NOG 10-Q Quarter ended Sept. 30, 2012

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

T QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

£ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ____________ to____________

Commission File No. 001-33999

NORTHERN OIL AND GAS, INC.

(Exact name of Registrant as specified in its charter)

Minnesota	95-3848122
(State or Other Jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)

315 Manitoba Avenue – Suite 200

Wayzata, Minnesota 55391

(Address of Principal Executive Offices)

(952) 476-9800

(Registrant’s Telephone Number)

N/A

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes T No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes T No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer x Accelerated Filer ¨

Non-Accelerated Filer £ Smaller Reporting Company £

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No T

As of November 5, 2012, there were 63,475,452 shares of our common stock, par value $0.001, outstanding.

GLOSSARY OF TERMS

Unless otherwise indicated in this report, natural gas volumes are stated at the legal pressure base of the state or geographic area in which the reserves are located at 60 degrees Fahrenheit.  Crude oil and natural gas equivalents are determined using the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or natural gas liquids.

The following definitions shall apply to the technical terms used in this report.

Terms used to describe quantities of crude oil and natural gas:

“ Bbl .”  One stock tank barrel of 42 U.S. gallons liquid volume used herein in reference to crude oil, condensate or NGLs.

“ Boe .”  A barrel of oil equivalent and is a standard convention used to express oil, NGL and natural gas volumes on a comparable oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or NGL.

“ Boepd. ” Boe per day.

“ Btu or British Thermal Unit .”  The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

“ MBbl .”  One thousand barrels of crude oil, condensate or NGLs.

“ MBoe .”  One thousand Boes.

“ Mcf .”  One thousand cubic feet of natural gas.

“ MMBbl .”  One million barrels of crude oil, condensate or NGLs.

“ MMBoe .”  One million Boes.

“ MMBtu .”  One million British Thermal Units.

“ MMcf .”  One million cubic feet of natural gas.

“ NGLs .”  Natural gas liquids.  Hydrocarbons found in natural gas that may be extracted as liquefied petroleum gas and natural gasoline.

Terms used to describe our interests in wells and acreage:

“ Basin .”  A large natural depression on the earth’s surface in which sediments generally brought by water accumulate.

“ Completion. ”  The process of treating a drilled well followed by the installation of permanent equipment for the production of crude oil, NGLs, and/or natural gas.

“ Conventional play. ”  An area that is believed to be capable of producing crude oil, NGLs, and natural gas occurring in discrete accumulations in structural and stratigraphic traps.

“ Developed acreage. ”  Acreage consisting of leased acres spaced or assignable to productive wells.  Acreage included in spacing units of infill wells is classified as developed acreage at the time production commences from the initial well in the spacing unit.  As such, the addition of an infill well does not have any impact on a company’s amount of developed acreage.

“ Development well. ”  A well drilled within the proved area of a crude oil, NGL, or natural gas reservoir to the depth of stratigraphic horizon (rock layer or formation) noted to be productive for the purpose of extracting proved crude oil, NGL, or natural gas reserves.

“ Dry hole .”  A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.

“ Exploratory well ”  A well drilled to find and produce crude oil, NGLs, or natural gas in an unproved area, to find a new reservoir in a field previously found to be producing crude oil, NGLs, or natural gas in another reservoir, or to extend a known reservoir.

“ Field .”  An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.

“ Formation .”  A layer of rock which has distinct characteristics that differs from nearby rock.

“ Gross acres or Gross wells. ”  The total acres or wells, as the case may be, in which a working interest is owned.

“ Held by operations. ”  A provision in an oil and gas lease that extends the stated term of the lease as long as drilling operations are ongoing on the property.

“ Held by production. ”  A provision in an oil and gas lease that extends the stated term of the lease as long as the property produces a minimum quantity of crude oil, NGLs, and natural gas.

“ Hydraulic fracturing .”  The technique of improving a well’s production or injection rates by pumping a mixture of fluids into the formation and rupturing the rock, creating an artificial channel. As part of this technique, sand or other material may also be injected into the formation to keep the channel open, so that fluids or natural gases may more easily flow through the formation.

“ Infill well. ”  A subsequent well drilled in an established spacing unit to the addition of an already established productive well in the spacing unit.  Acreage on which infill wells are drilled is considered developed commencing with the initial productive well established in the spacing unit.  As such, the addition of an infill well does not have any impact on a company’s amount of developed acreage.

“ Net acres. ”  The percentage ownership of gross acres.  Net acres are deemed to exist when the sum of fractional ownership working interests in gross acres equals one (e.g., a 10% working interest in a lease covering 640 gross acres is equivalent to 64 net acres).

“ Net well. ”  A well that is deemed to exist when the sum of fractional ownership working interests in gross wells equals one.

“ NYMEX .”  The New York Mercantile Exchange.

“ OPEC. ”  The Organization of Petroleum Exporting Countries.

“ Productive well .”  A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.

“ Recompletion .”  The process of treating a drilled well followed by the installation of permanent equipment for the production of crude oil, NGLs or natural gas or, in the case of a dry hole, the reporting of abandonment to the appropriate agency.

