Northern Oil & Gas (NOG) Update - Feb 15

[dan_s]

MINNEAPOLIS--(BUSINESS WIRE)-- Northern Oil and Gas, Inc. (NYSE: NOG) (the “Company” or “NOG”) today announced a fourth quarter 2023 operations update, also highlighting elective Ground Game acquisitions, and preliminary 2024 guidance.

HIGHLIGHTS

Fourth quarter 2023 production estimated to be 114.4 Mboe per day, resulting in annual production toward the high end of NOG’s guidance range < This beats my Q4 production forecast of 113,000 Boepd.
Executed on $25 million of opportunistic Ground Game acquisitions in the fourth quarter
Initiating preliminary 2024 production and capital spending guidance
2024 production guidance implies ~20% year over year growth on a flat capital budget at the midpoint of guidance ranges versus preliminary 2023 actuals (excluding non-budgeted acquisitions)

FOURTH QUARTER OPERATIONAL UPDATE

Production volumes in the fourth quarter of 2023 are estimated to have averaged 114.4 Mboe per day. Production increased 12% compared to the third quarter, driven by a full quarter contribution from the Novo acquisition (which closed mid-Q3) and increased Williston Basin production. The increase was tempered in part by planned shut-ins (~2,000 boe per day, 80% oil) due to offset unit development in the Mascot Project. Oil production is estimated at ~60.2% of total volumes for the fourth quarter. Natural gas volumes materially exceeded internal forecasts. With these results, the Company expects total 2023 annual production toward the high end of its guidance range, or approximately 98.8 Mboe per day.

Mark-to-market gains on derivatives for the fourth quarter were an estimated $235.6 million and realized hedge gains were an estimated $11.8 million. Realized prices for natural gas are estimated to be 96% - 97% of average NYMEX Henry Hub prices for the fourth quarter, slightly better than internal expectations driven by improved winter propane prices and tighter seasonal Appalachian differentials. Realized prices for oil are estimated to be at a discount of $4.02 - $4.05 of average NYMEX WTI benchmark prices for the fourth quarter, reflecting markedly wider Williston Basin differentials and modestly weaker Midland-Cushing pricing than the prior quarters in 2023. < NOG reports natural gas and NGLs on a combined basis, so their realized gas prices should be close to $3.75/mcfe for Q4.

Lease operating costs in the fourth quarter were an estimated $9.70 - $9.75 per boe. < Higher than my forecast of $9.45/boe. The Company saw more normalized levels of expensed workover activity in the fourth quarter compared to lower levels in the third quarter. Fourth quarter operating expenses also included approximately $4.0 million in firm transport charges for the Appalachian properties, reflecting a refinement in NOG’s quarterly accrual process as compared to its prior practice. The first quarter accrual is expected to be approximately $2.3 million and, based on current natural gas prices, is expected to be lower on a quarterly basis thereafter. NOG expects the firm transport charges to sunset by mid-2025.

MASCOT UPDATE

The Company continues to experience strong well performance at its Mascot Project and continues to work with MPDC to optimize future development, which over time could add additional zones and future inventory. Currently, the project has planned shut-in activity as it completes its first large batch well development and begins bringing curtailed wells back to production in stages throughout the first quarter. The Company expects 17 gross wells to be turned to sales early in the second quarter of 2024, followed by another 12 gross wells in the third quarter before commencing completion operations on another large pad. Based on recent discussions with MPDC, NOG anticipates a ~10% reduction in average well costs on current and future wells versus 2023; however, NOG continues to budget based on original well cost expectations.

FOURTH QUARTER CAPITAL EXPENDITURES AND ELECTIVE GROUND GAME ACQUISITIONS

The Company experienced a significant acceleration in drilling activity in the fourth quarter, resulting in a material pull-forward of capital expenditures. Although the overall pace of turn-in-lines (TILs) remained consistent with previous expectations, the development cadence of NOG's wells-in-process advanced ahead of schedule. Consequently, NOG incurred approximately $50 million of capital in the fourth quarter that was previously planned for 2024. In line with this acceleration, NOG has observed a meaningful reduction in development timelines for recent wells-in-process.

During the fourth quarter, the Company turned-in-line an estimated 27.6 net wells, representing a 20% increase from the third quarter. Furthermore, the Company added 20.8 net wells to the drilling and completing (D&C) list, concluding the quarter at approximately 66.5 net wells-in-process, a 20% increase year-over-year. The combined strong activity levels contributed significantly to the increased capital expenditures in the fourth quarter.

Additionally, NOG seized on market opportunities created by significant dislocations from commodity price volatility in the fourth quarter as budget constraints developed across the space. This facilitated NOG’s completion of multiple Ground Game transactions, spending approximately $25 million of total elective acquisition and development capital in the fourth quarter. These transactions included 4.6 net wells-in-process and future drilling locations and approximately 663 net acres. Approximately half of the acquired 4.6 net wells turned in line at the end of the fourth quarter, incurring substantially all of their capital in 2023, with production contributions expected in the first quarter of 2024. The transactions are expected to generate strong returns on capital employed, with cash flow contributions primarily in 2024 and beyond.

