NOG - Northern Oil And Gas: Net Debt Should Be Reduced To $1.6 Billion By End Of 2023 (Rating Upgrade)

2023-11-03 20:24:59 ET

Summary

• Northern Oil and Gas reported solid Q3 2023 results, with production slightly above its guidance midpoint.
• It has largely maintained its full-year guidance and I project that it can generate $234 million in free cash flow in Q4 2023.
• This should allow it to reduce its net debt to around $1.6 billion by the end of the year.
• Northern's recent equity offering pushes its outstanding share count up to slightly over 100 million.
• I estimate its value at $44 per share at long-term $75 oil and $3.75 gas.

Northern Oil and Gas ( NOG ) reported solid Q3 2023 results , with production 1% above its guidance midpoint for the quarter. It appears capable of generating around $234 million in free cash flow in Q4 2023 as well.

Northern has boosted its quarterly dividend to $0.40 per share and expects to maintain it at that level in 2024, giving it plenty of ability to reduce its net debt and/or help pay for additional acquisitions.

Northern did an equity offering in October that gave it $291 million in proceeds before offering expenses. Thus it appears likely to end 2023 with no credit facility debt.

The equity offering does slightly reduce Northern's estimated value though, and I now estimate its value at $44 per share at long-term $75 WTI oil and $3.75 NYMEX gas. I now consider Northern a buy since its share price has gone down by around $3 since I last looked at it, while my estimated value has only gone down by $1. This gives it a reasonable amount of upside again.

Q3 2023 Results

Northern reported solid results in Q3 2023, with production averaging 102,327 BOEPD (62% oil). This was towards the high end of its guidance range for 99,000 BOEPD to 103,000 BOEPD for the quarter, and was 1% above its guidance midpoint. This contributed to $128 million in free cash flow for the quarter.

Northern has maintained its full-year production guidance, although it tightened up the range to 97,000 BOEPD to 99,000 BOEPD. Most of Northern's full-year guidance remained unchanged, although it did increase its full-year capex budget by around $23 million to reflect additional well spuds that will be completed next year.

Northern also improved its guidance around differentials. I had noted before that its guidance around natural gas differentials looked pretty conservative, and that belief appears to be correct with Northern now expecting to realize 95% to 105% of Henry Hub for its natural gas compared to 85% to 95% before.

Q4 2023 Outlook

Based on Northern's full-year guidance it may average 111,100 BOEPD in production in Q4 2023, including around 70,000 barrels per day in oil production. This is roughly in-line with my previous expectations.

At the current Q4 2023 strip of $82 to $83 WTI oil, Northern may be able to realize around $79.50 per barrel for its oil. This translates into $568 million in projected Q4 2023 revenues after hedges.

I've modeled Northern's production expenses at around $9 per BOE in Q4 2023. Northern's production expenses per BOE have declined as Permian production makes up a larger proportion of its total production. The Williston Basin production has higher per unit production expenses.

Northern increased its 2023 capex budget to account for increased development activity (with around 8 additional net spuds in 2023 compared to its original guidance).

Northern's Q4 2023 capex budget should still end up the lowest of any 2023 quarter though, and I estimate it can generate $234 million in Q4 2023 free cash flow.

Increased Dividend

Northern increased its quarterly dividend to $0.40 per share, payable on January 31, 2024 to its stockholders of record as of the close of business on December 28, 2023. This represents a roughly 5% increase from its previous $0.38 per share quarterly dividend, and is the 11th consecutive increase in its dividend.

Northern now expects to maintain this $0.40 per share quarterly dividend throughout 2024, which would be a roughly 7% increase in per share dividends compared to what it declared in 2023.

Based on Northern's most recent share count of 100.5 million shares, this dividend would add up to $161 million per year.

Northern does have 1.2 million outstanding warrants with an exercise price of $26.62, and convertible notes that could convert into up to 13.2 million shares. Those convertible notes are only convertible under certain conditions before 2028 though.

Projected Net Debt And Valuation Estimates

Northern reported $2.076 billion in net debt at the end of Q3 2023. It subsequently closed on an offering of 7.475 million shares at $38.88 per share, giving it $291 million in proceeds before offering expenses.

Between the offering proceeds and Northern's projected Q4 2023 free cash flow (less dividend payments), it should end 2023 with approximately $1.6 billion in net debt. This is slightly under 1.0x Northern's annualized Q4 2023 EBITDAX. Northern is capable of fully paying off its credit facility debt by the end of the year, and its debt situation looks decent, although Northern may continue to make acquisitions.

While Northern's results are in-line with my expectations, I have reduced its estimated value slightly to $44 per share (at long-term $75 WTI oil and $3.75 NYMEX gas) to reflect the impact of its October 2023 equity offering. That offering helped reduce Northern's net debt and leverage a bit, but the offering was also at a price that was below my estimated value for Northern.

Conclusion

Northern reported solid Q3 2023 results, with production towards the high end of its guidance for the quarter. Northern largely maintained its full-year guidance and it is now projected to generate $234 million in Q4 2023 free cash flow at current strip prices. When combined with its recent equity offering this should reduce Northern's leverage to under 1.0x based on annualized Q4 2023 EBITDAX, which is its first full quarter including Novo production.

Northern now has a bit over 100 million outstanding shares and I estimate its value at approximately $44 per share now based on long-term $75 WTI oil and $3.75 NYMEX gas.

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