“ Reservoir .”  A porous and permeable underground formation containing a natural accumulation of producible crude oil, NGLs and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs.

“ Spacing .”  The distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres, e.g., 40-acre spacing, and is often established by regulatory agencies.

“ Unconventional play. ”  An area believed to be capable of producing crude oil, NGLs, and/or natural gas occurring in cumulations that are regionally extensive but require recently developed technologies to achieve profitability.  These areas tend to have low permeability and may be closely associated with source rock as this is the case with crude oil and natural gas shale, tight crude oil and natural gas sands and coal bed methane.

“ Undeveloped acreage .”  Leased acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of crude oil, NGLs, and natural gas, regardless of whether such acreage contains proved reserves.  Undeveloped acreage includes net acres held by operations until a productive well is established in the spacing unit.

“ Unit .”  The joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests.  Also, the area covered by a unitization agreement.

“ Wellbore .”  The hole drilled by the bit that is equipped for natural gas production on a completed well.  Also called well or borehole.

“ West Texas Intermediate or WTI. ”  A light, sweet blend of oil produced from the fields in West Texas.

“ Working interest .”  The right granted to the lessee of a property to explore for and to produce and own crude oil, NGLs, natural gas or other minerals. The working interest owners bear the exploration, development, and operating costs on either a cash, penalty, or carried basis.

Terms used to assign a present value to or to classify our reserves:

“ Possible reserves. ”  The additional reserves which analysis of geoscience and engineering data suggest are less likely to be recoverable than probable reserves.

“ Pre-tax PV-10% or PV-10. ”  The estimated future net revenue, discounted at a rate of 10% per annum, before income taxes and with no price or cost escalation or de-escalation in accordance with guidelines promulgated by the SEC.

“ Probable reserves. ”  The additional reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than proved reserves but which together with proved reserves, are as likely as not to be recovered.

“ Proved developed producing reserves (PDP’s). ”  Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.  Additional crude oil, NGLs, and natural gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included in “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

“ Proved developed non-producing reserves (PDNP’s). ” Proved crude oil, NGLs, and natural gas reserves that are developed behind pipe, shut-in or that can be recovered through improved recovery only after the necessary equipment has been installed, or when the costs to do so are relatively minor.  Shut-in reserves are expected to be recovered from (1) completion intervals which are open at the time of the estimate but which have not started producing, (2) wells that were shut-in for market conditions or pipeline connections, or (3) wells not capable of production for mechanical reasons. Behind-pipe reserves are expected to be recovered from zones in existing wells that will require additional completion work or future recompletion prior to the start of production.

“ Proved reserves .”  The quantities of crude oil, NGLs and natural gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.  The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

“ Proved undeveloped drilling location. ”  A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.

“ Proved undeveloped reserves ” or “ PUDs .”  Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for development. Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Estimates for proved undeveloped reserves will not be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.

(i)           The area of the reservoir considered as proved includes: (A) the area identified by drilling and limited by fluid contacts, if any, and (B) adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible crude oil, NGLs or natural gas on the basis of available geoscience and engineering data.

(ii)           In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (“LKH”) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.

(iii)           Where direct observation from well penetrations has defined a highest known oil (“HKO”) elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering or performance data and reliable technology establish the higher contact with reasonable certainty.

(iv)           Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) the project has been approved for development by all necessary parties and entities, including governmental entities.

(v)           Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based on future conditions.

“ Standardized measure .”  The estimated future net revenue, discounted at a rate of 10% per annum, after income taxes and with no price or cost escalation, calculated in accordance with Accounting Standards Codification (“ASC”) 932, formerly Statement of Financial Accounting Standards No. 69 “Disclosures About Oil and Gas Producing Activities.”

NORTHERN OIL AND GAS, INC.

FORM 10-Q

September 30, 2012

C O N T E N T S

		Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)			2
Balance Sheets			2
Statements of Income and Comprehensive Income			3
Statements of Cash Flows			4
Notes to Unaudited Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			36
Item 4. Controls and Procedures			38
PART II – OTHER INFORMATION			39
Item 1. Legal Proceedings			39
Item 1A.        Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 6. Exhibits			39
Signatures			40

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

NORTHERN OIL AND GAS, INC.

