Northern Oil and Gas, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The unaudited filing was submitted November 6, 2020. Northern is a non-operated oil and gas producer focused primarily on the Bakken and Three Forks formations in the Williston Basin. Unless noted, dollar amounts below are in millions.
Key financial and operating metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Oil and gas sales | $73.7 | $158.0 | $224.5 | $440.5 |
| Net commodity derivative gain (loss) | ($26.4) | $75.9 | $277.6 | ($27.1) |
| Total revenue | $47.3 | $233.9 | $502.1 | $413.4 |
| Operating income (loss) | ($218.7) | $121.1 | ($712.5) | $118.0 |
| Net income (loss) | ($233.0) | $94.4 | ($763.9) | $31.6 |
| Adjusted EBITDA (non-GAAP) | $82.7 | $124.4 | $257.5 | $340.0 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $258.7 | $269.3 |
- Production: Q3 averaged approximately 29,051 Boe per day, 77% oil. Volume was down 29% year over year but up 22% sequentially as shut-in and curtailed production returned and new wells began producing. Nine-month production was down 12% year over year.
- Prices and costs: Q3 realized price including settled derivatives was $43.97/Boe, down 6% year over year. Production expense was $9.04/Boe versus $8.62; nine-month expense was $9.99/Boe versus $8.27. Q3 production taxes were $6.9 million and DD&A was $30.8 million.
- Impairment: Northern recorded a non-cash full-cost ceiling impairment of $199.5 million in Q3 and $962.2 million year to date. The charge drove reported losses and reduced property book value; management said it did not reduce cash flow. Total assets were $1,025.5 million, total liabilities $1,109.3 million, and stockholders’ deficit $83.7 million at September 30.
- Cash flow and investment: Nine-month investing cash outflow was $249.6 million and financing cash outflow was $23.4 million. Cash declined by $14.3 million to $1.8 million. Cash development and acquisition spending was $249.3 million, including settlement of prior-period accrued costs.
- Debt and liquidity: Debt principal totaled $988.8 million: $571.0 million on the revolving facility, $287.8 million of second-lien notes, and a $130.0 million VEN Bakken note. Carrying debt was $983.3 million, including $65.0 million classified as current. Reported liquidity was $90.8 million—$89.0 million of revolver availability plus cash—and working capital was positive $13.3 million. The company reported compliance with its revolving-credit financial covenants.
Material changes versus comparable periods
- Q3 oil and gas sales fell 53% year over year, reflecting lower realized prices and 29% lower production. Nine-month sales fell 49%.
- Total revenue rose 21% for the first nine months despite the sharp sales decline, primarily because commodity derivatives contributed a $277.6 million gain versus a $27.1 million loss in 2019. Derivative results include non-cash mark-to-market changes and can make reported revenue volatile.
- Q3 GAAP net loss of $233.0 million contrasted with prior-year net income of $94.4 million, principally due to the impairment and a $70.2 million loss on unsettled derivatives. Nine-month GAAP net loss was $763.9 million.
- Adjusted EBITDA declined to $82.7 million in Q3 and $257.5 million year to date, from $124.4 million and $340.0 million, respectively. Management attributed declines primarily to lower realized prices after settled hedges, lower production, and higher unit production costs.
- Debt principal decreased from $1,127.7 million at year-end 2019 to $988.8 million, through repayments and exchanges. Those transactions included issuance of preferred and common shares; common shares outstanding increased, and the company also effected a 1-for-10 reverse stock split in September 2020.
Outlook, risks, and unusual items
- Management reduced its 2020 capital-spending forecast to $175–$200 million, 53%–59% below 2019 developmental capital expenditures. It expected production to remain affected to some extent by curtailments, shut-ins, and delayed completions through the remainder of 2020 and into 2021.
- Management expected cash flow from operations and revolver availability to meet liquidity needs for at least 12 months, including the $65 million VEN Bakken Note payment due January 1, 2021. This outlook is subject to commodity prices, production, spending, and access to borrowing.
- Management expected further non-cash ceiling-test write-downs if lower prices reduced the trailing 12-month prices used in the impairment calculation. The company noted that prices used for the September test were above actual and then-current forecast prices.
- COVID-19-related demand weakness, oil-market volatility, operator reductions in drilling and production, concentration in the Williston Basin, and reliance on third-party operators are significant risks. Four operators accounted for 48% of Q3 oil and gas sales.
- The Dakota Access Pipeline remained operational under a temporary stay of a shutdown order, but future shutdown remained possible; management warned this could increase oil price differentials. A separate mineral-ownership dispute involving North Dakota riverbed leases could require reversal of approximately $4.4 million of accrued revenue if resolved adversely.
- The Series A preferred stock carried a 6.5% cumulative dividend; $12.5 million of dividends had accumulated and none had been declared or paid as of September 30. Management maintained a full valuation allowance on deferred tax assets.
Important facts for investors to verify
- Whether production, commodity prices, and hedging settlements supported management’s 12-month liquidity expectation and the January 2021 note payment.
- Subsequent borrowing-base determinations, revolver availability, covenant headroom, and progress on debt maturities and repayments.
- The scale and timing of additional impairment charges, and how they affect reported equity and reserve values.
- Hedge coverage and counterparty-option exercise terms, alongside the difference between cash settlements and non-cash mark-to-market derivative results.
- Developments in COVID-19 impacts, third-party operator activity, DAPL litigation, and the Missouri River mineral-ownership dispute.
- The filing reports adjusted EBITDA and adjusted net income as non-GAAP measures; compare them with GAAP results and review the company’s reconciliations.