water hauling, water disposal and servicing expenses. Production expenses are generally higher during a well's first year of operations, due to higher levels of servicing activities.

Northern pays production taxes based on realized oil and natural gas sales. These costs were $28.5 million in 2012, compared to $14.3 million in 2011. Average production tax rates were 9.6% and 9.0% in 2012 and 2011, respectively. The 2012 average production tax rate was higher than the 2011 average due to fewer wells that qualified for reduced rates or tax exemptions during 2012.

General and administrative expense was $22.6 million for 2012 compared to $13.6 million for 2011. The 2012 increase of$9.0 million when compared to 2011 is due to a $5.5 million severance charge in connection with the departures of the Company's former president and former chief operating officer, as well as higher personnel costs incurred as Northern continued to invest in its technical and operational staff to support its growth.

Depletion, depreciation, amortization and accretion ("DD&A") was $98.9 million in 2012, compared to $41.2 million in 2011. The increase in aggregate DD&A expense for 2012 compared to 2011 was driven by a 95% increase in production and higher depletion rates. Depletion expense, the largest component of DD&A, averaged $26.18 per Boe in 2012, compared to $21.20per Boe in 2011. Depletion rates rose in 2012 due to increased future development cost and production expense estimates.

The provision for income taxes was $43.0 million in 2012, compared to $26.8 million in 2011. The effective tax rate in 2012 was 37.3%, compared to an effective tax rate of 39.8% in 2011. The decrease in the 2012 effective tax rate in 2012 as compared to 2011 was due to lower state tax levels.

Net income was $72.3 million in 2012, compared to $40.6 million in 2011. The increase in net income was driven by higher production levels in 2012 as compared to 2011. The increased production expense, interest expense, and depletion expenses in 2012 partially offset higher oil and gas revenues. Diluted net income per common share increased to $1.15 in 2012, compared to $0.65 in 2011.

Adjusted Net Income for 2012 was $66.2 million, or $1.05 per diluted share, as compared to $38.8 million, or $0.62 per diluted share, for 2011. The increase in Adjusted Net Income was primarily due to Northern's continued addition of oil and natural gas production from new wells, which was partially offset by a higher depletion rate in 2012 compared to 2011. Northern defines Adjusted Net Income as net income (loss) excluding (i) unrealized gain (loss) on derivative instruments, net of tax, and (ii) severance expenses in connection with the departures of Northern's former president and former chief operating officer, net of tax.

Adjusted EBITDA for 2012 was $225.3 million, which represents a 101% increase over Adjusted EBITDA of $112.3 million for 2011. Northern defines Adjusted EBITDA as net income (loss) before (i) interest expense, (ii) income taxes, (iii) depreciation, depletion, amortization and accretion, (iv) unrealized gain (loss) on derivative instruments and (v) non-cash share based compensation expense.

Adjusted Net Income and Adjusted EBITDA are non-GAAP measures. Management believes the use of these non-GAAP financial measures provides useful information to investors to gain an overall understanding of current financial performance. Specifically, management believes the non-GAAP results included herein provide useful information to both management and investors by excluding certain expenses and unrealized derivatives gains and losses that management believes are not indicative of Northern's core operating results. In addition, these non-GAAP financial measures are used by management for budgeting and forecasting as well as subsequently measuring Northern's performance, and management believes it is providing investors with financial measures that most closely align to its internal measurement processes.

