Sergei Dubrovskii
Northern Oil and Gas (NYSE:NOG) has a significant amount of credit facility debt now (estimated at $850 million in early January) due to its multiple recent acquisitions. This includes its Mascot Project acquisition, which was announced since I last looked at Northern.
At current strip prices, Northern is now projected to generate around $600 million in positive cash flow in 2023 (not including the potential impact of cash taxes). This should increase in 2024 though due to cash flow from the Mascot Project, which is expected to generate roughly zero cash flow in 2023 (due to heavy capital expenditures), but that project could generate close to $200 million in unlevered free cash flow in 2024.
I am maintaining my estimate of Northern’s value as being in the mid-to-high $30s with long-term (after 2023) $70s WTI oil.
Mascot Project
Since I last looked at Northern in October 2022, it acquired a 39.958% working interest in the Mascot Project (Midland Basin) for $320 million in cash (net of purchase price adjustments). This acquisition closed in early January 2023 and the Mascot assets are expected to deliver net production of approximately 7,000 BOEPD (80% oil) for Northern in 2023. As part of the acquisition, Northern is also getting a pro rata portion of the Collegiate Midstream system (allocated value of $36 million).
Northern provided some projections for its share of the Mascot Project based on mid-October strip prices and its original 36.7% working interest in the projection. I’ve updated those production and cash flow estimates below based on a 39.958% working interest as well as current strip prices. Since mid-October, natural gas strip prices have declined (particularly for 2023), while oil strip prices have generally increased marginally.
| 39.958% Working Interest In Mascot Project | 2023E | 2024E | 2025E |
| Production (BOEPD) | 7,020 | 10,890 | 6,750 |
| Oil Volumes (BBL Per Day) | 5,610 | 8,270 | 4,630 |
| Unhedged Cash Flow From Ops ($MM) | $155 | $220 | $120 |
| Capital Expenditures ($MM) | $155 | $25 | $0 |
| Unlevered Free Cash Flow ($MM) | $0 | $195 | $120 |
The idea with the Mascot Project is that there will be a continuous one to two rig drilling programs over the 4,400 gross acres for the next year, with the drilling project being completed in early 2024. At that point the main inventory will have been used up, although Northern noted that additional unbooked infill and secondary zones remain for future development.
At current strip, there is expected to be zero unlevered free cash flow in 2023 from the Mascot Project due to the capex mostly being spent this year. With minimal capex in 2024 and no capex in 2025 though, Northern is now projected to receive $315 million of unlevered free cash flow in those years. This means that excluding interest costs, Northern’s purchase of the Mascot Project should essentially be paid back via cash flow by the end of 2025 if commodity prices follow current strip and Northern’s production projections are accurate.
Other Notes
Northern converted the remaining $164.4 million in 6.5% Series A Convertible Preferred Stock into approximately 7.4 million common shares, and made a cash payment of approximately $10 million (in addition to the last scheduled semi-annual cash dividend) to preferred shareholders. Northern will also save approximately $11 million per year in preferred dividend payments from the conversion, although the common dividend payments on the additional common shares is getting close to that amount.
Northern’s credit facility borrowing base was also increased to $1.6 billion, with an elected commitment of $1.0 billion. Due to all its recent acquisitions, Northern’s credit facility debt was likely fairly high (estimated at ~$850 million) in early January after its Mascot Project acquisition closed. I project that it can generate approximately $600 million in positive cash flow in 2023 at current strip prices though, so it should be able to work that credit facility debt amount down depending on how much it spends on share repurchases and additional acquisitions.
Conclusion
Northern could potentially average 90,000+ BOEPD in average production in 2023 after all its acquisitions and could generate around $600 million in positive cash flow at current strip. It has added a lot to its credit facility debt due to its acquisitions but appears capable of paying it down significantly during 2023 if it doesn’t make additional acquisitions.
The investment in the Mascot Project is not expected to add to Northern’s 2023 free cash flow, but it should have a significant impact (close to $200 million) on its 2024 free cash flow at current strip prices.
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