Northern Oil and Gas, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Unaudited quarter ended March 31, 2021; comparisons are with Q1 2020 unless noted. Northern is a U.S. oil and gas company focused on non-operated minority working and mineral interests. At quarter-end, it had 482.3 net producing wells and approximately 182,972 net leased acres, about 90% developed and substantially concentrated in the Williston Basin.
Financial and operating performance
- Oil and gas sales were $157.3 million, up 21%. Production fell 13% to 3.46 million Boe (about 38,417 Boe per day for the quarter); average production was 76% oil.
- Total reported revenue was $21.4 million versus $506.8 million, driven by a $135.9 million net commodity-derivative loss in Q1 2021 versus a $376.6 million gain in Q1 2020. The 2021 derivative loss included $128.6 million of unsettled mark-to-market losses; these are noncash until settlement.
- Net loss was $90.4 million, compared with net income of $368.3 million. Net loss attributable to common stockholders was $94.2 million, or $1.73 per diluted share, versus income of $364.6 million, or $7.33 per diluted share.
- Operating expenses totaled $85.8 million, down from $115.9 million. Production expense was $9.92 per Boe versus $9.38; production taxes were $3.89 versus $2.99; G&A was $1.96 versus $1.22; and DD&A was $9.03 versus $15.53 per Boe. Operating loss was $64.4 million versus operating income of $390.9 million.
- Operating cash flow was $62.8 million, down from $100.7 million. Investing cash outflow was $52.7 million and financing cash outflow was $8.8 million. Cash ended the quarter at $2.7 million.
- Debt principal totaled $828.7 million at quarter-end: $263.0 million under the revolver, $550.0 million of 8.125% notes due 2028, and $15.7 million of second-lien notes due 2023. Liquidity was reported at $399.7 million, including $397.0 million of revolver availability. Working-capital deficit was $53.5 million.
- Stockholders’ deficit was $180.7 million. The company had $2.2 million shares of 6.5% Series A preferred stock outstanding, with $20.1 million in undeclared accumulated dividends at quarter-end.
Material changes and significant transactions
- Q1 refinancing included issuing $550 million of 2028 notes and a $132.9 million net common-stock offering. Proceeds helped repay the $130 million VEN Bakken note, retire $272.1 million of second-lien principal for $280.2 million including premiums, and reduce revolver borrowings from $532 million at year-end to $263 million. Refinancing resulted in a $12.6 million debt-extinguishment loss.
- On April 1, 2021, Northern completed the Reliance acquisition, after the reporting date. Consideration included $120.9 million cash (including a previously paid $17.5 million deposit) and warrants for 3.25 million shares at $14 per share. Assets included approximately 61,712 net acres and 95.3 net producing wells, plus 24.9 net wells in progress, in Pennsylvania’s Appalachian Basin.
- Oil and gas sales rose despite lower production, as prices improved. Average NYMEX oil and natural gas prices were $58.13 per barrel and $3.37 per Mcf, up 28% and 76%, respectively. Realized price including settled derivatives increased 7% to $43.39 per Boe.
Outlook, risks and contingencies
The filing provides no specific production, earnings, capital-spending or cash-flow guidance. Management says development and acquisition spending is discretionary and may be adjusted based on projected commodity prices, cash flows and returns. Hedging covered approximately 79% of production in Q1; management states hedges are intended to improve cash-flow predictability, while potentially limiting gains from rising prices.
Key risks include commodity-price volatility, COVID-19 and economic conditions, reliance on third-party operators, regional infrastructure and weather constraints, and the risk that litigation or regulatory review could affect the Dakota Access Pipeline. Derivatives had a net fair-value liability of $94.7 million at quarter-end. The company reported compliance with revolver financial covenants. A Missouri River mineral-title dispute could require reversal of approximately $4.3 million of accrued revenue if resolved adversely. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the Q1 earnings swing reflects noncash derivative revaluation versus cash settlements and underlying operations.
- Post-acquisition debt, liquidity, integration results and final Reliance purchase-price adjustments; the acquisition closed after quarter-end.
- Future production and capital activity, given lower year-over-year production and reliance on third-party operators.
- Hedge volumes, prices, possible counterparty options, and resulting exposure to commodity prices.
- Preferred-stock cumulative dividends and the timing and cash impact of declared payments.