FOURTH QUARTER 2012

The following tables summarize Northern's fourth quarter operating and financial results for 2012 as compared to 2011:

Quarter Ended December 31,
2012
2011
Change
Net Production:
Oil (Bbl)
909,317
588,922
54%
Natural Gas and other liquids (Mcf)
541,659
303,076
79%
Total (Boe)
999,593
639,435
56%
Average Daily Production:
Oil (Bbl)
9,884
6,401
54%
Natural Gas and other liquids (Mcf)
5,888
3,294
79%
Total (Boe)
10,865
6,950
56%
Average Sales Prices:
Oil (per Bbl)
$ 85.86
$ 86.94
(1)%
Effect of oil hedges on average price (per Bbl)
4.77
(4.61)
204%
Oil net of hedging (per Bbl)
90.63
82.33
10%
Natural Gas and other liquids (per Mcf)
4.23
6.72
(37)%
Realized price per Boe(a)
84.74
79.01
7%
Average Production Costs (per Boe of production):
Production Expenses
$ 9.85
$ 7.04
40%
Production Taxes
7.66
6.43
19%
General and Administrative
4.08
5.49
(26)%
Depletion, Depreciation, Amortization and Accretion
26.79
23.42
14%

(a) Realized prices include realized gains or losses on cash settlements for commodity derivatives.


In the fourth quarter of 2012, oil, natural gas and NGL sales including the effect of settled derivatives, increased 68% compared to the fourth quarter of 2011, driven primarily by a 56% increase in production due to net wells added during the year. Northern's oil price differential to the NYMEX WTI benchmark during the fourth quarter of 2012 was $2.17 per barrel, as compared to $5.01 per barrel in the fourth quarter of 2011.

As a result of derivative activities, Northern incurred a net cash settlement gain of $4.3 million in the fourth quarter of 2012, compared to a loss of $2.7 million in the fourth quarter of 2011. As a result of forward oil price changes, mark-to-market derivative gains and losses were non-cash losses of $3.0 million in the fourth quarter of 2012 compared to non-cash losses of$23.6 million in the fourth quarter of 2011.

Production expenses were $9.8 million in the fourth quarter of 2012 compared to $4.5 million in the fourth quarter of 2011. Northern experiences an increase in aggregate operating expenses as it adds new wells and maintains production from existing properties. On a per unit basis, production expenses per Boe increased from $7.04 per barrel sold in the fourth quarter of 2011 to $9.85 in the fourth quarter of 2012. The increased cost on a per unit basis is primarily due to increased costs associated with water hauling, water disposal and servicing expenses. Production expenses are generally higher during a well's first year of operations, due to higher levels of servicing activities.

Northern pays production taxes based on realized oil and gas sales. These costs were $7.7 million in the fourth quarter of 2012, compared to $4.1 million in the fourth quarter of 2011. Average production tax rates were 9.5% in the fourth quarter of 2012 and 7.7% in the fourth quarter of 2011. The 2012 average production tax rate was higher than the 2011 average due to fewer wells that qualified for reduced rates or tax exemptions during 2012.

General and administrative expense was $4.1 million for the fourth quarter of 2012, compared to $3.5 million for the fourth quarter of 2011. The fourth quarter of 2012 increase was primarily driven by severance charges in connection with the departure of the Company's former chief operating officer.

DD&A was $26.8 million in the fourth quarter of 2012, compared to $15.0 million in the fourth quarter of 2011. The increase in aggregate DD&A expense for the fourth quarter of 2012 compared to the fourth quarter of 2011 was driven by a 56% increase in production and higher depletion rates. Depletion expense, the largest component of DD&A, was $26.66 per BOE in the fourth quarter of 2012, compared to $23.23 per BOE in the fourth quarter of 2011. Depletion rates rose in 2012 due to increased future development cost and higher production expense estimates.

The provision for income taxes was $8.1 million of expense in the fourth quarter of 2012, compared to $1.1 million in the fourth quarter of 2011. The increase in income tax expense in 2012 as compared to 2011 was due to higher levels of pretax income in 2012.

Net income was $19.6 million in the fourth quarter of 2012, compared to a loss of $1.4 million in the fourth quarter of 2011. Diluted net income per common share increased to $0.31 in the fourth quarter of 2012, compared to a loss of $0.02 in the fourth quarter of 2011.

