Northern Oil And Gas: Acquisitions Increase Its Near-Term Leverage

Summary

• Northern has been active in making a number of acquisitions recently.
• These will help boost its 2H 2019 and 2020 production levels.
• However, Northern's year-end 2019 leverage is likely to end up over 2.0x as a result of the acquisitions (and associated capex).
• It should be able to deliver a significant amount of positive cash flow in 2020 to help itself deleverage if it doesn't become too aggressive with growth.
• This idea was discussed in more depth with members of my private investing community, Distressed Value Investing. Start your free trial today »

Northern Oil and Gas (NYSE:NOG) previously closed on its Flywheel Bakken acquisition and noted that those assets are performing well. It also announced that it had made a number of "Ground Game" acquisitions that should boost production in the second half of 2019 and 2020.

However, the various acquisitions have boosted Northern's projected leverage and net debt for now, and concerns over this have likely contributed to Northern's weak stock performance. Northern is well hedged but will still need to be careful not to overextend itself with its acquisitions.

Curtailment Issues

Production curtailments due to infrastructure bottlenecks in the Williston Basin continues to have an impact on Northern's production. It estimated that these curtailments reduced its production by around 2,800 BOEPD in Q1 2019 and 2,500 BOEPD in Q2 2019.

The impact of curtailments was baked into Northern's earlier 2019 guidance to a certain extent. However, it previously expected the curtailments to start abating by the second half of 2019, while it "now expects similar levels of curtailment to persist through the third quarter and likely well into the fourth quarter of 2019". The additional midstream infrastructure that is scheduled to go into service in late 2019 should end the curtailments after that point.

Flywheel Bakken Performance

Northern reported that its Flywheel Bakken assets are on track to have higher production in the second half of 2019 than previously expected. It initially indicated that these assets would produce around 6,600 BOEPD in 2H 2019. Now, it expects around 6,825 BOEPD in the second half of 2019, with production rising from 6,650 BOEPD in Q3 2019 to 7,000 BOEPD in Q4 2019.

Ground Game Acquisitions

Northern also has made a number of what it calls Ground Game acquisitions in Q2 2019 and Q3 2019. These involve around 40 small deals that aggregate

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in NOG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.