NOG - Northern Oil and Gas: Production May Exceed 110000 BOEPD In Q4 2023

2023-08-31 08:01:28 ET

Summary

• Northern Oil and Gas has been growing production through acquisitions as well as strong well performance.
• It may end up with over 110,000 BOEPD in average production in Q4 2023 with a full quarter's contribution from its Novo acquisition.
• Northern is also projected to generate close to $400 million in free cash flow during 2H 2023, keeping its net debt reasonable.
• I estimate Northern's value at $45 per share at long-term $75 WTI oil and $3.75 NYMEX gas.

Northern Oil and Gas ( NOG ) may now exceed 110,000 BOEPD in average production during Q4 2023. It has been growing production through acquisitions as well as good performance from newer wells that it participated in.

I now expect Northern to generate close to $400 million in free cash flow in the second half of 2023 at the current strip. This would reduce its net debt to around $1.8 billion by the end of the year.

In a longer-term $75 WTI oil environment, I estimate Northern's value at $45 per share now and believe that it can generate around $6 to $7 per share in free cash flow (before cash income taxes) per year at $75 oil while maintaining production levels.

Northern's recent acquisitions plus its improved outlook for free cash flow during the rest of the year help boost its value compared to earlier in 2023 .

2H 2023 Outlook

Northern increased its full-year 2023 guidance to reflect well performance that exceeded expectations as well as its Forge and Novo acquisitions. The Forge acquisition closed at the end of Q2 2023 and the Novo acquisition closed in the middle of Q3 2023.

Northern now expects to average approximately 98,000 BOEPD for the full year, including 101,000 BOEPD in Q3 2023 at the guidance midpoint. Northern's Q4 2023 production may end up at around 112,000 BOEPD based on its full-year guidance.

At the current strip (roughly $79 WTI oil and $2.90 NYMEX gas) for the second half of the year, Northern is projected to generate $1.088 billion in revenues after hedges.

I have assumed that Northern realizes approximately 90% of NYMEX for its natural gas during the second half of the year. Northern bumped up its full-year guidance for realized natural gas prices to 85% to 95% of NYMEX. However, given that Northern realized approximately 140% of NYMEX for its natural gas during the first half of 2023, it would only need to realize 60% of NYMEX during the second half of the year to exceed the high-end of its full-year guidance range. Thus, I believe that Northern's full-year guidance around natural gas realizations is quite conservative.

Northern's capital expenditure budget was more heavily weighted to the first half of the year and thus may end up around $340 million for 2H 2023.

I now expect Northern to generate $394 million in free cash flow during 2H 2023 at current strip prices.

Notes On Debt

Northern had $1.69 billion in net debt at the end of Q2 2023, which included the costs of the Forge acquisition which closed on June 30. Northern paid another $431 million (after taking into consideration its $37.5 million deposit) upon closing of the Novo acquisition .

Northern's current quarterly dividend of $0.38 per share adds up to approximately $35 million per quarter.

Thus, Northern is now projected to end up with $1.8 billion in net debt at the end of 2023, before the impact of any additional transactions or share repurchases. This would be approximately 1.1x Northern's annualized Q4 2023 EBITDAX, which is a manageable level for the company.

Notes On Valuation

I have increased Northern's estimated value to around $45 per share based on long-term $75 WTI oil and $3.75 NYMEX gas. This is based on production of 112,000 BOEPD (63% to 64% oil). At that production level and those commodity prices, Northern should be able to generate over $1.6 billion EBITDAX per year. If Northern can maintain 112,000 BOEPD with an $850 million capex budget, then it would have around $650 million in free cash flow before cash income taxes (which are expected to be relatively minimal in 2024).

This is close to $7 per share in free cash flow based on Northern's current outstanding share count, or around $6.20 per share if its convertible notes are converted into shares and its outstanding warrants are exercised.

Conclusion

Northern has been rapidly growing production through acquisitions, while strong well performance has also helped it. Northern's Q4 2023 production may end up at around 112,000 BOEPD now.

If it attempts to maintain that production level, I believe that Northern can generate $650 million in free cash flow per year before cash income taxes at $75 WTI oil. Northern may end up with 107 million to 108 million shares if its convertible notes are converted into shares and its warrants (issued for the Veritas acquisition) are exercised. This helps boost Northern's estimated value to $45 per share at long-term $75 WTI oil now.

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