BALANCE SHEETS

SEPTEMBER 30, 2012 AND DECEMBER 31, 2011

		September 30, 2012				December 31,
		(UNAUDITED)				2011
CURRENT ASSETS
Cash and Cash Equivalents		$	8,234,566			$	6,279,587
Trade Receivables			79,324,983				51,418,830
Advances to Operators			4,050,511				17,530,474
Prepaid Expenses			758,476				486,421
Other Current Assets			280,052				317,460
Derivative Instruments			4,005,611				-
Deferred Tax Asset			-				4,472,000
Total Current Assets			96,654,199				80,504,772
PROPERTY AND EQUIPMENT
Oil and Natural Gas Properties, Full Cost Method of Accounting
Proved			1,051,333,841				566,195,321
Unproved			104,910,316				137,784,903
Other Property and Equipment			3,173,798				2,988,641
Total Property and Equipment			1,159,417,955				706,968,865
Less - Accumulated Depreciation and Depletion			135,352,039				63,265,919
Total Property and Equipment, Net			1,024,065,916				643,702,946
DERIVATIVE INSTRUMENTS			2,283,655				-
DEBT ISSUANCE COSTS			12,211,806				1,386,201
TOTAL ASSETS		$	1,135,215,576			$	725,593,919
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable		$	122,259,062			$	110,133,286
Accrued Expenses			2,769,351				65,443
A ccrued Interest			9,022,667				98,798
Derivative Instruments			-				9,363,068
Deferred Tax Liability			709,000				-
Total Current Liabilities			134,760,080				119,660,595
LONG-TERM LIABILITIES
Revolving Credit Facility			68,000,000				69,900,000
8% Senior Notes Due 2020			300,000,000				-
Derivative Instruments			-				2,574,903
Other Noncurrent Liabilities			1,422,683				959,366
Deferred Tax Liability			65,657,000				35,929,000
Total Long-Term Liabilities			435,079,683				109,363,269
TOTAL LIABILITIES			569,839,763				229,023,864
COMMITMENTS AND CONTINGENCIES (NOTE 8)

STOCKHOLDERS' EQUITY
Preferred Stock, Par Value $.001; 5,000,000 Authorized, No Shares Outstanding			-				-
Common Stock, Par Value $.001; 95,000,000 Authorized, (9/30/2012 – 63,490,667
Shares Outstanding and 12/31/2011 – 63,330,421 Shares Outstanding)			63,491				63,330
Additional Paid-In Capital			464,209,170				448,198,350
Retained Earnings			101,103,152				48,370,684
Accumulated Other Comprehensive Loss			-				(62,309	)
Total Stockholders' Equity			565,375,813				496,570,055
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	1,135,215,576			$	725,593,919
The accompanying notes are an integral part of these financial statements.

NORTHERN OIL AND GAS, INC.

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(UNAUDITED)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2012				2011				2012				2011
REVENUES
Oil and Gas Sales		$	80,690,301			$	43,680,619			$	216,268,712			$	106,203,904
Gain (Loss) on Settled Derivatives			1,701,296				(1,824,719	)			(4,729,186	)			(10,695,006	)
Unrealized (Loss) Gain on Derivative Instruments			(22,308,470	)			27,105,400				18,125,928				26,675,003
Other Revenue			12,486				88,738				160,752				218,984
Total Revenues			60,095,613				69,050,038				229,826,206				122,402,885
OPERATING EXPENSES
Production Expenses			8,734,636				3,910,859				22,540,237				8,542,761
Production Taxes			8,092,843				4,261,407				20,829,732				10,188,308
General and Administrative Expense			9,467,711				4,073,988				18,568,696				10,113,995
Depletion of Oil and Gas Properties			27,952,585				10,749,384				71,781,894				25,962,463
Depreciation and Amortization			104,830				75,597				304,226				214,205
Accretion of Discount on Asset Retirement Obligations			23,709				7,781				61,162				20,305
Total Expenses			54,376,314				23,079,016				134,085,947				55,042,037
INCOME FROM OPERATIONS			5,719,299				45,971,022				95,740,259				67,360,848
OTHER INCOME (EXPENSE)
Interest Expense			(5,205,822	)			(182,499	)			(8,130,225	)			(425,687	)
Interest Income			106				1,699				1,206				567,327
Gain on Available for Sale Securities			-				-				-				215,092
Total Other Income (Expense)			(5,205,716	)			(180,800	)			(8,129,019	)			356,732
INCOME BEFORE INCOME TAXES			513,583				45,790,222				87,611,240				67,717,580
INCOME TAX PROVISION			213,422				17,173,000				34,878,772				25,725,300
NET INCOME		$	300,161			$	28,617,222			$	52,732,468			$	41,992,280
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized Gains on Marketable Securities (Net of Tax of $109,000 for the nine months ended September 30, 2011)			-				-				-				173,846
Reclassification of Derivative Instruments Included in Income (Net of Tax of $119,000 for the three months ended September 30, 2011 and $39,000 and $331,000 for the nine months ended September 30, 2012 and 2011, respectively)			-				176,950				62,309				518,900
Total Other Comprehensive Income		$	-			$	176,950			$	62,309			$	692,746

COMPREHENSIVE INCOME		$	300,161			$	28,794,172			$	52,794,777			$	42,685,026
Net Income Per Common Share – Basic		$	0.00			$	0.46			$	0.84			$	0.68
Net Income Per Common Share – Diluted		$	0.00			$	0.46			$	0.84			$	0.68
Weighted Average Shares Outstanding – Basic			62,589,256				61,919,641				62,410,110				61,708,537
Weighted Average Shares Outstanding – Diluted			62,882,673				62,265,502				62,753,241				62,114,115
The accompanying notes are an integral part of these financial statements.