Adjusted Net Income for the fourth quarter of 2012 was $21.4 million, or $0.34 per diluted share, as compared to $13.3 million, or $0.21 per diluted share, for the fourth quarter of 2011. Northern defines Adjusted Net Income as net income (loss) excluding (i) unrealized gain (loss) on derivative instruments, net of tax, and (ii) severance expenses in connection with the departures of Northern's former president and former chief operating officer, net of tax.

Northern's Adjusted EBITDA for the fourth quarter of 2012 was $64.3 million, which represents a 64% increase over Adjusted EBITDA of $39.1 million for the fourth quarter of 2011. Northern defines Adjusted EBITDA as net income (loss) before (i) interest expense, (ii) income taxes, (iii) depreciation, depletion, amortization and accretion, (iv) unrealized gain (loss) on derivative instruments and (v) non-cash share based compensation expense.

Adjusted Net Income and Adjusted EBITDA are non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measure is included in the accompanying financial tables found later in this release.

ACREAGE AND DRILLING UPDATE

As of December 31, 2012, Northern controlled approximately 179,131 net acres targeting the Williston Basin Bakken and Three Forks. In 2012, Northern acquired leasehold interests covering an aggregate of approximately 17,590 net mineral acres in its key prospect areas, for an average cost of $1,788 per net acre, and earned an additional 6,450 net acres through farm-in arrangements. In the fourth quarter of 2012, Northern acquired leasehold interests covering an aggregate of approximately 3,404 net mineral acres in its key prospect areas at an average price of $1,082 per acre.

As of December 31, 2012, approximately 64% of Northern's total acreage position, and approximately 72% of Northern's North Dakota acreage position, was developed, held by production, held by operations or permitted.

In 2012 Northern spud approximately 42.8 net wells and added 48.3 net wells to production. Northern added 7.7 net wells to production in the fourth quarter of 2012.

CAPITAL EXPENDITURES

During 2012, Northern's acquisition and development expenditures included approximately $485 million of drilling, completion and capitalized workover costs, $8.5 million of capitalized internal costs and $5.9 million of capitalized interest. Northern's drilling and completion expenditures were heavily weighted to the first half of 2012, as operators worked through the backlog of wells awaiting completion at the end of 2011. Also in 2012, approximately $37 million was expended on acreage acquisitions and other acreage related costs located in the Williston Basin.

LIQUIDITY UPDATE

Northern ended the year with $124 million drawn on its revolving credit facility, which has a total borrowing capacity of $350 million. Northern also ended the year with $13 million in cash, resulting in liquidity of approximately $240 million.

CAPITAL PROGRAM AND PRODUCTION GUIDANCE FOR 2013

Northern expects 2013 total capital expenditures to range between $420 and $440 million. The total capital budget includes:

  • $370 to $390 million in drilling and completions expense
  • $20 million on acreage acquisitions
  • Approximately $30 million of other capital expenditure activities, primarily capitalized workover expenses.

The 2013 budget anticipates the Company will participate in the drilling and completion of approximately 44 net wells targeting the Bakken and Three Forks formations during 2013. Northern expects the average well cost to range between $8.4 to $8.8 million per well. Northern expects cash flow from operations and its revolving credit facility to meet its capital expenditure needs for 2013.

Based on the assumed net well additions outlined above, Northern estimates 2013 production to be in a range of 4.7 to 5.0 million barrels of oil equivalent. Based on current activity and production levels, Northern estimates that production growth and the benefits from developmental multi-well pad drilling will be weighted towards the second half of 2013.

2012 YEAR-END RESERVES

Based on reports prepared by Ryder Scott Company, L.P., Northern's estimated total proved reserves at December 31, 2012were approximately 67.6 million barrels of oil equivalent (MMBoe), a 44% increase as compared to 46.8 MMBoe at December 31, 2011. Approximately 45% of Northern's proved reserves at December 31, 2012 are categorized as either proved developed producing or proved developed non-producing, meaning behind pipe. Approximately 55% are classified as proved undeveloped.


 

Article Tags

Northern Oil and Gas United States Worldwide Finance Operations Update Production Update


This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. More


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