Given the acceleration of 2024 development capital and the additional elective Ground Game capital, total fourth quarter capital expenditures were approximately $260 million, excluding non-budgeted acquisitions and other items. < Free cash flow in Q4 should be ~$100 million.

FIRST QUARTER UPDATE

Extreme regional freezing conditions experienced in January had a slight impact on overall production levels. These weather-related disruptions led to modest curtailments in the Williston Basin as well as minor effects on certain areas of the Permian Basin. NOG estimates a 2.0% reduction to overall production levels in the first quarter from the freeze-off conditions.

NOG expects first quarter 2024 production volumes to be slightly lower than the fourth quarter of 2023. The Company expects first quarter production to be affected by a modestly reduced completions count sequentially driven by a typical seasonal slowdown in the Williston Basin, the aforementioned weather disruptions early in the first quarter, and planned curtailments at the Mascot Project prior to its second quarter ramp. Offsetting these factors are the expected contributions from the recently closed Delaware and Utica acquisitions. Overall, the Company expects 5 – 7 fewer net turn-in-lines in the first quarter of 2024 compared to the fourth quarter of 2023, though overall development activity will continue to build momentum. With a strong backlog of wells-in-process, the Company expects re-acceleration of turn-in-line activity as the year progresses.

PRELIMINARY 2024 PRODUCTION AND CAPITAL EXPENDITURE GUIDANCE

The Company will provide detailed line-item 2024 guidance with year-end 2023 results but is providing preliminary production and spending guidance for 2024 as follows:

Full year 2024 production expected between 115,000 – 120,000 boe per day, with oil production estimated at 70,000 – 73,000 bbl per day
Quarterly production expected to decline slightly in the first quarter, and increase modestly thereafter on a sequential quarterly basis throughout

2024

Budgeting approximately 90 net turn-in-lines (TILs) and over 70 net well spuds for 2024
Total 2024 capital expenditure budget of $825 – $900 million, inclusive of drilling and completion, Ground Game acquisitions and workover expenses

Approximately 58% – 60% of the capital budget is expected to be incurred in the first half of 2024, driven primarily by activity ramps on NOG’s Mascot and Novo properties. Development plans for 2024 also reflect steady activity in the Williston and other assets throughout the year. The Company forecasts modestly reduced Appalachian natural gas activity from prior plans due to lower strip prices, which has a small impact on total volumes and minimal effect on cash flows. In total, the Company expects to turn in line approximately 3.1 net Appalachian wells in 2024, however the majority of the associated capital was incurred in 2023.

NOG’s preliminary capital expenditure budget anticipates 50% allocated to the Permian Basin, 35% to the Williston Basin and 1% to the Appalachian Basin. The remainder of the budget is for Ground Game capital and increased workover and other items. Given elevated levels of development since 2021, NOG has experienced increased workover activity and is budgeting for this to continue in 2024.

The Company’s capital budget does not forecast any significant change in well drilling and completion costs, although NOG has recently seen anecdotal evidence of cost reductions, particularly on the Mascot project and its Novo and Forge properties.

MANAGEMENT COMMENTS

“NOG enters 2024 guiding toward 20% year over year production growth on a flat budget, something few companies can offer in our space,” commented Nick O’Grady, NOG’s Chief Executive Officer. “Our balance sheet is stronger than ever, our cash flow is hedged and protected, and we will allocate our capital dynamically to seek the best possible total return for our investors. The opportunity set in front of us in 2024 is as strong as it has ever been during my tenure at the Company.”

“The fourth quarter was a testament to our ability to be creative, nimble and opportunistic on the deal front,” commented Adam Dirlam, NOG’s President. “Deal by deal, we continue to add value setting the stage for growth in 2024 and beyond. We remain pleased with the performance of our larger projects, assets and operating partners, a testament to our underwriting process here at NOG.”

ABOUT NOG

NOG is a real asset company with a primary strategy of acquiring and investing in non-operated minority working and mineral interests in the premier hydrocarbon producing basins within the contiguous United States. More information about NOG can be found at www.noginc.com.

[dan_s]

I have updated my forecast/valuation model based on the Feb 15 press release. My valuation stays at $63/share, but I actually think NOG deserves a higher valuation multiple than 4.25 X operating CFPS. Why?
> I now have more confidence in my model because they provided fresh production and capital expenditure guidance for 2024 that, based on my model, should generate close to $600 million of free cash flow in 2024.
> NOG has a lot of high quality "Running Room", with more than enough operating cash flow to generate 15% to 20% annual production growth.
> NOG pays a quarterly dividend of $0.40/share for annual yield of 4.7%, which is very good for an aggressive growth company.
> I believe NOG will benefit from the merger of ESTE into PR because PR is a first-class operator that has industry leading low D&C costs per well AND they have a lot of Tier One development drilling locations in the Delaware Basin.

TipRanks: "This morning Neal Dingmann, a 5-Star energy sector analyst at Truist Financial, submitted an updated model and price target to TipRanks. Neal rates NOG a BUY with a price target of $56.00."