Northern Oil and Gas, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 7, 2018. The company is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana. Approximately 89% of its 142,075 net acres were developed.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Oil, natural gas and NGL sales | $86.9 million | $48.8 million |
| Total revenue, including derivative results | $66.6 million | $65.8 million |
| Operating income | $25.9 million | $33.2 million |
| Net income | $3.0 million; $0.05 diluted EPS | $16.9 million; $0.27 diluted EPS |
| Operating cash flow | $45.5 million | $29.7 million |
| Capital spending (cash investing outflow) | $58.0 million | $20.3 million |
| Cash at quarter-end | $89.5 million | $102.2 million at Dec. 31, 2017 |
| Long-term debt, net | $980.8 million | $979.3 million at Dec. 31, 2017 |
| Working capital | $0.9 million deficit | $29.2 million surplus at Dec. 31, 2017 |
- Production rose 35% to 1.62 million Boe (about 17,995 Boe per day); oil was approximately 84% of production. The company participated in 91 gross (5.8 net) wells completed and brought on production.
- Oil and gas sales increased with higher volumes and prices, but a $20.3 million net derivative loss—versus a $17.0 million gain a year earlier—kept reported total revenue nearly flat. The loss included $8.1 million of cash settlements and a $12.1 million non-cash mark-to-market loss.
- Net income declined despite higher sales, reflecting derivative losses, higher DD&A ($18.6 million versus $12.8 million) and higher interest expense ($23.1 million versus $16.3 million). Production expense was $7.71 per Boe, down from $9.75; production taxes rose to $7.9 million from $4.5 million.
- Adjusted EBITDA, a non-GAAP measure, was $56.0 million versus $29.6 million; adjusted net income was $11.3 million versus a $0.1 million loss. These measures exclude specified items and should be considered alongside GAAP results.
- Net cash declined $12.7 million. Cash development and acquisition spending exceeded operating cash flow by $12.5 million. A further $85.1 million of oil and gas property costs was included in accounts payable at quarter-end.
Debt, liquidity and capital structure
- Debt comprised $700 million principal of 8% senior unsecured notes due June 2020 and $300 million of term loans. The term loan facility matures November 2022, bears a floating rate of Adjusted LIBOR (1% floor) plus 7.75%, and had a 9.5% weighted-average rate during the quarter. A 1% rate increase would add about $3.0 million to annual interest expense.
- The company had $100 million of delayed-draw borrowing availability and reported compliance with term-loan financial covenants at March 31. The facility is secured by substantially all company assets and includes restrictive covenants and prepayment protections.
- Management said cash flow and available term-loan capacity were expected to fund budgeted capital expenditures and operating costs for at least 12 months, while noting that significant acquisitions or higher drilling activity could require additional capital.
- Stockholders’ deficit was $488.8 million. The quarter-end balance sheet reported 65.9 million common shares outstanding; the filing states 128.2 million shares outstanding as of May 1, before certain later-described transaction issuances.
Material changes, outlook and notable items
- Average daily production increased about 35% year over year, and the average oil price differential to NYMEX narrowed to $4.46 per barrel from $8.06. Average NYMEX oil price was $62.89 per barrel versus $51.78.
- Management expected 2018 well costs to rise 5–10% as activity and higher-intensity completions increased; average AFE cost was $7.9 million for wells elected in Q1 versus $7.5 million in 2017. It said sustained lower oil prices could reduce or eliminate planned capital spending and impair covenant headroom.
- At quarter-end, open oil swaps covered 6.1 million barrels at a weighted-average price of about $52.48 per barrel, including 2.2 million barrels for the remainder of 2018 at $53.33. Derivatives are not designated for hedge accounting, so fair-value changes cause earnings volatility. Their net liability was $42.3 million, up from $30.2 million at year-end.
- The company had agreed with holders of about $497 million, or 71%, of its 2020 notes to exchange those notes for approximately $155 million of common stock and $344 million of new second-lien notes due 2023. Closing remained conditional on, among other things, a $140 million gross equity raise, reincorporation in Delaware, shareholder and lender approvals, and intercreditor arrangements; the filing cautions that completion was not assured.
- After quarter-end, the company completed an April public offering at $1.50 per share, raising $93.4 million gross and approximately $89.5 million net. It also described subscription agreements contingent on the exchange closing. The proposed exchange and related subscriptions could result in substantial additional share issuance and dilution.
- On April 25, the company agreed to acquire properties from Salt Creek Oil and Gas, subject to closing conditions, with consideration including 6 million shares; closing was expected in early June.
- No full-cost ceiling-test impairment was recorded in Q1. Management warned lower commodity prices could trigger future non-cash write-downs. The company recorded no income-tax provision; a $226.2 million valuation allowance covered net deferred tax assets, citing cumulative losses and commodity-price uncertainty.
- Contingencies include a Missouri Riverbed mineral-title dispute; an adverse final judgment could require reversal of approximately $5.4 million in accrued revenue. A federal securities class action was ongoing; the company said it intended to defend itself. Management did not expect ordinary-course litigation to materially affect results, but outcomes are uncertain.
Most important facts for investors to verify
- Whether the note exchange and related equity raise closed, the final debt terms, lender and shareholder approvals, and the resulting share count and dilution.
- Whether production growth and realized pricing can sustain cash generation as development spending, well costs and interest expense rise.
- Liquidity, covenant compliance and refinancing plans for the $700 million of notes due in 2020, including the term loan’s high floating rate and security provisions.
- Hedge volumes, settlement exposure and the effect of future commodity prices on realized revenue, derivative liabilities and potential ceiling-test impairment.
- Developments in the mineral-title dispute, securities litigation and the Salt Creek acquisition.