Northern Oil And Gas: Hedges Driving Advantageous Future

Summary

• Northern Oil and Gas has a strong hedge position, with 75% of 2020 and 55% of 2021 production hedged at $58 and $55 per barrel, respectively.
• Profit from these hedges has already amounted to $33MM and is projected to accumulate $277MM over 2020 and $162MM over 2021 at current forward strip pricing.
• Operators curtailing production and suspending completions could lead to Northern getting "free reserves" at margins better than if the wells were producing, while saving capital.
• With no near-term debt maturities and strong projected cash flow ahead from hedging with minimal capital expenditures, Northern is positioned to thrive both during and after the collapse.

Investment Thesis

Northern Oil and Gas (NYSE:NOG) is in a unique situation due to strong hedging and no near-term debt maturities to build substantial cash flow during the downturn, and emerge strong and ready to capitalize on opportunities.

When Hedging Works as Designed

Hedges can be a distasteful topic in the oil and gas E&P social and investor circles, but in situations like we find ourselves in here in 2020, risk-averse hedging can make all the difference for a company.

Few examples of this are greater than with Northern Oil and Gas, who not only is superbly hedged at a great price for 2020, but has substantial volumes hedged at another great price for 2021. With the oil price crash well below its prices and the futures remaining well below, the hedges Northern has are tremendous in value.

According to Northern, it has > 75% of its 2020 production, or 10,106,344 barrels, hedged at $58.02/bbl, and >55% of 2021 production, or 7,261,124 barrels, hedged at $55.36/bbl:

Source - April Presentation - With red highlights by author

Substantial Profits to Date, With More to Come

To assess the base value of Northern's hedges, we simply compare their volumes with historical and future strip prices throughout the contract periods.

Here are the futures going forward for West Texas Intermediate and Henry Hub. Note that the WTI contract has already rolled over, but the Henry Hub contract front month doesn't roll over until the 28^th:

Source - CME WTI Futures

Source - CME Henry Hub Futures

Below, then, are the realized (Q1 2020) and forecast future net cash flow from Northern's hedges through 2021:

Source - Author

As you can see, Northern has already realized $31MM in cash flow from its hedges in Q1 of this year. It is currently projected to realize another $99MM in Q2, and

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

As an owner in oil and gas wells and properties, I have a business relationship with multiple public oil and gas companies. This relationship is limited solely as a minor, 3rd party owner in the wells, wherein my only authorities are to make elections on participating in proposed wells, and subsequent operations on those wells. While I am able to discuss operations with operators, I have to make my own elections and decisions, and the operators control the process. As NOG is a non-operating company only, I do not have any business relationships with them.